-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IMaB8svDoPBMXNnagLcdt5KS0MKbWcftD9jRgdRv1ps7UCrUXgDfh/4XePv/WJG3 CyKmAT9OsADYSGGa9GUqVg== 0000950137-00-001914.txt : 20000428 0000950137-00-001914.hdr.sgml : 20000428 ACCESSION NUMBER: 0000950137-00-001914 CONFORMED SUBMISSION TYPE: 485BPOS PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 20000427 EFFECTIVENESS DATE: 20000427 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KILICO VARIABLE SEPARATE ACCOUNT/IL CENTRAL INDEX KEY: 0000810369 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 363050975 STATE OF INCORPORATION: IL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: SEC FILE NUMBER: 333-88845 FILM NUMBER: 610918 BUSINESS ADDRESS: STREET 1: 1 KEMPER DRIVE CITY: LONG GROVE STATE: IL ZIP: 60049-0001 BUSINESS PHONE: 8479693507 MAIL ADDRESS: STREET 1: C/O KEMPER LIFE INSURANCE COMPANIES STREET 2: 1 KEMPER DRIVE CITY: LONG GROVE STATE: IL ZIP: 60049-0001 485BPOS 1 POST-EFFECTIVE AMENDMENT #1 TO FORM S-6 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 27, 2000 REGISTRATION STATEMENT NO. 333-88845 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 POST-EFFECTIVE AMENDMENT NO. 1 TO FORM S-6 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933 OF SECURITIES OF UNIT INVESTMENT TRUSTS REGISTERED ON FORM N-8B-2 A. Exact name of trust: KILICO VARIABLE SEPARATE ACCOUNT B. Name of depositor: KEMPER INVESTORS LIFE INSURANCE COMPANY C. Complete address of depositor's principal executive offices: 1 Kemper Drive Long Grove, Illinois 60049 D. Name and complete address of agent for service: DEBRA P. REZABEK, ESQ. Kemper Investors Life Insurance Company 1 Kemper Drive Long Grove, Illinois 60049 COPIES TO: FRANK J. JULIAN, ESQ. JOAN E. BOROS, ESQ. Kemper Investors Life Insurance Company Jorden Burt Boros Cicchetti Berenson & Johnson 1 Kemper Drive 1025 Thomas Jefferson Street, N.W. Long Grove, Illinois 60049 Suite 400E Washington, D.C. 20007
It is proposed that this filing will become effective (check appropriate box) [ ] Immediately upon filing pursuant to paragraph (b), or [ ] 60 days after filing pursuant to paragraph (a) (1), or [X] On May 1, 2000 pursuant to paragraph (b), or [ ] On (date) pursuant to paragraph (a) (1) of Rule 485. E. Title of securities being registered: The variable portion of Flexible Premium Variable Life Insurance Policies. F. Approximate date of proposed public offering: Continuous [ ] Check box if it is proposed that this filing will become effective on (date) at (time) pursuant to Rule 487. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 RECONCILIATION AND TIE BETWEEN ITEMS IN FORM N-8B-2 AND THE PROSPECTUS
ITEM NO. OF FORM N-8B-2 CAPTION IN PROSPECTUS - -------- --------------------- 1. Cover Page 2. Cover Page 3. Not Applicable 4. Distribution of Policies 5. KILICO and the Separate Account; State Regulation of KILICO 6. KILICO and the Separate Account 7. Not Applicable 8. Experts 9. Legal Proceedings; Legal Considerations 10. KILICO and the Separate Account; The Funds; The Policy; Policy Benefits and Rights; General Provisions; Voting Interests, Dollar Cost Averaging; Systematic Withdrawal Plan; Federal Tax Matters 11. Cover Page; Summary; KILICO and the Separate Account; The Funds 12. Not Applicable 13. Charges and Deductions 14. The Policy 15. The Policy; Policy Benefits and Rights 16. Summary; The Policy 17. The Policy; Policy Benefits and Rights 18. The Funds 19. General Provisions 20. The Funds; General Provisions 21. Policy Benefits and Rights 22. Not Applicable 23. Not Applicable 24. General Provisions 25. KILICO and the Separate Account 26. Not Applicable 27. KILICO and the Separate Account 28. KILICO's Directors and Officers 29. KILICO and the Separate Account 30. Not Applicable 31. Not Applicable 32. Not Applicable 33. Not Applicable 34. Not Applicable 35. KILICO and the Separate Account; Distribution of Policies 36. Not Applicable 37. Not Applicable 38. Distribution of Policies 39. KILICO and the Separate Account; Distribution of Policies 40. Not Applicable 41. KILICO and the Separate Account; Distribution of Policies 42. Not Applicable 43. Not Applicable 44. KILICO and the Separate Account; Charges and Deductions 45. Not Applicable 46. The Policy; Policy Benefits and Rights; Charges and Deductions 47. Summary; KILICO and the Separate Account; The Policy 48. Not Applicable 49. Not Applicable 50. Not Applicable
3
ITEM NO. OF FORM N-8B-2 CAPTION IN PROSPECTUS - -------- --------------------- 51. Cover Page; Summary; KILICO and the Separate Account; The Policy; Policy Benefits and Rights; Charges and Deductions; General Provisions; Distribution of Policies 52. Summary; KILICO and the Separate Account; The Funds; General Provisions 53. Federal Tax Matters 54. Not Applicable 55. Not Applicable 56. Not Applicable 57. Not Applicable 58. Not Applicable 59. Financial Statements
4 PROSPECTUS --MAY 1, 2000 - -------------------------------------------------------------------------------- FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY - -------------------------------------------------------------------------------- ISSUED BY KEMPER INVESTORS LIFE INSURANCE COMPANY THROUGH ITS KILICO VARIABLE SEPARATE ACCOUNT HOME OFFICE: 1 KEMPER DRIVE, LONG GROVE, ILLINOIS 60049 (800) 321-9313 This Prospectus describes a Flexible Premium Variable Life Insurance Policy ("Policy") offered by Kemper Investors Life Insurance Company ("we" or "KILICO"). The Policy provides life insurance and accumulates variable Cash Value. Policy benefits depend upon the investment experience of the KILICO Variable Separate Account. Generally, Policy premiums are flexible. The Policy is "life insurance" for federal tax purposes. If the Policy is a modified endowment contract, different tax rules apply to distributions. See "Federal Tax Matters", page 25 for a discussion of laws that affect the tax treatment of the Policy. You have the following choices for allocating premium: - the Fixed Account, which accrues interest at our guaranteed rate, and - the Subaccounts of the Separate Account, which invest in portfolios of underlying mutual funds. The following Portfolios are currently available under the Policy: - THE ALGER AMERICAN FUND - Alger American Balanced - Alger American Growth - Alger American Income & Growth - Alger American MidCap Growth - THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC. - DREYFUS LIFE & ANNUITY INDEX FUND D/B/A DREYFUS STOCK INDEX FUND - DREYFUS VARIABLE INVESTMENT FUND ("DREYFUS VIF") - Dreyfus VIF-Appreciation (formerly Capital Appreciation) - Dreyfus VIF-Small Cap - FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST* (CLASS 2 SHARES) - Templeton Asset Strategy (formerly Templeton Asset Allocation) - Templeton Global Income Securities (formerly Templeton Bond) - Templeton Developing Markets Securities (formerly Templeton Developing Markets) - Templeton International Securities (formerly Templeton International) - - FIDELITY VARIABLE INSURANCE PRODUCTS FUND (INITIAL CLASS) - Fidelity VIP Equity-Income - Fidelity VIP Growth - Fidelity VIP High Income - Fidelity VIP Overseas - - JANUS ASPEN SERIES - Janus Aggressive Growth - Janus Aspen Balanced - Janus Aspen Flexible Income - Janus Aspen Growth - Janus Aspen International Growth - Janus Aspen Worldwide Growth - - SCUDDER VARIABLE LIFE INVESTMENT FUND ("SCUDDER VLIF") (CLASS A SHARES) - Scudder VLIF Capital Growth - Scudder VLIF Growth and Income - Scudder VLIF International - - KEMPER VARIABLE SERIES - Kemper Government Securities - Kemper Investment Grade Bond - Kemper Money Market - Kemper Small Cap Growth - Kemper Total Return - Kemper Value+Growth * Effective May 1, 2000, the funds of Templeton Variable Products Series Fund merged into similar corresponding funds of Franklin Templeton Variable Insurance Products Trust. You may obtain more information about these Portfolios in the accompanying prospectuses. Not all portfolios described in the prospectuses may be available under the Policy. You choose from two death benefit options. The Death Benefit is at least the amount shown in the Policy Specifications, unless there are loans. Cash Value is not guaranteed. If the Surrender Value does not cover all Policy charges, the Policy will lapse. The Policy Specifications show the guarantee premium and the guarantee period. The Policy will not lapse during the guarantee period if the guarantee premium is paid. You may cancel the Policy and receive a refund during the Free-Look Period. If you already own a flexible premium variable life insurance policy, it may not be advantageous to buy additional insurance or to replace your policy with the Policy described in this Prospectus. THIS PROSPECTUS MUST BE ACCOMPANIED OR PRECEDED BY A CURRENT PROSPECTUS FOR THE AVAILABLE UNDERLYING PORTFOLIOS. YOU SHOULD READ AND RETAIN ALL PROSPECTUSES FOR FUTURE REFERENCE. YOU CAN FIND THIS PROSPECTUS AND OTHER INFORMATION ABOUT THE SEPARATE ACCOUNT REQUIRED TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION (SEC) AT THE SEC'S WEB SITE AT HTTP://WWW.SEC.GOV. THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. 5 TABLE OF CONTENTS - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
PAGE ---- DEFINITIONS................................................. 1 SUMMARY..................................................... 3 FEES AND EXPENSES........................................... 5 KILICO AND THE SEPARATE ACCOUNT............................. 9 THE FUNDS................................................... 9 FIXED ACCOUNT OPTION........................................ 12 THE POLICY.................................................. 13 POLICY BENEFITS AND RIGHTS.................................. 15 CHARGES AND DEDUCTIONS...................................... 19 GENERAL PROVISIONS.......................................... 22 DOLLAR COST AVERAGING....................................... 24 SYSTEMATIC WITHDRAWAL PLAN.................................. 24 DISTRIBUTION OF POLICIES.................................... 25 FEDERAL TAX MATTERS......................................... 25 LEGAL CONSIDERATIONS........................................ 28 SAFEKEEPING OF THE SEPARATE ACCOUNT'S ASSETS................ 28 VOTING INTERESTS............................................ 28 STATE REGULATION OF KILICO.................................. 28 KILICO'S DIRECTORS AND OFFICERS............................. 29 LEGAL MATTERS............................................... 31 LEGAL PROCEEDINGS........................................... 31 EXPERTS..................................................... 31 REGISTRATION STATEMENT...................................... 31 FINANCIAL STATEMENTS........................................ 31 APPENDIX A TABLE OF DEATH BENEFIT FACTORS................... 71 APPENDIX B SURRENDER TARGET PREMIUMS........................ 72
6 DEFINITIONS ACCUMULATION UNIT--An accounting unit of measure used to calculate the value of each Subaccount. AGE--The Insured's age on his or her nearest birthday. BENEFICIARY--The person to whom the proceeds due on the Insured's death are paid. CASH VALUE--The sum of the value of Policy assets in the Separate Account, Fixed Account and Loan Account. COMPANY ("WE", "US", "OUR", "KILICO")--Kemper Investors Life Insurance Company. Our home office is located at 1 Kemper Drive, Long Grove, Illinois 60049. DATE OF RECEIPT--The date on which a request, form or payment is received at our home office, provided: (1) that date is a Valuation Date and (2) we receive the request, form or payment before the close of the New York Stock Exchange (usually 3:00 p.m. Central time). Otherwise, the next Valuation Date. DEBT--The sum of (1) the principal of any outstanding loan, plus (2) any loan interest due or accrued to us. FIXED ACCOUNT--The amount of assets held in the General Account attributable to the fixed portion of the Policy. FREE-LOOK PERIOD--The time when you may cancel the Policy and receive a refund. This time depends on the state where the Policy is issued; however, it will be at least 10 days from the date you receive the Policy. FUNDS--The underlying mutual funds in which the Subaccounts of the Separate Account invest. GENERAL ACCOUNT--The assets of KILICO other than those allocated to the Separate Account or any other separate account. GUIDELINE SINGLE PREMIUM--The maximum initial amount of premium that can be paid while retaining qualification as a life insurance policy under the Internal Revenue Code. INSURED--The person whose life is covered by the Policy and who is named in the Policy Specifications. ISSUE DATE--The date shown in the Policy Specifications. Incontestability and suicide periods are measured from the Issue Date. LOAN ACCOUNT--The amount of assets transferred from the Separate Account and the Fixed Account and held in the General Account as collateral for Debt. MATURITY DATE--The Policy Date anniversary nearest the Insured's 100th birthday. MONTHLY PROCESSING DATE--The same day in each month as the Policy Date. MORTALITY AND EXPENSE RISK CHARGE--A charge deducted in the calculation of the Accumulation Unit Value for the assumption of mortality risks and expense guarantees. NET SURRENDER VALUE--The Surrender Value on the date of surrender minus any Debt. OWNER ("YOU", "YOUR", "YOURS")--The person(s) named as owner in the application unless later changed as provided in the Policy. PLANNED PREMIUM--The scheduled premium you specify in the application. POLICY DATE--The Policy Date is used to determine Policy Years and Monthly Processing Dates. The Policy Date is the date that insurance coverage takes effect subject to the conditions set forth in the application, including the payment of the initial premium. POLICY YEAR--Each year commencing with the Policy Date and each Policy Date anniversary thereafter. PORTFOLIO(S)--The underlying Portfolios in which the Subaccounts invest. Each Portfolio is an open-end investment company registered with the SEC or a separate investment series of a registered open-end investment company. SEPARATE ACCOUNT VALUE--The portion of the Cash Value in the Subaccount(s) of the Separate Account. 1 7 SPECIFIED AMOUNT--The amount chosen by you and used to calculate the death benefit. The Specified Amount is shown in the Policy Specifications. SUBACCOUNT--A subdivision of the Separate Account. SURRENDER VALUE--Cash Value minus any applicable surrender charge. TRADE DATE--The date 30 days following the date you complete all requirements for coverage and we record coverage under the Policy as in force. VALUATION DATE--Each business day on which valuation of the assets of the Separate Account is required by applicable law, which currently is each day that the New York Stock Exchange is open for trading. VALUATION PERIOD--The period that starts at the close of a Valuation Date and ends at the close of the next succeeding Valuation Date. 2 8 SUMMARY This section summarizes this Prospectus. Please read the entire Prospectus. You should refer to the heading "Definitions" for the meaning of certain terms. If states require variations, they appear in supplements attached to this Prospectus or in endorsements to the Policy. Unless otherwise indicated, this Prospectus describes an in force Policy with no loans. You pay a premium for life insurance coverage on the Insured. Generally, you may choose the amount and frequency of premium payments. The Policy provides for a Surrender Value which is payable if the Policy is terminated during an Insured's lifetime. The death benefit and Cash Value of the Policy may increase or decrease to reflect investment experience. Cash Value is not guaranteed. If the Surrender Value is insufficient to pay Policy charges, the Policy will lapse unless an additional premium payment or loan repayment is made. The Policy will remain in force during the guarantee period if the premiums paid, minus withdrawals and Debt, are at least equal to the guarantee premiums. (See "The Policy--Premiums and Allocation of Premiums and Separate Account Value," page 13, "Charges and Deductions," page 19, and "Policy Benefits and Rights," page 15.) A Policy may be issued as or become a modified endowment contract as a result of a material change or reduction in benefits as defined by the Internal Revenue Code. The Policy may also become a modified endowment contract if excess premiums are paid. If the Policy is treated as a modified endowment contract, certain distributions will be included in your federal gross income (See "Federal Tax Matters," page 25.) The purpose of the Policy is to provide insurance protection for the beneficiary. The Policy is not comparable to a systematic investment plan of a mutual fund. POLICY BENEFITS CASH VALUE. Cash Value reflects the amount and frequency of premium payments, the investment experience of the selected Subaccounts, any values in the Fixed Account and Loan Account, and Policy charges. You bear the entire investment risk on amounts allocated to the Separate Account. We do not guarantee Separate Account Value. (See "Policy Benefits and Rights--Cash Value," page 17.) You may surrender a Policy at any time and receive the Net Surrender Value. The Net Surrender Value is the Surrender Value minus any outstanding Debt. The Surrender Value is the Cash Value minus any applicable surrender charge. Partial withdrawals are available subject to restrictions. (See "Policy Benefits and Rights--Surrender Privilege," page 19.) POLICY LOANS. After the first Policy Year, you may borrow up to 90% of Cash Value minus surrender charges and any other indebtedness. Interest is charged at an effective annual rate of 4.50%. (See "Federal Tax Matters," page 25.) PREFERRED LOANS. After the first Policy Year, you may borrow an amount up to the earnings in the Policy subject to any previous indebtedness. Interest on preferred loans is charged at an effective annual rate of 3%. The minimum amount of any loan is $500. When a loan is made, a portion of Cash Value equal to the loan amount is transferred from the Separate Account and the Fixed Account (pro rata, unless you request otherwise) to the Loan Account. We credit 3% annual interest to Cash Value held in the Loan Account. (See "Policy Benefits and Rights--Policy Loans," page 18.) If the Policy is a modified endowment contract, a loan is treated as a taxable distribution. (See "Federal Tax Matters," page 25.) DEATH BENEFITS. An in force Policy pays a death benefit upon the death of the Insured. The Policy has two death benefit options. The Policy owner elects a death benefit option on the application. Under Option A, the death benefit is the Specified Amount stated in the Policy Specifications. Under Option B, the death benefit is the Specified Amount stated in the Policy Specifications plus the Cash Value. The death benefit is never less than the multiple of Cash Value specified in Appendix A. The death benefit payable is reduced by any Debt. (See "Policy Benefits and Rights--Death Benefits," page 15.) PREMIUMS The amount and frequency of premium payments are flexible. You specify a Planned Premium on the application. However, you are not required to make the Planned Premiums, and, subject to certain restrictions, may make premium payments in any amount and at any frequency. The amount, frequency, and period of time over which you pay premiums affects whether the Policy will be classified as a modified endowment contract. The minimum monthly premium payment is $50. Other minimums apply for other payment modes. 3 9 Payment of the Planned Premium does not guarantee that a Policy remains in force. Instead, Surrender Value must be sufficient to cover all Policy charges for the Policy to remain in force. A Policy will remain in force during the guarantee period if premiums paid, less withdrawals and Debt, equal or exceed the sum of the guarantee premiums. (See "The Policy--Premiums," page 13.) THE SEPARATE ACCOUNT ALLOCATION OF PREMIUMS. The portion of the premium available for allocation equals the premium paid less applicable charges. You indicate in the application the percentages of premium to be allocated among the Subaccounts of the Separate Account and the Fixed Account. The Policy currently offers thirty-one Subaccounts, each of which invests in shares of a designated Portfolio. The initial premium, minus applicable charges, is allocated to the Kemper Money Market Subaccount on the day after receipt. On the Trade Date, the Separate Account Value in the Kemper Money Market Subaccount is allocated among the Subaccounts and the Fixed Account in accordance with your instructions in the application. (See "The Policy--Policy Issue," page 13.) TRANSFERS. You may transfer Separate Account Value among the Subaccounts and into the Fixed Account once every fifteen days. One annual transfer is permitted from the Fixed Account to the Subaccounts. (See "The Policy--Allocation of Premiums and Separate Account Value," page 13.) THE FUNDS The following Portfolios of The Alger American Fund are currently available for investment by the Separate Account: - ALGER AMERICAN BALANCED - ALGER AMERICAN GROWTH - ALGER AMERICAN INCOME & GROWTH - ALGER AMERICAN MIDCAP GROWTH The Dreyfus Socially Responsible Growth Fund, Inc. is currently available for investment by the Separate Account. Dreyfus Life & Annuity Index Fund, d/b/a Dreyfus Stock Index Fund (hereinafter "Dreyfus Stock Index Fund") is currently available for investment by the Separate Account. The following Portfolios of the Dreyfus Variable Investment Fund are currently available for investment by the Separate Account: - DREYFUS VIF - APPRECIATION (FORMERLY CAPITAL APPRECIATION) - DREYFUS VIF - SMALL CAP Class 2 Shares of the following Portfolios of the Franklin Templeton Variable Insurance Products Trust are currently available for investment by the Separate Account: - TEMPLETON ASSET STRATEGY (FORMERLY TEMPLETON ASSET ALLOCATION) - TEMPLETON GLOBAL INCOME SECURITIES (FORMERLY TEMPLETON BOND) - TEMPLETON DEVELOPING MARKETS SECURITIES (FORMERLY TEMPLETON DEVELOPING MARKETS) - TEMPLETON INTERNATIONAL SECURITIES (FORMERLY TEMPLETON INTERNATIONAL) Initial Class Shares of the following Portfolios of the Fidelity Variable Insurance Products Fund are currently available for investment by the Separate Account: - FIDELITY VIP EQUITY-INCOME - FIDELITY VIP GROWTH - FIDELITY VIP HIGH INCOME - FIDELITY VIP OVERSEAS 4 10 The following Portfolios of the Janus Aspen Series are currently available for investment by the Separate Account: - JANUS ASPEN AGGRESSIVE GROWTH - JANUS ASPEN BALANCED - JANUS ASPEN FLEXIBLE INCOME - JANUS ASPEN GROWTH - JANUS ASPEN INTERNATIONAL GROWTH - JANUS ASPEN WORLDWIDE GROWTH Class A Shares of the following Portfolios of the Scudder Variable Life Investment Fund are currently available for investment by the Separate Account: - SCUDDER VLIF CAPITAL GROWTH - SCUDDER VLIF GROWTH AND INCOME - SCUDDER VLIF INTERNATIONAL The following Portfolios of the Kemper Variable Series are currently available for investment by the Separate Account: - KEMPER GOVERNMENT SECURITIES - KEMPER INVESTMENT GRADE BOND - KEMPER MONEY MARKET - KEMPER SMALL CAP GROWTH - KEMPER TOTAL RETURN - KEMPER VALUE+GROWTH For a more detailed description of the Funds, see "The Funds," page 9, the Funds' prospectuses accompanying this Prospectus, and Statements of Additional Information available from us upon request. FEES AND EXPENSES The following tables are designed to help you understand the fees and expenses that you bear, directly or indirectly, as a Policy Owner. The first table describes the Policy charges and deductions you directly bear under the Policy. The second table describes the fees and expenses of the Portfolios that you bear indirectly when you purchase a Policy. Expenses of the Portfolios are not fixed or specified under the terms of the Policy, and actual expenses may vary. (See "Charges and Deductions", beginning on page 19.) 5 11 POLICY CHARGES AND DEDUCTIONS CHARGES DEDUCTED FROM THE SEPARATE ACCOUNT: Mortality and Expense Risk Charge: CURRENT: .60% of average daily assets for first ten Policy Years; .40% for Policy Years eleven through twenty; and .20% for Policy Year twenty-one and thereafter GUARANTEED: .60% for all Policy Years Federal Income Tax Charge: Currently none(1) CHARGES DEDUCTED FROM THE CASH VALUE (DEDUCTED MONTHLY): Cost of Insurance Charge(2): CURRENT: Ranges from $0.05668 per month per $1,000 of net amount at risk to $36.32850 per month per $1,000 of net amount at risk(3) GUARANTEED: Ranges from $0.05668 per month per $1,000 of net amount at risk to $83.33333 per month per $1,000 of net amount at risk(3) Administrative Expense Charge: $10 monthly in Policy Year one; currently $6 monthly in Policy Years two and thereafter, with a $7.50 maximum monthly charge guaranteed Tax Charge: 2.5% from each premium payment for state and local taxes(4) 1% from each premium payment for corporate income tax liability(4) Sales Load: 2.5% from each premium payment(4) Systematic Withdrawal Charge: $50 for the initial set-up plus $25 each time a change is made to the plan TRANSACTION CHARGES: Transfer Fee: $25 per transfer in excess of twelve transfers in a single Policy Year(5) Maximum Partial Withdrawal Charge: $25 per partial withdrawal after the first partial withdrawal in a single Policy Year(6) Maximum Surrender Charge(7): 100% of the target premium as shown in Appendix B
- --------------- (1) We currently do not assess a charge for federal income taxes that may be attributed to the operations of the Separate Account. We reserve the right to do so in the future. (See "Charges and Deductions," beginning on page 19.) (2) The current cost of insurance charge will never exceed the guaranteed cost of insurance charge shown in the Policy Specifications. The net amount at risk equals the death benefit divided by 1.0024663, minus Cash Value. (See "Charges and Deductions--Cost of Insurance Charge," page 20.) (3) Current and guaranteed cost of insurance charges are based on the issue age (or attained age following an increase in Specified Amount), sex, Insured's rate class, and Policy Year. (4) Before net premiums are allocated. (5) Except there will be no transfer charge for transfers related to Automatic Asset Reallocation and Dollar Cost Averaging. (6) Except there will be no partial withdrawal charge for withdrawals taken under the Systematic Withdrawal Plan. (7) We deduct a surrender charge if the Policy is surrendered or the Cash Value is applied under a Settlement Option prior to the eleventh Policy Year (or the eleventh Policy Year following an increase in Specified Amount). 6 12 PORTFOLIO EXPENSES (As a percentage of average net assets for the period ended December 31, 1999) (total expense figures shown are after fee waivers or reductions and expense reimbursements)
12B-1 TOTAL PORTFOLIO TOTAL PORTFOLIO PORTFOLIO MANAGEMENT FEES FEES OTHER EXPENSES ANNUAL EXPENSES --------- --------------- ----- --------------- --------------- Alger American Balanced.......................... 0.75% 0.18% 0.93% Alger American Growth............................ 0.75% 0.04% 0.79% Alger American Income & Growth................... 0.625% 0.075% 0.70% Alger American MidCap Growth..................... 0.80% 0.05% 0.85% The Dreyfus Socially Responsible Growth Fund, Inc. .......................................... 0.75% 0.04% 0.79% Dreyfus Stock Index Fund......................... 0.25% 0.01% 0.26% Dreyfus VIF-Appreciation......................... 0.75% 0.03% 0.78% Dreyfus VIF-Small Cap............................ 0.75% 0.03% 0.78% Templeton Asset Strategy(1)(3)................... 0.60% 0.25% 0.18% 1.03% Templeton Global Income Securities(1)(2)(4)...... 0.60% 0.25% 0.05% 0.90% Templeton Developing Markets Securities(1)(5).... 1.25% 0.25% 0.31% 1.81% Templeton International Securities(1)(6)......... 0.69% 0.25% 0.19% 1.13% Fidelity VIP Equity-Income(8).................... 0.48% 0.08% 0.56% Fidelity VIP Growth(8)........................... 0.58% 0.07% 0.65% Fidelity VIP High Income......................... 0.58% 0.11% 0.69% Fidelity VIP Overseas(8)......................... 0.73% 0.14% 0.87% Janus Aspen Aggressive Growth(9)................. 0.65% 0.02% 0.67% Janus Aspen Balanced(9).......................... 0.65% 0.02% 0.67% Janus Aspen Flexible Income...................... 0.65% 0.07% 0.72% Janus Aspen Growth(9)............................ 0.65% 0.02% 0.67% Janus Aspen International Growth(9).............. 0.65% 0.11% 0.76% Janus Aspen Worldwide Growth(9).................. 0.65% 0.05% 0.70% Scudder VLIF Capital Growth...................... 0.46% 0.03% 0.49% Scudder VLIF Growth and Income................... 0.47% 0.08% 0.55% Scudder VLIF International....................... 0.85% 0.18% 1.03% Kemper Government Securities..................... 0.55% 0.08% 0.63% Kemper Investment Grade Bond(7).................. 0.60% 0.05% 0.65% Kemper Money Market.............................. 0.50% 0.04% 0.54% Kemper Small Cap Growth.......................... 0.65% 0.06% 0.71% Kemper Total Return.............................. 0.55% 0.06% 0.61% Kemper Value + Growth(7)......................... 0.75% 0.08% 0.83%
- --------------- (1) The Portfolio's Class 2 distribution plan or "Rule 12b-1 Plan" is described in the Portfolio's prospectus. (2) The Portfolio's administration fee is paid indirectly through the management fee. (3) On February 8, 2000, Portfolio shareholders approved a merger and reorganization that combined the Portfolio with Templeton Global Asset Allocation Fund, effective May 1, 2000. The shareholders of that fund had approved new management fees, which apply to the combined fund effective May 1, 2000. The table shows restated total expenses based on the new fees and the assets of the Portfolio as of December 31, 1999, and not the assets of the combined fund. However, if the table reflected both the new fees and the combined assets, the Portfolio's expenses after May 1, 2000 would be estimated as: Management Fees 0.60%, 12b-1 Fees 0.25%, Total Portfolio Other Expenses 0.14%, and Total Portfolio Annual Expenses 0.99%. (4) On February 8, 2000, a merger and reorganization was approved that combined the Portfolio with a similar fund of Templeton Variable Products Series Fund, effective May 1, 2000. The table shows total expenses based on the Portfolio's assets as of December 31, 1999, and not assets of the combined fund. However, if the table reflected combined assets, the Portfolio's expenses after May 1, 2000 would be estimated as: Management Fees 0.60%, 12b-1 Fees 0.25%, Total Portfolio Other Expenses 0.04%, and Total Portfolio Annual Expenses 0.89%. (5) On February 8, 2000, Portfolio shareholders approved a merger and reorganization that combined the Portfolio with the Templeton Developing Markets Equity Fund, effective May 1, 2000. The shareholders of that fund had approved new management fees, which apply to the combined fund effective May 1, 2000. The table shows restated total expenses based on the new fees and the assets of the Portfolio as of December 31, 1999, and not 7 13 the assets of the combined fund. However, if the table reflected both the new fees and the combined assets, the Portfolio's expenses after May 1, 2000 would be estimated as: Management Fees 1.25%, 12b-1 Fees 0.25%, Total Portfolio Other Expenses 0.29%, and Total Portfolio Annual Expenses 1.79%. (6) On February 8, 2000, shareholders approved a merger and reorganization that combined the Portfolio with the Templeton International Equity Fund, effective May 1, 2000. The shareholders of that fund had approved new management fees, which apply to the combined fund effective May 1, 2000. The table shows restated total expenses based on the new fees and the assets of the Portfolio as of December 31, 1999, and not the assets of the combined fund. However, if the table reflected both the new fees and the combined assets, the Portfolio's expenses after May 1, 2000 would be estimated as: Management Fees 0.65%, 12b-1 Fees 0.25%, Total Portfolio Other Expenses 0.20%, and Total Portfolio Annual Expenses 1.10%. (7) Pursuant to their respective agreements with Kemper Variable Series, the investment manager and the accounting agent have agreed, for the one year period commencing on May 1, 2000 to limit their respective fees and to reimburse other expenses to the extent necessary to limit total operating expenses of the following described Portfolios to the amounts set forth after the Portfolio names: Kemper Value+Growth Portfolio (.84%) and Kemper Investment Grade Bond Portfolio (.80%). The amounts set forth in the table above reflect actual expenses for the past fiscal year, which were at or lower than these expense limits. (8) A portion of the brokerage commissions that certain Portfolios pay was used to reduce expenses. In addition, certain Portfolios have entered into arrangements with their custodian whereby credits realized as a result of uninvested cash balances were used to reduce a portion of Portfolio expenses. Without these reductions, Management Fees, Total Portfolio Other Expenses and Total Portfolio Annual Expenses would have been .48%, .09% and .57%, respectively, for Fidelity VIP Equity-Income Portfolio; .58%, .08% and .66%, respectively, for the Fidelity VIP Growth Portfolio; and .73%, .18% and .91%, respectively, for the Fidelity VIP Overseas Portfolio. (9) Expenses are based upon expenses for the fiscal year ended December 31, 1999, restated to reflect a reduction in the management fee for Janus Aspen Aggressive Growth, Janus Aspen Balanced, Janus Aspen Growth, Janus Aspen International Growth and Janus Aspen Worldwide Growth Portfolios. All expenses are shown without the effect of any expense offset arrangements. TAX TREATMENT UNDER CURRENT FEDERAL TAX LAW Under existing tax law, any increase in Cash Value is generally not taxable until a distribution occurs through a withdrawal or surrender. Generally, distributions are not included in income until the amount of the distributions exceeds the premiums paid for the Policy. If the Policy is a modified endowment contract, a loan is also treated as a distribution. Generally, distributions from a modified endowment contract (including loans) are included in income to the extent the Cash Value exceeds premiums paid. A change of Owners, an assignment, a loan or a surrender of the Policy may have tax consequences. Death Benefits payable under the Policy are generally excludable from the gross income of the Beneficiary. As a result, the Beneficiary would not be subject to income tax on the Death Benefit. (See "Federal Tax Matters," page 25.) FREE-LOOK PERIOD You may examine a Policy and return it for a refund during the Free-Look Period. The length of the Free-Look Period depends on the state where the Policy is issued; however, it will be at least 10 days from the date you receive the Policy. (See "Policy Benefits and Rights--Free-Look Period and Exchange Rights," page 19.) ILLUSTRATIONS OF CASH VALUE, SURRENDER VALUE, DEATH BENEFIT Tables in Exhibit 9 to the registration statement illustrate Cash Value, Surrender Value and Death Benefits. These illustrations are based on Policy charges and hypothetical assumed rates of return for the Separate Account. The Separate Account's investment experience will differ, and the actual Policy values will be higher or lower than those illustrated. Upon request, we will provide a free, personalized illustration reflecting the proposed Insured's age, underwriting classification, and sex (where applicable). Otherwise, a personalized illustration uses the same methodology as those appearing in Exhibit 9 to the registration statement. 8 14 KILICO AND THE SEPARATE ACCOUNT KEMPER INVESTORS LIFE INSURANCE COMPANY We were organized under the laws of the State of Illinois in 1947 as a stock life insurance company. Our offices are located at 1 Kemper Drive, Long Grove, Illinois 60049. We offer life insurance and annuity products and are admitted to do business in the District of Columbia and all states except New York. We are a wholly-owned subsidiary of Kemper Corporation, a nonoperating holding company. KILICO and Kemper Corporation are wholly-owned subsidiaries of Zurich Financial Services ("ZFS"). ZFS is owned by Zurich Allied A.G. and Allied Zurich p.l.c. fifty-seven percent and forty-three percent, respectively. SEPARATE ACCOUNT KILICO Variable Separate Account (the "Separate Account") was established as a separate investment account on January 22, 1987. The Separate Account receives and invests net premiums under the Policy. In addition, the Separate Account receives and invests net premiums for other variable life insurance policies offered by KILICO. The Separate Account is administered and accounted for as part of our general business. The income, capital gains or capital losses of the Separate Account are credited to or charged against Separate Account assets, without regard to the income, capital gains or capital losses of any other separate account or any other business we conduct. The Policy benefits are our obligations. The Separate Account is registered with the Securities and Exchange Commission ("Commission") as a unit investment trust under the Investment Company Act of 1940 (the "1940 Act"). However, the Commission does not supervise the management, investment practices or policies of the Separate Account or KILICO. The Policy currently offers thirty-one Subaccounts. Additional Subaccounts may be added in the future. Not all Subaccounts may be available in all jurisdictions or under all Policies. THE FUNDS The Separate Account invests in shares of The Alger American Fund, The Dreyfus Socially Responsible Growth Fund, Inc., Dreyfus Stock Index Fund, Dreyfus Variable Investment Fund, Franklin Templeton Variable Insurance Products Trust, Fidelity Variable Insurance Products Fund, Janus Aspen Series, Scudder Variable Life Investment Fund and Kemper Variable Series. (Effective May 1, 2000, the funds of Templeton Variable Products Series Fund merged into similar corresponding funds of Franklin Templeton Variable Insurance Products Trust.) The Commission does not supervise the Funds' management, investment practices or policies. The Funds provide investment vehicles for variable life insurance and variable annuity contracts. Shares of the Funds currently are sold only to insurance company separate accounts and certain qualified retirement plans. In addition to the Separate Account, shares of the Funds may be sold to variable life insurance and variable annuity separate accounts of insurance companies not affiliated with KILICO. It is conceivable that in the future it may be disadvantageous for variable life insurance separate accounts of companies unaffiliated with KILICO, or for variable life insurance separate accounts, variable annuity separate accounts and qualified retirement plans to invest simultaneously in the Funds. Currently, we do not foresee disadvantages to variable life insurance owners, variable annuity owners or qualified retirement plans. The Funds have an obligation to monitor events for material conflicts between owners and determine what action, if any, should be taken. In addition, if we believe that a Fund's response to any of those events or conflicts insufficiently protects Owners, we will take appropriate action on our own. A Fund may consist of separate portfolios. The assets of each portfolio are held separate from the assets of the other portfolios, and each portfolio has its own distinct investment objective and policies. Each portfolio operates as a separate investment fund, and the income, gains or losses of one portfolio generally have no effect on the investment performance of any other portfolio. THE ALGER AMERICAN FUND The Alger American Fund Portfolios in which the Separate Account invests are summarized below: ALGER AMERICAN BALANCED: This Portfolio seeks current income and long-term capital appreciation. ALGER AMERICAN GROWTH: This Portfolio seeks long-term capital appreciation. 9 15 ALGER AMERICAN INCOME & GROWTH: This Portfolio primarily seeks to provide a high level of dividend income; its secondary goal is to provide capital appreciation. ALGER AMERICAN MIDCAP GROWTH: This Portfolio seeks long-term capital appreciation. Fred Alger Management, Inc. is the investment adviser to each Portfolio of The Alger American Fund specified above. THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC. This Fund seeks to provide capital growth, with current income as a secondary goal. To pursue these goals, the Fund invests primarily in the common stock of companies that, in the opinion of the Fund's management, meet traditional investment standards and conduct their business in a manner that contributes to the enhancement of the quality of life in America. The Dreyfus Corporation serves as the investment adviser, and NCM Capital Management Group, Inc. is the sub-adviser, for this Fund. DREYFUS STOCK INDEX FUND This Fund seeks to match the total return of the Standard & Poor's Composite Stock Price Index. The Dreyfus Corporation serves as the investment adviser for this Fund. DREYFUS VARIABLE INVESTMENT FUND The Dreyfus Variable Investment Fund Portfolios in which the Separate Account invests are summarized below: DREYFUS VIF-APPRECIATION (FORMERLY CAPITAL APPRECIATION): This Portfolio seeks long-term capital growth consistent with the preservation of capital; current income is a secondary goal. DREYFUS VIF-SMALL CAP: This Portfolio seeks to maximize capital appreciation. The Dreyfus Corporation serves as the investment adviser to each Portfolio of the Dreyfus Variable Investment Fund specified above. Fayez Sarofim & Co. serves as the sub-adviser for the Dreyfus VIF-Appreciation Portfolio. FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST The Franklin Templeton Variable Insurance Products Trust Portfolios in which the Separate Account invests are summarized below: TEMPLETON ASSET STRATEGY (FORMERLY TEMPLETON ASSET ALLOCATION) (CLASS 2 SHARES): This Portfolio seeks high total return. TEMPLETON GLOBAL INCOME SECURITIES (FORMERLY TEMPLETON BOND) (CLASS 2 SHARES): This Portfolio seeks high current income. Capital appreciation is a secondary consideration. TEMPLETON DEVELOPING MARKETS SECURITIES (FORMERLY TEMPLETON DEVELOPING MARKETS) (CLASS 2 SHARES): This Portfolio seeks long-term capital appreciation. The Portfolio primarily invests in emerging market equity securities. TEMPLETON INTERNATIONAL SECURITIES (FORMERLY TEMPLETON INTERNATIONAL) (CLASS 2 SHARES): This Portfolio seeks long-term capital growth. Templeton Investment Counsel, Inc. is the investment adviser for the Templeton Asset Strategy Fund, the Templeton Global Income Securities Fund and the Templeton International Securities Fund. Templeton Asset Management Ltd. is the investment manager for the Templeton Developing Markets Securities Fund. FIDELITY VARIABLE INSURANCE PRODUCTS FUND The Fidelity Variable Insurance Products Fund Portfolios in which the Separate Account invests are summarized below: FIDELITY VIP EQUITY-INCOME (INITIAL CLASS): This Portfolio seeks reasonable income. FIDELITY VIP GROWTH (INITIAL CLASS): This Portfolio seeks capital appreciation. 10 16 FIDELITY VIP HIGH INCOME (INITIAL CLASS): This Portfolio seeks a high level of current income while also considering growth of capital. FIDELITY VIP OVERSEAS (INITIAL CLASS): This Portfolio seeks long-term growth of capital. Fidelity Management & Research Company (FMR) is the investment adviser for the available Portfolios of the Fidelity Variable Insurance Products Fund. Fidelity Management & Research (U.K.) Inc. (FMR U.K.), in London, England, and Fidelity Management & Research Far East Inc. (FMR Far East), in Tokyo, Japan, each serve as sub-advisers to the Fidelity VIP High Income Portfolio and the Fidelity VIP Overseas Portfolio. Fidelity International Investment Advisors (U.K.) Limited (FIIA (U.K.) L), in London, England, also serves as sub-adviser to the Fidelity VIP Overseas Portfolio. JANUS ASPEN SERIES The Janus Aspen Series Portfolios in which the Separate Account invests are summarized below: JANUS ASPEN AGGRESSIVE GROWTH: This Portfolio seeks long-term growth of capital. JANUS ASPEN BALANCED: This Portfolio seeks long-term capital growth, consistent with preservation of capital and balanced by current income. JANUS ASPEN FLEXIBLE INCOME: This Portfolio seeks to obtain maximum total return consistent with preservation of capital. JANUS ASPEN GROWTH: This Portfolio seeks long-term growth of capital in a manner consistent with the preservation of capital. JANUS ASPEN INTERNATIONAL GROWTH: This Portfolio seeks long-term growth of capital. JANUS ASPEN WORLDWIDE GROWTH: This Portfolio seeks long-term growth of capital in a manner consistent with the preservation of capital. Janus Capital Corporation serves as the investment adviser for the six available Portfolios of the Janus Aspen Series. SCUDDER VARIABLE LIFE INVESTMENT FUND The Scudder Variable Life Investment Fund Portfolios in which the Separate Account invests are summarized below: SCUDDER VLIF CAPITAL GROWTH (A SHARES): This Portfolio seeks to maximize long-term capital growth through a broad and flexible investment program. SCUDDER VLIF GROWTH AND INCOME (A SHARES): This Portfolio seeks long-term growth of capital, current income and growth of income. SCUDDER VLIF INTERNATIONAL (A SHARES): This Portfolio seeks long-term growth of capital primarily through diversified holdings of marketable foreign equity investments. Scudder Kemper Investments, Inc., our affiliate, is the investment adviser of each Portfolio of the Scudder Variable Life Investment Fund specified above. KEMPER VARIABLE SERIES The Kemper Variable Series Portfolios in which the Separate Account invests are summarized below: KEMPER GOVERNMENT SECURITIES: This Portfolio seeks high current return consistent with preservation of capital. KEMPER INVESTMENT GRADE BOND: This Portfolio seeks high current income. KEMPER MONEY MARKET: This Portfolio seeks maximum current income to the extent consistent with stability of principal from a portfolio of high quality money market instruments. The Portfolio seeks to maintain a net asset value of $1.00 per share but there can be no assurance that the Portfolio will be able to do so. KEMPER SMALL CAP GROWTH: This Portfolio seeks maximum appreciation of investors' capital. KEMPER TOTAL RETURN: This Portfolio seeks a high total return, a combination of income and capital appreciation, consistent with reasonable risk. 11 17 KEMPER VALUE+GROWTH: This Portfolio seeks growth of capital. A secondary objective of the Portfolio is the reduction of risk over a full market cycle compared to a portfolio of only growth stocks or only value stocks. Scudder Kemper Investments, Inc. is the investment manager to each Portfolio of the Kemper Variable Series specified above. The Portfolios may not achieve their stated objectives. More detailed information, including a description of risks involved in investing in the Portfolios, is found in the Funds' prospectuses and Statements of Additional Information. The Funds' prospectuses accompany this Prospectus. The Funds' Statements of Additional Information are available from us upon request. CHANGE OF INVESTMENTS We reserve the right to make additions to, deletions from, or substitutions for the shares held by the Separate Account or that the Separate Account may purchase. We reserve the right to eliminate the shares of any of the portfolios and to substitute shares of another portfolio or of another investment company, if the shares of a portfolio are no longer available for investment, or if in our judgment further investment in any portfolio becomes inappropriate in view of the purposes of the Policy or the Separate Account. We may also eliminate or combine one or more Subaccounts, transfer assets, or substitute one Subaccount for another Subaccount, if, in our discretion, marketing, tax or investment conditions warrant. We will not substitute any shares attributable to an Owner's interest in a Subaccount without notice to the Owner and the Commission's prior approval, if required. Nothing contained in this Prospectus shall prevent the Separate Account from purchasing other securities for other series or classes of policies, or from permitting a conversion between series or classes of policies on the basis of requests made by Owners. We also reserve the right to establish additional Subaccounts of the Separate Account, each of which would invest in a new portfolio of the Funds, or in shares of another investment company. New Subaccounts may be established when, in our sole discretion, marketing needs or investment conditions warrant. New Subaccounts may be made available to existing Owners as we determine. If we deem it to be in the best interests of persons having voting interests under the Policy, the Separate Account may be: - operated as a management company under the 1940 Act; - deregistered under the 1940 Act in the event such registration is no longer required; or - combined with our other separate accounts. To the extent permitted by law, we may also transfer assets of the Separate Account to another separate account, or to the General Account. FIXED ACCOUNT OPTION AMOUNTS ALLOCATED OR TRANSFERRED TO THE FIXED ACCOUNT ARE PART OF OUR GENERAL ACCOUNT, SUPPORTING INSURANCE AND ANNUITY OBLIGATIONS. INTERESTS IN THE FIXED ACCOUNT ARE NOT REGISTERED UNDER THE SECURITIES ACT OF 1933 ("1933 ACT"), AND THE FIXED ACCOUNT IS NOT REGISTERED AS AN INVESTMENT COMPANY UNDER THE 1940 ACT. ACCORDINGLY, NEITHER THE FIXED ACCOUNT NOR ANY FIXED ACCOUNT INTERESTS GENERALLY ARE SUBJECT TO THE PROVISIONS OF THE 1933 OR 1940 ACTS. WE HAVE BEEN ADVISED THAT THE STAFF OF THE COMMISSION HAS NOT REVIEWED THE DISCLOSURES IN THIS PROSPECTUS RELATING TO THE FIXED ACCOUNT. STATEMENTS REGARDING THE FIXED ACCOUNT, HOWEVER, MAY BE SUBJECT TO THE GENERAL PROVISIONS OF THE FEDERAL SECURITIES LAWS RELATING TO THE ACCURACY AND COMPLETENESS OF STATEMENTS MADE IN PROSPECTUSES. Under the Fixed Account Option, we pay a fixed interest rate for stated periods. This Prospectus describes only the aspects of the Policy involving the Separate Account, unless we refer to fixed accumulation and settlement options. A minimum balance of $500 must remain in the Fixed Account under the Fixed Account Option. We guarantee the interest rate credited to the Fixed Account will be at least 3% annually. At our discretion, we may credit interest in excess of 3%. We reserve the right to change the rate of excess interest credited. We also reserve the right to declare different rates of excess interest depending on when amounts are allocated or transferred to the Fixed Account. As a result, amounts at any designated time may be credited with a different rate of excess interest than the rate previously credited to such amounts and to amounts allocated or transferred at any other designated time. 12 18 THE POLICY POLICY ISSUE Before we issue a Policy, we must receive a completed application and a full initial premium at our home office. We ordinarily issue a Policy only for Insureds Age 1 through 80 who supply satisfactory evidence of insurability. Acceptance of an application is subject to our underwriting requirements. If we decline an application, we will refund the Cash Value in the Kemper Money Market Subaccount plus the total amount of monthly deductions and deductions against premiums. After underwriting is complete and the Policy is delivered to you, insurance coverage begins as of the Policy Date. (See "Premiums," below.) PREMIUMS We must receive premiums at our home office. (See "Distribution of Policies.") Checks must be made payable to KILICO. PLANNED PREMIUMS. You specify a Planned Premium payment on the application that provides for the payment of level premiums over a specified period of time. However, you are not required to pay Planned Premiums. The minimum monthly premium is $50. Other minimums are: annual $600; semi-annual $300; and quarterly $150. The amount, frequency and period of time over which you pay premiums may affect whether the Policy will be classified as a modified endowment contract. Accordingly, variations from Planned Premiums may cause the Policy to become a modified endowment contract, and therefore subject to different tax treatment from conventional life insurance contracts for certain pre-death distributions (See "Federal Tax Matters".) Payment of the Planned Premium does not guarantee that a Policy remains in force. Instead, the continuation of the Policy depends upon the Policy's Net Surrender Value. Even if Planned Premiums are paid, the Policy will lapse any time the Net Surrender Value is insufficient to pay the current monthly deductions and a grace period expires without sufficient payment. (See "Policy Lapse and Reinstatement.") A guarantee period and a monthly guarantee premium are specified in the Policy Specifications. The guarantee period ends on the tenth Policy anniversary. During the guarantee period, the Policy remains in force and no grace period will begin, provided that the total premiums received, minus any withdrawals and any Debt, equal or exceed the monthly guarantee premium times the number of months since the Policy Date, including the current month. The full initial premium is the only premium required to be paid under a Policy. However, additional premiums may be necessary to keep the Policy in force. (See "The Policy--Policy Lapse and Reinstatement.") We may reject or limit any premium payment below the current minimum premium amount, or that would increase the death benefit by more than the amount of the premium. We may return all or a portion of a premium payment if it would disqualify the Policy as life insurance under the Internal Revenue Code. Certain charges are deducted from each premium payment. (See "Charges and Deductions.") The remainder of the premium, known as the net premium, is allocated as described below under "Allocation of Premiums and Separate Account Value." POLICY DATE. The Policy Date is used to determine Policy Years and Monthly Processing Dates. The Policy Date is the date that insurance coverage takes effect subject to conditions set forth in the application, including the payment of initial premium. If this date is the 29th, 30th, or 31st of a month, the Policy Date will be the first day of the following month. ALLOCATION OF PREMIUMS AND SEPARATE ACCOUNT VALUE ALLOCATION OF PREMIUMS. The initial net premium is allocated to the Kemper Money Market Subaccount. The Separate Account Value remains in the Kemper Money Market Subaccount until the Trade Date. On the Trade Date, the Separate Account Value in the Kemper Money Market Subaccount is allocated to the Subaccounts and the Fixed Account as specified in the application. Additional premiums received will be allocated as specified in the application or in later written instructions received from you. The minimum amount of any premium that may be allocated to a Subaccount is $50. Cash Value may be allocated to a total of nineteen Subaccounts at any given time. 13 19 The Separate Account Value will vary with the investment experience of the chosen Subaccounts. You bear the entire investment risk. TRANSFERS. After the Trade Date, Separate Account Value may be transferred among the Subaccounts and into the Fixed Account. These transfers are limited to one transfer every fifteen days. All transfers made during a business day are treated as one transfer. Fixed Account value may be transferred to one or more Subaccounts. One transfer of Fixed Account value may be made once each Policy Year in the thirty day period following the end of a Policy Year. Transfer requests must be in writing in a form acceptable to us, or by telephone authorization under forms we authorize. (See "General Provisions--Written Notices and Requests.") The minimum partial transfer amount is $500. No partial transfer may be made if the value of your remaining interest in a Subaccount or the Fixed Account, from which amounts are to be transferred, would be less than $500 after the transfer. We may waive these minimums for reallocations under established third party asset allocation programs. Transfers are based on the Accumulation Unit values next determined following our receipt of valid, complete transfer instructions. We may suspend, modify or terminate the transfer provision. We will charge $25 for each transfer in excess of twelve transfers per policy year, excluding Automatic Asset Reallocation and Dollar Cost Averaging transfers. We disclaim all liability if we follow in good faith instructions given in accordance with our procedures, including requests for personal identifying information, that are designed to limit unauthorized use of the privilege. Therefore, you bear the risk of loss in the event of a fraudulent telephone transfer. If you authorize a third party to transact transfers on your behalf, we will reallocate the Cash Value pursuant to the authorized asset allocation program. However, we do not offer or participate in any asset allocation program and we take no responsibility for any third party asset allocation program. We may suspend or cancel acceptance of a third party's instructions at any time and may restrict the investment options available for transfer under third party authorizations. AUTOMATIC ASSET REALLOCATION. You may elect to have transfers made automatically among the Subaccounts on an annual or a quarterly basis so that Cash Value is reallocated to match the percentage allocations in your predefined premium allocation elections. Transfers under this program are not subject to the $500 minimum transfer limitations, limited by the fifteen day transfer restriction nor subject to the $25 transfer charge. An election to participate in the automatic asset reallocation program must be in writing on our form and returned to our home office. There is currently no charge to participate in the program. POLICY LAPSE AND REINSTATEMENT LAPSE. The Policy will lapse when the Net Surrender Value is insufficient to cover the current monthly deductions and a grace period expires without a sufficient payment. (See "Charges and Deductions.") The grace period is 61 days. The grace period begins when we send notice that the Net Surrender Value is insufficient to cover the monthly deductions. If we do not receive a premium payment or loan repayment during the grace period sufficient to keep the Policy in force for three months, the Policy will lapse and terminate without value. If payment is received within the grace period, the premium or loan repayment will be allocated to the Subaccounts and the Fixed Account in accordance with current allocation instructions. Amounts over and above the amounts necessary to prevent lapse may be paid as additional premiums, to the extent permissible. (See "The Policy--Premiums.") We will not accept any payment causing the total premium payment to exceed the maximum payment permitted for life insurance under the guideline premium limits. However, you may voluntarily repay a portion of Debt to avoid lapse. You may also combine premium payments with Debt repayments. (See "Federal Tax Matters.") The death benefit payable during the grace period will be the Death Benefit in effect immediately prior to the grace period, less any Debt and any unpaid monthly deductions. REINSTATEMENT. If a Policy lapses because of insufficient Net Surrender Value to cover the monthly deductions, and it has not been surrendered for its Net Surrender Value, it may be reinstated at any time within 14 20 three years after the date of lapse. Tax consequences may affect the decision to reinstate. Reinstatement is subject to: - receipt of evidence of insurability satisfactory to us; - payment of a minimum premium sufficient to cover monthly deductions for the grace period and to keep the Policy in force three months; and - payment or reinstatement of any Debt which existed at the date of termination of coverage. The effective date of reinstatement of a Policy is the Monthly Processing Date that coincides with or next follows the date we approve the application for reinstatement. Suicide and incontestability provisions apply from the effective date of reinstatement. POLICY BENEFITS AND RIGHTS DEATH BENEFITS While the Policy is in force (see "Policy Lapse and Reinstatement--Lapse," above), the death benefit is based on the death benefit option, the Specified Amount and the table of death benefit percentages applicable at the time of death. The death benefit proceeds equal the death benefit minus any Debt and minus any monthly deductions due during the grace period. You select in the application one of two death benefit options: Option A or Option B. Subject to certain restrictions, you can change the death benefit option selected. So long as the Policy remains in force, the death benefit under either option will never be less than the Specified Amount. You choose the Specified Amount on the application. The Specified Amount is stated in the Policy Specifications. The minimum Specified Amount is $100,000. OPTION A. Under Option A, the death benefit equals the Specified Amount or, if greater, the Cash Value (determined as of the end of the Valuation Period during which the Insured dies) multiplied by a death benefit percentage. The death benefit percentages vary according to the Insured's age. The death benefit percentage is 250% for an Insured at Age 40 or under, and it declines for older Insureds. In setting the death benefit percentages, we seek to ensure that the Policy will qualify for favorable federal income tax treatment. A table showing the death benefit percentages is in Appendix A to this Prospectus and in the Policy. OPTION B. Under Option B, the death benefit equals the Specified Amount plus the Cash Value (determined as of the end of the Valuation Period during which the Insured dies) or, if greater, the Cash Value multiplied by a death benefit percentage. The specified percentage is the same as that used in connection with Option A. The death benefit under Option B always varies as Cash Value varies. EXAMPLES OF OPTIONS A AND B. The following examples demonstrate the determination of death benefits under Options A and B. The examples show three Policies--Policies I, II, and III--with the same Specified Amount, but different Cash Values and assume that the Insured is Age 35 at the time of death and that there is no outstanding Debt.
POLICY I POLICY II POLICY III -------- --------- ---------- Specified Amount............................... $100,000 $100,000 $100,000 Cash Value on Date of Death.................... $ 25,000 $ 50,000 $ 75,000 Death Benefit Percentage....................... 250% 250% 250% Death Benefit Under Option A................... $100,000 $125,000 $187,500 Death Benefit Under Option B................... $125,000 $150,000 $187,500
Under Option A, the death benefit for Policy I equals $100,000 since the death benefit is the greater of the Specified Amount ($100,000) or the Cash Value at the date of death times the death benefit percentage ($25,000 X 250% = $62,500). For both Policies II and III under Option A, the Cash Value times the death benefit percentage ($50,000 X 250% = $125,000 for Policy II; $75,000 X 250% = $187,500 for Policy III) is greater than the Specified Amount ($100,000), so the death benefit equals the higher value. Under Option B, the death benefit for Policy I equals $125,000 since the death benefit is the greater of Specified Amount plus Cash Value ($100,000 + $25,000 = $125,000) or the Cash Value times the death benefit percentage ($25,000 X 250% = $62,500). Similarly, in Policy II, Specified Amount plus Cash Value ($100,000 + $50,000 = $150,000) is greater than Cash Value times the death benefit percentage ($50,000 X 250% = $125,000). In Policy III, the Cash Value 15 21 times the death benefit percentage ($75,000 X 250% = $187,500) is greater than the Specified Amount plus Cash Value ($100,000 + $75,000 = $175,000), so the death benefit equals the higher value. All calculations of death benefit are made as of the end of the Valuation Period during which the Insured dies. Death benefit proceeds may be paid to a Beneficiary in a lump sum or under the Policy's settlements options. Death Benefits ordinarily are paid within seven days after we receive all required documentation. Payments may be postponed in certain circumstances. (See "General Provisions--Postponement of Payments".) CHANGES IN DEATH BENEFIT OPTION After the first Policy Year, you may change the death benefit option from Option A to Option B, or from Option B to Option A. Changes in the death benefit option may be made in writing once per Policy Year. The effective date of the change is the next Monthly Processing Date after we accept the change. A change in the death benefit from Option A to Option B reduces the Specified Amount by the amount of the Policy's Cash Value. Therefore, the death benefit payable under Option B at the time of the change equals the amount payable under Option A immediately prior to the change. The change in option affects the determination of the death benefit since the Cash Value will then be added to the new Specified Amount, and the death benefit then varies with the Cash Value. We may require evidence of insurability before we accept a change in the death benefit from Option A to Option B. A change in the death benefit from Option B to Option A increases the Specified Amount by the amount of the Policy's Cash Value. Therefore, the death benefit payable under Option A at the time of the change equals the amount payable under Option B immediately prior to the change. However, the change in option affects the determination of the death benefit since the Cash Value is not added to the Specified Amount in determining the death benefit. The death benefit then equals the new Specified Amount (or, if higher, the Cash Value times the applicable specified percentage). A change in death benefit option may affect the future monthly cost of insurance charge, which varies with the net amount at risk. Generally, net amount at risk is the amount by which the death benefit exceeds the Cash Value. (See "Charges and Deductions--Cost of Insurance Charge.") If the death benefit does not equal the Cash Value times a death benefit percentage under either Options A or B, changing from Option B to Option A will generally decrease the future net amount at risk. This would decrease the future cost of insurance charges. Changing from Option A to Option B generally results in a net amount at risk that remains level. Such a change, however, results in an increase in the cost of insurance charges over time, since the cost of insurance rates increase with the Insured's Age. CHANGES IN SPECIFIED AMOUNT After the first Policy Year, you may increase or decrease the Specified Amount, subject to our approval. A change in Specified Amount may only be made once per Policy Year. The minimum change in Specified Amount is $25,000. Increases are not allowed after the Insured attains age 80. Increasing the Specified Amount could increase the death benefit. Decreasing the Specified Amount could decrease the death benefit. The amount of change in the death benefit will depend, among other things, upon the selected death benefit option and the degree to which the death benefit exceeds the Specified Amount prior to the change. Changing the Specified Amount could affect the subsequent level of death benefit and Policy values. An increase in Specified Amount may increase the net amount at risk, thereby increasing your cost of insurance charge and the guarantee premium amount. However, an increase in Specified Amount does not extend the guarantee period. Conversely, a decrease in Specified Amount may decrease the net amount at risk, thereby decreasing your cost of insurance charge. A decrease in Specified Amount will not decrease the guarantee premium. Decreases in the death benefit may have tax consequences. (See "Federal Tax Matters.") INCREASES. We require additional evidence of insurability for an increase in Specified Amount. DECREASES. Any decrease in Specified Amount is first applied to the most recent increases successively, then to the original Specified Amount. A decrease is not permitted if the Specified Amount would fall below the lesser of the initial Specified Amount or $100,000. If after a decrease in the Specified Amount, total premiums paid exceed the tax law's premium limitations, we will refund the amount exceeding the premium limitations. Some or all of the amount refunded may be subject to tax. (See "Federal Tax Matters.") We reserve the right to deny a requested decrease in Specified Amount. The reasons for denial may include: - our determination that the decrease would cause the Policy to fail the tax guideline premium limitations, or 16 22 - our determination that the decrease would cause the Policy to terminate because the distributions from Cash Value required under the tax code to effect the decrease exceed Net Surrender Value. Requests for change in Specified Amount must be made in writing. The requested change becomes effective on the Monthly Processing Date on or next following our acceptance of the request. If the Owner is not the Insured, we require the Insured's consent. BENEFITS AT MATURITY If the Insured is alive on the Policy Date anniversary nearest the Insured's 100th birthday, we pay the Owner the Surrender Value of the Policy. On the Maturity Date, the Policy terminates and we have no further obligations under the Policy except as provided in the Extended Maturity Option Rider. CASH VALUE Cash Value reflects: - the investment experience of the selected Subaccounts, - the frequency and amount of premiums paid, - transfers between Subaccounts, - withdrawals, - any Fixed Account or Loan Account values, and - Policy charges. You may make partial withdrawals of Cash Value or surrender the Policy and receive the Policy's Net Surrender Value. (See "Surrender Privilege.") The Cash Value is not guaranteed. CALCULATION OF CASH VALUE. Cash Value is the total of: - Separate Account Value, - Fixed Account value, and - Loan Account value. Cash Value is determined on each Valuation Date. It is first calculated on the Policy Date. On that date, the Cash Value equals the initial net premium, minus the monthly deductions for the first Policy Month. (See "Charges and Deductions.") On any Valuation Date, Separate Account Value in any Subaccount equals: (1) Separate Account Value in the Subaccount at the end of the preceding Valuation Period times the Investment Experience Factor (defined below) for the current Valuation Period; plus (2) Any net premiums received and allocated to the Subaccount during the current Valuation Period; plus (3) Any amounts transferred to the Subaccount during the current Valuation Period (from a Subaccount, the Fixed Account or the Loan Account for Policy loan repayment (see "Policy Benefits and Rights--Policy Loans,")); minus (4) The pro rata portion of the monthly cost of insurance charge, administrative charge, and any other charges assessed to the Subaccount (see "Charges and Deductions--Cost of Insurance Charge"); minus (5) Any amounts transferred from the Subaccount during the current Valuation Period; minus (6) Any amounts withdrawn from the Subaccount during the current Valuation Period; minus (7) Any amounts loaned from the Subaccount during the current Valuation Period. There will also be Cash Value in the Loan Account if there is a Policy loan outstanding. The Loan Account is credited with amounts transferred from Subaccounts for Policy loans. The Loan Account balance accrues daily interest at an effective annual rate of 3.00%. (See "Policy Benefits and Rights--Policy Loans.") The Cash Value in the Fixed Account is credited with interest at our declared annual rate. The annual rate will never be less than 3%. 17 23 ACCUMULATION UNIT VALUE. Each Subaccount has its own Accumulation Unit Value. When net premiums or other amounts are allocated to a Subaccount, units are purchased based on the Subaccount's Accumulation Unit Value at the end of the Valuation Period during which the allocation is made. When amounts are transferred out of, or deducted from, a Subaccount, units are redeemed in a similar manner. For each Subaccount, Accumulation Unit Value was initially set at the same unit value as the net asset value of a share of the underlying Portfolio. The Accumulation Unit Value for each subsequent Valuation Period is the Investment Experience Factor for that Valuation Period times the Accumulation Unit Value for the preceding Valuation Period. Each Valuation Period has a single Accumulation Unit Value which applies for each day in the period. The number of Accumulation Units will not change due to investment experience. The Investment Experience Factor may be greater or less than one; therefore, the Accumulation Unit Value may increase or decrease. INVESTMENT EXPERIENCE FACTOR. The investment experience of the Separate Account is calculated by applying the Investment Experience Factor to the Separate Account Value in each Subaccount during a Valuation Period. Each Subaccount has its own Investment Experience Factor. The Investment Experience Factor of a Subaccount for any Valuation Period is determined by dividing (1) by (2) and subtracting (3) from the result, where: (1) is the net result of: a. The net asset value per share of the investment held in the Subaccount determined at the end of the current Valuation Period; plus b. the per share amount of any dividend or capital gain distributions made by the investments held in the Subaccount, if the "ex-dividend" date occurs during the current Valuation Period; plus or minus c. a charge or credit for any taxes reserved for the current Valuation Period which we determine have resulted from the investment operations of the Subaccount; (2) is the net asset value per share of the investment held in the Subaccount determined at the end of the preceding Valuation Period; (3) is the factor representing the Mortality and Expense Risk Charge. (See "Charges and Deductions--Mortality and Expense Risk Charge.") POLICY LOANS After the first Policy Year, you may borrow all or part of the Policy's maximum loan amount. The maximum loan amount is 90% of Surrender Value. The amount of any new loan may not exceed the maximum loan amount less Debt on the date a loan is granted. Loan interest is charged at an effective annual rate of 4.5%. PREFERRED LOANS. After the first Policy Year, the Policy Owner may borrow an amount up to the earnings in the Policy subject to any previous indebtedness. Interest on a preferred loan is charged at an effective annual rate of 3%. The minimum amount of any loan is $500. The loan ordinarily is paid within seven days after we receive a written loan request, although payments may be postponed under certain circumstances. (See "Postponement of Payments," and "Federal Tax Matters.") On the date a loan is made, the loan amount is transferred from the Separate Account and Fixed Account to the Loan Account. Unless you direct otherwise, the loan amount is deducted from the Subaccounts and the Fixed Account in proportion to the values that each bears to the total of Separate Account Value and Fixed Account value at the end of the Valuation Period during which the request is received. Interest not paid when due is added to the loan amount. Unpaid interest is due upon the earlier of the next Policy Date anniversary or when coverage ceases. The same interest rates apply to unpaid interest. When interest is added to the loan amount, we transfer an equal amount from the Separate Account and the Fixed Account to the Loan Account. Cash Value in the Loan Account earns 3.00% annual interest. Such interest is allocated to the Loan Account. LOAN REPAYMENT. All or any portion of a loan may be repaid at any time. You must specify that the purpose of a payment is loan repayment; otherwise a payment is treated as premium. At the time of repayment, the Loan Account is reduced by the repayment amount, adjusted for the difference between interest charged and interest earned. The net repayment amount is allocated to the Subaccounts and the Fixed Account, according to your 18 24 current allocation instructions, at the end of the Valuation Period during which the repayment is received. These transfers are not limited by the 15 day transfer restriction. EFFECTS OF POLICY LOAN. Policy loans decrease the Net Surrender Value and, therefore, the amount available to pay Policy charges. If the Net Surrender Value on the day preceding a Monthly Processing Date is less than the next monthly deductions we will notify you. (See "General Provisions--Written Notices and Requests.") The Policy will lapse and terminate without value, unless we receive a sufficient payment within 61 days of the date notice is sent. (See "The Policy--Policy Lapse and Reinstatement.") EFFECT ON INVESTMENT EXPERIENCE. A Policy Loan affects Cash Value. The collateral for the outstanding loan (the amount held in the Loan Account) does not participate in the experience of the Subaccounts or earn current interest in the Fixed Account. If the interest credited to the Loan Account is more than the amount that would have been earned in the Subaccounts or the Fixed Account, the Cash Value will, and the Death Benefit may, be higher as a result of the loan. Conversely, if the amount credited to the Loan Account is less than would have been earned in the Subaccounts or the Fixed Account, the Cash Value, as well as the Death Benefit, may be less. TAX TREATMENT. If the Policy is a modified endowment contract, a loan is treated as a distribution and is includible in income to the extent that Cash Value exceeds premiums paid. Therefore, a loan may result in federal income tax and a 10% tax penalty may also apply. (See "Federal Tax Matters.") SURRENDER PRIVILEGE If the Insured is alive, you may surrender the Policy for its Surrender Value. To surrender the Policy, you must return the Policy to us, along with a written request. The Net Surrender Value equals Surrender Value, minus any Debt. The Surrender Value equals the Cash Value minus any applicable surrender charge. (See "Surrender Charge.") PARTIAL WITHDRAWALS. After the first Policy Year, you may withdraw a portion of Surrender Value. The minimum amount of each withdrawal is $500. The maximum withdrawal is limited to 10% of Net Surrender Value during the surrender charge period. We will charge $25 for each partial withdrawal taken in excess of one per Policy Year, except those withdrawals under the Systematic Withdrawal Plan. This charge reimburses us for the administrative expense related to the withdrawal. This charge is deducted after the partial withdrawal amount is determined. (See "Charges and Deductions.") A withdrawal decreases Cash Value by the amount of the withdrawal and, if Death Benefit Option A is in effect, reduces Specified Amount by the amount of the withdrawal. FREE-LOOK PERIOD AND EXCHANGE RIGHTS During the Free-Look Period, you may examine the Policy and return it for a refund. The time period depends on where the Policy is issued; however, it will be at least 10 days from the date you receive the Policy, or, 45 days after you complete the application for insurance, whichever is later. The amount of the refund is the sum of Cash Value in the Kemper Money Market Subaccount plus the total amount of monthly deductions and deductions from Premium. This amount will be at least equal to premiums paid. To receive a refund you should return the Policy to us or to the agent who sold the Policy. At any time during the first two years after the Issue Date, you may exchange the Policy for a non-variable permanent fixed benefit life insurance policy then currently offered by us or an affiliate. Evidence of insurability is not required. The amount of the new policy may be, at your election, either the initial Death Benefit or the same net amount at risk as the Policy on the exchange date. All Debt must be repaid and the Policy must be surrendered before the exchange is made. The new policy will have the same Policy Date and issue age as the exchanged Policy. CHARGES AND DEDUCTIONS DEDUCTIONS FROM PREMIUMS We deduct a sales load of 2.5% from each premium before the net premium is allocated. Additionally, we deduct a state and local premium tax charge of 2.5% from each premium payment before net premium is allocated. This charge reimburses us for paying state premium taxes. We expect to pay an average state premium tax rate of approximately 2.5%, but the actual premium tax attributable to a Policy may be more or less. In addition, a charge for federal taxes, equal to 1% of each premium payment, is deducted to compensate us for higher corporate income taxes under the Internal Revenue Code. 19 25 We expect to recover total premium tax expenses over the life of the Policies from aggregate tax charges and the unamortized state premium tax charge portion of the surrender charge. However, the amount of premium taxes differs from state to state and some states have no premium tax. Accordingly, the amount of these charges paid under your Policy may be more or less than the premium taxes we actually pay with respect to your Policy. COST OF INSURANCE CHARGE We deduct a cost of insurance charge monthly from the Subaccounts and the Fixed Account. This charge covers our anticipated mortality costs. The cost of insurance charge is deducted monthly in advance and is allocated pro rata among the Subaccounts and the Fixed Account. We deduct the cost of insurance by cancelling units under the Subaccounts and withdrawing amounts from the Fixed Account on the Policy Date and on each Monthly Processing Date thereafter. If the Monthly Processing Date falls on a day other than a Valuation Date, the charge is determined on the next Valuation Date. The cost of insurance charge is determined by multiplying the monthly cost of insurance rate (see below) by the "net amount at risk" for each Policy month. The net amount at risk equals the Death Benefit divided by 1.0024663, minus the Cash Value on the Monthly Processing Date. COST OF INSURANCE RATE. The monthly cost of insurance rates are based on the issue age, sex, rate class of the Insured and Policy Year. We determine the monthly cost of insurance rates based on our expectations as to future mortality experience. Any change in the schedule of rates applies to all individuals of the same class as the Insured. The cost of insurance rate may never exceed those shown in the table of guaranteed maximum cost of insurance rates in the Policy. The guaranteed maximum cost of insurance rates are based on the 1980 Commissioner's Standard Ordinary Smoker and Non-Smoker Mortality Tables, Age Nearest Birthday, published by the National Association of Insurance Commissioners. RATE CLASS. The rate class of an Insured will affect the cost of insurance rate. We currently place Insureds in preferred rate classes and rate classes involving a higher mortality risk. The cost of insurance rates for rate classes involving a higher mortality risk are multiples of the preferred rates. (See "Charges and Deductions--Cost of Insurance Rate," above.) MORTALITY AND EXPENSE RISK CHARGE We deduct a daily charge, at a current annual rate of .60% for the first ten Policy Years, .40% for Policy Years eleven through twenty, and .20% for Policy Years twenty-one and thereafter, from the Subaccounts for mortality and expense risks we assume. We guarantee an annual rate of .60% for all Policy Years. The mortality and expense risk we assume is that our estimates of longevity and of the expenses incurred over the life of the Policy will not be correct. MONTHLY ADMINISTRATIVE CHARGE We deduct a monthly administrative expense charge to reimburse us for certain expenses related to maintenance of the Policies, accounting and record keeping and periodic reporting to Owners. This charge is designed only to reimburse us for actual administrative expenses. For the first Policy Year, this charge is $10 per month. In Policy Years two and thereafter it is anticipated that the charge will be $6 per month, however, should these expenses exceed those currently assumed, the charge may be increased up to $7.50 per month. OTHER CHARGES SURRENDER CHARGE. We deduct a surrender charge from the Cash Value if the Policy is surrendered or Cash Value is applied under a settlement option during the first ten Policy Years. A surrender charge is also assessed during the first ten Policy Years following an increase in Specified Amount. 1. The amount of the surrender charge for the initial Specified Amount is the product of a. times b. times c. where: a. is the initial Specified Amount (in 1,000s); b. is the surrender target premium rate as shown in Appendix B; and c. is the surrender charge percentage for the applicable Policy Year as shown below. 20 26 During the ten Policy Years following an increase in Specified Amount, an additional surrender charge applies. The additional charge is calculated as described below based on the amount of increase, years commencing on the date of the increase and surrender target premium associated with the increase. 2. The amount of the surrender charge for each increase in the Specified Amount is the product of a. times b. times c. where: a. is the amount of increase in Specified Amount for the base plan (in 1,000s); b. is the surrender target premium rate as shown in Appendix B; and c. is the surrender charge percentage for the applicable Policy Year as shown below. The surrender charge is the sum of the amounts in 1. and 2. above. The surrender charge is not reduced by any decrease in Specified Amount. The applicable surrender target premium rate depends on the Insured's age at issue, sex, tobacco status, and underwriting rate class. See Appendix B. SURRENDER CHARGE PERCENTAGES:
Policy Year Percentages - ----------- ----------- 1-5 100% 6 80% 7 60% 8 45% 9 30% 10 15% 11+ 0%
PARTIAL WITHDRAWAL CHARGE. We will charge $25 for each partial withdrawal in a Policy Year after the first withdrawal. This charge reimburses us for the administrative expenses related to the withdrawal. However, the partial withdrawal charge does not apply to those under the Systematic Withdrawal Plan. TRANSFER CHARGE. We will charge up to $25 for each transfer in excess of twelve transfers per Policy Year, excluding Automatic Asset Reallocation and Dollar Cost Averaging transfers. The transfer charge reimburses us for the administrative expenses related to the transfer. TAXES. Currently, no charges are made against the Separate Account for federal, state or other taxes attributable to the Separate Account. We may, however, in the future impose charges for income taxes or other taxes attributable to the Separate Account or the Policy. (See "Federal Tax Matters.") CHARGES AGAINST THE FUNDS. Under investment advisory agreements with each Fund, the investment manager and/or adviser provides investment advisory and/or management services for the Portfolios. The Funds are responsible for advisory fees and various other expenses, including 12b-1 distribution fees. Investment advisory fees and expenses differ with respect to each of the Portfolios. (See "The Funds.") For additional information about the fees and expenses of the Funds, see "The Funds", page 9, and the Fund prospectuses accompanying this Prospectus, and Statements of Additional Information available from us upon request. The Fund(s) may pay 12b-1 service fees to us or our affiliates for support or distribution services relating to Fund shares. We may receive compensation from the investment advisers for administrative services related to the Funds. This compensation will be consistent with the services rendered or the cost savings resulting from the arrangement. For more information concerning investment advisory fees and other charges against the Portfolios, see the Funds' prospectuses accompanying this Prospectus and Statements of Additional Information available from us upon request. SYSTEMATIC WITHDRAWAL PLAN. An initial charge of $50 is imposed to enter into a Systematic Withdrawal Plan. In addition, a $25 charge is imposed each time a change is made to the plan. These charges reimburse us for administrative expenses of this plan. (See "Systematic Withdrawal Plan.") REDUCTION OF CHARGES. We may reduce certain charges and credit additional amounts in special circumstances that result in lower sales, administrative, or mortality expenses. For example, special circumstances may 21 27 exist in connection with group or sponsored arrangements, sales to our existing policyowners, sales to employees or clients of members of the ZFS group of companies, or employees and registered representatives (and their families) of broker-dealers (or their affiliated financial institutions) that have entered into selling group agreements with Investors Brokerage Services, Inc., the distributor of the Policies. The amounts of any reductions will reflect the reduced sales effort and administrative costs resulting from, or the different mortality experience expected as a result of, the special circumstances. Reductions will not unfairly discriminate against any person, including the affected Owners and owners of all other policies funded by the Separate Account. GENERAL PROVISIONS SETTLEMENT OPTIONS You, or the Beneficiary at the death of the Insured if no election by you is in effect, may elect to have the Death Benefit or Surrender Value paid in a lump sum or have the amount applied to one of the Settlement Options. Payments under these options will not be affected by the investment experience of the Separate Account after proceeds are applied under a Settlement Option. The payee elects monthly, quarterly, semi-annual or annual payments. The option selected must result in a payment that at least equals our required minimum in effect when the option is chosen. If at any time the payments are less than the minimum, we may increase the period between payments to quarterly, semi-annual or annual or make the payment in one lump sum. Benefit payments are based on Net Surrender Value calculated on the day preceding the date the first benefit payment is due. The payment will be based on the Settlement Option elected in accordance with the appropriate settlement option table. OPTION 1--FIXED INSTALLMENT ANNUITY. We pay income for the period and payment mode elected. The period elected must be at least 5 years, but not more than 30 years. OPTION 2--LIFE ANNUITY. We pay monthly income to the payee during the payee's lifetime. If this Option is elected, annuity payments terminate automatically and immediately on the death of the payee without regard to the number or total amount of payments made. Thus, it is possible for an individual to receive only one payment if death occurred prior to the date the second payment was due. OPTION 3--LIFE ANNUITY WITH INSTALLMENTS GUARANTEED. We pay monthly income for the guaranteed period elected and thereafter for the remaining lifetime of the payee. The available guaranteed periods are 5, 10, 15 or 20 years. OPTION 4--JOINT AND SURVIVOR ANNUITY. We pay the full monthly income while both payees are living. Upon the death of either payee, the income continues during the lifetime of the surviving payee. The surviving payee's income is based on the percentage designated (50%, 66 2/3%, 75% or 100%) at election time. Payments terminate automatically and immediately upon the death of the surviving payee without regard to the number or total amount of payments received. We must consent to any other payment methods. The guaranteed monthly payments are based on an interest rate of 2.50% per year and, where mortality is involved, the "1983 Table a" individual mortality table developed by the Society of Actuaries, with a 5 year setback. POSTPONEMENT OF PAYMENTS GENERAL. Payment of any amount due upon: (a) Policy termination at the Maturity Date, (b) surrender of the Policy, (c) payment of any Policy loan, or (d) death of the Insured, may be postponed whenever: (1) The New York Stock Exchange is closed other than customary weekend and holiday closings, or trading on the New York Stock Exchange is restricted as determined by the Commission; (2) The Commission by order permits postponement for the protection of owners; or (3) An emergency exists, as determined by the Commission, as a result of which disposal of securities is not reasonably practicable or it is not reasonably practicable to determine the value of the net assets of the Separate Account. Transfers may also be postponed under these circumstances. 22 28 PAYMENT NOT HONORED BY BANK. The portion of any payment due under the Policy which is derived from any amount paid to us by check or draft may be postponed until such time as we determine that such instrument has been honored by the bank upon which it was drawn. THE CONTRACT The Policy, any endorsements, and the application constitute the entire contract between you and KILICO. All statements made by the Insured or contained in the application will, in the absence of fraud or misrepresentation, be deemed representations and not warranties. Only the President, the Secretary, or an Assistant Secretary of KILICO is authorized to change or waive the terms of a Policy. Any change or waiver must be in writing and signed by one of those persons. MISSTATEMENT OF AGE OR SEX If the age or sex of the Insured is misstated, the Death Benefit will be adjusted to reflect the correct sex and age. INCONTESTABILITY We may contest the validity of a Policy if any material misrepresentations are made in the application. However, a Policy will be incontestable after it has been in force during the lifetime of the Insured for two years from the Issue Date. A new two year contestability period will apply to increases in insurance and to reinstatements, beginning with the effective date of the increase or reinstatement. SUICIDE Suicide by the Insured, while sane or insane, within two years from the Issue Date (or within two years following an increase in Specified Amount) is a risk not assumed under the Policy. Our liability for such suicide is limited to the premiums paid less any withdrawals and Debt. When the laws of the state in which a Policy is delivered require less than a two year period, the period or amount paid will be as stated in such laws. ASSIGNMENT No Policy assignment is binding on us until we receive it. We assume no responsibility for the validity of the assignment. Any claim under an assignment is subject to proof of the extent of the assignee's interest. If the Policy is assigned, your rights and the rights of the Beneficiary are subject to the rights of the assignee of record. NONPARTICIPATING The Policy does not pay dividends. It does not participate in any of KILICO's surplus or earnings. OWNER AND BENEFICIARY You may designate a new Owner while the Insured is alive. You designate primary and secondary Beneficiaries in the application. We rely upon the latest filed change of beneficiary. If the Insured dies, and no designated Beneficiary is alive at that time, we will pay the Insured's estate. The interest of any Beneficiary may be subject to that of an assignee. In order to change the Owner or a designated Beneficiary, you must sign our form. The change is effective when you sign the form, but we are not liable for payments made or actions taken before we receive the signed form. RECORDS AND REPORTS We keep the Separate Account records. We send you, at your last known address of record, an annual report showing: - Death Benefit - partial withdrawals - Accumulation Unit Value - transfers - Cash Value - Policy loans and repayments - Surrender Value - Policy changes - additional premium payments
23 29 We also send you confirmations and acknowledgments of various transactions, as well as annual and semi-annual Fund reports. WRITTEN NOTICES AND REQUESTS Send written notices or requests to our home office: Kemper Investors Life Insurance Company, Customer Service, 1 Kemper Drive, Long Grove, Illinois 60049. Please include the Policy number and the Insured's full name. We send notices to your address shown in the application unless an address change is filed with us. OPTIONAL INSURANCE BENEFITS The following optional insurance benefits are available by rider at the time of application: - waiver of premium due to Insured's total disability, - term insurance on the Insured's dependent children, - acceleration of a portion of the death benefit due to Insured's terminal illness, - other insured rider, and - extended maturity rider. The cost of these benefits is added to the monthly deduction. These benefits and restrictions are described in the Rider. We provide samples of these provisions upon written request. DOLLAR COST AVERAGING Under our Dollar Cost Averaging program, Cash Value in the Fixed Account, the Kemper Money Market Subaccount or the Kemper Government Securities Subaccount ("DCA Subaccount") is automatically transferred monthly to other Subaccounts and the Fixed Account. You may enroll any time by completing our Dollar Cost Averaging form. Transfers are made on the tenth day of the month, or the next business day if the tenth falls on a weekend. We must receive the enrollment form at least five business days before the transfer date. Transfers commence on the first transfer date following the Trade Date. The minimum transfer amount is $100 per Subaccount or Fixed Account. In order to enroll, Cash Value in the DCA Subaccount must be at least $10,000. Dollar Cost Averaging automatically ends if Cash Value in the DCA Subaccount is less than the amount designated to be transferred. Cash Value remaining in the DCA Subaccount will be transferred. Dollar Cost Averaging ends if: - the number of designated monthly transfers has been completed, - Cash Value attributable to the DCA Subaccount is insufficient to complete the next transfer, - we receive your written termination at least five business days before the next transfer date, or - the Policy is surrendered. There is currently no charge to participate in the Dollar Cost Averaging program. We will give 30 days notice if we amend the Dollar Cost Averaging program. We may terminate the program at any time. You may change Dollar Cost Averaging instructions by completing our enrollment form. We must receive the enrollment form at least 5 business days (10 business days for Fixed Account transfers) before the next transfer date. To participate in Dollar Cost Averaging, you may have Cash Value in the Fixed Account and no more than eight non-DCA Subaccounts. SYSTEMATIC WITHDRAWAL PLAN We offer a Systematic Withdrawal Plan ("SWP") allowing you to preauthorize periodic withdrawals after the first Policy Year. You instruct us to withdraw selected amounts from the Fixed Account, or up to two Subaccounts, on a monthly, quarterly, semi-annual or annual basis. Your periodic payment must be at least $500. These periodic payments are partial withdrawals and are subject to surrender charges. (See "Policy Benefits and Rights--Surrender Privileges".) The $25 withdrawal charge does not apply. However, we charge $50 to 24 30 establish an SWP and a $25 charge each time a change is made. These charges reimburse us for SWP administrative expenses. Periodic payments may be subject to income taxes, withholding and tax penalties. (See "Federal Tax Matters.") An SWP application and additional information may be obtained from us or from your representative. We will give 30 days notice if we amend the SWP. The SWP may be terminated at any time by you or us. DISTRIBUTION OF POLICIES Investors Brokerage Services, Inc. ("IBS") serves as distributor of the Policies. IBS is located at 1 Kemper Drive, Long Grove, Illinois 60049. IBS is our wholly-owned subsidiary. It is registered as a broker-dealer under the Securities Exchange Act of 1934 (the "1934 Act"), and is a member of the National Association of Securities Dealers, Inc. ("NASD"). The Policy is sold by licensed insurance representatives who represent us and who are registered representatives of broker-dealers that are registered under the 1934 Act and are members of the NASD. The maximum sales commission payable to registered representatives is approximately 70% of premiums up to the commission target premium and 2.5% of excess premium in the first year and 2.5% of total premium in renewal years two through five. Beginning in the second Policy Year, a service fee on assets which have been maintained and serviced may also be paid. In addition, certain overrides and production and managerial bonuses may be paid. These additional amounts may constitute a substantial portion of total commissions and fees paid. Firms to which service fees and commissions may be paid include affiliated broker-dealers. In addition to the commissions described above, we may pay additional promotional incentives, in the form of cash or other compensation, to licensed broker-dealers that sell the Policy. These incentives may be offered to certain broker-dealers that sell or are expected to sell certain minimums during specified periods. The distribution agreement with IBS provides for indemnification of IBS by KILICO and the Separate Account for liability arising out of allegedly untrue statements in, or omissions of material fact from, the prospectus or the Registration Statement. IBS agrees to indemnify KILICO and the Separate Account against claims arising from the conduct of IBS or unaffiliated broker-dealers that sell Policies. FEDERAL TAX MATTERS INTRODUCTION This discussion of the federal income tax treatment of the Policy is not exhaustive, does not cover all situations, and is not intended as tax advice. The federal income tax treatment of the Policy is unclear in certain circumstances, and a qualified tax adviser should always be consulted with regard to the application of law to individual circumstances. This discussion is based on the Internal Revenue Code of 1986, as amended ("Code"), Treasury Department regulations, and interpretations existing on the date of this Prospectus. These authorities, however, are subject to change by Congress, the Treasury Department, and the courts. This discussion does not address state or local tax consequences, nor federal estate or gift tax consequences, associated with owning the Policy. IN ADDITION, WE MAKE NO GUARANTEE REGARDING ANY TAX TREATMENT--FEDERAL, STATE OR LOCAL--OF ANY POLICY OR OF ANY TRANSACTION INVOLVING A POLICY. OUR TAX STATUS We are taxed as a life insurance company and the operations of the Separate Account are treated as part of our total operations. The operations of the Separate Account do not materially affect our federal income tax liability because we are allowed a deduction to the extent that net investment income of the Separate Account is applied to increase Cash Value. We may incur state and local taxes attributable to the Separate Account. At present, these taxes are not significant. Accordingly, we do not charge or credit the Separate Account for federal, state or local taxes. However, our federal income taxes are increased because of the federal tax law's treatment of deferred acquisition costs. Accordingly, we charge 1% of each premium payment to compensate us for our higher corporate income tax liability. If there is a material change in law, charges or credits may be made to the Separate Account for taxes or reserves for taxes. These charges or credits are determined independently of the taxes we actually pay. 25 31 TAXATION OF LIFE INSURANCE POLICIES TAX STATUS OF THE POLICY. The Code establishes a definition of life insurance which, in part, places limitations on the amount of premiums that may be paid and the Cash Value that can accumulate relative to the Death Benefit. We believe the Policy meets this definition. We reserve the right to refund premiums and earnings thereon, increase the Death Benefit (which may result in higher Policy charges), or take any other action we deem necessary to ensure the Policy's compliance with the tax definition of life insurance. The Death Benefit is generally excludable from the Beneficiary's gross income. Interest and other income credited are not taxable unless certain withdrawals are made (or are deemed to be made) from the Policy prior to the Insured's death, as discussed below. This tax treatment will only apply, however, if (1) the investments of the Separate Account are "adequately diversified", and (2) we, rather than you, are considered the owner of the assets of the Separate Account. DIVERSIFICATION REQUIREMENTS. The Code prescribes the manner in which the Separate Account must be "adequately diversified." If the Separate Account fails to comply with these diversification standards, the Policy will not be treated as a life insurance contract, and you will be taxed on the income on the contract (as defined in the tax law). We expect that the Separate Account, through the Funds, will comply with the prescribed diversification requirements. OWNERSHIP TREATMENT. In certain circumstances, variable life insurance contract owners may be considered the owners of the assets of a segregated asset account such as the Separate Account. Income and gains from the Separate Account would then be includible in your gross income. The Internal Revenue Service ("IRS") has stated that a variable contract owner will be considered the owner of the assets of a separate account if the owner possesses the ability to exercise investment control over such assets. As of the date of this Prospectus, no comprehensive guidance has been issued by the IRS clarifying the circumstances when such investment control by a variable contract owner would exist. As a result, your right to allocate Cash Values among the Subaccounts may cause you to be considered the owner of the assets of the Separate Account. We do not know what limits may be set forth in any guidance that the IRS may issue, or whether any such limits will apply to existing Policies. We therefore reserve the right to modify the Policy as necessary to attempt to prevent Policy Owners from being considered the owners of the assets of the Separate Account. However, there is no assurance that such efforts would be successful. The following discussion assumes that the Policy will be treated as a life insurance contract for tax purposes. TAX TREATMENT OF LIFE INSURANCE DEATH BENEFIT PROCEEDS. In general, the Death Benefit is excludable from the beneficiary's gross income under the Code. Certain transfers of the Policy, however, may result in a portion of the Death Benefit being taxable. If the Death Benefit is paid under a Settlement Option, generally payments will be prorated between the non-taxable Death Benefit and taxable interest. TAX DEFERRAL DURING ACCUMULATION PERIOD. Any increase in Cash Value is generally not taxable to you unless amounts are received (or are deemed to be received) from the Policy before the Insured's death. If the Policy is surrendered, the excess of Cash Value over the "investment in the contract" is includible in your ordinary income. The "investment in the contract" generally is premium payments minus non-taxable distributions. As described below, the tax treatment of amounts distributed, including loans, while the Insured is alive depends upon whether your Policy is a "modified endowment contract" ("MEC"). The term "modified endowment contract," or "MEC," is defined below. POLICIES WHICH ARE NOT MECS TAX TREATMENT OF WITHDRAWALS GENERALLY. If the Policy is not a MEC, the amount of any withdrawal generally will be treated first as a non-taxable recovery of premiums and then as taxable income. Thus, a withdrawal from a non-MEC Policy generally is not taxable income unless the total withdrawals exceed the investment in the contract. DISTRIBUTIONS REQUIRED IN THE FIRST 15 POLICY YEARS. The Code limits the amount of premium that may be paid and Cash Value that can accumulate relative to the Death Benefit. Where cash distributions are required in connection with a reduction in benefits during the first 15 years after the Policy is issued (or if withdrawals are made in anticipation of a reduction in benefits during this period), some or all of such amounts may be taxable. A reduction in benefits may result from a decrease in Specified Amount, a change from an Option B Death Benefit to an Option A Death Benefit, if withdrawals are made, and in certain other instances. TAX TREATMENT OF LOANS. If a Policy is not a MEC, a loan generally is treated as indebtedness of the Policy owner. As a result, the loan is not taxable income to you if the Policy remains in force. However, when the 26 32 interest rate credited to the Loan Account is the same as the interest rate charged for the loan (preferred loan), it is unclear whether the IRS would consider some or all of the loan proceeds to be includible in income. Absent further guidance, we will treat all loans, including preferred loans, as indebtedness. If a Policy lapses when a loan is outstanding, the amount of the loan outstanding will be treated as a surrender in determining whether any amounts are includible in the Policy owner's income. Generally, interest paid on Policy Loans or other indebtedness related to the Policy will not be tax deductible, except in the case of certain indebtedness under a Policy covering a "key person." A tax adviser should be consulted before taking any Policy Loan. POLICIES WHICH ARE MECS CHARACTERIZATION OF A POLICY AS A MEC. A Policy is a MEC if (1) the Policy is received in exchange for a life insurance contract that was a MEC, or (2) the Policy is issued on or after June 21, 1988 and premiums are paid more rapidly than permitted under the "7-Pay Test." A Policy fails this test (and thus is a MEC) if the accumulated amount paid during the first 7 Policy Years exceeds the cumulative sum of the net level premiums which would have been paid to that time if the Policy provided for paid-up future benefits after the payment of 7 level annual premiums. Under the Code, a material change of the Policy generally results in a reapplication of the 7-Pay Test. In addition, any reduction in benefits during the 7-Pay period will affect the application of this test. We monitor the Policies and attempt to notify Policy Owners on a timely basis if a Policy is in jeopardy of becoming a MEC. You may then request that we take available steps to avoid treating the Policy as a MEC. TAX TREATMENT OF WITHDRAWALS, LOANS, ASSIGNMENTS AND PLEDGES UNDER MECS. If the Policy is a MEC, withdrawals are treated first as withdrawals of income and then as a recovery of premiums. Thus, withdrawals are includible in income to the extent that the Cash Value exceeds the investment in the contract. A Policy loan is treated as a withdrawal for tax purposes. If you assign or pledge Cash Value under a MEC (or agree to assign or pledge any portion), such portion is a withdrawal for tax purposes. The investment in the contract is increased by the amount includible in income with respect to any assignment, pledge, or loan, though it is not affected by any other aspect of the assignment, pledge, or loan (including its release or repayment). Before assigning, pledging, or requesting a loan under a MEC, you should consult a tax adviser. PENALTY TAX. Generally, proceeds of a surrender or a withdrawal (or the amount of any deemed withdrawal) from a MEC are subject to a penalty tax of 10% of the portion of the proceeds that is includible in income, unless the surrender or withdrawal is made (1) after you attain age 59 1/2, (2) because you have become disabled (as defined in the Code), or (3) as substantially equal periodic payments over your life or life expectancy (or the joint lives or life expectancies of you and your beneficiary, within the meaning of the law). AGGREGATION OF POLICIES. All life insurance contracts which are treated as MECs and which are purchased by the same person from us or our affiliates within the same calendar year are aggregated and treated as one contract in determining the tax on withdrawals (including deemed withdrawals). The effects of aggregation are not always clear; however, it could affect the taxable amount of a withdrawal (or a deemed withdrawal) and could subject the withdrawal to the 10% penalty tax. CONSIDERATIONS APPLICABLE TO BOTH MECS AND NON-MECS LOSS OF INTEREST DEDUCTION WHERE POLICIES ARE HELD BY OR FOR THE BENEFIT OF CORPORATIONS, TRUSTS, ETC. If an entity (such as a corporation or a trust, not an individual) purchases a Policy or is the beneficiary of a Policy issued after June 8, 1997, a portion of the interest on indebtedness unrelated to the Policy may not be deductible by the entity. However, this rule does not apply to a Policy owned by an entity engaged in a trade or business which covers the life of only one individual who is (a) a 20 percent owner of the entity, or (b) an officer, director, or employee of the trade or business, at the time first covered by the Policy. Entities that are considering purchasing the Policy, or that will be Beneficiaries under a Policy, should consult a tax adviser. OTHER CONSIDERATIONS. Changing the Policy owner, exchanging the Policy, changing from one Death Benefit option to another, and other Policy changes may have tax consequences depending on the circumstances of the change. Federal estate and state and local estate taxes, or inheritance taxes and other tax consequences of ownership or receipt of Policy proceeds depend on the circumstances of each Policy owner or Beneficiary. The exchange of one life insurance contract for another life insurance contract generally is not taxed (unless cash is distributed or a loan is reduced or forgiven). The insured under the new contract must be the same as the insured under the old contract. 27 33 FEDERAL INCOME TAX WITHHOLDING We withhold and send to the federal government a part of the taxable portion of withdrawals unless you notify us in writing at the time of withdrawal that you are electing no withholding. You are always responsible for the payment of any taxes and early distribution penalties that may be due on the amounts received. You may also be required to pay penalties under the estimated tax rules, if your withholding and estimated tax payments are insufficient to satisfy your total tax liability. LEGAL CONSIDERATIONS On July 6, 1983, the Supreme Court held in ARIZONA GOVERNING COMMITTEE V. NORRIS that certain annuity benefits provided by employers' retirement and fringe benefit programs may not vary between men and women on the basis of sex. The Policy contains cost of insurance rates that distinguish between men and women. Accordingly, employers and employee organizations should consider, in consultation with legal counsel, the impact of federal, state and local laws, including Title VII of the Civil Rights Act, the Equal Pay Act, and NORRIS and subsequent cases on any employment-related insurance or fringe benefit program before purchasing the Policy. SAFEKEEPING OF THE SEPARATE ACCOUNT'S ASSETS We hold the assets of the Separate Account. We keep these assets segregated and apart from our general funds. We maintain records of all purchases and redemptions of the shares of each Portfolio by each of the Subaccounts. VOTING INTERESTS We vote a Fund's shares held in the Separate Account at regular and special shareholder meetings of the Fund in accordance with instructions received from persons having voting interests in the corresponding Subaccounts of the Separate Account. Owners of all Policies participating in each Subaccount are entitled to give us instructions with respect to that Subaccount. An Owner's proportionate interest in that Subaccount is measured by units. We determine the number of shares for which an Owner may give voting instructions as of the record date for the meeting. Owners will receive proxy material, reports, and other materials relating to the appropriate Portfolio. We vote all Fund shares held in the Separate Account proportionately based on Owners' instructions. If changes in law permit, we may vote a Fund's shares in our own right. We may, when required by state insurance regulatory authorities, disregard voting instructions if the instructions require that the shares be voted so as to cause a change in the subclassification or investment objective of the Fund or of one or more of its Portfolios or to approve or disapprove an investment advisory contract for a Portfolio. In addition, we may disregard voting instructions in favor of changes initiated by an Owner in the investment policy or the investment adviser of a Portfolio if we reasonably disapprove of such changes. A proposed change would be disapproved only if the change is contrary to state law or prohibited by state regulatory authorities, or if we determine that the change would have an adverse effect on our General Account in that the proposed investment policy for a Portfolio may result in overly speculative or unsound investments. In the event we disregard voting instructions, we will include a summary of that action and the reasons for it in the next annual report to Owners. STATE REGULATION OF KILICO KILICO, a stock life insurance company organized under the laws of Illinois, is subject to regulation by the Illinois Department of Insurance. We file an annual statement with the Director of Insurance on or before March 1st of each year covering our operations and reporting on our financial condition as of December 31st of the preceding year. Periodically, the Director of Insurance examines the liabilities and reserves of KILICO and the Separate Account and certifies to their adequacy. In addition, we are subject to the insurance laws and regulations of the other states where we operate. Generally, the insurance departments of other states apply the laws of Illinois in determining our permissible investments. 28 34 KILICO'S DIRECTORS AND OFFICERS Our directors and principal officers are listed below together with their current positions and their other business experience during the past five years. The address of each officer and director is 1 Kemper Drive, Long Grove, Illinois 60049.
NAME AND AGE POSITION WITH KILICO YEAR OF ELECTION OTHER BUSINESS EXPERIENCE DURING PAST 5 YEARS OR MORE -------------------- ----------------------------------------------------- Gale K. Caruso (42) President and Chief Executive Officer of Federal Kemper Life President and Chief Executive Officer Assurance Company ("FKLA"), Fidelity Life Association since June 1999. Director since July ("FLA"), Zurich Life Insurance Company of America ("ZLICA") 1999. and Zurich Direct, Incorporated ("ZD") since June 1999. Director of FKLA, FLA and ZLICA since July 1999. Chairman, President and Chief Executive Officer of Scudder Canada Investor Services, Ltd. from 1995 to June 1999. Managing Director of Scudder Kemper Investments, Inc. from July 1986 to June 1999. Eliane C. Frye (52) Executive Vice President of FKLA and FLA since March 1995. Executive Vice President since March Executive Vice President of ZLICA and ZD since March 1996. 1995. Director since May 1998. Director of FLA since December 1997. Director of FKLA and ZLICA since May 1998. Director of ZD from March 1996 to March 1997. Director of IBS and IBSIA since 1995. Senior Vice President of KILICO, FKLA and FLA from 1993 to 1995. Vice President of FKLA and FLA from 1988 to 1993. Frederick L. Blackmon (48) Senior Vice President and Chief Financial Officer of FKLA Senior Vice President and Chief since December 1995. Senior Vice President and Chief Financial Officer since December Financial Officer of FLA since January 1996. Senior Vice 1995. President and Chief Financial Officer of ZLICA and ZD since March 1996. Director of FLA since May 1998. Director of ZD from March 1996 to March 1997. Treasurer and Chief Financial Officer of Kemper since January 1996. Chief Financial Officer of Alexander Hamilton Life Insurance Company from April 1989 to November 1995. Russell M. Bostick (43) Senior Vice President and Chief Information Officer of FKLA, Senior Vice President and Chief FLA, ZLICA and ZD since March 1999. Vice President and Chief Information Officer since March 1999. Information Officer of FKLA, FLA, KILICO, ZLICA and ZD from April 1998 to March 1999. Chief Technology Officer of Corporate Software & Technology from June 1997 to April 1998. Vice President, Information Technology Department of CNA Insurance Companies from January 1995 to June 1997. James C. Harkensee (41) Senior Vice President of FKLA and FLA since January 1996. Senior Vice President since January Senior Vice President of ZLICA and ZD since 1995. Director 1996. of ZD from April 1993 to March 1997 and since March 1998. Vice President of ZLICA from 1992 to 1995. Vice President of ZD from 1994 to 1995. James E. Hohmann (44) Senior Vice President of FKLA since December 1995. Chief Senior Vice President since December Actuary of FKLA and KILICO from December 1995 to January 1995. Director since May 1998. 1999. Senior Vice President of FLA since January 1996. Chief Actuary of FLA from January 1996 to January 1999. Senior Vice President of ZLICA and ZD since March 1996. Chief Actuary of ZLICA and ZD from March 1996 to January 1999. Director of FLA since June 1997. Director of FKLA and ZLICA since May 1998. Director of ZD from March 1996 to March 1997. Managing Principal (Partner) of Tillinghast-Towers Perrin from January 1991 to December 1995. Edward K. Loughridge (45) Senior Vice President and Corporate Development Officer of Senior Vice President and Corporate FKLA and FLA since January 1996. Senior Vice President and Development Officer since January Corporate Development Officer for ZLICA and ZD since March 1996. 1996. Senior Vice President of Human Resources of Zurich-American Insurance Group from February 1992 to March 1996.
29 35
NAME AND AGE POSITION WITH KILICO YEAR OF ELECTION OTHER BUSINESS EXPERIENCE DURING PAST 5 YEARS OR MORE -------------------- ----------------------------------------------------- Debra P. Rezabek (44) Senior Vice President of FKLA and FLA since March 1996. Senior Vice President since 1996. Corporate Secretary of FKLA and FLA since January 1996. General Counsel since 1992. Corporate Director of FLA since May 1998. Vice President of KILICO, Secretary since January 1996. FKLA and FLA since 1995. General Counsel and Director of Government Affairs of FKLA and FLA since 1992 and of KILICO since 1993. Senior Vice President, General Counsel and Corporate Secretary of ZLICA and ZD since March 1996. Director of ZD from March 1996 to March 1997. Secretary of IBS and IBSIA since 1993. Director of IBS and IBSIA from 1993 to 1996. General Counsel and Assistant Secretary of KILICO, FKLA and FLA from 1992 to 1996. Assistant Secretary of Kemper since January 1996. Edward L. Robbins (60) Senior Vice President and Chief Actuary of FKLA, FLA, ZLICA Senior Vice President and Chief and ZD since March 1999. Senior Actuary of FKLA, FLA, Actuary since March 1999. KILICO, ZLICA and ZD from July 1998 to March 1999. Principal of KPMG Peat Marwick LLP from May 1984 to July 1998. Kenneth M. Sapp (54) Senior Vice President of FKLA, FLA and ZLICA since January Senior Vice President since January 1998. Senior Vice President of ZD since March 1998. Director 1998. of IBS since May 1998. Director of IBSIA since September 1998. Vice President--Aetna Life Brokerage of Aetna Life & Annuity Company from February 1992 to January 1998. George Vlaisavljevich (57) Senior Vice President of FKLA, FLA and ZLICA since October Senior Vice President since October 1996. Senior Vice President of ZD since March 1997. Director 1996. of IBS and IBSIA since October 1996. Executive Vice President of The Copeland Companies from April 1983 to September 1996. William H. Bolinder (56) Director of FKLA and FLA since January 1996. Director of Chairman of the Board from January ZLICA and ZD since March 1995. Chairman of the Board of FKLA 1996 to June 1999 and since April and FLA from January 1996 to June 1999 and since April 2000. 2000. Director since January 1996. Chairman of the Board of ZLICA and ZD from March 1995 to June 1999 and since April 2000. Chairman of the Board and Director of Kemper since January 1996. Director of SKI since January 1996. Vice Chairman of SKI from January 1996 to 1998. Member of the Group Executive Board of Zurich Financial Services Group since 1998. Member of the Corporate Executive Board of Zurich Insurance Group from October 1994 to 1998. Chairman of Zurich American Insurance Company since 1998. Chairman of the Board of American Guarantee and Liability Insurance Company, Zurich American Insurance Company of Illinois, American Zurich Insurance Company and Steadfast Insurance Company since 1995. Chief Executive Officer of American Guarantee and Liability Insurance Company, Zurich American Insurance Company of Illinois and American Zurich Insurance Company from 1986 to June 1995. President of Zurich Holding Company of America ("ZHCA") since 1995. Vice Chairman of ZHCA since 1996. Underwriter for Zurich American Lloyds since 1986. David A. Bowers (53) Director of FKLA and ZLICA since May 1997. Director of FLA Director since May 1997. since June 1997. Executive Vice President, Corporate Secretary and General Counsel of Zurich U.S. since August 1985. Vice President, General Counsel and Secretary of Kemper since January 1996. Gunther Gose (55) Director of FKLA, FLA and ZLICA since November 1998. Chief Director since November 1998. Financial Officer and Member of the Group Executive Board of Zurich Financial Services since October 1998. Member of the Corporate Executive Board of Zurich Insurance Group from April 1990 to October 1998.
30 36 LEGAL MATTERS All matters of Illinois law pertaining to the Policy, including the validity of the Policy and our right to issue the Policy under Illinois Insurance Law, have been passed upon by Frank J. Julian, our Associate General Counsel. Jorden Burt Boros Cicchetti Berenson & Johnson LLP, Washington, D.C., has advised us on certain legal matters concerning federal securities laws applicable to the issue and sale of Policies. LEGAL PROCEEDINGS There are no legal proceedings to which the Separate Account is a party or to which the assets of the Separate Account are subject. We are not a party in any litigation that is of material importance in relation to our total assets or that relates to the Separate Account. EXPERTS The consolidated balance sheets of KILICO as of December 31, 1999 and 1998 and the related consolidated statements of operations, comprehensive income, stockholder's equity, and cash flows for the years ended December 31, 1999, 1998 and 1997 have been included herein and in the registration statement in reliance upon the report of PricewaterhouseCoopers LLP, independent accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. The statements of assets and liabilities and policy owners' equity of the KILICO Variable Separate Account as of December 31, 1999 and the related statements of operations for the year then ended and the statements of changes in policy owners' equity for each of the two years then ended and for each of the periods presented has been included herein in reliance upon the report of PricewaterhouseCoopers LLP, independent accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. Actuarial matters included in this Prospectus have been examined by Christopher J. Nickele, FSA as stated in the opinion filed as an exhibit to the Registration Statement. REGISTRATION STATEMENT A Registration Statement has been filed with the Securities and Exchange Commission (SEC) under the Securities Act of 1933, as amended, with respect to the Policies. For further information concerning the Separate Account, KILICO and the Policy, reference is made to the Registration Statement as amended with exhibits. Copies of the Registration Statement are available from the Commission upon payment of a fee or at the SEC's website at http://www.sec.gov. FINANCIAL STATEMENTS The included financial statements of the Subaccounts of the Separate Account do not reflect any assets attributable to the Policy, because we did not sell the Policy during the periods covered by those financial statements. Instead, those financial statements solely reflect assets and operations attributable to sales of other variable life insurance contracts issued by the Separate Account. The financial statements do not cover certain Subaccounts of the Separate Account, because there were no assets in those Subaccounts as of the end of the periods covered. The included financial statements for KILICO only bear on our ability to meet our obligations under the Policy. They do not relate to the investment performance of the assets held in the Separate Account. 31 37 REPORT OF INDEPENDENT ACCOUNTANTS The Board of Directors of Kemper Investors Life Insurance Company and Policy Owners of Kemper Investors Life Insurance Company's KILICO Variable Separate Account In our opinion, the accompanying statements of assets and liabilities and policy owners' equity and the related statements of operations and changes in policy owners' equity present fairly, in all material respects, the financial position of the subaccounts of Kemper Investors Life Insurance Company's (the "Company") KILICO Variable Separate Account, which includes the Fidelity VIP Equity-Income Subaccount, Fidelity VIP High Income Subaccount (investment options within the Fidelity Variable Insurance Products Fund), Scudder VLIF Growth and Income Subaccount and Scudder VLIF International Subaccount (investment options within the Scudder Variable Life Investment Fund), Kemper Government Securities Subaccount, Kemper Money Market Subaccount, Kemper Small Cap Growth Subaccount, and Kemper Total Return Subaccount (investment options within the Kemper Variable Series, formerly Investors Fund Series), thereof at December 31, 1999, and the results of their operations for the year then ended and the changes in their policy owners' equity for each of the two years then ended, in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included direct confirmation of investments owned at December 31, 1999 provides a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Chicago, Illinois February 24, 2000 32 38 (This page intentionally left blank) 33 39 KILICO VARIABLE SEPARATE ACCOUNT STATEMENTS OF ASSETS AND LIABILITIES AND POLICY OWNERS' EQUITY DECEMBER 31, 1999 (IN THOUSANDS)
FIDELITY VARIABLE INSURANCE PRODUCTS FUND ----------------------------- FIDELITY VIP FIDELITY VIP EQUITY-INCOME HIGH INCOME SUBACCOUNT SUBACCOUNT ------------- ------------ ASSETS Investments in underlying portfolio funds, at current value.................................................. $126 14 Dividends and other receivables........................... -- -- ---- -- Total assets...................................... 126 14 ---- -- LIABILITIES AND POLICY OWNERS' EQUITY Liabilities: Mortality and expense risk charges..................... -- -- Other payables......................................... -- -- ---- -- Total liabilities................................. -- -- ---- -- Policy owners' equity..................................... $126 14 ==== == ANALYSIS OF POLICY OWNERS' EQUITY Excess of proceeds from units sold over payments for units redeemed............................................... $125 14 Accumulated net investment income......................... -- -- Accumulated net realized gain on sales of investments..... 1 -- Unrealized appreciation (depreciation) of investments..... -- -- ---- -- Policy owners' equity..................................... $126 14 ==== ==
- --------------- *Formerly Investors Fund Series See accompanying notes to financial statements. 34 40
SCUDDER VARIABLE LIFE INVESTMENT FUND KEMPER VARIABLE SERIES* ---------------------------------- -------------------------------------------------------------- KEMPER SCUDDER VLIF SCUDDER VLIF GOVERNMENT KEMPER KEMPER KEMPER GROWTH AND INCOME INTERNATIONAL SECURITIES MONEY MARKET SMALL CAP GROWTH TOTAL RETURN SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ----------------- ------------- ---------- ------------ ---------------- ------------ 69 93 4,307 1,937 2,174 3,468 -- -- -- 5 -- -- -- -- ----- ----- ----- ----- 69 93 4,307 1,942 2,174 3,468 -- -- ----- ----- ----- ----- -- -- 3 1 2 3 -- -- -- 10 1 -- -- -- ----- ----- ----- ----- -- -- 3 11 3 3 -- -- ----- ----- ----- ----- 69 93 4,304 1,931 2,171 3,465 == == ===== ===== ===== ===== 69 68 1,799 1,274 1,460 254 1 2 2,046 657 43 1,998 -- 1 578 -- 25 1,012 (1) 22 (119) -- 643 201 -- -- ----- ----- ----- ----- 69 93 4,304 1,931 2,171 3,465 == == ===== ===== ===== =====
35 41 KILICO VARIABLE SEPARATE ACCOUNT STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999 (IN THOUSANDS)
FIDELITY VARIABLE INSURANCE PRODUCTS FUND ---------------------------- FIDELITY VIP FIDELITY VIP EQUITY- HIGH INCOME INCOME SUBACCOUNT SUBACCOUNT ------------ ------------ REVENUE Dividends and capital gains distributions................. $1 -- EXPENSES Mortality and expense risk charges........................ 1 -- -- -- Net investment income (loss).............................. -- -- -- -- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain on sales of investments................. 1 -- Change in unrealized appreciation (depreciation) of investments............................................ -- -- -- -- Net realized and unrealized gain (loss) on investments...... 1 -- -- -- Net increase (decrease) in policy owners' equity resulting from operations........................................... $1 -- == ==
- --------------- * Formerly Investors Fund Series See accompanying notes to financial statements. 36 42
SCUDDER VARIABLE LIFE INVESTMENT FUND KEMPER VARIABLE SERIES* ------------------------------------- --------------------------------------------------- SCUDDER VLIF KEMPER KEMPER KEMPER GROWTH AND SCUDDER VLIF GOVERNMENT MONEY SMALL CAP KEMPER INCOME INTERNATIONAL SECURITIES MARKET GROWTH TOTAL RETURN SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ----------------- ----------------- ---------- ---------- ---------- ------------ 2 3 219 63 -- 326 1 1 40 24 14 26 -- -- ---- -- --- --- 1 2 179 39 (14) 300 -- -- ---- -- --- --- -- 1 -- -- 13 196 (1) 22 (189) -- 550 (16) -- -- ---- -- --- --- (1) 23 (189) -- 563 180 -- -- ---- -- --- --- -- 25 (10) 39 549 480 == == ==== == === ===
37 43 KILICO VARIABLE SEPARATE ACCOUNT STATEMENTS OF CHANGES IN POLICY OWNERS' EQUITY FOR THE YEAR ENDED DECEMBER 31, 1999 (IN THOUSANDS)
FIDELITY VARIABLE INSURANCE PRODUCTS FUND ---------------------------- FIDELITY VIP FIDELITY VIP EQUITY- HIGH INCOME INCOME SUBACCOUNT SUBACCOUNT ------------ ------------ OPERATIONS Net investment income (loss).............................. $ -- -- Net realized gain on sales of investments................. 1 -- Change in unrealized appreciation (depreciation) of investments............................................ -- -- ---- -- Net increase (decrease) in policy owners' equity resulting from operations............................. 1 -- ---- -- ACCOUNT UNIT TRANSACTIONS Proceeds from units sold.................................. 81 11 Net transfers (to) from affiliate and subaccounts......... 48 5 Payments for units redeemed............................... (23) (4) ---- -- Net increase (decrease) in policy owners' equity from account unit transactions............................. 106 12 ---- -- Total increase (decrease) in policy owners' equity.......... 107 12 POLICY OWNERS' EQUITY Beginning of year......................................... 19 2 ---- -- End of year............................................... $126 14 ==== ==
- --------------- * Formerly Investors Fund Series See accompanying notes to financial statements. 38 44
SCUDDER VARIABLE LIFE INVESTMENT FUND KEMPER VARIABLE SERIES* ------------------------------------- --------------------------------------------------- SCUDDER VLIF KEMPER KEMPER KEMPER GROWTH AND SCUDDER VLIF GOVERNMENT MONEY SMALL CAP KEMPER INCOME INTERNATIONAL SECURITIES MARKET GROWTH TOTAL RETURN SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ----------------- ----------------- ---------- ---------- ---------- ------------ 1 2 179 39 (14) 300 -- 1 -- -- 13 196 (1) 22 (189) -- 550 (16) --- --- ----- ------ ------ ----- -- 25 (10) 39 549 480 --- --- ----- ------ ------ ----- 55 44 33 5,456 988 97 26 29 (44) (1,180) (60) (358) (18) (13) (68) (3,350) (388) (433) --- --- ----- ------ ------ ----- 63 60 (79) 926 540 (694) --- --- ----- ------ ------ ----- 63 85 (89) 965 1,089 (214) 6 8 4,393 966 1,082 3,679 --- --- ----- ------ ------ ----- 69 93 4,304 1,931 2,171 3,465 === === ===== ====== ====== =====
39 45 KILICO VARIABLE SEPARATE ACCOUNT STATEMENTS OF CHANGES IN POLICY OWNERS' EQUITY FOR THE YEAR ENDED DECEMBER 31, 1998 (IN THOUSANDS)
FIDELITY VARIABLE INSURANCE PRODUCTS FUND ------------------------------ FIDELITY VIP FIDELITY VIP EQUITY-INCOME HIGH INCOME SUBACCOUNT(A) SUBACCOUNT(A) ------------- ------------- OPERATIONS Net investment income..................................... $-- -- Net realized gain (loss) on sales of investments.......... -- -- Change in unrealized appreciation (depreciation) of investments............................................ -- -- --- --- Net increase in policy owners' equity resulting from operations............................................ -- -- --- --- ACCOUNT UNIT TRANSACTIONS Proceeds from units sold.................................. 11 -- Net transfers (to) from affiliate and subaccounts......... 10 2 Payments for units redeemed............................... (2) -- --- --- Net increase (decrease) in policy owners' equity from account unit transactions............................. 19 2 --- --- Total increase (decrease) in policy owners' equity.......... 19 2 POLICY OWNERS' EQUITY Beginning of period....................................... -- -- --- --- End of period............................................. $19 2 === ===
- --------------- * Formerly Investors Fund Series (a) For the period June 15, 1998 (commencement of operations) to December 31, 1998. See accompanying notes to financial statements. 40 46
SCUDDER VARIABLE LIFE INVESTMENT FUND KEMPER VARIABLE SERIES* ---------------------------------- -------------------------------------------------------------- KEMPER SCUDDER VLIF SCUDDER VLIF GOVERNMENT KEMPER KEMPER KEMPER GROWTH AND INCOME INTERNATIONAL SECURITIES MONEY MARKET SMALL CAP GROWTH TOTAL RETURN SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ----------------- ------------- ---------- ------------ ---------------- ------------ -- -- 232 66 55 489 -- -- 284 -- 12 (67) -- -- (253) -- 75 (1) -- -- ----- ------ ----- ----- -- -- 263 66 142 421 -- -- ----- ------ ----- ----- 4 2 32 5,791 590 63 4 7 (399) (2,163) 318 638 (2) (1) (200) (3,694) (192) (479) -- -- ----- ------ ----- ----- 6 8 (567) (66) 716 222 -- -- ----- ------ ----- ----- 6 8 (304) -- 858 643 -- -- 4,697 966 224 3,036 -- -- ----- ------ ----- ----- 6 8 4,393 966 1,082 3,679 == == ===== ====== ===== =====
41 47 KILICO VARIABLE SEPARATE ACCOUNT NOTES TO FINANCIAL STATEMENTS (1) GENERAL INFORMATION AND SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION KILICO Variable Separate Account (the "Separate Account") is a unit investment trust registered under the Investment Company Act of 1940, as amended, established by Kemper Investors Life Insurance Company ("KILICO"). KILICO is an indirect, wholly-owned subsidiary of Zurich Financial Services ("ZFS"). ZFS is owned by Zurich Allied AG and Allied Zurich p.l.c., fifty-seven percent and forty-three percent, respectively. Zurich Allied AG is listed on the Swiss Market Index (SMI) Allied Zurich p.l.c. is included in the FTSE-100 Share Index in London. The Separate Account is used to fund policies ("Policy") for the Kemper Select variable universal life policies ("Kemper Select"), the Power V flexible premium variable universal life policies ("Power V"), the Farmers Variable Universal Life I flexible premium variable life policies ("Farmers Variable Universal Life I") and Kemper Destinations Life modified single premium variable universal life policies ("Kemper Destinations Life"). The Separate Account is divided into fifty-eight subaccount options available to Policy Owners depending upon their respective Policy. The Kemper Select policies have five subaccounts which are available to Policy Owners and each subaccount invests exclusively in the shares of a corresponding portfolio of the Kemper Variable Series (formerly Investors Fund Series), an open-end diversified management investment company. The Power V policies have twenty-three subaccounts which are available to Policy Owners and each subaccount invests exclusively in the shares of a corresponding portfolio of the Kemper Variable Series, the American Skandia Trust, the Fidelity Variable Insurance Products Fund, the Fidelity Variable Insurance Products Fund II, the Fidelity Variable Insurance Products Fund III and the Scudder Variable Life Investment Fund (Class B Shares), all of which are open-end diversified management investment companies. The Farmers Variable Universal Life I policies have twelve subaccounts which are available to Policy Owners and each subaccount invests exclusively in the shares of a corresponding portfolio of the Kemper Variable Series, the Janus Aspen Series, the PIMCO Variable Insurance Trust, the Templeton Variable Products Series Fund (Class 2 Shares) and the Scudder Variable Life Investment Fund (Class A Shares), all of which are open-end diversified management investment companies. The Kemper Destinations Life policies have thirty-seven subaccounts which are available to Policy Owners and each subaccount invests exclusively in the shares of a corresponding portfolio of the Kemper Variable Series, the Scudder Variable Life Investment Fund (Class A Shares), The Alger American Fund, The Dreyfus Socially Responsible Growth Fund, Inc., the Dreyfus Investment Portfolios and the Warburg Pincus Trust, all of which are open-end diversified management investment companies. ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that could affect the reported amounts of assets and liabilities as well as the disclosure of contingent amounts at the date of the financial statements. As a result, actual results reported as income and expenses could differ from the estimates reported in the accompanying financial statements. SECURITY VALUATION The investments are stated at current value which is based on the closing bid price, net asset value, at December 31, 1999. SECURITY TRANSACTIONS AND INVESTMENT INCOME Security transactions are generally accounted for on the trade date (date when KILICO accepts risks of providing insurance coverage to the insured). Dividends and capital gains distributions are recorded as income on the ex-dividend date. Realized gains and losses from security transactions are generally reported on a first in, first out (FIFO) cost basis. ACCUMULATION UNIT VALUATION On each day the New York Stock Exchange (the "Exchange") is open for trading, the accumulation unit value is determined as of the earlier of 3:00 p.m. (Central time) or the close of the Exchange by dividing the total value of each subaccount's investments and other assets, less liabilities, by the number of accumulation units outstanding in the respective subaccount. 42 48 FEDERAL INCOME TAXES The operations of the Separate Account are included in the federal income tax return of KILICO. Under existing federal income tax law, investment income and realized capital gains and losses of the Separate Account increase liabilities under the policy and are, therefore, not taxed. Thus the Separate Account may realize net investment income and capital gains and losses without federal income tax consequences. (2) SUMMARY OF INVESTMENTS Investments as of December 31, 1999 do not include any amounts attributable to Kemper Destinations Life because sales had not commenced prior to December 31, 1999. Investments, at cost, at December 31, 1999, are as follows (in thousands, differences are due to rounding):
SHARES OWNED COST ------ ------- FIDELITY VARIABLE INSURANCE PRODUCTS FUND: Fidelity VIP Equity-Income Subaccount....................... 5 $ 126 Fidelity VIP High Income Subaccount......................... 1 14 SCUDDER VARIABLE LIFE INVESTMENT FUND: Scudder VLIF Growth and Income Subaccount................... 6 70 Scudder VLIF International Subaccount....................... 5 71 KEMPER VARIABLE SERIES: Kemper Government Securities Subaccount..................... 3,724 4,426 Kemper Money Market Subaccount.............................. 1,937 1,937 Kemper Small Cap Growth Subaccount.......................... 819 1,531 Kemper Total Return Subaccount.............................. 1,203 3,267 ------- TOTAL INVESTMENTS AT COST.............................. $11,442 =======
A description of the underlying investments are summarized below. FIDELITY VARIABLE INSURANCE PRODUCTS FUND FIDELITY VIP EQUITY-INCOME SUBACCOUNT: This subaccount invests in the Fidelity VIP Equity-Income Portfolio (Initial Class) of the Fidelity Variable Insurance Products Fund. The Portfolio seeks reasonable income. FIDELITY VIP HIGH INCOME SUBACCOUNT: This subaccount invests in the Fidelity VIP High Income Portfolio (Initial Class) of the Fidelity Variable Insurance Products Fund. The Portfolio seeks a high level of current income while also considering growth of capital. SCUDDER VARIABLE LIFE INVESTMENT FUND SCUDDER VLIF GROWTH AND INCOME SUBACCOUNT: This subaccount invests in the Scudder VLIF Growth and Income Portfolio (Class A Shares) of the Scudder Variable Life Investment Fund. The Portfolio seeks long-term growth of capital, current income and growth of income from a portfolio consisting primarily of common stocks and securities convertible into common stocks. SCUDDER VLIF INTERNATIONAL SUBACCOUNT: This subaccount invests in the Scudder VLIF International Portfolio (Class A Shares) of the Scudder Variable Life Investment Fund. The Portfolio seeks long-term growth of capital principally from a diversified portfolio of foreign equity securities. KEMPER VARIABLE SERIES KEMPER GOVERNMENT SECURITIES SUBACCOUNT: This subaccount invests in the Kemper Government Securities Portfolio of the Kemper Variable Series. The Portfolio seeks high current return consistent with preservation of capital. KEMPER MONEY MARKET SUBACCOUNT: This subaccount invests in the Kemper Money Market Portfolio of the Kemper Variable Series. The Portfolio seeks maximum current income to the extent consistent with stability of principal from a portfolio of high quality money market instruments. The Portfolio seeks to maintain a net asset value of $1.00 per share but there can be no assurance that the Portfolio will be able to do so. 43 49 KILICO VARIABLE SEPARATE ACCOUNT NOTES TO FINANCIAL STATEMENTS (CONTINUED) (2) SUMMARY OF INVESTMENTS (CONTINUED) KEMPER SMALL CAP GROWTH SUBACCOUNT: This subaccount invests in the Kemper Small Cap Growth Portfolio of the Kemper Variable Series. The Portfolio seeks maximum appreciation of investors' capital. KEMPER TOTAL RETURN SUBACCOUNT: This subaccount invests in the Kemper Total Return Portfolio of the Kemper Variable Series. The Portfolio seeks a high total return, a combination of income and capital appreciation, consistent with reasonable risk. (3) TRANSACTIONS WITH AFFILIATES KILICO provides a death benefit payment upon the death of the Policy Owner under the terms of the death benefit option selected by the Policy Owner as further described in the Policy. KILICO assesses a monthly charge to the subaccounts for the cost of providing this insurance protection to the Policy Owner. These cost of insurance charges vary with the issue age, sex and rate class of the Policy Owner, and are allocated among the subaccounts in the proportion of each subaccount to the Separate Account value. Cost of insurance charges totaled $101,356, $2,874,754 and $32,068 for the Kemper Select, Power V and Farmers Variable Universal Life I policies, respectively, for the year ended December 31, 1999. Additionally, KILICO assesses a daily charge to the subaccounts for mortality and expense risk assumed by KILICO at an annual rate of 0.90% of assets. Proceeds payable on the surrender of a Policy are reduced by the amount of any applicable contingent deferred sales charge. A state and local premium tax charge of 2.5% is deducted from each premium payment under the Power V and Farmers Variable Universal Life I policies prior to allocation of the net premium. This charge is to reimburse KILICO for the payment of state premium taxes. KILICO expects to pay an average state premium tax rate of approximately 2.5% but the actual premium tax attributable to a Policy may be more or less. Under Section 848 of the Internal Revenue Code (the "Code"), the receipt of premium income by a life insurance company requires the deferral of a portion of the acquisition cost over a maximum of a 120 month period. The effect of Section 848 for KILICO is an acceleration of income recognition over a deferral of the associated deductions for tax purposes; this is referred to as deferred acquisition cost or, the "DAC tax". As compensation for this accelerated liability, a DAC tax charge of 1.00% of each premium dollar is deducted from the premium by KILICO under the Power V and Farmers Variable Universal Life I policies before investment of a Policy Owner's funds into the Separate Account. Under the Kemper Destinations Life policies, for the first ten policy years, a tax charge equal to an annual rate of 0.40% of the average monthly cash value is assessed against the Policy. The tax charge covers a portion of KILICO's state premium tax expense and a certain Federal income tax liability incurred as a result of the receipt of premium. Policy loans are also provided for under the terms of the Policy. The minimum amount of the loan under the Power V and Farmers Variable Universal Life I policies is $500 and is limited to 90% of the surrender value, less applicable surrender charges. The minimum amount of the loan under the Kemper Destinations Life policies is $1,000 and is limited to 90% of the surrender value, less applicable surrender charges. Interest is assessed against a policy loan under the terms of the Policy. Policy loans are carried in KILICO's general account. Scudder Kemper Investments, Inc., an affiliated company, is the investment manager of the Kemper Variable Series and the Scudder Variable Life Investment Fund. Investors Brokerage Services, Inc., a wholly-owned subsidiary of KILICO, is the principal underwriter for the Separate Account. Fidelity Management & Research Company is the investment manager of the Fidelity Variable Insurance Products Fund and is not affiliated with KILICO. (4) NET TRANSFERS (TO) FROM AFFILIATE OR SUBACCOUNTS Net transfers (to) from affiliate or subaccounts include transfers of all or part of the Policy Owner's interest to or from another eligible subaccount or to the general account of KILICO. (5) POLICY OWNERS' EQUITY Policy Owners' equity as of December 31, 1999 does not include any amounts attributable to Kemper Destinations Life because sales had not commenced prior to December 31, 1999. 44 50 (5) POLICY OWNERS' EQUITY (CONTINUED) Policy Owners' equity for the policies listed below, at December 31, 1999, is as follows (in thousands, except unit value; differences are due to rounding):
NUMBER POLICY OF UNIT OWNERS' UNITS VALUE EQUITY ------ ------- ------- KEMPER SELECT POLICIES KEMPER VARIABLE SERIES: Kemper Government Securities Subaccount..................... 2,002 $ 2.131 $4,267 Kemper Money Market Subaccount.............................. 820 1.771 1,454 Kemper Total Return Subaccount.............................. 1,012 3.231 3,270 ------ TOTAL KEMPER SELECT POLICY OWNERS' EQUITY.............. $8,991 ====== POWER V POLICIES FIDELITY VARIABLE INSURANCE PRODUCTS FUND: Fidelity VIP Equity-Income Subaccount....................... 5 $26.657 $ 126 Fidelity VIP High Income Subaccount......................... 1 12.299 14 SCUDDER VARIABLE LIFE INVESTMENT FUND: Scudder VLIF Growth and Income Subaccount................... 5 11.818 56 Scudder VLIF International Subaccount....................... 4 22.057 91 KEMPER VARIABLE SERIES: Kemper Government Securities Subaccount..................... 26 1.377 36 Kemper Money Market Subaccount.............................. 418 1.141 477 Kemper Small Cap Growth Subaccount.......................... 623 3.481 2,169 Kemper Total Return Subaccount.............................. 45 4.337 195 ------ TOTAL POWER V POLICY OWNERS' EQUITY.................... $3,164 ====== FARMERS VARIABLE UNIVERSAL LIFE I POLICIES SCUDDER VARIABLE LIFE INVESTMENT FUND: Scudder VLIF Growth and Income Subaccount................... 1 $11.746 $ 13 Scudder VLIF International Subaccount....................... 0 22.335 2 KEMPER VARIABLE SERIES: Kemper Government Securities Subaccount..................... 1 1.208 1 Kemper Small Cap Growth Subaccount.......................... 1 2.635 2 ------ TOTAL FARMERS VARIABLE UNIVERSAL LIFE I POLICY OWNERS' EQUITY................................................ $ 18 ======
(6) SUBSEQUENT EVENT As of February 1, 2000, Zurich Kemper LifeINVESTOR flexible premium variable universal life policies ("Zurich Kemper LifeINVESTOR") was made available in the Separate Account. Zurich Kemper LifeINVESTOR policies have thirty-one subaccounts which are available to Policy Owners and each subaccount invests exclusively in the shares of a corresponding portfolio of The Alger American Fund, The Dreyfus Socially Responsible Growth Fund, Inc., the Dreyfus Life & Annuity Index Fund d/b/a Dreyfus Stock Index Fund, the Dreyfus Variable Investment Fund, the Templeton Variable Products Series Fund (Class 2 Shares), the Fidelity Variable Insurance Products Fund (Initial Class), the Janus Aspen Series, the Scudder Variable Life Investment Fund (Class A Shares), and the Kemper Variable Series, all of which are open-end diversified management investment companies. 45 51 REPORT OF INDEPENDENT ACCOUNTANTS The Board of Directors and Stockholder of Kemper Investors Life Insurance Company: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, comprehensive income, stockholder's equity and cash flows present fairly, in all material respects, the financial position of Kemper Investors Life Insurance Company and subsidiaries (the "Company") at December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. In addition, in our opinion, the financial statement schedules listed in the accompanying index present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedules are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Chicago, Illinois March 17, 2000 46 52 (This page intentionally left blank) 47 53 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
DECEMBER 31 DECEMBER 31 1999 1998 ----------- ----------- ASSETS Fixed maturities, available for sale, at fair value (amortized cost: December 31, 1999, $3,397,188, December 31, 1998, $3,421,535)..................................... $ 3,276,017 $ 3,482,820 Trading account securities at fair value (amortized cost: December 31, 1998, $99,095)............................... -- 101,781 Equity securities (cost: December 31, 1999, $65,235; December 31, 1998, $66,776)............................... 61,592 66,854 Short-term investments...................................... 42,391 58,334 Joint venture mortgage loans................................ 67,242 65,806 Third-party mortgage loans.................................. 63,875 76,520 Other real estate-related investments....................... 20,506 22,049 Policy loans................................................ 261,788 271,540 Other invested assets....................................... 25,621 23,645 ----------- ----------- Total investments................................. 3,819,032 4,169,349 Cash........................................................ 12,015 13,486 Accrued investment income................................... 127,219 124,213 Goodwill.................................................... 203,907 216,651 Value of business acquired.................................. 119,160 118,850 Deferred insurance acquisition costs........................ 159,667 91,543 Deferred income taxes....................................... 93,502 35,059 Reinsurance recoverable..................................... 309,696 344,837 Receivable on sales of securities........................... 3,500 3,500 Other assets and receivables................................ 29,950 23,029 Assets held in separate accounts............................ 9,778,068 7,099,204 ----------- ----------- Total assets...................................... $14,655,716 $12,239,721 =========== =========== LIABILITIES Future policy benefits...................................... $ 3,718,833 $ 3,906,391 Other policyholder benefits and funds payable............... 457,328 318,369 Other accounts payable and liabilities...................... 71,482 61,898 Liabilities related to separate accounts.................... 9,778,068 7,099,204 ----------- ----------- Total liabilities................................. 14,025,711 11,385,862 ----------- ----------- Commitments and contingent liabilities STOCKHOLDER'S EQUITY Capital stock--$10 par value, authorized 300,000 shares; outstanding 250,000 shares................................ 2,500 2,500 Additional paid-in capital.................................. 804,347 804,347 Accumulated other comprehensive income (loss)............... (120,819) 32,975 Retained earnings (deficit)................................. (56,023) 14,037 ----------- ----------- Total stockholder's equity........................ 630,005 853,859 ----------- ----------- Total liabilities and stockholder's equity........ $14,655,716 $12,239,721 =========== ===========
See accompanying notes to consolidated financial statements. 48 54 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands)
YEAR ENDED DECEMBER 31 -------------------------------- 1999 1998 1997 -------- -------- -------- REVENUE Net investment income....................................... $264,640 $273,512 $296,195 Realized investment gains (losses).......................... (9,549) 51,868 10,546 Premium income.............................................. 21,990 22,346 22,239 Separate account fees and charges........................... 74,715 61,982 85,413 Other income................................................ 11,623 10,031 11,087 -------- -------- -------- Total revenue..................................... 363,419 419,739 425,480 -------- -------- -------- BENEFIT AND EXPENSES Interest credited to policyholders.......................... 162,243 176,906 199,782 Claims incurred and other policyholder benefits............. 18,185 28,029 28,372 Taxes, licenses and fees.................................... 30,234 30,292 52,608 Commissions................................................. 67,555 39,046 32,602 Operating expenses.......................................... 45,989 44,575 36,837 Deferral of insurance acquisition costs..................... (69,814) (46,565) (38,177) Amortization of insurance acquisition costs................. 5,524 12,082 3,204 Amortization of value of business acquired.................. 12,955 17,677 24,948 Amortization of goodwill.................................... 12,744 12,744 15,295 -------- -------- -------- Total benefits and expenses....................... 285,615 314,786 355,471 -------- -------- -------- Income before income tax expense............................ 77,804 104,953 70,009 Income tax expense.......................................... 32,864 39,804 31,292 -------- -------- -------- Net income........................................ $ 44,940 $ 65,149 $ 38,717 ======== ======== ========
See accompanying notes to consolidated financial statements. 49 55 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (in thousands)
YEAR ENDED DECEMBER 31 --------------------------------- 1999 1998 1997 --------- -------- -------- NET INCOME.................................................. $ 44,940 $ 65,149 $ 38,717 --------- -------- -------- OTHER COMPREHENSIVE INCOME (LOSS), BEFORE TAX: Unrealized holding gains (losses) on investments arising during period: Unrealized holding gains (losses) on investments.......... (180,267) 25,372 60,802 Adjustment to value of business acquired.................. 12,811 (9,332) (28,562) Adjustment to deferred insurance acquisition costs........ 5,726 (2,862) (2,680) --------- -------- -------- Total unrealized holding gains (losses) on investments arising during period............... (161,730) 13,178 29,560 --------- -------- -------- Less reclassification adjustments for items included in net income: Adjustment for (gains) losses included in realized investment gains (losses)............................ 16,651 6,794 (9,016) Adjustment for amortization of premium on fixed maturities included in net investment income......... (10,533) (17,064) (17,866) Adjustment for (gains) losses included in amortization of value of business acquired........................ (454) (7,378) (2,353) Adjustment for (gains) losses included in amortization of insurance acquisition costs....................... 1,892 (463) (355) --------- -------- -------- Total reclassification adjustments for items included in net income.......................... 7,556 (18,111) (29,590) --------- -------- -------- Other comprehensive income (loss), before related income tax expense (benefit)......................................... (169,286) 31,289 59,150 Related income tax expense (benefit)........................ (15,492) 10,952 (985) --------- -------- -------- Other comprehensive income (loss), net of tax..... (153,794) 20,337 60,135 --------- -------- -------- Comprehensive income (loss)....................... $(108,854) $ 85,486 $ 98,852 ========= ======== ========
See accompanying notes to consolidated financial statements. 50 56 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (in thousands)
DECEMBER 31 --------------------------------- 1999 1998 1997 --------- -------- -------- CAPITAL STOCK, beginning and end of period.................. $ 2,500 $ 2,500 $ 2,500 --------- -------- -------- ADDITIONAL PAID-IN CAPITAL, beginning of period............. 804,347 806,538 761,538 Capital contributions from parent........................... -- 4,261 45,000 Adjustment to prior period capital contribution from parent.................................................... -- (6,452) -- --------- -------- -------- End of period..................................... 804,347 804,347 806,538 --------- -------- -------- ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS), beginning of period.................................................... 32,975 12,637 (47,498) Other comprehensive income (loss), net of tax............... (153,794) 20,338 60,135 --------- -------- -------- End of period..................................... (120,819) 32,975 12,637 --------- -------- -------- RETAINED EARNINGS, beginning of period...................... 14,037 43,888 34,421 Net income.................................................. 44,940 65,149 38,717 Dividends to parent......................................... (115,000) (95,000) (29,250) --------- -------- -------- End of period..................................... (56,023) 14,037 43,888 --------- -------- -------- Total stockholder's equity........................ $ 630,005 $853,859 $865,563 ========= ======== ========
See accompanying notes to consolidated financial statements. 51 57 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
YEAR ENDED DECEMBER 31 -------------------------------------- 1999 1998 1997 ----------- ----------- --------- CASH FLOWS FROM OPERATING ACTIVITIES Net income................................................ $ 44,940 $ 65,149 $ 38,717 Reconcilement of net income to net cash provided: Realized investment (gains) losses..................... 9,549 (51,868) (10,546) Net change in trading account securities............... (51,239) (6,727) -- Interest credited and other charges.................... 158,557 173,958 198,206 Deferred insurance acquisition costs, net.............. (64,290) (34,483) (34,973) Amortization of value of business acquired............. 12,955 17,677 24,948 Amortization of goodwill............................... 12,744 12,744 15,295 Amortization of discount and premium on investments.... 11,157 17,353 17,866 Deferred income taxes.................................. (42,952) (12,469) (99,370) Net change in current federal income taxes............. (10,594) (73,162) 97,386 Benefits and premium taxes due related to separate account bank-owned life insurance.................... 149,477 123,884 180,546 Other, net (11,901) (41,477) 17,168 ----------- ----------- --------- Net cash provided from operating activities....... 218,403 190,579 445,243 ----------- ----------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Cash from investments sold or matured: Fixed maturities held to maturity...................... 335,735 491,699 229,208 Fixed maturities sold prior to maturity................ 1,269,290 882,596 633,872 Equity securities...................................... 11,379 107,598 -- Mortgage loans, policy loans and other invested assets............................................... 75,389 180,316 131,866 Cost of investments purchased or loans originated: Fixed maturities....................................... (1,455,496) (1,319,119) (606,028) Equity securities...................................... (8,703) (83,303) -- Mortgage loans, policy loans and other invested assets............................................... (43,665) (66,331) (76,350) Short-term investments, net............................... 15,943 177,723 (164,361) Net change in receivable and payable for securities transactions........................................... -- (677) 29,746 Net change in other assets................................ (2,725) -- 244 ----------- ----------- --------- Net cash provided from investing activities....... 197,147 370,502 178,197 ----------- ----------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Policyholder account balances: Deposits............................................... 383,874 180,124 145,687 Withdrawals............................................ (694,848) (649,400) (745,510) Capital contributions from parent......................... -- 4,261 45,000 Dividends to parent....................................... (115,000) (95,000) (29,250) Other..................................................... 8,953 (11,448) (18,275) ----------- ----------- --------- Net cash used in financing activities............. (417,021) (571,463) (602,348) ----------- ----------- --------- Net increase (decrease) in cash.............. (1,471) (10,382) 21,092 CASH, beginning of period................................... 13,486 23,868 2,776 ----------- ----------- --------- CASH, end of period......................................... $ 12,015 $ 13,486 $ 23,868 =========== =========== =========
See accompanying notes to consolidated financial statements. 52 58 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION Kemper Investors Life Insurance Company and subsidiaries (the "Company") issues fixed and variable annuity products, variable life, term life and interest-sensitive life insurance products marketed primarily through a network of financial institutions, securities brokerage firms, insurance agents and financial planners. The Company is licensed in the District of Columbia and all states except New York. The Company is a wholly-owned subsidiary of Kemper Corporation ("Kemper"). Kemper and the Company are wholly-owned subsidiaries of Zurich Financial Services ("ZFS" or "Zurich"). ZFS is owned by Zurich Allied AG and Allied Zurich p.l.c., fifty-seven percent and forty-three percent, respectively. Zurich Allied AG is listed on the Swiss Market Index. Allied Zurich p.l.c. is included in the FTSE-100 Share Index in London. The financial statements include the accounts of the Company on a consolidated basis. All significant intercompany balances and transactions have been eliminated. Certain reclassifications have been made to the 1998 and 1997 consolidated financial statements in order for them to conform to the 1999 presentation. The accompanying consolidated financial statements of the Company as of and for the years ended December 31, 1999, 1998 and 1997, have been prepared in conformity with accounting principles generally accepted in the United States. ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that could affect the reported amounts of assets and liabilities as well as the disclosure of contingent assets or liabilities at the date of the financial statements. As a result, actual results reported as revenue and expenses could differ from the estimates reported in the accompanying financial statements. As further discussed in the accompanying notes to the consolidated financial statements, significant estimates and assumptions affect goodwill, deferred insurance acquisition costs, the value of business acquired, provisions for real estate-related losses and reserves, other-than-temporary declines in values for fixed maturities, the valuation allowance for deferred income taxes and the calculation of fair value disclosures for certain financial instruments. GOODWILL The Company reviews goodwill to determine if events or changes in circumstances may have affected the recoverability of the outstanding goodwill as of each reporting period. In the event that the Company determines that goodwill is not recoverable, it would amortize such amounts as additional goodwill expense in the accompanying financial statements. As of December 31, 1999, the Company believes that no such adjustment is necessary. In December of 1997, the Company changed its amortization period from twenty-five years to twenty years in order to conform to Zurich's accounting practices and policies. As a result of the change in amortization periods, the Company recorded an increase in goodwill amortization expense of $5.1 million during 1997. VALUE OF BUSINESS ACQUIRED The value of business acquired reflects the estimated fair value of the Company's life insurance business in force and represents the portion of the cost to acquire the Company that is allocated to the value of the right to receive future cash flows from insurance contracts existing at the date of acquisition. Such value is the present value of the actuarially determined projected cash flows for the acquired policies. The value of the business acquired is amortized over the estimated contract life of the business acquired in relation to the present value of estimated gross profits using current assumptions based on an interest rate equal to 53 59 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) the liability or contract rate on the value of business acquired. The estimated amortization and accretion of interest for the value of business acquired for each of the years through December 31, 2004 are as follows:
PROJECTED (IN THOUSANDS) BEGINNING ACCRETION OF ENDING YEAR ENDED DECEMBER 31 BALANCE AMORTIZATION INTEREST BALANCE ---------------------- --------- ------------ ------------ --------- 1997 (actual).......................................... 168,692 (34,906) 9,958 143,744 1998 (actual).......................................... 143,744 (26,807) 9,129 126,066 1999 (actual).......................................... 126,066 (20,891) 7,936 113,111 2000................................................... 113,111 (23,418) 6,971 96,664 2001................................................... 96,664 (21,493) 5,890 81,061 2002................................................... 81,061 (17,805) 4,970 68,226 2003................................................... 68,226 (16,160) 4,185 56,251 2004................................................... 56,251 (14,625) 3,438 45,064
The projected ending balance of the value of business acquired will be further adjusted to reflect the impact of unrealized gains or losses on fixed maturities held as available for sale in the investment portfolio. Such adjustments are not recorded in the Company's net income but rather are recorded as a credit or charge to accumulated other comprehensive income, net of income tax. This adjustment increased the value of business acquired by $6.0 million as of December 31, 1999 and decreased the value of business acquired by $7.2 million as of December 31, 1998. Accumulated other comprehensive income increased by approximately $3.9 million as of December 31, 1999 due to this adjustment and decreased accumulated other comprehensive income by $4.7 million as of December 31, 1998. LIFE INSURANCE REVENUE AND EXPENSES Revenue for annuities, variable life insurance and interest-sensitive life insurance products consists of investment income, and policy charges such as mortality, expense and surrender charges and expense loads for premium taxes on certain contracts. Expenses consist of benefits and interest credited to contracts, policy maintenance costs and amortization of deferred insurance acquisition costs. Premiums for term life policies are reported as earned when due. Profits for such policies are recognized over the duration of the insurance policies by matching benefits and expenses to premium income. REINSURANCE In the ordinary course of business, the Company enters into reinsurance agreements to diversify risk and limit its overall financial exposure to certain blocks of fixed-rate annuities and to individual death claims. The Company generally cedes 100 percent of the related annuity liabilities under the terms of the reinsurance agreements. Although these reinsurance agreements contractually obligate the reinsurers to reimburse the Company, they do not discharge the Company from its primary liabilities and obligations to policyholders. As such, these amounts paid or deemed to have been paid are recorded on the Company's consolidated balance sheet as reinsurance recoverables and ceded future policy benefits. DEFERRED INSURANCE ACQUISITION COSTS The costs of acquiring new business, principally commission expense and certain policy issuance and underwriting expenses, have been deferred to the extent they are recoverable from estimated future gross profits on the related contracts and policies. The deferred insurance acquisition costs for annuities, separate account business and interest-sensitive life insurance products are being amortized over the estimated contract life in relation to the present value of estimated gross profits. Deferred insurance acquisition costs related to such interest-sensitive products also reflect the estimated impact of unrealized gains or losses on fixed maturities held as available for sale in the investment portfolio, through a credit or charge to accumulated other comprehensive income, net of income tax. The deferred insurance acquisition costs for term-life insurance products are being amortized over the premium paying period of the policies. 54 60 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) FUTURE POLICY BENEFITS Liabilities for future policy benefits related to annuities and interest-sensitive life contracts reflect net premiums received plus interest credited during the contract accumulation period and the present value of future payments for contracts that have annuitized. Current interest rates credited during the contract accumulation period range from 3.0 percent to 10.0 percent. Future minimum guaranteed interest rates vary from 3.0 percent to 4.0 percent. For contracts that have annuitized, interest rates used in determining the present value of future payments range principally from 2.5 percent to 12.0 percent. Liabilities for future term life policy benefits have been computed principally by a net level premium method. Anticipated rates of mortality are based on the 1975-1980 Select and Ultimate Table modified by Company experience, including withdrawals. Estimated future investment yields are a level 7.1 percent. GUARANTY FUND ASSESSMENTS The Company is liable for guaranty fund assessments related to certain unaffiliated insurance companies that have become insolvent during the years 1999 and prior. The Company's financial statements include provisions for all known assessments that are expected to be levied against the Company as well as an estimate of amounts (net of estimated future premium tax recoveries) that the Company believes it will be assessed in the future for which the life insurance industry has estimated the cost to cover losses to policyholders. INVESTED ASSETS AND RELATED INCOME Investments in fixed maturities and equity securities are carried at fair value. Short-term investments are carried at cost, which approximates fair value. The amortized cost of fixed maturities is adjusted for amortization of premiums and accretion of discounts to maturity, or in the case of mortgage-backed and asset-backed securities, over the estimated life of the security. Such amortization is included in net investment income. Amortization of the discount or premium from mortgage-backed and asset-backed securities is recognized using a level effective yield method which considers the estimated timing and amount of prepayments of the underlying loans and is adjusted to reflect differences which arise between the prepayments originally anticipated and the actual prepayments received and currently anticipated. To the extent that the estimated lives of such securities change as a result of changes in prepayment rates, the adjustment is also included in net investment income. The Company does not accrue interest income on fixed maturities deemed to be impaired on an other-than-temporary basis, or on mortgage loans and other real estate loans where the likelihood of collection of interest is doubtful. Mortgage loans are carried at their unpaid balance, net of unamortized discount and any applicable reserves or write-downs. Other real estate-related investments, net of any applicable reserves and write-downs, include notes receivable from real estate ventures and investments in real estate ventures, adjusted for the equity in the operating income or loss of such ventures. Real estate reserves are established when declines in collateral values, estimated in light of current economic conditions, indicate a likelihood of loss. Investments in policy loans and other invested assets, consisting primarily of venture capital investments and a leveraged lease, are carried primarily at cost. Realized gains or losses on sales of investments, determined on the basis of identifiable cost on the disposition of the respective investment, recognition of other-than-temporary declines in value and changes in real estate-related reserves and write-downs are included in revenue. Net unrealized gains or losses on revaluation of investments are credited or charged to accumulated other comprehensive income (loss). Such unrealized gains are recorded net of deferred income tax expense, while unrealized losses are not tax benefitted. SEPARATE ACCOUNT BUSINESS The assets and liabilities of the separate accounts represent segregated funds administered and invested by the Company for purposes of funding variable annuity and variable life insurance contracts for the exclusive benefit of variable annuity and variable life insurance contract holders. The Company receives administrative fees from the 55 61 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) separate account and retains varying amounts of withdrawal charges to cover expenses in the event of early withdrawals by contract holders. The assets and liabilities of the separate accounts are carried at fair value. INCOME TAX The Company files a separate Federal income tax return. Deferred taxes are provided on the temporary differences between the tax and financial statement basis of assets and liabilities. (2) CASH FLOW INFORMATION The Company defines cash as cash in banks and money market accounts. The Company paid federal income taxes of $83.8 million, $126.0 million and $29.0 million directly to the United States Treasury Department during 1999, 1998 and 1997, respectively. (3) INVESTED ASSETS AND RELATED INCOME The Company is carrying its fixed maturity investment portfolio at estimated fair value as fixed maturities are considered available for sale. The carrying value of fixed maturities compared with amortized cost, adjusted for other-than-temporary declines in value, were as follows:
ESTIMATED UNREALIZED CARRYING AMORTIZED --------------------- VALUE COST GAINS LOSSES (in thousands) ---------- ---------- -------- ---------- DECEMBER 31, 1999 U.S. treasury securities and obligations of U.S. government agencies and authorities................ $ 6,516 $ 6,631 $ -- $ (115) Obligations of states and political subdivisions, special revenue and nonguaranteed.................. 21,656 22,107 -- (451) Debt securities issued by foreign governments........ 23,890 24,749 380 (1,239) Corporate securities................................. 2,063,054 2,147,606 2,750 (87,302) Mortgage and asset-backed securities................. 1,160,901 1,196,095 450 (35,644) ---------- ---------- ------- --------- Total fixed maturities........................ $3,276,017 $3,397,188 $ 3,580 $(124,751) ========== ========== ======= ========= DECEMBER 31, 1998 U.S. treasury securities and obligations of U.S. government agencies and authorities................ $ 7,951 $ 7,879 $ 81 $ (9) Obligations of states and political subdivisions, special revenue and nonguaranteed.................. 27,039 26,768 362 (91) Debt securities issued by foreign governments........ 69,357 67,239 2,266 (148) Corporate securities................................. 1,908,850 1,866,372 46,664 (4,186) Mortgage and asset-backed securities................. 1,469,623 1,453,277 19,063 (2,717) ---------- ---------- ------- --------- Total fixed maturities........................ $3,482,820 $3,421,535 $68,436 $ (7,151) ========== ========== ======= =========
The carrying value and amortized cost of fixed maturity investments, by contractual maturity at December 31, 1999, are shown below. Actual maturities will differ from contractual maturities because borrowers may 56 62 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (3) INVESTED ASSETS AND RELATED INCOME (CONTINUED) have the right to call or prepay obligations with or without call or prepayment penalties and because mortgage-backed and asset-backed securities provide for periodic payments throughout their life.
CARRYING AMORTIZED VALUE COST (in thousands) ---------- ---------- One year or less............................................ $ 49,221 $ 48,953 Over one year through five years............................ 747,086 765,064 Over five years through ten years........................... 1,022,850 1,073,468 Over ten years.............................................. 295,959 313,608 Securities not due at a single maturity date, primarily mortgage and asset-backed securities(1)................... 1,160,901 1,196,095 ---------- ---------- Total fixed maturities............................... $3,276,017 $3,397,188 ========== ==========
- --------------- (1) Weighted average maturity of 4.9 years. Proceeds from sales of investments in fixed maturities prior to maturity were $1,269.3 million, $882.6 million and $633.9 million during 1999, 1998 and 1997, respectively. Gross gains of $7.9 million, $10.1 million and $3.1 million and gross losses of $17.7 million, $8.0 million and $13.7 million were realized on sales and write-downs of fixed maturities in 1999, 1998 and 1997, respectively. Excluding agencies of the U.S. government, there were no individual investments that exceeded ten percent of stockholder's equity at December 31, 1999. At December 31, 1999, securities carried at approximately $6.2 million were on deposit with governmental agencies as required by law. Upon default or indication of potential default by an issuer of fixed maturity securities, the issue(s) of such issuer would be placed on nonaccrual status and, since declines in fair value would no longer be considered by the Company to be temporary, would be analyzed for possible write-down. Any such issue would be written down to its net realizable value during the fiscal quarter in which the impairment was determined to have become other than temporary. Thereafter, each issue on nonaccrual status is regularly reviewed, and additional write-downs may be taken in light of later developments. The Company's computation of net realizable value involves judgments and estimates, so such value should be used with care. Such value determination considers such factors as the existence and value of any collateral security; the capital structure of the issuer; the level of actual and expected market interest rates; where the issue ranks in comparison with other debt of the issuer; the economic and competitive environment of the issuer and its business; the Company's view on the likelihood of success of any proposed issuer restructuring plan; and the timing, type and amount of any restructured securities that the Company anticipates it will receive. The Company's $151.6 million real estate portfolio at December 31, 1999 consists of joint venture and third-party mortgage loans and other real estate-related investments. At December 31, 1999 and 1998, total impaired real estate-related loans were as follows:
DECEMBER 31 DECEMBER 31 1999 1998 (in millions) ----------- ----------- Impaired loans without reserves--gross...................... $ 74.9 $ 83.9 Impaired loans with reserves--gross......................... 23.4 25.0 ------ ------ Total gross impaired loans........................... 98.3 108.9 Reserves related to impaired loans.......................... (18.5) (18.5) Write-downs related to impaired loans....................... (3.5) (3.5) ------ ------ Net impaired loans................................... $ 76.3 $ 86.9 ====== ======
Impaired loans without reserves include loans in which the deficit in equity investments in real estate-related investments is considered in determining reserves and write-downs. The Company had an average balance of $100.0 million and $54.6 million in impaired loans for 1999 and 1998, respectively. Cash payments received on impaired loans are generally applied to reduce the outstanding loan balance. 57 63 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (3) INVESTED ASSETS AND RELATED INCOME (CONTINUED) At December 31, 1999 and 1998, loans on nonaccrual status, before reserves and write-downs, amounted to $98.3 million and $37.4 million, respectively. The Company's nonaccrual loans are generally included in impaired loans. NET INVESTMENT INCOME The sources of net investment income were as follows:
1999 1998 1997 (in thousands) -------- -------- -------- Interest and dividends on fixed maturities.................. $231,176 $232,707 $250,170 Dividends on equity securities.............................. 4,618 2,143 2,123 Income from short-term investments.......................... 3,568 5,391 4,128 Income from mortgage loans.................................. 6,296 14,964 16,283 Income from policy loans.................................... 20,131 21,096 20,549 Income from other real estate-related investments........... 155 352 6,631 Income from other loans and investments..................... 2,033 2,223 2,045 -------- -------- -------- Total investment income.............................. $267,977 $278,876 $301,929 Investment expense.......................................... (3,337) (5,364) (5,734) -------- -------- -------- Net investment income................................ $264,640 $273,512 $296,195 ======== ======== ========
NET REALIZED INVESTMENT GAINS (LOSSES) Net realized investment gains (losses) for the years ended December 31, 1999, 1998 and 1997, were as follows:
REALIZED GAINS (LOSSES) ------------------------------ 1999 1998 1997 (in thousands) ------- ------- -------- Real estate-related......................................... $ 4,201 $41,362 $ 19,758 Fixed maturities............................................ (9,755) 2,158 (10,656) Trading account securities--gross gains..................... 491 3,254 -- Trading account securities--gross losses.................... (7,794) (417) -- Trading account securities--holding losses.................. -- (151) -- Equity securities........................................... 1,039 5,496 914 Other....................................................... 2,269 166 530 ------- ------- -------- Realized investment gains (losses) before income tax expense (benefit)...................................... $(9,549) $51,868 $ 10,546 Income tax expense (benefit)................................ (3,342) 18,154 3,691 ------- ------- -------- Net realized investment gains (losses).................... $(6,207) $33,714 $ 6,855 ======= ======= ========
Unrealized gains (losses) are computed below as follows: fixed maturities--the difference between fair value and amortized cost, adjusted for other-than-temporary declines in value; equity and other securities--the 58 64 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (3) INVESTED ASSETS AND RELATED INCOME (CONTINUED) difference between fair value and cost. The change in net unrealized investment gains (losses) by class of investment for the years ended December 31, 1999, 1998 and 1997 were as follows:
CHANGE IN UNREALIZED GAINS (LOSSES) ------------------------------------------- DECEMBER 31 DECEMBER 31 DECEMBER 31 1999 1998 1997 (in thousands) ------------ ------------ ----------- Fixed maturities............................................ $(182,456) $36,717 $ 87,787 Equity and other securities................................. (3,929) (1,075) (103) Adjustment to deferred insurance acquisition costs.......... 3,834 (2,399) (2,325) Adjustment to value of business acquired.................... 13,265 (1,954) (26,209) --------- ------- -------- Unrealized gain (loss) before income tax expense (benefit).............................................. (169,286) 31,289 59,150 Income tax expense (benefit)................................ (15,492) 10,952 (985) --------- ------- -------- Net unrealized gain (loss) on investments............ $(153,794) $20,337 $ 60,135 ========= ======= ========
(4) UNCONSOLIDATED INVESTEES At December 31, 1999 and 1998 the Company, along with other Kemper subsidiaries, directly held partnership interests in a number of real estate joint ventures. The Company's direct and indirect real estate joint venture investments are accounted for utilizing the equity method, with the Company recording its share of the operating results of the respective partnerships. The Company, as an equity owner, has the ability to fund, and historically has elected to fund, operating requirements of certain of the joint ventures. Consolidation accounting methods are not utilized as the Company, in most instances, does not own more than 50 percent in the aggregate, and in any event, major decisions of the partnership must be made jointly by all partners. As of December 31, 1999 and 1998, the Company's net equity investment in unconsolidated investees amounted to $0.9 million and $1.2 million, respectively. The Company's share of net income related to such unconsolidated investees amounted to $155 thousand, $241 thousand and $835 thousand in 1999, 1998 and 1997, respectively. (5) CONCENTRATION OF CREDIT RISK The Company generally strives to maintain a diversified invested asset portfolio; however, certain concentrations of credit risk exist in mortgage and asset-backed securities and real estate. Approximately 20.0 percent of the Company's investment-grade fixed maturities at December 31, 1999 were mortgage-backed securities, down from 28.0 percent at December 31, 1998, due to sales and paydowns during 1999. These investments consist primarily of marketable mortgage pass-through securities issued by the Government National Mortgage Association, the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation and other investment-grade securities collateralized by mortgage pass-through securities issued by these entities. The Company has not made any investments in interest-only or other similarly volatile tranches of mortgage-backed securities. The Company's mortgage-backed investments are generally AAA credit quality. Approximately 16.8 percent and 15.4 percent of the Company's investment-grade fixed maturities at December 31, 1999 and 1998, respectively, consisted of corporate asset-backed securities. The majority of the Company's investments in asset-backed securities were backed by home equity loans (24.0%), commercial mortgage-backed securities (22.8%), manufactured housing loans (12.5%), other commercial assets (11.3%) and collateralized loan and bond obligations (10.6%). The Company's real estate portfolio is distributed by geographic location and property type. The geographic distribution of a majority of the real estate portfolio as of December 31, 1999 was as follows: California (36.8%), Hawaii (13.6%), Washington (10.9%) and Colorado (10.1%). The property type distribution of a majority of the real estate portfolio as of December 31, 1999 was as follows: hotels (36.3%), land (36.1%) and residential (13.5%). To maximize the value of certain land and other projects, additional development has been proceeding or has been planned. Such development of existing projects would continue to require funding, either from the 59 65 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (5) CONCENTRATION OF CREDIT RISK (CONTINUED) Company or third parties. In the present real estate markets, third-party financing can require credit enhancing arrangements (e.g., standby financing arrangements and loan commitments) from the Company. The values of development projects are dependent on a number of factors, including Kemper's and the Company's plans with respect thereto, obtaining necessary construction and zoning permits and market demand for the permitted use of the property. There can be no assurance that such permits will be obtained as planned or at all, nor that such expenditures will occur as scheduled, nor that Kemper's and the Company's plans with respect to such projects may not change substantially. Slightly more than half of the Company's real estate mortgage loans are on properties or projects where the Company, Kemper, or their affiliates have taken ownership positions in joint ventures with a small number of partners. At December 31, 1999, loans to and investments in joint ventures in which Patrick M. Nesbitt or his affiliates ("Nesbitt"), a third-party real estate developer, have ownership interests constituted approximately $63.9 million, or 42.2 percent, of the Company's real estate portfolio. The Nesbitt ventures consist of nine hotel properties, one office building and one retail property. At December 31, 1999, the Company did not have any Nesbitt-related off-balance-sheet legal funding commitments outstanding. At December 31, 1999, loans to a master limited partnership (the "MLP") between subsidiaries of Kemper and subsidiaries of Lumbermens Mutual Casualty Company ("Lumbermens"), a former affiliate, constituted approximately $55.4 million, or 36.5 percent, of the Company's real estate portfolio. Kemper's interest in the MLP is 75.0 percent at December 31, 1999. Loans to the MLP were placed on non-accrual status at the beginning of 1999 due to management's desire not to increase book value of the MLP over net realizable value, as interest on these loans has historically been added to principal. At December 31, 1999, MLP-related commitments accounted for approximately $0.1 million of the Company's off-balance-sheet legal commitments. The remaining significant real estate-related investments amounted to $20.7 million at December 31, 1999 and consisted of various zoned and unzoned residential and commercial lots located in Hawaii. Due to certain negative zoning restriction developments in January 1997 and a continuing economic slump in Hawaii, the Company has placed these real estate-related investments on nonaccrual status as of December 31, 1996. The Company is currently pursuing the zoning of all remaining unzoned properties, as well as pursuing steps to sell all remaining zoned properties. However, due to the state of Hawaii's economy, which has lagged behind the economic expansion of most of the rest of the United States, the Company anticipates that it could be several additional years until it completely disposes of all of its investments in Hawaii. At December 31, 1999, off-balance sheet legal commitments related to Hawaiian properties totaled $4.0 million. At December 31, 1999, the Company no longer had any outstanding loans or investments in projects with the Prime Group, Inc. or its affiliates, as all such investments have been sold. However, the Company continues to have Prime Group-related commitments, which accounted for $25.7 million of the Company's off-balance-sheet legal commitments at December 31, 1999. (6) INCOME TAXES Income tax expense (benefit) was as follows for the years ended December 31, 1999, 1998 and 1997:
1999 1998 1997 (in thousands) -------- -------- -------- Current..................................................... $ 75,816 $ 52,273 $130,662 Deferred.................................................... (42,952) (12,469) (99,370) -------- -------- -------- Total............................................. $ 32,864 $ 39,804 $ 31,292 ======== ======== ========
60 66 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (6) INCOME TAXES (CONTINUED) Additionally, the deferred income tax (benefit) expense related to items included in other comprehensive income was as follows for the years ended December 31, 1999, 1998 and 1997:
1999 1998 1997 (in thousands) -------- ------- ------- Unrealized gains and losses on investments.................. $(21,477) $12,476 $ 9,002 Value of business acquired.................................. 4,643 (684) (9,173) Deferred insurance acquisition costs........................ 1,342 (840) (814) -------- ------- ------- Total............................................. $(15,492) $10,952 $ (985) ======== ======= =======
The actual income tax expense for 1999, 1998 and 1997 differed from the "expected" tax expense for those years as displayed below. "Expected" tax expense was computed by applying the U.S. federal corporate tax rate of 35 percent in 1999, 1998, and 1997 to income before income tax expense.
1999 1998 1997 (in thousands) ------- ------- ------- Computed expected tax expense............................... $27,232 $36,734 $24,503 Difference between "expected" and actual tax expense: State taxes............................................... 1,608 (434) 1,801 Amortization of goodwill.................................. 4,460 4,460 5,353 Dividend received deduction............................... -- (540) -- Foreign tax credit........................................ (306) (250) (278) Other, net................................................ (130) (166) (87) ------- ------- ------- Total actual tax expense.......................... $32,864 $39,804 $31,292 ======= ======= =======
Deferred tax assets and liabilities are generally determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The Company only records deferred tax assets if future realization of the tax benefit is more likely than not, with a valuation allowance recorded for the portion that is not likely to be realized. The valuation allowance is subject to future adjustments based upon, among other items, the Company's estimates of future operating earnings and capital gains. The Company has established a valuation allowance to reduce the deferred federal tax asset related to real estate and unrealized losses on investments to a realizable amount. This amount is based on the evidence available and management's judgment. Any reversals of the valuation allowance are contingent upon the recognition of future capital gains in the Company's federal income tax return or a change in circumstances which causes the recognition of the benefits to become more likely than not. The change in the valuation allowance is related solely to the change in the net deferred federal tax asset or liability from unrealized gains or losses on investments. The tax effects of temporary differences that give rise to significant portions of the Company's net deferred federal tax assets or liabilities were as follows:
DECEMBER 31 DECEMBER 31 DECEMBER 31 1999 1998 1997 (in thousands) ----------- ----------- ----------- Deferred federal tax assets: Deferred insurance acquisition costs ("DAC Tax").......... $121,723 $ 86,332 $ 75,522 Unrealized losses on investments.......................... 43,758 -- -- Life policy reserves...................................... 43,931 27,240 43,337 Unearned revenue.......................................... 59,349 42,598 37,243 Real estate-related....................................... 7,103 13,944 13,400 Other investment-related.................................. 928 5,770 3,298 Other..................................................... 3,133 4,923 4,371 -------- -------- -------- Total deferred federal tax assets...................... 279,925 180,807 177,171 Valuation allowance....................................... (58,959) (15,201) (15,201) -------- -------- -------- Total deferred federal tax assets after valuation allowance............................................ 220,966 165,606 161,970 -------- -------- --------
61 67 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (6) INCOME TAXES (CONTINUED)
DECEMBER 31 DECEMBER 31 DECEMBER 31 1999 1998 1997 (in thousands) ----------- ----------- ----------- Deferred federal tax liabilities: Value of business acquired................................ 55,884 41,598 48,469 Deferred insurance acquisition costs...................... 41,706 32,040 20,811 Depreciation and amortization............................. 19,957 19,111 20,201 Other investment-related.................................. 7,670 14,337 18,774 Unrealized gains on investments........................... -- 21,477 9,002 Other..................................................... 2,247 1,984 4,720 -------- -------- -------- Total deferred federal tax liabilities................. 127,464 130,547 121,977 -------- -------- -------- Net deferred federal tax assets............................. $ 93,502 $ 35,059 $ 39,993 ======== ======== ========
The net deferred tax assets relate primarily to unearned revenue and the DAC Tax associated with $1.6 billion and $1.5 billion of new and renewal sales in 1999 and 1998, respectively, from a non-registered individual and group variable bank-owned life insurance contract ("BOLI"). Management believes that it is more likely than not that the results of future operations will generate sufficient taxable income over the ten year amortization period of the unearned revenue and DAC Tax to realize such deferred tax assets. The tax returns through the year 1993 have been examined by the Internal Revenue Service ("IRS"). Changes proposed are not material to the Company's financial position. The tax returns for the years 1994 through 1996 are currently under examination by the IRS. (7) RELATED-PARTY TRANSACTIONS The Company received capital contributions from Kemper of $4.3 million and $45.0 million during 1998 and 1997, respectively. The Company paid cash dividends of $115.0 million, $95.0 million and $29.3 million to Kemper during 1999, 1998 and 1997, respectively. The Company has loans to joint ventures, consisting primarily of mortgage loans on real estate, in which the Company and/or one of its affiliates has an ownership interest. At December 31, 1999 and 1998, joint venture mortgage loans totaled $67.2 million and $65.8 million, respectively, and during 1999, 1998 and 1997, the Company earned interest income on these joint venture loans of $0.6 million, $6.8 million and $7.5 million, respectively. All of the Company's personnel are employees of Federal Kemper Life Assurance Company ("FKLA"), an affiliated company. The Company is allocated expenses for the utilization of FKLA employees and facilities, the investment management services of Scudder Kemper Investments, Inc. ("SKI") an affiliated company, and the information systems of Kemper Service Company ("KSvC"), an SKI subsidiary, based on the Company's share of administrative, legal, marketing, investment management, information systems and operation and support services. During 1999 and 1998, expenses allocated to the Company from SKI amounted to $17 thousand and $43 thousand, respectively. During 1997, expenses allocated to the Company from SKI and KSvC amounted to $114 thousand. The Company also paid to SKI investment management fees of $1.8 million, $3.1 million and $3.5 million during 1999, 1998 and 1997, respectively. In addition, expenses allocated to the Company from FKLA during 1999, 1998 and 1997 amounted to $34.1 million, $35.5 million and $30.0 million, respectively. The Company also paid to Kemper real estate subsidiaries fees of $1.0 million, $1.5 million and $2.2 million in 1999, 1998 and 1997, respectively, related to the management of the Company's real estate portfolio. (8) REINSURANCE As of December 31, 1999 and 1998, the reinsurance recoverable related to fixed-rate annuity liabilities ceded to an affiliate amounted to $309.7 million and $344.8 million, respectively. In 1996, the Company assumed, on a yearly renewable term basis, term life insurance from FKLA. Premiums assumed during 1999 under the terms of the treaty amounted to $21.3 million and the face amount which remained outstanding at December 31, 1999 amounted to $10.4 billion. 62 68 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (8) REINSURANCE (CONTINUED) Effective January 1, 1997, the Company ceded 90 percent of all new direct life insurance premiums to outside reinsurers. Life reserves ceded to outside reinsurers on the Company's direct business amounted to approximately $595 thousand and $413 thousand as of December 31, 1999 and 1998, respectively. During December 1997, the Company entered into a funds withheld reinsurance agreement with a Zurich affiliated company, Zurich Insurance Company, Bermuda Branch ("ZICBB"), formerly ZC Life Reinsurance Limited. Under the terms of this agreement, the Company ceded, on a yearly renewable term basis, 90 percent of the net amount at risk (death benefit payable to the insured less the insured's separate account cash surrender value) related to BOLI, which is held in the Company's separate accounts. As consideration for this reinsurance coverage, the Company cedes separate account fees (cost of insurance charges) to ZICBB and retains a portion of such funds under the terms of the reinsurance agreement in a funds withheld account which is included as a component of benefits and funds payable in the accompanying consolidated balance sheets. During 1998, the Company modified the reinsurance agreement to increase the reinsurance from ninety percent to one hundred percent. The following table contains amounts related to the BOLI funds withheld reinsurance agreement (in millions): BANK OWNED LIFE INSURANCE (BOLI) (in millions)
YEAR ENDED DECEMBER 31 -------------------------------- 1999 1998 1997 -------- -------- -------- Face amount in force........................................ $ 82,021 $ 66,186 $ 59,338 ======== ======== ======== Net amount at risk ceded.................................... $(75,979) $(62,160) $(51,066) ======== ======== ======== Cost of insurance charges ceded............................. $ 166.4 $ 175.5 $ 24.3 ======== ======== ======== Funds withheld account...................................... $ 263.4 $ 170.9 $ 23.4 ======== ======== ========
The Company has a funds withheld account ("FWA") supporting reserve credits on reinsurance ceded on the BOLI product. Amendments to the reinsurance contracts during 1998 changed the methodology used to determine increases to the FWA. A substantial portion of the FWA was marked-to-market based predominantly upon the total return of the Governmental Bond Division of the KILICO Variable Series I Separate Account. During 1998, the Company recorded a $2.5 million increase to the FWA related to this mark-to-market. In November 1998, to properly match revenue and expenses, the Company had also placed assets supporting the FWA in a segmented portion of its General Account. This portfolio was classified as "trading" under Statement of Financial Accounting Standards No. 115 ("FAS 115") at December 31, 1998 and through November 30, 1999. FAS 115 mandates that assets held in a trading account be valued at fair value, with changes in fair value flowing through the income statement as realized capital gains and losses. During 1998, the Company recorded a realized capital gain of $2.8 million upon transfer of these assets from "available for sale" to the trading portfolio as required by FAS 115. In addition, the Company recorded realized capital losses of $7.3 million and $0.2 million related to the changes in fair value of this portfolio during 1999 and 1998, respectively. Due to a change in the reinsurance strategy related to the BOLI product, effective December 1, 1999, the Company no longer marked-to-market a portion of the FWA liability and therefore no longer designated the related portion of assets as "trading". As a result, changes in fair value to the FWA and the assets supporting the FWA no longer flow through the Company's operating results. (9) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS FKLA sponsors a health and welfare benefit plan that provides insurance benefits covering substantially all eligible, active and retired employees of FKLA and their covered dependents and beneficiaries. The Company is allocated a portion of the costs of providing such benefits. The Company is self insured with respect to medical benefits, and the plan is not funded except with respect to certain disability-related medical claims. The medical plan provides for medical insurance benefits at retirement, with eligibility based upon age and the participant's number of years of participation attained at retirement. The plan is contributory for pre-Medicare retirees, and 63 69 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (9) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (CONTINUED) will be contributory for all retiree coverage for most current employees, with contributions generally adjusted annually. Postretirement life insurance benefits are noncontributory and are limited to $10,000 per participant. The allocated accumulated postretirement benefit obligation accrued by the Company amounted to $1.2 million and $2.0 million at December 31, 1999 and 1998, respectively. The discount rate used in determining the allocated postretirement benefit obligation was 8.0 percent and 7.0 percent for 1999 and 1998, respectively. The assumed health care trend rate used was based on projected experience for 1999, 7.2 percent for 2000, gradually declining to 5.6 percent by the year 2004 and gradually declining thereafter. A one percentage point increase in the assumed health care cost trend rate for each year would increase the accumulated postretirement benefit obligation as of December 31, 1999 and 1998 by $190 thousand and $312 thousand, respectively. (10) COMMITMENTS AND CONTINGENT LIABILITIES The Company is involved in various legal actions for which it establishes liabilities where appropriate. In the opinion of the Company's management, based upon the advice of legal counsel, the resolution of such litigation is not expected to have a material adverse effect on the consolidated financial statements. Although neither the Company nor its joint venture projects have been identified as a "potentially responsible party" under Federal environmental guidelines, inherent in the ownership of, or lending to, real estate projects is the possibility that environmental pollution conditions may exist on or near or relate to properties owned or previously owned on properties securing loans. Where the Company has presently identified remediation costs, they have been taken into account in determining the cash flows and resulting valuations of the related real estate assets. Based on the Company's receipt and review of environmental reports on most of the projects in which it is involved, the Company believes its environmental exposure would be immaterial to its consolidated results of operations. However, the Company may be required in the future to take actions to remedy environmental exposures, and there can be no assurance that material environmental exposures will not develop or be identified in the future. The amount of future environmental costs is impossible to estimate due to, among other factors, the unknown magnitude of possible exposures, the unknown timing and extent of corrective actions that may be required, the determination of the Company's liability in proportion to others and the extent such costs may be covered by insurance or various environmental indemnification agreements. (11) FINANCIAL INSTRUMENTS--OFF-BALANCE-SHEET RISK At December 31, 1999, the Company had future legal loan commitments and stand-by financing agreements totaling $29.8 million to support the financing needs of various real estate investments. To the extent these arrangements are called upon, amounts loaned would be collateralized by assets of the joint ventures, including first mortgage liens on the real estate. The Company's criteria in making these arrangements are the same as for its mortgage loans and other real estate investments. These commitments are included in the Company's analysis of real estate-related reserves and write-downs. The fair values of loan commitments and standby financing agreements are estimated in conjunction with and using the same methodology as the fair value estimates of mortgage loans and other real estate-related investments. (12) FAIR VALUE OF FINANCIAL INSTRUMENTS Fair value estimates are made at specific points in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. A significant portion of the Company's financial instruments are carried at fair value. Fair value estimates for financial instruments not carried at fair value are generally determined using discounted cash flow models and assumptions that are based on judgments regarding current and future economic conditions and the risk characteristics of the investments. Although fair value estimates are calculated using assumptions that management believes are appropriate, changes in assumptions could significantly affect the estimates and such estimates should be used with care. 64 70 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (12) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) Fair value estimates are determined for existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and certain liabilities that are not considered financial instruments. Accordingly, the aggregate fair value estimates presented do not represent the underlying value of the Company. For example, the Company's subsidiaries are not considered financial instruments, and their value has not been incorporated into the fair value estimates. In addition, tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of the estimates. The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments: FIXED MATURITIES AND EQUITY SECURITIES: Fair values were determined by using market quotations, or independent pricing services that use prices provided by market makers or estimates of fair values obtained from yield data relating to instruments or securities with similar characteristics, or fair value as determined in good faith by the Company's portfolio manager, SKI. CASH AND SHORT-TERM INVESTMENTS: The carrying amounts reported in the consolidated balance sheets for these instruments approximate fair values. MORTGAGE LOANS AND OTHER REAL ESTATE-RELATED INVESTMENTS: Fair values were estimated based upon the investments observable market price, net of estimated costs to sell. The estimates of fair value should be used with care given the inherent difficulty in estimating the fair value of real estate due to the lack of a liquid quotable market. OTHER LOANS AND INVESTMENTS: The carrying amounts reported in the consolidated balance sheets for these instruments approximate fair values. The fair values of policy loans were estimated by discounting the expected future cash flows using an interest rate charged on policy loans for similar policies currently being issued. LIFE POLICY BENEFITS: Fair values of the life policy benefits regarding investment contracts (primarily deferred annuities) and universal life contracts were estimated by discounting gross benefit payments, net of contractual premiums, using the average crediting rate currently being offered in the marketplace for similar contracts with maturities consistent with those remaining for the contracts being valued. The Company had projected its future average crediting rate in 1999 and 1998 to be 4.78 percent and 4.75 percent, respectively, while the assumed average market crediting rate was 5.0 percent in both 1999 and 1998. The carrying values and estimated fair values of the Company's financial instruments at December 31, 1999 and 1998 were as follows:
DECEMBER 31, 1999 DECEMBER 31, 1998 ------------------------ ------------------------ CARRYING FAIR CARRYING FAIR VALUE VALUE VALUE VALUE (in thousands) ---------- ---------- ---------- ---------- Financial instruments recorded as assets: Fixed maturities.............................. $3,276,017 $3,276,017 $3,482,820 $3,482,820 Trading account securities.................... -- -- 101,781 101,781 Cash and short-term investments............... 54,406 54,406 71,820 71,820 Mortgage loans and other real estate-related assets..................................... 151,623 151,623 164,375 164,375 Policy loans.................................. 261,788 261,788 271,540 271,540 Equity securities............................. 61,592 61,592 66,854 66,854 Other invested assets......................... 25,620 26,226 23,645 27,620 Financial instruments recorded as liabilities: Life policy benefits, excluding term life reserves................................... 3,399,299 3,299,254 3,551,050 3,657,510 Funds withheld account........................ 263,428 263,428 170,920 170,920
(13) STOCKHOLDER'S EQUITY--RETAINED EARNINGS The maximum amount of dividends which can be paid by insurance companies domiciled in the State of Illinois to shareholders without prior approval of regulatory authorities is restricted. The maximum amount of dividends which can be paid by the Company without prior approval in 2000 is $59.1 million. The Company paid 65 71 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (13) STOCKHOLDER'S EQUITY--RETAINED EARNINGS (CONTINUED) cash dividends of $115.0 million, $95.0 million and $29.3 million to Kemper during 1999, 1998 and 1997, respectively. The Company's net income and capital and surplus as determined in accordance with statutory accounting principles were as follows:
1999 1998 1997 (in thousands) -------- -------- -------- Net income.................................................. $ 59,116 $ 64,871 $ 58,372 ======== ======== ======== Statutory capital and surplus............................... $394,966 $455,213 $476,924 ======== ======== ========
In March 1998, the National Association of Insurance Commissioners approved the codification of statutory accounting principles. Codification is effective January 1, 2001. The Company has not quantified the impact that codification will have on its statutory financial position or results of operations. (14) UNAUDITED INTERIM FINANCIAL INFORMATION The following table sets forth the Company's unaudited quarterly financial information: (in thousands)
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 YEAR QUARTER ENDED -------- -------- ------------ ----------- -------- 1999 OPERATING SUMMARY Revenues.................................. $95,646 $ 86,164 $78,301 $103,308 $363,419 ======= ======== ======= ======== ======== Net operating income, excluding realized gains (losses)......................... $11,222 $ 14,385 $11,568 $ 13,971 $ 51,147 Net realized investment gains (losses).... (627) (1,286) (5,098) 805 (6,207) ------- -------- ------- -------- -------- Net income........................ $10,595 $ 13,099 $ 6,470 $ 14,776 $ 44,940 ======= ======== ======= ======== ======== 1998 OPERATING SUMMARY Revenues.................................. $98,026 $110,003 $98,752 $112,958 $419,739 ======= ======== ======= ======== ======== Net operating income, excluding realized gains.................................. $ 8,025 $ 5,700 $ 7,169 $ 10,541 $ 31,435 Net realized investment gains............. 1,205 10,187 5,818 16,504 33,714 ------- -------- ------- -------- -------- Net income........................ $ 9,230 $ 15,887 $12,987 $ 27,045 $ 65,149 ======= ======== ======= ======== ======== 1997 OPERATING SUMMARY Revenues.................................. $89,055 $ 99,293 $86,071 $151,061 $425,480 ======= ======== ======= ======== ======== Net operating income, excluding realized gains (losses)......................... $ 9,590 $ 7,701 $ 6,075 $ 8,496 $ 31,862 Net realized investment gains (losses).... 578 5,305 (1,971) 2,943 6,855 ------- -------- ------- -------- -------- Net income........................ $10,168 $ 13,006 $ 4,104 $ 11,439 $ 38,717 ======= ======== ======= ======== ========
(15) OPERATING SEGMENTS AND RELATED INFORMATION In June 1997, the Financial Accounting Standards Board ("the FASB") issued Statement of Financial Accounting Standards No. 131 ("FAS 131"), DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. FAS 131 established standards for how to report information about operating segments. It also established standards for related disclosures about products and services, geographic areas and major customers. The Company adopted FAS 131 as of December 31, 1998 and the impact of implementation did not affect the Company's consolidated financial position, results of operations or cash flows. In the initial year of adoption, FAS 131 requires comparative information for earlier years to be restated, unless impracticable to do so. The Company, FKLA, Zurich Life Insurance Company of America, ("ZLICA"), and Fidelity Life Association ("FLA"), a Mutual Legal Reserve Company, owned by its policyholders, operate under the trade name Zurich Kemper Life. For purposes of this operating segment disclosure, Zurich Kemper Life will also include the 66 72 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (15) OPERATING SEGMENTS AND RELATED INFORMATION (CONTINUED) operations of Zurich Direct, Inc., an affiliated direct marketing life insurance agency and excludes FLA, as it is owned by its policyholders. Zurich Kemper Life is segregated by Strategic Business Unit ("SBU"). The SBU concept employed by ZFS has each SBU concentrate on a specific customer market. The SBU is the focal point of Zurich Kemper Life, because it is at the SBU level that Zurich Kemper Life can clearly identify customer segments and then work to understand and satisfy the needs of each customer. The contributions of Zurich Kemper Life's SBUs to consolidated revenues, operating results and certain balance sheet data pertaining thereto, are shown in the following tables on the basis of accounting principles generally accepted in the United States. Zurich Kemper Life is segregated into the Life Brokerage, Financial, Retirement Solutions Group ("RSG") and Direct SBUs. The SBUs are not managed at the legal entity level, but rather at the Zurich Kemper Life level. Zurich Kemper Life's SBUs cross legal entity lines, as certain similar products are sold by more than one legal entity. The vast majority of the Company's business is derived from the Financial and RSG SBUs. Each SBU's revenue is derived from geographically dispersed areas as Zurich Kemper Life is licensed in the District of Columbia and all states except New York. During 1999, 1998 and 1997, Zurich Kemper Life did not derive net revenue from one customer that exceeded 10 percent of the total revenue of Zurich Kemper Life. The principal products and markets of Zurich Kemper Life's SBUs are as follows: LIFE BROKERAGE: The Life Brokerage SBU develops low cost term and universal life insurance, as well as fixed annuities, to market through independent agencies and national marketing organizations. FINANCIAL: The Financial SBU focuses on a wide range of products that provide for the accumulation, distribution and transfer of wealth and primarily includes variable and fixed annuities, variable universal life and bank-owned life insurance. These products are distributed to consumers through financial intermediaries such as banks, brokerage firms and independent financial planners. Institutional business includes BOLI and funding agreements (included in FKLA). RSG: The RSG SBU has a sharp focus on its target customer. This SBU markets variable annuities to K-12 schoolteachers, administrators, and healthcare workers, along with college professors and certain employees of selected non-profit organizations. This target market is eligible for what the IRS designates as retirement-oriented savings or investment plans that qualify for special tax treatment. DIRECT: The Direct SBU is a direct marketer of basic, low-cost term life insurance through various marketing media. 67 73 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (15) OPERATING SEGMENTS AND RELATED INFORMATION (CONTINUED) Summarized financial information for ZKL's SBU's are as follows: As of and for the period ending December 31, 1999: (in thousands)
LIFE BROKERAGE FINANCIAL RSG DIRECT TOTAL INCOME STATEMENT ---------- ----------- ---------- -------- ----------- REVENUE Premium income..................... $ 145,533 $ 410 $ -- $ 8,038 $ 153,981 Net investment income.............. 137,106 175,590 101,202 1,297 415,195 Realized investment gains (losses)........................ 976 (6,980) (98) -- (6,102) Fees and other income.............. 70,477 48,873 35,742 44,528 199,620 ---------- ----------- ---------- -------- ----------- Total revenue.............. 354,092 217,893 136,846 53,863 762,694 ---------- ----------- ---------- -------- ----------- BENEFITS AND EXPENSES Policyholder benefits.............. 200,161 112,869 68,801 3,529 385,360 Intangible asset amortization...... 54,957 12,053 13,989 -- 80,999 Net deferral of insurance acquisition costs............... (37,433) (43,664) (20,624) (41,412) (143,133) Commissions and taxes, licenses and fees............................ 21,881 66,702 26,700 17,411 132,694 Operating expenses................. 56,179 25,101 23,611 71,194 176,085 ---------- ----------- ---------- -------- ----------- Total benefits and expenses................. 295,745 173,061 112,477 50,722 632,005 ---------- ----------- ---------- -------- ----------- Income before income tax expense..... 58,347 44,832 24,369 3,141 130,689 Income tax expense................... 25,707 19,235 10,966 1,114 57,022 ---------- ----------- ---------- -------- ----------- Net income................. $ 32,640 $ 25,597 $ 13,403 $ 2,027 $ 73,667 ========== =========== ========== ======== =========== BALANCE SHEET Total assets....................... $3,066,956 $10,311,850 $4,755,437 $144,189 $18,278,432 ========== =========== ========== ======== ===========
NET INCOME REVENUE (LOSS) ASSETS -------- ------- ------------- Total revenue, net income and assets, respectively, from above:.................................................... $762,694 $73,667 $18,278,432 -------- ------- ----------- Less: Revenue, net income and assets of FKLA.................... 305,334 24,801 3,162,048 Revenue, net income and assets of ZLICA................... 49,460 8,528 456,283 Revenue, net loss and assets of Zurich Direct............. 44,481 (4,602) 4,385 -------- ------- ----------- Totals per the Company's consolidated financial statements............................................. $363,419 $44,940 $14,655,716 ======== ======= ===========
68 74 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (15) OPERATING SEGMENTS AND RELATED INFORMATION (CONTINUED) As of and for the period ending December 31, 1998:
(in thousands) LIFE INCOME STATEMENT BROKERAGE FINANCIAL RSG DIRECT TOTAL - ---------------- ---------- ---------- ---------- -------- ----------- REVENUE Premium income...................... $ 160,067 $ 56 $ -- $ 5,583 $ 165,706 Net investment income............... 141,171 180,721 100,695 271 422,858 Realized investment gains........... 20,335 33,691 15,659 30 69,715 Fees and other income............... 80,831 40,421 31,074 23,581 175,907 ---------- ---------- ---------- -------- ----------- Total revenue.................. 402,404 254,889 147,428 29,465 834,186 ---------- ---------- ---------- -------- ----------- BENEFITS AND EXPENSES Policyholder benefits............... 243,793 117,742 73,844 2,110 437,489 Intangible asset amortization....... 58,390 15,669 15,703 -- 89,762 Net deferral of insurance acquisition costs................ (55,569) (9,444) (22,964) (22,765) (110,742) Commissions and taxes, licenses and fees............................. 29,539 43,919 22,227 11,707 107,392 Operating expenses.................. 61,659 24,924 20,279 35,593 142,455 ---------- ---------- ---------- -------- ----------- Total benefits and expenses.... 337,812 192,810 109,089 26,645 666,356 ---------- ---------- ---------- -------- ----------- Income before income tax expense...... 64,592 62,079 38,339 2,820 167,830 Income tax expense.................... 26,774 24,340 14,794 1,001 66,909 ---------- ---------- ---------- -------- ----------- Net income..................... $ 37,818 $ 37,739 $ 23,545 $ 1,819 $ 100,921 ========== ========== ========== ======== =========== BALANCE SHEET Total assets........................ $3,194,530 $8,232,927 $4,172,828 $ 46,254 $15,646,539 ========== ========== ========== ======== ===========
NET INCOME REVENUE (LOSS) ASSETS -------- -------- ----------- Total revenue, net income and assets, respectively, from above:.................................................... $834,186 $100,921 $15,646,539 -------- -------- ----------- Less: Revenue, net income and assets of FKLA.................... 336,841 35,953 2,986,381 Revenue, net loss and assets of ZLICA..................... 54,058 (1,066) 416,115 Revenue, net income and assets of Zurich Direct........... 23,548 885 4,322 -------- -------- ----------- Totals per the Company's consolidated financial statements........................................ $419,739 $ 65,149 $12,239,721 ======== ======== ===========
69 75 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (15) OPERATING SEGMENTS AND RELATED INFORMATION (CONTINUED) As of and for the period ending December 31, 1997:
(IN THOUSANDS) LIFE INCOME STATEMENT BROKERAGE FINANCIAL RSG DIRECT TOTAL - --------------------------------------- ---------- ---------- ---------- ------- ----------- REVENUE Premium income....................... $ 167,439 $ -- $ -- $ 4,249 $ 171,688 Net investment income................ 155,885 212,767 91,664 455 460,771 Realized investment gains............ 2,503 7,744 2,692 50 12,989 Fees and other income................ 78,668 73,823 23,663 8,007 184,161 ---------- ---------- ---------- ------- ----------- Total revenue................... 404,495 294,334 118,019 12,761 829,609 ---------- ---------- ---------- ------- ----------- BENEFITS AND EXPENSES Policyholder benefits................ 247,878 153,327 60,061 2,234 463,500 Intangible asset amortization........ 58,534 25,593 15,589 -- 99,716 Net deferral of insurance acquisition costs............................. (50,328) (18,222) (13,033) (5,242) (86,825) Commissions and taxes, licenses and fees.............................. 39,477 66,552 16,668 3,518 126,215 Operating expenses................... 55,859 20,282 14,320 19,472 109,933 ---------- ---------- ---------- ------- ----------- Total benefits and expenses..... 351,420 247,532 93,605 19,982 712,539 ---------- ---------- ---------- ------- ----------- Income (loss) before income tax expense (benefit)............................ 53,075 46,802 24,414 (7,221) 117,070 Income tax expense (benefit)........... 25,554 21,144 10,545 (2,528) 54,715 ---------- ---------- ---------- ------- ----------- Net income (loss)............... $ 27,521 $ 25,658 $ 13,869 $(4,693) $ 62,355 ========== ========== ========== ======= =========== BALANCE SHEET Total assets......................... $2,877,854 $7,416,791 $3,759,173 $41,669 $14,095,487 ========== ========== ========== ======= ===========
NET INCOME REVENUE (LOSS) ASSETS -------- ------- ----------- Total revenue, net income and assets, respectively, from above:.................................................... $829,609 $62,355 $14,095,487 Less: Revenue, net income and assets of FKLA.................... 338,854 24,740 3,105,396 Revenue, net income and assets of ZLICA................... 57,233 2,193 398,786 Revenue, net loss and assets of Zurich Direct............. 8,042 (3,295) 1,655 -------- ------- ----------- Totals per the Company's consolidated financial statements........................................ $425,480 $38,717 $10,589,650 ======== ======= ===========
(16) SUBSEQUENT EVENT In February 2000, the Company announced that it had entered into an agreement to purchase for $5.5 million the following related entities, all privately held New York corporations: - PMG Securities Corporation - PMG Asset Management, Inc. - PMG Life Agency, Inc., and - PMG Marketing, Inc. These companies were primarily purchased for their specialization in the target market of the RSG SBU. The acquisition is expected to close at the end of the first quarter 2000. 70 76 APPENDIX A TABLE OF DEATH BENEFIT FACTORS
ATTAINED ATTAINED ATTAINED ATTAINED AGE* PERCENT AGE* PERCENT AGE* PERCENT AGE* PERCENT - -------- ------- -------- ------- -------- ------- -------- ------- 0-40 250 50 185 60 130 70 115 41 243 51 178 61 128 71 113 42 236 52 171 62 126 72 111 43 229 53 164 63 124 73 109 44 222 54 157 64 122 74 107 45 215 55 150 65 120 75-90 105 46 209 56 146 66 119 91 104 47 203 57 142 67 118 92 103 48 197 58 138 68 117 93 102 49 191 59 134 69 116 94 101 95 & thereafter 100
* ATTAINED AGE AS OF THE BEGINNING OF THE POLICY YEAR 71 77 APPENDIX B POLICY FORM L-8521 KEMPER INVESTORS LIFE INSURANCE COMPANY SURRENDER TARGET PREMIUMS
PREFERRED NONTOBACCO STANDARD NONTOBACCO PREFERRED TOBACCO STANDARD TOBACCO ISSUE -------------------- -------------------- ------------------ ---------------- AGE MALE FEMALE MALE FEMALE MALE FEMALE MALE FEMALE - ----- -------- --------- -------- --------- ------- -------- ------ ------- 1 NA NA 7.60 6.30 NA NA NA NA 2 NA NA 7.60 6.30 NA NA NA NA 3 NA NA 7.60 6.30 NA NA NA NA 4 NA NA 7.60 6.30 NA NA NA NA 5 NA NA 7.60 6.30 NA NA NA NA 6 NA NA 7.60 6.30 NA NA NA NA 7 NA NA 7.60 6.30 NA NA NA NA 8 NA NA 7.60 6.30 NA NA NA NA 9 NA NA 7.60 6.30 NA NA NA NA 10 NA NA 7.60 6.30 NA NA NA NA 11 NA NA 7.60 6.30 NA NA NA NA 12 NA NA 7.60 6.30 NA NA NA NA 13 NA NA 7.60 6.30 NA NA NA NA 14 NA NA 7.60 6.30 NA NA NA NA 15 7.60 6.30 7.60 6.30 10.19 8.23 10.19 8.23 16 7.60 6.30 7.60 6.30 10.19 8.23 10.19 8.23 17 7.60 6.30 7.60 6.30 10.19 8.23 10.19 8.23 18 7.60 6.30 7.60 6.30 10.19 8.23 10.19 8.23 19 7.60 6.30 7.60 6.30 10.19 8.23 10.19 8.23 20 7.60 6.30 7.60 6.30 10.19 8.23 10.19 8.23 21 7.81 6.48 7.81 6.48 10.52 8.52 10.52 8.52 22 8.03 6.67 8.03 6.67 10.84 8.81 10.84 8.81 23 8.24 6.85 8.24 6.85 11.17 9.10 11.17 9.10 24 8.46 7.04 8.46 7.04 11.49 9.39 11.49 9.39 25 8.67 7.22 8.67 7.22 11.82 9.68 11.82 9.68 26 8.98 7.47 8.98 7.47 12.28 10.06 12.28 10.06 27 9.29 7.72 9.29 7.72 12.74 10.44 12.74 10.44 28 9.60 7.97 9.60 7.97 13.21 10.83 13.21 10.83 29 9.91 8.22 9.91 8.22 13.67 11.21 13.67 11.21 30 10.22 8.47 10.22 8.47 14.13 11.59 14.13 11.59 31 10.65 8.78 10.65 8.78 14.76 12.08 14.76 12.08 32 11.08 9.10 11.08 9.10 15.39 12.57 15.39 12.57 33 11.50 9.41 11.50 9.41 16.01 13.05 16.01 13.05 34 11.93 9.73 11.93 9.73 16.64 13.54 16.64 13.54 35 12.36 10.04 12.36 10.04 17.27 14.03 17.27 14.03 36 12.94 10.59 12.94 10.59 18.14 14.66 18.14 14.66 37 13.52 11.13 13.52 11.13 19.01 15.29 19.01 15.29 38 14.11 11.68 14.11 11.68 19.87 15.93 19.87 15.93 39 14.69 12.22 14.69 12.22 20.74 16.56 20.74 16.56 40 15.27 12.77 15.27 12.77 21.61 17.19 21.61 17.19 41 16.28 13.59 16.28 13.59 22.76 18.01 22.76 18.01 42 17.29 14.40 17.29 14.40 23.91 18.83 23.91 18.83 43 18.31 15.22 18.31 15.22 25.05 19.66 25.05 19.66 44 19.32 16.03 19.32 16.03 26.20 20.48 26.20 20.48 45 20.33 16.85 20.33 16.85 27.35 21.30 27.35 21.30 46 21.53 17.57 21.53 17.57 28.94 22.43 28.94 22.43 47 22.73 18.28 22.73 18.28 30.54 23.56 30.54 23.56 48 23.92 19.00 23.92 19.00 32.13 24.70 32.13 24.70 49 25.12 19.71 25.12 19.71 33.73 25.83 33.73 25.83 50 26.32 20.43 26.32 20.43 35.32 26.96 35.32 26.96 51 27.88 21.24 27.88 21.24 37.33 28.38 37.33 28.38 52 29.44 22.06 29.44 22.06 39.34 29.80 39.34 29.80 53 31.00 22.87 31.00 22.87 41.36 31.23 41.36 31.23 54 32.56 23.69 32.56 23.69 43.37 32.65 43.37 32.65 55 34.12 24.50 34.12 24.50 45.38 34.07 45.38 34.07 56 34.67 25.41 34.67 25.41 46.50 34.71 46.50 34.71 57 35.21 26.32 35.21 26.32 47.62 35.34 47.62 35.34
72 78
PREFERRED NONTOBACCO STANDARD NONTOBACCO PREFERRED TOBACCO STANDARD TOBACCO ISSUE -------------------- -------------------- ------------------ ---------------- AGE MALE FEMALE MALE FEMALE MALE FEMALE MALE FEMALE - ----- -------- --------- -------- --------- ------- -------- ------ ------- 58 35.76 27.24 35.76 27.24 48.73 35.98 48.73 35.98 59 36.30 28.15 36.30 28.15 49.85 36.61 49.85 36.61 60 36.85 29.06 36.85 29.06 50.97 37.25 50.97 37.25 61 38.65 30.50 38.65 30.50 50.76 38.80 50.76 38.80 62 40.45 31.93 40.45 31.93 50.56 40.35 50.56 40.35 63 42.25 33.37 42.25 33.37 50.35 41.90 50.35 41.90 64 44.05 34.80 44.05 34.80 50.15 43.45 50.15 43.45 65 45.85 36.24 45.85 36.24 49.94 45.00 49.94 45.00 66 46.34 38.72 46.34 38.72 49.72 45.75 49.72 45.75 67 46.84 41.19 46.84 41.19 49.49 46.50 49.49 46.50 68 47.33 43.67 47.33 43.67 49.27 47.24 49.27 47.24 69 47.83 46.14 47.83 46.14 49.04 47.99 49.04 47.99 70 48.32 48.62 48.32 48.62 48.82 48.74 48.82 48.74 71 47.87 47.86 47.87 47.86 48.65 48.11 48.65 48.11 72 47.41 47.11 47.41 47.11 48.49 47.48 48.49 47.48 73 46.96 46.35 46.96 46.35 48.32 46.85 48.32 46.85 74 46.50 45.60 46.50 45.60 48.16 46.22 48.16 46.22 75 47.26 46.78 47.26 46.78 48.55 47.28 48.55 47.28 76 47.02 46.39 47.02 46.39 48.44 46.94 48.44 46.94 77 46.78 46.00 46.78 46.00 48.33 46.60 48.33 46.60 78 46.53 45.62 46.53 45.62 48.21 46.27 48.21 46.27 79 46.29 45.23 46.29 45.23 48.10 45.93 48.10 45.93 80 46.05 44.84 46.05 44.84 47.99 45.59 47.99 45.59
73 79 PART II--OTHER INFORMATION UNDERTAKING TO FILE REPORTS Subject to the terms and conditions of Section 15(d) of the Securities and Exchange Act of 1934, as amended, the undersigned Registrant hereby undertakes to file with the Securities and Exchange Commission such supplementary and periodic information, documents, and reports as may be prescribed by any rule or regulation of the Commission heretofore or hereafter duly adopted pursuant to authority conferred in that section. REPRESENTATION AS TO FEES AND CHARGES KILICO hereby represents that the fees and charges deducted under the Flexible Premium Variable Life Insurance Policies hereby registered by this Registration Statement in the aggregate are reasonable in relation to the services rendered, the expenses expected to be incurred, and the risks assumed by KILICO. REPRESENTATION PURSUANT TO RULE 6E-3(T) This filing is made pursuant to Rule 6e-3(T) under the Investment Company Act of 1940, as amended. UNDERTAKING AS TO INDEMNIFICATION Pursuant to the Distribution Agreement filed as Exhibit 1-A(3)(a) to this Registration Statement, KILICO and the Separate Account have agreed to indemnify Investors Brokerage Services, Inc. ("IBS") against any claims, liabilities and expenses which IBS may incur under the Securities Act of 1933, as amended (the "Securities Act"), common law or otherwise, arising out of or based upon any alleged untrue statements of material fact contained in any registration statement or prospectus of the Separate Account, or any omission to state a material fact therein, the omission of which makes any statement contained therein misleading. IBS will agree to indemnify KILICO and the Separate Account against any and all claims, demands, liabilities and expenses which KILICO or the Separate Account may incur, arising out of or based upon any act or deed of IBS or of any registered representative of an NASD member investment dealer which has an agreement with IBS and is acting in accordance with KILICO's instructions. Insofar as indemnification for liability arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant, the Registrant has been advised that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-1 80 CONTENTS OF REGISTRATION STATEMENT This Registration Statement comprises the following Papers and Documents: The Facing sheet. Reconciliation and tie between items in N-8B-2 and Prospectus. The prospectus consisting of 73 pages. The undertaking to file reports. Representation as to Fees and Charges Pursuant to Section 26 of the Investment Company Act of 1940. Representation Pursuant to Rule 6e-3(T). Undertaking as to Indemnification. The signatures. Written consents of the following persons: (10) A. Frank J. Julian, Esq. (Included in Opinion filed as Exhibit 3. B. PricewaterhouseCoopers LLP, independent accountants (Filed as Exhibit 6). C. Christopher J. Nickele, FSA (included in Opinion filed as Exhibit 3 (b)). The following exhibits: (1) 1-A(1) KILICO Resolution establishing the Separate Account (1) 1-A(3)(a) Distribution Agreement between KILICO and Investors Brokerage Services, Inc. (IBS) (3) 1-A(3)(b) Specimen Selling Group Agreement of IBS (10) 1-A(3)(c) Schedules of commissions (3) 1-A(3)(d) General Agent Agreement (10) 1-A(5)(a) Form of Policy (10) 1-A(5)(b) Accelerated Death Benefit Rider (10) 1-A(5)(c) Extended Maturity Option Rider (10) 1-A(5)(d) Dependent Children's Rider (10) 1-A(5)(e) Waiver of Selected Premium Rider (10) 1-A(5)(f) Other Insured Rider (1) 1-A(6)(a) KILICO Articles of Incorporation (3) 1-A(6)(b) By-Laws of KILICO (5) 1-A(8)(a)(i) Participation Agreement between Kemper Investors Life Insurance Company and Scudder Variable Life Investment Fund (5) 1-A(8)(a)(ii) Participating Contract and Policy Agreement between Kemper Investors Life Insurance Company and Scudder Kemper Investments, Inc. (5) 1-A(8)(a)(iii) Indemnification Agreement between Kemper Investors Life Insurance Company and Scudder Kemper Investments, Inc. (4) 1-A(8)(b)(i) Fund Participation Agreement among Kemper Investors Life Insurance Company, Fidelity Variable Insurance Products Fund and Fidelity Distributors Corporation (10) 1-A(8)(b)(ii) Third Amendment to Fund Participation Agreement among Kemper Investors Life Insurance Company, Fidelity Variable Insurance Products Fund and Fidelity Distributors Corporation (5) 1-A(8)(c) Participation Agreement Among Templeton Variable Products Series Fund, Franklin Templeton Distributors, Inc. and Kemper Investors Life Insurance Company. (11) 1-A(8)(d)(i) Fund Participation Agreement by and among The Alger American Fund, Kemper Investors Life Insurance Company and Fred Alger & Company, Incorporated (11) 1-A(8)(d)(ii) Service Agreement between Fred Alger Management, Inc. and Kemper Investors Life Insurance Company (redacted) (9) 1-A(8)(e)(i) Fund Participation Agreement between Kemper Investors Life Insurance Company and The Dreyfus Socially Responsible Growth Fund, Inc.
II-2 81 (11) 1-A(8)(e)(ii) Administrative Services Agreement by and between The Dreyfus Corporation and Kemper Investors Life Insurance Company (redacted) (11) 1-A(8)(e)(iii) November 1, 1999 Amendment to Fund Participation Agreement between Kemper Investors Life Insurance Company and The Dreyfus Socially Responsible Growth Fund, Inc. (11) 1-A(8)(e)(iv) November 1, 1999 Amendment to Administrative Services Agreement by and between The Dreyfus Corporation and Kemper Investors Life Insurance Company (redacted) (6) 1-A(8)(f)(i) Fund Participation Agreement among Kemper Investors Life Insurance Company, Janus Aspen Series and Janus Capital Corporation (7) 1-A(8)(f)(ii) Service Agreement between Kemper Investors Life Insurance Company and Janus Capital Corporation (8) 1-A(8)(g) Fund Participation Agreement among Kemper Investors Life Insurance Company, Kemper Variable Series (formerly known as Kemper Investors Fund), Zurich Kemper Investments, Inc. and Kemper Distributors, Inc. (10) 1-A(10) Application for Policy (2) 2 Specimen Notice of Withdrawal Right (10) 3(a) Opinion and consent of legal officer of KILICO as to legality of policies being registered 3(b) Opinion and consent of actuarial officer of KILICO regarding prospectus illustrations and actuarial matters 6 Consents of PricewaterhouseCoopers LLP, independent accountants (10) 8 Procedures Memorandum, pursuant to Rule 6e-3(T)(b)(12)(iii) 9 Illustrations
- --------------- (1) Incorporated by reference to the Registration Statement of the Registrant on Form S-6 filed on or about December 26, 1995 (File No. 33-65399). (2) Incorporated by reference to Pre-Effective Amendment No. 1 to the Registration Statement of the Registrant on Form S-6 filed on or about June 5, 1996 (File No. 33-65399). (3) Incorporated by reference to Amendment No. 2 to the Registration Statement on Form S-1 (File No. 333-02491) filed on or about April 23, 1997. (4) Incorporated by reference to Post-Effective Amendment No. 24 to the Registration Statement on Form N-4 filed on or about April 26, 1996 (File No. 2-72671). (5) Incorporated by reference to Amendment No. 5 to the Registration Statement on Form S-1 for KILICO (file No. 333-22389) filed on or about April 20, 1999. (6) Incorporated herein by reference to Post-Effective Amendment No. 23 to the Registration Statement on Form N-4 filed on or about September 14, 1995 (File No. 2-72671). (7) Incorporated herein by reference to Post-Effective Amendment No. 25 to the Registration Statement on Form N-4 filed on or about April 28, 1997 (File No. 2-72671). (8) Incorporated herein by reference to Amendment No. 3 to the Registration Statement of KILICO on Form S-1 filed on or about April 8, 1998 (File No. 333-22389). (9) Incorporated herein by reference to Post-Effective Amendment No. 28 to the Registration Statement on Form N-4 (File No. 2-72671) filed on or about April 28, 1999. (10) Incorporated herein by reference to Pre-Effective Amendment No. 1 to the Registration Statement on Form S-6 filed on or about December 29, 1999 (File No. 333-88845). (11) Incorporated herein by reference to Amendment No. 6 to the Registration Statement on Form S-1 filed on or about April 17, 2000 (File No. 333-22389). II-3 82 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant, KILICO Variable Separate Account, certifies that it meets the requirements of effectiveness of this Amendment to the Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused this Amendment to the Registration Statement to be signed on its behalf by the undersigned thereunto duly authorized, in the City of Long Grove and State of Illinois on the 26th day of April, 2000. KILICO VARIABLE SEPARATE ACCOUNT (Registrant) By: Kemper Investors Life Insurance Company (Depositor) By: /s/ GALE K. CARUSO -------------------------------------- Gale K. Caruso, President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this Amendment to the Registration Statement has been signed below by the following directors and principal officers of Kemper Investors Life Insurance Company in the capacities indicated on the 26th day of April, 2000.
SIGNATURE TITLE --------- ----- /s/ GALE K. CARUSO President, Chief Executive Officer and Director - ----------------------------------------------------- (Principal Executive Director) Gale K. Caruso /s/ W. H. BOLINDER Chairman of the Board and Director - ----------------------------------------------------- William H. Bolinder /s/ FREDERICK L. BLACKMON Senior Vice President and Chief Financial - ----------------------------------------------------- Officer Frederick L. Blackmon (Principal Financial Officer and Principal Accounting Officer /s/ DAVID A. BOWERS Director - ----------------------------------------------------- David A. Bowers /s/ ELIANE C. FRYE Director - ----------------------------------------------------- Eliane C. Frye /s/ GUNTHER GOSE Director - ----------------------------------------------------- Gunther Gose /s/ JAMES E. HOHMANN Director - ----------------------------------------------------- James E. Hohmann
II-4 83 EXHIBIT INDEX 3(b) Opinion and consent of actuarial officer of KILICO regarding prospectus illustrations and actuarial matters 6 Consents of PricewaterhouseCoopers LLP, independent accountants 9 Illustrations
EX-99.3(B) 2 OPINION AND CONSENT OF ACTUARIAL OFFICER 1 EXHIBIT 3 (b) ACTUARIAL OPINION This opinion is supplied with the filing of Post-Effective Amendment No. 1 to the Registration Statement on Form S-6, File No. 333-88845, by the KILICO Variable Separate Account (the "Separate Account") and Kemper Investors Life Insurance Company ("KILICO") covering an indefinite number of units of interest in the Separate Account. Premiums received under KILICO's Variable Life Policies may be allocated by KILICO to the Separate Account as described in the Prospectus included in the Registration Statement. I am familiar with the Policy provisions and the description in the Prospectus and it is my opinion that the illustrations of death benefits, accumulated values, cash values, and accumulated premiums included in Exhibit 9 of the Prospectus, based on the assumptions in the illustrations, are consistent with Policy provisions. The Policy rate structure has not been designed to make the relationship between planned premiums and benefits, as shown in the illustrations, appear more favorable for prospective nontobacco males ages 35 and 55 than for nontobacco males at other ages. The nontobacco risk class generally has a more favorable rate structure than the tobacco risk classes. Female risk classes generally have a more favorable rate structure than male risk classes. The current and guaranteed monthly mortality rates used in the illustrations have not been designed so as to make the relationship between current and guaranteed rates more favorable for the ages and sexes illustrated than for a nonsmoker male at other ages. The nontobacco risk classes generally have lower monthly mortality rates than the tobacco risk classes. The female risk classes generally have lower monthly mortality rates than the male risk classes. I consent to the use of this opinion as an Exhibit to Post-Effective Amendment No. 1 to the Registration Statement and to the reference to me under the heading "Experts" in the Prospectus. /s/ Christopher J. Nickele Christopher J. Nickele, FSA, MAAA Vice President, Actuarial - Agency EX-99.6 3 CONSENTS OF PRICEWATERHOUSECOOPERS LLP 1 EXHIBIT 6 CONSENT OF INDEPENDENT ACCOUNTANTS The Board of Directors of Kemper Investors Life Insurance Company and Policy Owners of KILICO Flexible Premium Variable Universal Life Insurance Policies - KILICO Variable Separate Account. We consent to the inclusion in this registration statement on Form S-6 (File No. 333-88845) of our report dated February 24, 2000 on our audit of the financial statements of KILICO Variable Separate Account and to the reference to our firm under the caption "Experts. PricewaterhouseCoopers LLP Chicago, Illinois April 24, 2000 2 CONSENT OF INDEPENDENT ACCOUNTANTS The Board of Directors of Kemper Investors Life Insurance Company and Policy Owners of KILICO Flexible Premium Variable Universal Life Insurance Policies - KILICO Variable Separate Account We consent to the inclusion in this registration statement on Form S-6 (File No. 333-88845) of our report dated March 17, 2000, on our audit of the consolidated financial statements of Kemper Investors Life Insurance Company and to the reference to our firm under the caption "Experts." PricewaterhouseCoopers LLP Chicago, Illinois April 24, 2000 EX-99.9 4 ILLUSTRATIONS 1 Exhibit 9 ILLUSTRATIONS OF CASH VALUES, CASH SURRENDER VALUES AND DEATH BENEFITS The tables in this Prospectus have been prepared to help show how values under a Policy change with investment experience. The tables illustrate how Cash Values, Surrender Values (reflecting the deduction of Surrender Charges, if any) and Death Benefits under a Policy issued on an Insured of a given age would vary over time if the hypothetical gross investment rates of return were a uniform, after tax, annual rate of 0%, 6%, and 12%. If the hypothetical gross investment rate of return averages 0%, 6%, or 12%, but fluctuates over or under those averages throughout the years, the Cash Values, Surrender Values and Death Benefits may be different. The amounts shown for the Cash Value, Surrender Value and Death Benefit as of each Policy Anniversary reflect the fact that the net investment return on the assets held in the Subaccounts is lower than the gross return. This is because of a daily charge to the Subaccounts for assuming mortality and expense risks, which is equivalent to an effective annual charge of .60% in Policy Years one through ten; .40% in Policy Years eleven through twenty; and .20% in Policy Years twenty-one and thereafter. This charge is guaranteed not to exceed an effective annual rate of 0.60%. In addition, the net investment returns also reflect the deduction of the Fund investment advisory fees and other Fund expenses, (.77%, the average of the fees and expenses). The tables also reflect applicable charges and deductions including a 6.0% deduction against premiums, monthly administrative charge of $10 in the first Policy Year and $6 thereafter (although not to exceed $7.50) and monthly charges for providing insurance protection. For each hypothetical gross investment rate of return, tables are provided reflecting current and guaranteed cost of insurance charges. A hypothetical gross average investment rate of return of 0% corresponds to an approximate net rate of return of -1.37% in Policy Years one through ten; -1.17% in Policy Years eleven through twenty; and 0.97% in Policy Years twenty-one and thereafter. A hypothetical gross average investment rate of return of 6% corresponds to an approximate net rate of return of 4.63%, 4.83%, and 5.03% respectively. Likewise, a hypothetical gross average investment rate of return of 12% corresponds to an approximate net rate of return of 10.63%, 10.83% and 11.03%. Cost of insurance rates vary by issue age, sex, rating class and Policy Year and, therefore, are not reflected in the approximate net annual investment rate of return above. Values are shown for Policies, which are issued to a male standard nonsmoker and a male preferred nonsmoker. Values for Policies issued on a basis involving a higher mortality risk would result in lower Cash Values, Surrender Values and Death Benefits than those illustrated. Females generally have a more favorable rate structure than males. The tables also reflect the fact that no charges for federal, state or other income taxes are currently made against the Separate Account. If such a charge is made in the future, it will take a higher gross rate of return than illustrated to produce the net after-tax returns shown in the tables. Upon request, we will furnish an illustration based on the proposed Insured's age, sex and premium payment requested. 2 FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY MALE STANDARD NON-TOBACCO $1,000.00 ANNUAL PREMIUM ISSUE AGE 35 $100,000 INITIAL DEATH BENEFIT: VALUES--CURRENT COST OF INSURANCE
Premium 0.00% Hypothetical 6.00% Hypothetical 12.00% Hypothetical Paid Plus Gross Investment Return Gross Investment Return Gross Investment Return Policy Interest Cash Surrender Death Cash Surrender Death Cash Surrender Death Year at 5% Value Value Benefit Value Value Benefit Value Value Benefit 1 1,050 642 0 100,000 689 0 100,000 736 0 100,000 2 2,153 1,316 80 100,000 1,452 216 100,000 1,595 359 100,000 3 3,310 1,971 735 100,000 2,241 1,005 100,000 2,535 1,299 100,000 4 4,526 2,607 1,371 100,000 3,057 1,821 100,000 3,564 2,328 100,000 5 5,802 3,230 1,994 100,000 3,906 2,670 100,000 4,701 3,465 100,000 6 7,142 3,847 2,858 100,000 4,797 3,808 100,000 5,960 4,971 100,000 7 8,549 4,455 3,713 100,000 5,730 4,988 100,000 7,355 6,614 100,000 8 10,027 5,054 4,498 100,000 6,706 6,150 100,000 8,900 8,344 100,000 9 11,578 5,645 5,274 100,000 7,728 7,358 100,000 10,612 10,241 100,000 10 13,207 6,228 6,043 100,000 8,800 8,614 100,000 12,509 12,323 100,000 11 14,917 6,820 6,820 100,000 9,943 9,943 100,000 14,639 14,639 100,000 12 16,713 7,391 7,391 100,000 11,129 11,129 100,000 16,990 16,990 100,000 13 18,599 7,939 7,939 100,000 12,358 12,358 100,000 19,586 19,586 100,000 14 20,579 8,465 8,465 100,000 13,634 13,634 100,000 22,455 22,455 100,000 15 22,657 8,970 8,970 100,000 14,957 14,957 100,000 25,627 25,627 100,000 16 24,840 9,453 9,453 100,000 16,334 16,334 100,000 29,139 29,139 100,000 17 27,132 9,905 9,905 100,000 17,754 17,754 100,000 33,020 33,020 100,000 18 29,539 10,321 10,321 100,000 19,218 19,218 100,000 37,312 37,312 100,000 19 32,066 10,701 10,701 100,000 20,728 20,728 100,000 42,063 42,063 100,000 20 34,719 11,041 11,041 100,000 22,285 22,285 100,000 47,325 47,325 100,000 Age 65 69,761 11,566 11,566 100,000 41,252 41,252 100,000 146,689 146,689 178,961 Age 70 94,836 8,206 8,206 100,000 53,049 53,049 100,000 250,017 250,017 290,020 Age 75 126,840 50 50 100,000 67,139 67,139 100,000 422,231 422,231 451,787 Age 80 167,685 0 0 0 85,510 85,510 100,000 711,565 711,565 747,144 Age 85 219,815 0 0 0 111,982 111,982 117,581 1,188,565 1,188,565 1,247,994
ASSUMPTIONS: (1) Based on Death Benefit Option A and assumes no Policy Loans have been made. (2) Values reflect current cost of insurance charges. (3) Net investment returns are calculated as the hypothetical gross investment return less all charges and deductions. (4) Death Benefit reflects current Internal Revenue Code requirements. (5) Zero values indicate policy lapse in absence of an additional premium payment. 3 The hypothetical investment rates of return shown above and elsewhere in this Prospectus are illustrative only and should not be deemed a representation of past or future investment rates of return. Actual rates of return may be more or less than those shown and will depend on a number of factors, including the investment allocations made by an Owner and actual expenses. The Death Benefit, Cash Value and Surrender Value for a Policy would be different from those shown if the actual rates of return averages 0%, 6% and 12% over a period of years but also fluctuated above or below those averaged for individual Policy Years. No representations can be made by Kemper Investors Life Insurance Company that these hypothetical rates of return can be achieved for any one year or sustained over any period of time. 4 FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY MALE STANDARD NON-TOBACCO $1,000.00 ANNUAL PREMIUM ISSUE AGE 35 $100,000 INITIAL DEATH BENEFIT: VALUES--GUARANTEED COST OF INSURANCE
Premium 0.00% Hypothetical 6.00% Hypothetical 12.00% Hypothetical Paid Plus Gross Investment Return Gross Investment Return Gross Investment Return Policy Interest Cash Surrender Death Cash Surrender Death Cash Surrender Death Year at 5% Value Value Benefit Value Value Benefit Value Value Benefit 1 1,050 642 0 100,000 689 0 100,000 736 0 100,000 2 2,153 1,298 62 100,000 1,434 198 100,000 1,576 340 100,000 3 3,310 1,936 700 100,000 2,204 968 100,000 2,495 1,259 100,000 4 4,526 2,554 1,318 100,000 2,999 1,763 100,000 3,501 2,265 100,000 5 5,802 3,152 1,916 100,000 3,818 2,582 100,000 4,602 3,366 100,000 6 7,142 3,728 2,740 100,000 4,663 3,674 100,000 5,808 4,820 100,000 7 8,549 4,281 3,540 100,000 5,531 4,790 100,000 7,128 6,386 100,000 8 10,027 4,811 4,255 100,000 6,425 5,869 100,000 8,574 8,018 100,000 9 11,578 5,315 4,944 100,000 7,342 6,972 100,000 10,158 9,787 100,000 10 13,207 5,794 5,608 100,000 8,285 8,100 100,000 11,896 11,710 100,000 11 14,917 6,244 6,244 100,000 9,252 9,252 100,000 13,801 13,801 100,000 12 16,713 6,665 6,665 100,000 10,241 10,241 100,000 15,892 15,892 100,000 13 18,599 7,055 7,055 100,000 11,254 11,254 100,000 18,188 18,188 100,000 14 20,579 7,413 7,413 100,000 12,289 12,289 100,000 20,711 20,711 100,000 15 22,657 7,735 7,735 100,000 13,346 13,346 100,000 23,486 23,486 100,000 16 24,840 8,020 8,020 100,000 14,425 14,425 100,000 26,540 26,540 100,000 17 27,132 8,263 8,263 100,000 15,520 15,520 100,000 29,903 29,903 100,000 18 29,539 8,457 8,457 100,000 16,629 16,629 100,000 33,605 33,605 100,000 19 32,066 8,598 8,598 100,000 17,747 17,747 100,000 37,687 37,687 100,000 20 34,719 8,678 8,678 100,000 18,869 18,869 100,000 42,191 42,191 100,000 Age 65 69,761 4,403 4,403 100,000 29,132 29,132 100,000 124,477 124,477 151,862 Age 70 94,836 0 0 0 31,302 31,302 100,000 207,310 207,310 240,479 Age 75 126,840 0 0 0 27,018 27,018 100,000 341,542 341,542 365,450 Age 80 167,685 0 0 0 4,832 4,832 100,000 561,793 561,793 589,882 Age 85 219,815 0 0 0 0 0 0 910,267 910,267 955,781
ASSUMPTIONS: (1) Based on Death Benefit Option A and assumes no Policy Loans have been made. (2) Values reflect guaranteed cost of insurance charges. (3) Net investment returns are calculated as the hypothetical gross investment return less all charges and deductions. (4) Death Benefit reflects current Internal Revenue Code requirements. 5 (5) Zero values indicate policy lapse in absence of an additional premium payment. The hypothetical investment rates of return shown above and elsewhere in this Prospectus are illustrative only and should not be deemed a representation of past or future investment rates of return. Actual rates of return may be more or less than those shown and will depend on a number of factors, including the investment allocations made by an Owner and actual expenses. The Death Benefit, Cash Value and Surrender Value for a Policy would be different from those shown if the actual rates of return averages 0%, 6% and 12% over a period of years but also fluctuated above or below those averaged for individual Policy Years. No representations can be made by Kemper Investors Life Insurance Company that these hypothetical rates of return can be achieved for any one year or sustained over any period of time. 6 FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY MALE STANDARD NON-TOBACCO $3,000.00 ANNUAL PREMIUM ISSUE AGE 55 $100,000 INITIAL DEATH BENEFIT: VALUES--CURRENT COST OF INSURANCE
Premium 0.00% Hypothetical 6.00% Hypothetical 12.00% Hypothetical Paid Plus Gross Investment Return Gross Investment Return Gross Investment Return Policy Interest Cash Surrender Death Cash Surrender Death Cash Surrender Death Year at 5% Value Value Benefit Value Value Benefit Value Value Benefit 1 3,150 2,179 0 100,000 2,329 0 100,000 2,479 0 100,000 2 6,458 4,340 928 100,000 4,779 1,367 100,000 5,237 1,825 100,000 3 9,930 6,432 3,020 100,000 7,305 3,893 100,000 8,252 4,840 100,000 4 13,577 8,454 5,042 100,000 9,908 6,496 100,000 11,550 8,138 100,000 5 17,406 10,400 6,988 100,000 12,588 9,176 100,000 15,162 11,750 100,000 6 21,426 12,268 9,538 100,000 15,346 12,617 100,000 19,121 16,392 100,000 7 25,647 14,052 12,005 100,000 18,184 16,137 100,000 23,467 21,420 100,000 8 30,080 15,750 14,215 100,000 21,105 19,570 100,000 28,246 26,711 100,000 9 34,734 17,361 16,337 100,000 24,114 23,090 100,000 33,515 32,491 100,000 10 39,620 18,880 18,368 100,000 27,214 26,703 100,000 39,335 38,823 100,000 11 44,751 20,345 20,345 100,000 30,472 30,472 100,000 45,865 45,865 100,000 12 50,139 21,710 21,710 100,000 33,842 33,842 100,000 53,128 53,128 100,000 13 55,796 22,967 22,967 100,000 37,330 37,330 100,000 61,231 61,231 100,000 14 61,736 24,108 24,108 100,000 40,947 40,947 100,000 70,299 70,299 100,000 15 67,972 25,124 25,124 100,000 44,703 44,703 100,000 80,482 80,482 100,000 16 74,521 26,006 26,006 100,000 48,613 48,613 100,000 91,933 91,933 105,723 17 81,397 26,746 26,746 100,000 52,697 52,697 100,000 104,626 104,626 118,228 18 88,617 27,333 27,333 100,000 56,977 56,977 100,000 118,679 118,679 131,734 19 96,198 27,756 27,756 100,000 61,482 61,482 100,000 134,252 134,252 146,334 20 104,158 27,998 27,998 100,000 66,244 66,244 100,000 151,526 151,526 162,133 Age 65 39,620 18,880 18,368 100,000 27,214 26,703 100,000 39,335 38,823 100,000 Age 70 67,972 25,124 25,124 100,000 44,703 44,703 100,000 80,482 80,482 100,000 Age 75 104,158 27,998 27,998 100,000 66,244 66,244 100,000 151,526 151,526 162,133 Age 80 150,340 25,874 25,874 100,000 96,595 96,595 101,425 272,122 272,122 285,728 Age 85 209,282 13,747 13,747 100,000 137,412 137,412 144,282 471,100 471,100 494,655
ASSUMPTIONS: (1) Based on Death Benefit Option A and assumes no Policy Loans have been made. (2) Values reflect current cost of insurance charges. (3) Net investment returns are calculated as the hypothetical gross investment return less all charges and deductions. (4) Death Benefit reflects current Internal Revenue Code requirements. 7 (5) Zero values indicate policy lapse in absence of an additional premium payment. The hypothetical investment rates of return shown above and elsewhere in this Prospectus are illustrative only and should not be deemed a representation of past or future investment rates of return. Actual rates of return may be more or less than those shown and will depend on a number of factors, including the investment allocations made by an Owner and actual expenses. The Death Benefit, Cash Value and Surrender Value for a Policy would be different from those shown if the actual rates of return averages 0%, 6% and 12% over a period of years but also fluctuated above or below those averaged for individual Policy Years. No representations can be made by Kemper Investors Life Insurance Company that these hypothetical rates of return can be achieved for any one year or sustained over any period of time. 8 FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY MALE STANDARD NON-TOBACCO $3,000.00 ANNUAL PREMIUM ISSUE AGE 55 $100,000 INITIAL DEATH BENEFIT: VALUES--GUARANTEED COST OF INSURANCE
Premium 0.00% Hypothetical 6.00% Hypothetical 12.00% Hypothetical Paid Plus Gross Investment Return Gross Investment Return Gross Investment Return Policy Interest Cash Surrender Death Cash Surrender Death Cash Surrender Death Year at 5% Value Value Benefit Value Value Benefit Value Value Benefit 1 3,150 1,903 0 100,000 2,045 0 100,000 2,186 0 100,000 2 6,458 3,748 336 100,000 4,151 739 100,000 4,573 1,161 100,000 3 9,930 5,501 2,089 100,000 6,292 2,880 100,000 7,152 3,740 100,000 4 13,577 7,162 3,750 100,000 8,465 5,053 100,000 9,943 6,531 100,000 5 17,406 8,720 5,308 100,000 10,665 7,253 100,000 12,965 9,553 100,000 6 21,426 10,171 7,441 100,000 12,889 10,159 100,000 16,241 13,511 100,000 7 25,647 11,504 9,457 100,000 15,130 13,083 100,000 19,799 17,752 100,000 8 30,080 12,709 11,173 100,000 17,381 15,846 100,000 23,668 22,133 100,000 9 34,734 13,769 12,745 100,000 19,632 18,608 100,000 27,883 26,860 100,000 10 39,620 14,669 14,157 100,000 21,871 21,359 100,000 32,486 31,974 100,000 11 44,751 15,394 15,394 100,000 24,092 24,092 100,000 37,530 37,530 100,000 12 50,139 15,933 15,933 100,000 26,289 26,289 100,000 43,086 43,086 100,000 13 55,796 16,268 16,268 100,000 28,458 28,458 100,000 49,239 49,239 100,000 14 61,736 16,384 16,384 100,000 30,593 30,593 100,000 56,093 56,093 100,000 15 67,972 16,256 16,256 100,000 32,686 32,686 100,000 63,775 63,775 100,000 16 74,521 15,847 15,847 100,000 34,721 34,721 100,000 72,438 72,438 100,000 17 81,397 15,058 15,058 100,000 36,636 36,636 100,000 82,262 82,262 100,000 18 88,617 13,924 13,924 100,000 38,478 38,478 100,000 93,500 93,500 103,785 19 96,198 12,315 12,315 100,000 40,175 40,175 100,000 106,012 106,012 115,553 20 104,158 10,138 10,138 100,000 41,691 41,691 100,000 119,865 119,865 128,255 Age 65 39,620 14,669 14,157 100,000 21,871 21,359 100,000 32,486 31,974 100,000 Age 70 67,972 16,256 16,256 100,000 32,686 32,686 100,000 63,775 63,775 100,000 Age 75 104,158 10,138 10,138 100,000 41,691 41,691 100,000 119,865 119,865 128,255 Age 80 150,340 0 0 0 45,415 45,415 100,000 213,611 213,611 224,292 Age 85 209,282 0 0 0 34,574 34,574 100,000 362,271 362,271 380,385
ASSUMPTIONS: (1) Based on Death Benefit Option A and assumes no Policy Loans have been made. (2) Values reflect guaranteed cost of insurance charges. (3) Net investment returns are calculated as the hypothetical gross investment return less all charges and deductions. (4) Death Benefit reflects current Internal Revenue Code requirements. 9 (5) Zero values indicate policy lapse in absence of an additional premium payment. The hypothetical investment rates of return shown above and elsewhere in this Prospectus are illustrative only and should not be deemed a representation of past or future investment rates of return. Actual rates of return may be more or less than those shown and will depend on a number of factors, including the investment allocations made by an Owner and actual expenses. The Death Benefit, Cash Value and Surrender Value for a Policy would be different from those shown if the actual rates of return averages 0%, 6% and 12% over a period of years but also fluctuated above or below those averaged for individual Policy Years. No representations can be made by Kemper Investors Life Insurance Company that these hypothetical rates of return can be achieved for any one year or sustained over any period of time. 10 FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY MALE PREFERRED NON-TOBACCO $1,500.00 ANNUAL PREMIUM ISSUE AGE 35 $150,000 INITIAL DEATH BENEFIT: VALUES--CURRENT COST OF INSURANCE
Premium 0.00% Hypothetical 6.00% Hypothetical 12.00% Hypothetical Paid Plus Gross Investment Return Gross Investment Return Gross Investment Return Policy Interest Cash Surrender Death Cash Surrender Death Cash Surrender Death Year at 5% Value Value Benefit Value Value Benefit Value Value Benefit 1 1,575 1,022 0 150,000 1,095 0 150,000 1,168 0 150,000 2 3,229 2,068 214 150,000 2,280 426 150,000 2,501 647 150,000 3 4,965 3,086 1,232 150,000 3,505 1,651 150,000 3,960 2,106 150,000 4 6,788 4,087 2,233 150,000 4,786 2,932 150,000 5,574 3,720 150,000 5 8,703 5,083 3,229 150,000 6,134 4,280 150,000 7,369 5,515 150,000 6 10,713 6,071 4,588 150,000 7,552 6,069 150,000 9,364 7,880 150,000 7 12,824 7,053 5,940 150,000 9,044 7,931 150,000 11,579 10,467 150,000 8 15,040 8,028 7,193 150,000 10,612 9,778 150,000 14,039 13,205 150,000 9 17,367 8,997 8,441 150,000 12,263 11,706 150,000 16,773 16,217 150,000 10 19,810 9,965 9,687 150,000 14,002 13,724 150,000 19,812 19,534 150,000 11 22,376 10,957 10,957 150,000 15,870 15,870 150,000 23,235 23,235 150,000 12 25,069 11,922 11,922 150,000 17,813 17,813 150,000 27,018 27,018 150,000 13 27,898 12,858 12,858 150,000 19,836 19,836 150,000 31,201 31,201 150,000 14 30,868 13,767 13,767 150,000 21,942 21,942 150,000 35,828 35,828 150,000 15 33,986 14,648 14,648 150,000 24,136 24,136 150,000 40,950 40,950 150,000 16 37,261 15,503 15,503 150,000 26,423 26,423 150,000 46,623 46,623 150,000 17 40,699 16,318 16,318 150,000 28,797 28,797 150,000 52,900 52,900 150,000 18 44,309 17,092 17,092 150,000 31,261 31,261 150,000 59,848 59,848 150,000 19 48,099 17,822 17,822 150,000 33,816 33,816 150,000 67,545 67,545 150,000 20 52,079 18,506 18,506 150,000 36,468 36,468 150,000 76,075 76,075 150,000 Age 65 104,641 22,248 22,248 150,000 70,304 70,304 150,000 236,811 236,811 288,910 Age 70 142,254 20,254 20,254 150,000 93,114 93,114 150,000 404,641 404,641 469,384 Age 75 190,260 13,466 13,466 150,000 122,308 122,308 150,000 685,252 685,252 733,219 Age 80 251,528 0 0 0 162,016 162,016 170,117 1,157,218 1,157,218 1,215,079 Age 85 329,723 0 0 0 212,485 212,485 223,109 1,940,038 1,940,038 2,037,039
ASSUMPTIONS: (1) Based on Death Benefit Option A and assumes no Policy Loans have been made. (2) Values reflect current cost of insurance charges. (3) Net investment returns are calculated as the hypothetical gross investment return less all charges and deductions. (4) Death Benefit reflects current Internal Revenue Code requirements. 11 (5) Zero values indicate policy lapse in absence of an additional premium payment. The hypothetical investment rates of return shown above and elsewhere in this Prospectus are illustrative only and should not be deemed a representation of past or future investment rates of return. Actual rates of return may be more or less than those shown and will depend on a number of factors, including the investment allocations made by an Owner and actual expenses. The Death Benefit, Cash Value and Surrender Value for a Policy would be different from those shown if the actual rates of return averages 0%, 6% and 12% over a period of years but also fluctuated above or below those averaged for individual Policy Years. No representations can be made by Kemper Investors Life Insurance Company that these hypothetical rates of return can be achieved for any one year or sustained over any period of time. 12 FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY MALE PREFERRED NON-TOBACCO $1,500.00 ANNUAL PREMIUM ISSUE AGE 35 $150,000 INITIAL DEATH BENEFIT: VALUES--GUARANTEED COST OF INSURANCE
Premium 0.00% Hypothetical 6.00% Hypothetical 12.00% Hypothetical Paid Plus Gross Investment Return Gross Investment Return Gross Investment Return Policy Interest Cash Surrender Death Cash Surrender Death Cash Surrender Death Year at 5% Value Value Benefit Value Value Benefit Value Value Benefit 1 1,575 1,022 0 150,000 1,095 0 150,000 1,168 0 150,000 2 3,229 2,051 197 150,000 2,261 407 150,000 2,482 628 150,000 3 4,965 3,050 1,196 150,000 3,468 1,614 150,000 3,920 2,066 150,000 4 6,788 4,021 2,167 150,000 4,714 2,860 150,000 5,497 3,643 150,000 5 8,703 4,960 3,106 150,000 6,000 4,146 150,000 7,223 5,369 150,000 6 10,713 5,867 4,384 150,000 7,327 5,843 150,000 9,114 7,631 150,000 7 12,824 6,738 5,626 150,000 8,692 7,579 150,000 11,185 10,073 150,000 8 15,040 7,574 6,739 150,000 10,098 9,263 150,000 13,456 12,622 150,000 9 17,367 8,371 7,814 150,000 11,543 10,986 150,000 15,945 15,388 150,000 10 19,810 9,130 8,851 150,000 13,030 12,751 150,000 18,676 18,398 150,000 11 22,376 9,846 9,846 150,000 14,555 14,555 150,000 21,674 21,674 150,000 12 25,069 10,517 10,517 150,000 16,120 16,120 150,000 24,964 24,964 150,000 13 27,898 11,141 11,141 150,000 17,723 17,723 150,000 28,581 28,581 150,000 14 30,868 11,717 11,717 150,000 19,365 19,365 150,000 32,558 32,558 150,000 15 33,986 12,239 12,239 150,000 21,044 21,044 150,000 36,933 36,933 150,000 16 37,261 12,706 12,706 150,000 22,761 22,761 150,000 41,753 41,753 150,000 17 40,699 13,110 13,110 150,000 24,509 24,509 150,000 47,062 47,062 150,000 18 44,309 13,440 13,440 150,000 26,282 26,282 150,000 52,913 52,913 150,000 19 48,099 13,691 13,691 150,000 28,077 28,077 150,000 59,368 59,368 150,000 20 52,079 13,850 13,850 150,000 29,885 29,885 150,000 66,495 66,495 150,000 Age 65 104,641 7,880 7,880 150,000 47,137 47,137 150,000 196,578 196,578 239,825 Age 70 142,254 0 0 0 52,146 52,146 150,000 327,224 327,224 379,580 Age 75 190,260 0 0 0 48,939 48,939 150,000 538,940 538,940 576,666 Age 80 251,528 0 0 0 22,885 22,885 150,000 886,327 886,327 930,644 Age 85 329,723 0 0 0 0 0 0 1,435,952 1,435,952 1,507,750
ASSUMPTIONS: (1) Based on Death Benefit Option A and assumes no Policy Loans have been made. (2) Values reflect guaranteed cost of insurance charges. (3) Net investment returns are calculated as the hypothetical gross investment return less all charges and deductions. (4) Death Benefit reflects current Internal Revenue Code requirements. 13 (5) Zero values indicate policy lapse in absence of an additional premium payment. The hypothetical investment rates of return shown above and elsewhere in this Prospectus are illustrative only and should not be deemed a representation of past or future investment rates of return. Actual rates of return may be more or less than those shown and will depend on a number of factors, including the investment allocations made by an Owner and actual expenses. The Death Benefit, Cash Value and Surrender Value for a Policy would be different from those shown if the actual rates of return averages 0%, 6% and 12% over a period of years but also fluctuated above or below those averaged for individual Policy Years. No representations can be made by Kemper Investors Life Insurance Company that these hypothetical rates of return can be achieved for any one year or sustained over any period of time. 14 FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY MALE PREFERRED NON-TOBACCO $4,500.00 ANNUAL PREMIUM ISSUE AGE 55 $150,000 INITIAL DEATH BENEFIT: VALUES--CURRENT COST OF INSURANCE
Premium 0.00% Hypothetical 6.00% Hypothetical 12.00% Hypothetical Paid Plus Gross Investment Return Gross Investment Return Gross Investment Return Policy Interest Cash Surrender Death Cash Surrender Death Cash Surrender Death Year at 5% Value Value Benefit Value Value Benefit Value Value Benefit 1 4,725 3,395 0 150,000 3,624 0 150,000 3,854 0 150,000 2 9,686 6,756 1,638 150,000 7,430 2,312 150,000 8,133 3,015 150,000 3 14,896 10,034 4,916 150,000 11,378 6,260 150,000 12,835 7,717 150,000 4 20,365 13,226 8,108 150,000 15,471 10,353 150,000 18,005 12,887 150,000 5 26,109 16,331 11,213 150,000 19,716 14,598 150,000 23,694 18,576 150,000 6 32,139 19,348 15,253 150,000 24,120 20,026 150,000 29,963 25,869 150,000 7 38,471 22,272 19,202 150,000 28,690 25,619 150,000 36,877 33,806 150,000 8 45,120 25,106 22,803 150,000 33,435 31,132 150,000 44,515 42,212 150,000 9 52,101 27,849 26,314 150,000 38,370 36,834 150,000 52,968 51,432 150,000 10 59,431 30,503 29,735 150,000 43,506 42,739 150,000 62,337 61,569 150,000 11 67,127 33,135 33,135 150,000 48,954 48,954 150,000 72,872 72,872 150,000 12 75,208 35,650 35,650 150,000 54,624 54,624 150,000 84,590 84,590 150,000 13 83,694 38,042 38,042 150,000 60,531 60,531 150,000 97,651 97,651 150,000 14 92,604 40,305 40,305 150,000 66,692 66,692 150,000 112,244 112,244 150,000 15 101,959 42,431 42,431 150,000 73,130 73,130 150,000 128,589 128,589 150,000 16 111,782 44,412 44,412 150,000 79,871 79,871 150,000 146,786 146,786 168,804 17 122,096 46,242 46,242 150,000 86,946 86,946 150,000 166,926 166,926 188,627 18 132,926 47,916 47,916 150,000 94,395 94,395 150,000 189,230 189,230 210,045 19 144,297 49,424 49,424 150,000 102,261 102,261 150,000 213,947 213,947 233,202 20 156,237 50,753 50,753 150,000 110,595 110,595 150,000 241,358 241,358 258,254 Age 65 59,431 30,503 29,735 150,000 43,506 42,739 150,000 62,337 61,569 150,000 Age 70 101,959 42,431 42,431 150,000 73,130 73,130 150,000 128,589 128,589 150,000 Age 75 156,237 50,753 50,753 150,000 110,595 110,595 150,000 241,358 241,358 258,254 Age 80 225,511 54,622 54,622 150,000 162,759 162,759 170,897 432,993 432,993 454,642 Age 85 313,924 50,458 50,458 150,000 229,680 229,680 241,164 751,026 751,026 788,578
ASSUMPTIONS: (1) Based on Death Benefit Option A and assumes no Policy Loans have been made. (2) Values reflect current cost of insurance charges. (3) Net investment returns are calculated as the hypothetical gross investment return less all charges and deductions. 15 (4) Death Benefit reflects current Internal Revenue Code requirements. (5) Zero values indicate policy lapse in absence of an additional premium payment. The hypothetical investment rates of return shown above and elsewhere in this Prospectus are illustrative only and should not be deemed a representation of past or future investment rates of return. Actual rates of return may be more or less than those shown and will depend on a number of factors, including the investment allocations made by an Owner and actual expenses. The Death Benefit, Cash Value and Surrender Value for a Policy would be different from those shown if the actual rates of return averages 0%, 6% and 12% over a period of years but also fluctuated above or below those averaged for individual Policy Years. No representations can be made by Kemper Investors Life Insurance Company that these hypothetical rates of return can be achieved for any one year or sustained over any period of time. 16 FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY MALE PREFERRED NON-TOBACCO $4,500.00 ANNUAL PREMIUM ISSUE AGE 55 $150,000 INITIAL DEATH BENEFIT: VALUES--GUARANTEED COST OF INSURANCE
Premium 0.00% Hypothetical 6.00% Hypothetical 12.00% Hypothetical Paid Plus Gross Investment Return Gross Investment Return Gross Investment Return Policy Interest Cash Surrender Death Cash Surrender Death Cash Surrender Death Year at 5% Value Value Benefit Value Value Benefit Value Value Benefit 1 4,725 2,915 0 150,000 3,129 0 150,000 3,343 0 150,000 2 9,686 5,726 608 150,000 6,339 1,221 150,000 6,979 1,861 150,000 3 14,896 8,401 3,283 150,000 9,602 4,484 150,000 10,909 5,791 150,000 4 20,365 10,935 5,817 150,000 12,917 7,799 150,000 15,164 10,046 150,000 5 26,109 13,318 8,200 150,000 16,277 11,159 150,000 19,774 14,656 150,000 6 32,139 15,538 11,444 150,000 19,675 15,581 150,000 24,775 20,681 150,000 7 38,471 17,583 14,513 150,000 23,104 20,034 150,000 30,211 27,140 150,000 8 45,120 19,436 17,133 150,000 26,553 24,250 150,000 36,127 33,823 150,000 9 52,101 21,072 19,537 150,000 30,006 28,471 150,000 42,575 41,040 150,000 10 59,431 22,470 21,702 150,000 33,449 32,682 150,000 49,622 48,855 150,000 11 67,127 23,607 23,607 150,000 36,871 36,871 150,000 57,353 57,353 150,000 12 75,208 24,464 24,464 150,000 40,266 40,266 150,000 65,876 65,876 150,000 13 83,694 25,020 25,020 150,000 43,628 43,628 150,000 75,323 75,323 150,000 14 92,604 25,248 25,248 150,000 46,949 46,949 150,000 85,855 85,855 150,000 15 101,959 25,114 25,114 150,000 50,221 50,221 150,000 97,670 97,670 150,000 16 111,782 24,562 24,562 150,000 53,420 53,420 150,000 111,006 111,006 150,000 17 122,096 23,444 23,444 150,000 56,458 56,458 150,000 126,146 126,146 150,000 18 132,926 21,815 21,815 150,000 59,408 59,408 150,000 143,409 143,409 159,184 19 144,297 19,480 19,480 150,000 62,168 62,168 150,000 162,544 162,544 177,173 20 156,237 16,302 16,302 150,000 64,688 64,688 150,000 183,731 183,731 196,593 Age 65 59,431 22,470 21,702 150,000 33,449 32,682 150,000 49,622 48,855 150,000 Age 70 101,959 25,114 25,114 150,000 50,221 50,221 150,000 97,670 97,670 150,000 Age 75 156,237 16,302 16,302 150,000 64,688 64,688 150,000 183,731 183,731 196,593 Age 80 225,511 0 0 0 72,355 72,355 150,000 327,113 327,113 343,468 Age 85 313,924 0 0 0 61,930 61,930 150,000 554,477 554,477 582,201
ASSUMPTIONS: (1) Based on Death Benefit Option A and assumes no Policy Loans have been made. (2) Values reflect guaranteed cost of insurance charges. (3) Net investment returns are calculated as the hypothetical gross investment return less all charges and deductions. (4) Death Benefit reflects current Internal Revenue Code requirements. 17 (5) Zero values indicate policy lapse in absence of an additional premium payment. The hypothetical investment rates of return shown above and elsewhere in this Prospectus are illustrative only and should not be deemed a representation of past or future investment rates of return. Actual rates of return may be more or less than those shown and will depend on a number of factors, including the investment allocations made by an Owner and actual expenses. The Death Benefit, Cash Value and Surrender Value for a Policy would be different from those shown if the actual rates of return averages 0%, 6% and 12% over a period of years but also fluctuated above or below those averaged for individual Policy Years. No representations can be made by Kemper Investors Life Insurance Company that these hypothetical rates of return can be achieved for any one year or sustained over any period of time. -----END PRIVACY-ENHANCED MESSAGE-----