<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 30, 1999
REGISTRATION STATEMENT 333-35159
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
POST-EFFECTIVE AMENDMENT NO. 4
TO
FORM S-6
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-2
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:
<TABLE>
<S> <C>
FRANK J. JULIAN, ESQ. JOAN E. BOROS, ESQ.
Kemper Investors Life Insurance Company Jorden Burt Boros
1 Kemper Drive Cicchetti Berenson & Johnson, LLP
Long Grove, Illinois 60049 1025 Thomas Jefferson Street, N.W.
Suite 400 E
Washington, D.C. 20007
</TABLE>
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, 1999 pursuant to paragraph (b), or
[ ] on (date) pursuant to paragraph (a)(1) of Rule 485.
If appropriate, check the following box:
[ ] this post effective amendment designates a new effective date for a
previously filed post-effective amendment.
E. Title of securities being registered:
The variable portion of Flexible Premium Variable Life Insurance
Policies (Individual Life and Survivorship).
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.
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<PAGE> 2
RECONCILIATION AND TIE BETWEEN
ITEMS IN FORM N-8B-2 AND THE PROSPECTUS
<TABLE>
<CAPTION>
ITEM NO. CAPTION IN PROSPECTUS
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<C> <S>
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 Matters
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
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
ITEM NO. CAPTION IN PROSPECTUS
- -------- ---------------------
<C> <S>
49. Not Applicable
50. Not Applicable
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
</TABLE>
<PAGE> 4
PROSPECTUS--MAY 1, 1999
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FLEXIBLE PREMIUM VARIABLE
LIFE INSURANCE POLICY
(INDIVIDUAL LIFE AND SURVIVORSHIP)
- --------------------------------------------------------------------------------
ISSUED BY
KEMPER INVESTORS LIFE INSURANCE COMPANY
THROUGH ITS KILICO VARIABLE SEPARATE ACCOUNT-2
HOME OFFICE: 1 KEMPER DRIVE, LONG GROVE, ILLINOIS 60049 (847) 550-5500
This Prospectus describes two variable life insurance policies of Kemper
Investors Life Insurance Company. These policies insure either the life of one
Insured ("Individual Policy") or two Insureds ("Survivorship Policy"). The
Survivorship Policy provides a Death Benefit payable on the death of the second
Insured as long as the Policy is in force. Generally, Policy premiums are
flexible. Policy benefits depend upon the investment experience of the KILICO
Variable Separate Account-2.
A Policy Owner has the following choices for allocating premium:
- the Fixed Account, which accrues interest at our declared annual rate,
and
- the Subaccounts of the Separate Account, which invest in portfolios of
the underlying mutual funds.
The following portfolios of underlying mutual funds are currently available
under the Policies:
- - Evergreen Variable Annuity Trust
- Evergreen VA Fund
- Evergreen VA Growth and Income Fund
- Evergreen VA Foundation Fund
- Evergreen VA Global Leaders Fund
- Evergreen VA Strategic Income Fund
- Evergreen VA Aggressive Growth Fund
- Evergreen VA Small Cap Value Fund (formerly Evergreen VA Small Cap Equity
Income Fund)
- Evergreen VA International Growth Fund
- Evergreen VA Masters Fund
- - Goldman Sachs Variable Insurance Trust
- Goldman Sachs International Equity Fund
- Goldman Sachs Global Income Fund
- - Morgan Stanley Dean Witter Universal Funds, Inc.
- High Yield Portfolio
- U.S. Real Estate Portfolio
- - Fidelity's Variable Insurance Products Fund ("VIP")
- VIP Money Market Portfolio
- VIP Overseas Portfolio
- - Fidelity's Variable Insurance Products Fund II ("VIP II")
- VIP II Contrafund Portfolio
- VIP II Index 500 Portfolio
You may obtain more information about these portfolios in the attached
prospectuses. Not all portfolios described in the prospectuses may be available
under the Policies.
Cash Value placed in the Fixed Account will earn interest at a rate
declared by us. While subject to change, this interest rate is guaranteed to be
at least 3% annually.
These Policies are "life insurance" for federal tax purposes. If a Policy
is a modified endowment contract, different rules apply. See "Federal Tax
Matters" for a discussion of laws that affect the tax treatment of the Policy.
The Owner chooses from two Death Benefit options. The Owner also chooses
the Death Benefit qualification test. This is the method of qualifying the
Policy as a life insurance contract for federal tax purposes. The Death Benefit
is at least the amount shown in the Policy Specifications, unless there are
loans. However, we reserve the right to limit the Death Benefit in certain
circumstances. Cash Value is not guaranteed. If the Surrender Value does not
cover all Policy charges, the Policy will lapse.
The Owner 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.
THE POLICY IS NOT INSURED BY THE FDIC, THE FEDERAL RESERVE BOARD, OR
ANY OTHER GOVERNMENT AGENCY, IS NOT A DEPOSIT OR OTHER OBLIGATION OF,
OR GUARANTEED BY, THE DEPOSITORY INSTITUTION, AND IS SUBJECT TO
INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL AMOUNT
INVESTED.
<PAGE> 5
TABLE OF CONTENTS
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- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DEFINITIONS................................................. 3
SUMMARY..................................................... 5
KILICO AND THE SEPARATE ACCOUNT............................. 10
THE FUNDS................................................... 10
FIXED ACCOUNT OPTION........................................ 13
THE POLICY.................................................. 13
POLICY BENEFITS AND RIGHTS.................................. 16
CHARGES AND DEDUCTIONS...................................... 22
GENERAL PROVISIONS.......................................... 24
DOLLAR COST AVERAGING....................................... 26
SYSTEMATIC WITHDRAWAL PLAN.................................. 27
DISTRIBUTION OF POLICIES.................................... 27
FEDERAL TAX MATTERS......................................... 28
LEGAL CONSIDERATIONS........................................ 30
SAFEKEEPING OF THE SEPARATE ACCOUNT'S ASSETS................ 31
VOTING INTERESTS............................................ 31
STATE REGULATION OF KILICO.................................. 31
KILICO'S DIRECTORS AND OFFICERS............................. 31
LEGAL MATTERS............................................... 33
LEGAL PROCEEDINGS........................................... 33
YEAR 2000 COMPLIANCE........................................ 34
EXPERTS..................................................... 34
REGISTRATION STATEMENT...................................... 35
FINANCIAL STATEMENTS........................................ 35
CHANGE OF ACCOUNTANTS....................................... 35
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS.................... 36
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS.................... 37
APPENDIX A--TABLE OF DEATH BENEFIT FACTORS.................. A-1
</TABLE>
2
<PAGE> 6
DEFINITIONS
ACCOUNT MAINTENANCE CHARGE--A charge deducted in the calculation of the
Accumulation Unit Value for maintaining the Separate Account and Policy Owner
records.
ACCUMULATION UNIT--An accounting unit of measure used to calculate the
value of each Subaccount.
ACCUMULATION UNIT VALUE--The value of a Subaccount measured by that
Subaccount's Accumulation Units.
AGE--An Insured's age on his or her nearest birthday.
BENEFICIARY--The person to whom the proceeds due on the Insured's (or last
surviving 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.
DEATH BENEFIT--The amount payable upon the death of the Insured (the last
surviving Insured in the case of a Survivorship Policy) while the Policy is in
force.
DEBT--The sum of (1) the principal of any outstanding loan, plus (2) any
loan interest due or accrued to KILICO.
FIXED ACCOUNT--The amount of assets held in the General Account
attributable to the fixed portion of the Policy.
FIXED ACCOUNT VALUE--The portion of the Cash Value in the General Account,
excluding the Loan Account.
FREE-LOOK PERIOD--The time when an Owner 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 the Owner receives 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.
INSURED(S)--The person whose life is covered by the Policy and who is named
in the Policy Specifications. For Survivorship Policies, there are two Insureds.
ISSUE DATE--The date shown in the Policy Specifications. Incontestability
and suicide periods for the initial Specified Amount 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 (or last
surviving Insured's) 100th birthday.
MONTHLY PROCESSING DATE--The same day in each month as the Policy Date.
Policy months are determined from the Monthly Processing 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 PREMIUM--The premium paid minus premium charges shown in the Policy
Specifications.
OWNER--The person designated on the application who may exercise all rights
and privileges under the Policy.
PLANNED PREMIUM--The scheduled premium specified by the Owner in the
application.
3
<PAGE> 7
POLICY DATE--The date shown in the Policy Specifications. The Policy Date
is used to determine Policy Years and Monthly Processing Dates. The Policy Date
is the date insurance coverage takes effect subject to principles of state law
regarding Our obligations between the time We accept an application and premium
and the time We issue the Policy. The specific terms are provided when We accept
an application.
POLICY LOAN--The amount of the Cash Value which the Owner has borrowed as a
loan. An Owner may borrow up to 90% of the Policy's Cash Value.
POLICY YEAR--Each year commencing with the Policy Date and each Policy Date
anniversary thereafter.
SEPARATE ACCOUNT--The KILICO Variable Separate Account-2, which was
established under Illinois law as a separate investment account of KILICO.
SEPARATE ACCOUNT VALUE--The portion of the Cash Value in the Subaccount(s).
SPECIFIED AMOUNT--The amount chosen by the Owner 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 on the date of surrender minus any Debt.
TRADE DATE--For Policies issued in jurisdictions that require a return of
initial premium during the Free-Look Period, including Policies which replace an
existing insurance policy issued in certain jurisdictions, the Valuation Date 30
days following the Issue Date or a later Valuation Date immediately upon the
Owner's completion of all requirements for coverage and Our recording the Policy
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.
4
<PAGE> 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.
The Owner pays a premium for life insurance coverage on the Insured(s).
Generally, an Owner 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. (See "The Policy--Premiums," "The Policy--Allocation of
Premiums and Separate Account Value," "Charges and Deductions," and "Policy
Benefits and Rights.")
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. For a Policy treated as a modified endowment contract,
certain distributions will be included in the Owner's federal gross income (See
"Federal Tax Matters.")
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. The Owner bears 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.")
The Owner may surrender a Policy at any time and receive the Surrender
Value. The Surrender Value is the Cash Value minus outstanding Debt. Partial
withdrawals are available subject to restrictions. (See "Policy Benefits and
Rights--Surrender Privilege.")
Policy Loans. The Owner may borrow up to 90% of Cash Value. (See "Policy
Benefits and Rights--Policy Loans.") The minimum amount of a loan is $500.
Interest is charged at a rate not exceeding the greater of the interest rate
shown in the Policy and a published monthly average, currently Moody's Corporate
Bond Yield Average-Monthly Average Corporates ("Adjustable Loan Interest Rate").
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
the Owner requests otherwise) to the Loan Account. We credit interest to Cash
Value held in the Loan Account. The interest rate is the Adjustable Loan
Interest Rate reduced by not more than 1%. (See "Policy Benefits and
Rights--Policy Loans.")
If the Policy is a modified endowment contract, a loan is treated as a
taxable distribution. (See "Federal Tax Matters.")
Death Benefit. An in force Policy pays a Death Benefit upon the death of
the Insured (or upon the death of the last surviving Insured for a Survivorship
Policy). The Policy has two death benefit options. 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 the Cash Value specified in Appendix B. We may limit the Death
Benefit in certain circumstances. The Death Benefit payable is reduced by any
Debt. (See "Policy Benefits and Rights--Death Benefit.")
PREMIUMS
The amount and frequency of premium payments are flexible. The Owner
specifies a Planned Premium on the application. However, the Owner is 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 an Owner pays 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.
5
<PAGE> 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. (See "The Policy--Premiums.")
THE SEPARATE ACCOUNT
Allocation of Premiums. The portion of the premium available for allocation
equals the premium paid less applicable charges. An Owner indicates in the
application the percentages of premium to be allocated among the Subaccounts of
the Separate Account and the Fixed Account. The Subaccounts each invest in
shares of a designated portfolio of Evergreen Variable Annuity Trust, Goldman
Sachs Variable Insurance Trust, Morgan Stanley Dean Witter Universal Funds,
Inc., Fidelity's Variable Insurance Products Fund, or Fidelity's Variable
Insurance Products Fund II.
For Policies issued in jurisdictions that require a return of premium
during the Free Look Period, the initial Net Premium is allocated to the
Fidelity VIP Money Market Subaccount on the day after receipt. On the Trade
Date, the Separate Account Value in the Fidelity VIP Money Market Subaccount is
allocated among the Subaccounts and the Fixed Account in accordance with the
Owner's instructions in the application. For all other jurisdictions, on the
Issue Date, the initial Net Premium will generally be allocated to the
Subaccounts and the Fixed Account in accordance with the Owner's instructions in
the application. (See "The Policy--Policy Issue.")
Transfers. The Owner may transfer Separate Account Value among the
Subaccount once every fifteen (15) days. Transfers are also permitted between
the Fixed Account and the Subaccounts, subject to restrictions. (See "The
Policy--Allocation of Premiums and Separate Account Value.")
THE FUNDS
The following Portfolios of Evergreen Variable Annuity Trust are currently
available for investment by the Separate Account:
- Evergreen VA Fund
- Evergreen VA Growth and Income Fund
- Evergreen VA Foundation Fund
- Evergreen VA Global Leaders Fund
- Evergreen VA Strategic Income Fund
- Evergreen VA Aggressive Growth Fund
- Evergreen VA Small Cap Value Fund (formerly Evergreen VA Small Cap Equity
Income Fund)
- Evergreen VA International Growth Fund
- Evergreen VA Masters Fund.
The following Portfolios of Goldman Sachs Variable Insurance Trust are
currently available for investment by the Separate Account:
- Goldman Sachs International Equity Fund
- Goldman Sachs Global Income Fund.
The following Portfolios of Morgan Stanley Dean Witter Universal Funds,
Inc. are currently available for investment by the Separate Account:
- High Yield Portfolio
- U.S. Real Estate Portfolio.
The following Portfolios of Fidelity's Variable Insurance Products Fund are
currently available for investment by the Separate Account:
- VIP Money Market Portfolio
- VIP Overseas Portfolio.
The following Portfolios of Fidelity's Variable Insurance Products Fund II
are currently available for investment by the Separate Account:
- VIP II Contrafund Portfolio
- VIP II Index 500 Portfolio.
For a more detailed description of the Funds, see "The Funds," and the
Funds' prospectuses accompanying this Prospectus, and statements of additional
information available from Us upon request.
6
<PAGE> 10
CHARGES
We deduct a state and local premium tax charge equal to the actual state
tax rate before Net Premium is allocated. In addition, We deduct a charge of 1%
of each premium payment to compensate Us for corporate income tax liability
before Net Premium is allocated. (See "Charges and Deductions--Deductions from
Premiums.")
We currently do not deduct any other charges from premium or the Separate
Account for federal, state or other taxes. Should We determine that these taxes
apply, We may make deductions from the Separate Account to pay those taxes. (See
"Charges and Deductions--Other Charges" and "Federal Tax Matters.")
We deduct a charge from Cash Value in each Subaccount and the Fixed Account
on the Policy Date and on each Monthly Processing Date for the cost of life
insurance coverage. In addition, We deduct an asset charge from each Subaccount
on a daily basis for Our assumption of mortality and expense risks. This charge
will not exceed an effective annual rate of .90%. (See "Charges and
Deductions--Cost of Insurance Charge" and "Charges and Deductions--Mortality and
Expense Risk Charge.")
We also deduct a Monthly Administrative Charge and an Account Maintenance
Charge. The Monthly Administrative Charge is deducted from Cash Value on each
Monthly Processing Date in the amount of $20 per month during the first Policy
Year and the first 12 months following an increase in Specified Amount, and $5
per month at all other times. We deduct the Account Maintenance Charge from each
Subaccount as a daily asset charge. The effective annual rate for this charge is
0.45%. (See "Charges and Deductions--Policy and Separate Account Administration
Charges.")
The Owner indirectly bears the annual Fund operating expenses of the
Portfolios in which the Subaccounts invest. These may include management fees,
12b-1 fees and other expenses. See "Charges and Deductions--Other Charges" in
this Prospectus and the prospectuses for the Funds.
TAX TREATMENT UNDER CURRENT FEDERAL TAX LAW
Under existing federal tax law, any increase in Cash Value is generally not
taxable to the Owner 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
treated as a modified endowment contract, a Policy Loan is also treated as a
distribution. Generally, distributions from a modified endowment contract
(including loans) are included in income to the extent Cash Value exceeds
premiums paid. A change of Owner, an assignment, a Policy 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.")
FREE-LOOK PERIOD
The Owner 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 the
Owner receives the Policy. (See "Policy Benefits and Rights--Free-Look Period
and Exchange Rights.")
ILLUSTRATIONS OF CASH VALUE, SURRENDER VALUE, DEATH BENEFIT
Tables in Exhibit 10. 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
and format as those appearing in Exhibit 10. to the registration statement.
FEES AND EXPENSES
The following tables are designed to help Owners understand the fees and
expenses that they bear, directly or indirectly. The first table describes the
Policy charges and deductions that Owners bear directly. The second table
describes the fees and expenses of the Portfolios. Owners indirectly bear these
fees and expenses. (See "Charges and Deductions.")
7
<PAGE> 11
POLICY CHARGES AND DEDUCTIONS
<TABLE>
<S> <C> <C>
Transaction Charges
Premium Tax Charge(1)............. 0.50% to 5% of each premium payment
DAC Tax Charge.................... 1% of each premium payment
Transfer Charge................... None
Sales Charge or Surrender None
Charge..........................
Account Value Charges (deducted monthly)
Cost of Insurance Charge(2)....... CURRENT GUARANTEED
Individual Policy Ranges from $0.01263 per $1,000 Ranges from $0.05669 per
of net amount at risk to $1,000 of net amount at
$83.33 per $1,000 of net risk to $83.33 per $1,000
amount at risk(3) of net amount at risk(3)
Survivorship Policy Ranges from $0.00833 per $1,000 Ranges from $0.01 per
of net amount at risk to $1,000 of net amount at
$83.33 per $1,000 of net risk to $83.33 per $1,000
amount at risk(3) of net amount at risk(3)
Monthly Administrative Charge..... $20 per month during Policy Year 1 and for 12 months following an
increase in Specified Amount(4)
$5 per month thereafter
Annual Separate Account Charges (deducted daily and shown as an annualized percentage of average net assets)
Mortality and Expense Risk Charge
Current...................... CUMULATIVE NET MORTALITY AND EXPENSE
PREMIUM PAID(5) RISK CHARGE
-------------- --------------------
Up to $100,000 0.65%
$100,000-$250,000 0.50%
$250,001-$500,000 0.40%
$500,001 and higher 0.30%
Guaranteed................... Effective annual rate guaranteed not to exceed 0.90%
Account Maintenance Charge........ 0.45%
Federal Income Tax Charge(6)...... None
</TABLE>
- ---------------
(1) We deduct a premium tax charge equal to the actual state tax rate from each
premium payment. State and local premium tax rates range from 0.50% to 5%.
We expect to pay an average state premium tax rate of 2.18%, but the actual
premium tax attributable to a Policy may be more or less. (See "Charges and
Deductions--Deductions from Premiums.")
(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.")
(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) We require current satisfactory evidence of insurability for an increase in
Specified Amount. (See "Policy Benefits and Rights--Changes in Specified
Amount.")
(5) We may combine total Net Premium paid on one or more Policies by a common
grantor, Owner, sponsor (such as in split dollar arrangements), or other
group arrangement.
(6) We do not currently charge for federal, state or other taxes that may be
applied to the Separate Account, but We may do so in the future. (See
"Charges and Deductions--Other Charges.")
8
<PAGE> 12
PORTFOLIO EXPENSES AFTER WAIVERS/REIMBURSEMENTS
(as a percentage of net assets for the period ended December 31, 1998)
<TABLE>
<CAPTION>
TOTAL
MANAGEMENT OTHER OPERATING
PORTFOLIO FEES EXPENSES EXPENSES
--------- ---------- -------- ---------
<S> <C> <C> <C>
Evergreen VA Fund(1)........................................ 0.95% 0.05% 1.00%
Evergreen VA Growth and Income Fund()(1).................... 0.95% 0.05% 1.00%
Evergreen VA Foundation Fund................................ 0.83% 0.17% 1.00%
Evergreen VA Global Leaders Fund()(1)....................... 0.95% 0.05% 1.00%
Evergreen VA Strategic Income Fund(1)....................... 0.45% 0.55% 1.00%
Evergreen VA Aggressive Growth Fund(1)...................... 0.60% 0.40% 1.00%
Evergreen VA Small Cap Value Fund(1)........................ 0.95% 0.05% 1.00%
Evergreen VA International Growth Fund(1)................... 0.75% 0.25% 1.00%
Evergreen VA Masters Fund(2)................................ 0.95% 0.05% 1.00%
Goldman Sachs International Equity Fund(3).................. 1.00% 0.25% 1.25%
Goldman Sachs Global Income Fund(3)......................... 0.90% 0.15% 1.05%
Morgan Stanley Dean Witter High Yield Portfolio(4).......... 0.15% 0.65% 0.80%
Morgan Stanley Dean Witter U.S. Real Estate Portfolio(4).... 0.17% 0.93% 1.10%
Fidelity's VIP Money Market Portfolio....................... 0.20% 0.10% 0.30%
Fidelity's VIP Overseas Portfolio(5)........................ 0.74% 0.15% 0.89%
Fidelity's VIP II Contrafund Portfolio(5)................... 0.59% 0.07% 0.66%
Fidelity's VIP II Index 500 Portfolio(6).................... 0.24% 0.04% 0.28%
</TABLE>
- ---------------
(1) Reflects an agreement to voluntarily limit aggregate operating expenses
(including investment advisory expenses, but excluding interest, brokerage
commissions and extraordinary expenses) to 1.00% of average daily net
assets. Absent such an agreement, the actual Management Fees, Other Expenses
and Total Operating Expenses for the period from January 1, 1998 to December
31, 1998 were as follows:
<TABLE>
<CAPTION>
TOTAL
MANAGEMENT OTHER OPERATING
FEES EXPENSES EXPENSES
---------- -------- ---------
<S> <C> <C> <C>
Evergreen VA Fund......................................... 0.95% 0.19% 1.14%
Evergreen VA Growth and Income Fund....................... 0.95% 0.21% 1.16%
Evergreen VA Global Leaders Fund.......................... 0.95% 0.61% 1.56%
Evergreen VA Strategic Income Fund........................ 0.45% 0.57% 1.02%
Evergreen VA Aggressive Growth Fund....................... 0.60% 0.95% 1.55%
Evergreen VA Small Cap Value Fund......................... 0.95% 2.52% 3.47%
Evergreen VA International Growth Fund.................... 0.75% 7.50% 8.25%
</TABLE>
(2) Expenses have been estimated for the current fiscal year.
(3) Each Goldman Sachs Portfolio is a series of Goldman Sachs Variable Insurance
Trust. Expenses are based on actual expenses for fiscal year ended December
31, 1998. Each Portfolio's investment adviser has voluntarily agreed to
reduce or limit certain "Other Expenses" (excluding management fees, taxes,
interest, brokerage fees, litigation, indemnification and other
extraordinary expenses) to the extent such expenses exceed . 25% and .15%,
respectively, of each Portfolio's average daily net assets. Without such
reduction, "Other Expenses" and "Total Operating Expenses" for the Goldman
Sachs International Equity Fund and the Goldman Sachs Global Income Fund
would have been 1.97% and 2.97% and 2.40% and 3.30%, respectively, on an
annualized basis. The reductions or limits may be discontinued or modified
by the investment adviser in its discretion at any time.
(4) Each Portfolio's management fees and expenses were voluntarily waived and/or
reimbursed by its investment adviser. Absent waiver and/or reimbursement,
Management Fees, Other Expenses, and Total Operating Expenses would have
been 0.50%, 0.65% and 1.15% for High Yield Portfolio, and 0.80%, 0.93% and
1.73% for U.S. Real Estate Portfolio.
(5) 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 custodian expenses. Including
these reductions, Total Operating Expenses would have been 0.91% for VIP
Overseas Portfolio and 0.70% for VIP II Contrafund Portfolio.
(6) The investment adviser agreed to reimburse a portion of VIP II Index 500
Portfolio's expenses during the period. Without such reimbursement,
Management Fees, Other Expenses and Total Operating Expenses would have been
0.24%, 0.11%, and 0.35%, respectively.
9
<PAGE> 13
KILICO AND THE SEPARATE ACCOUNT
KEMPER INVESTORS LIFE INSURANCE COMPANY
Kemper Investors Life Insurance Company ("KILICO"), 1 Kemper Drive, Long
Grove, Illinois 60049, was organized in 1947 and is a stock life insurance
company organized under the laws of the State of Illinois. KILICO is a
majority-owned (76.4 percent) subsidiary of Kemper Corporation, a non-operating
holding company. Kemper Corporation is a wholly-owned subsidiary of Zurich
Holding Company of America ("ZHCA"), which is a wholly-owned subsidiary of
Zurich Insurance Company ("Zurich"). Zurich is a wholly-owned subsidiary of
Zurich Financial Services ("ZFS"). ZFS was formed in the September, 1998 merger
of the Zurich Group with the financial services business of B.A.T. Industries.
ZFS is owned by Zurich Allied A.G. and Allied Zurich p.l.c., fifty-seven percent
and forty-three percent, respectively. KILICO offers life insurance and annuity
products and is admitted to do business in the District of Columbia and all
states except New York.
SEPARATE ACCOUNT
KILICO Variable Separate Account-2 was established as a separate investment
account on June 17, 1997. The Separate Account receives and invests Net Premium.
In addition, the Separate Account may receive and invest 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 (the "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 seventeen 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 Evergreen Variable Annuity Trust,
Goldman Sachs Variable Insurance Trust, Morgan Stanley Dean Witter Universal
Funds, Inc., Fidelity's Variable Insurance Products Fund, and Fidelity's
Variable Insurance Products Fund II. Each is a series type mutual fund
registered as an open-end management investment company. The Commission does not
supervise their 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.
The Separate Account invests in the Portfolios of the Funds. 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.
EVERGREEN VARIABLE ANNUITY TRUST
The Portfolios of the Evergreen Variable Annuity Trust in which the
Separate Account invests are summarized below:
Evergreen VA Fund: Seeks to achieve capital appreciation by investing in
the securities of little-known or relatively small companies, or companies
undergoing changes which the Fund's investment adviser believes will have
favorable consequences. Income will not be a factor in the selection of
portfolio investments.
10
<PAGE> 14
Evergreen VA Growth and Income Fund: Seeks to achieve a return composed of
capital appreciation in the value of its shares and current income. The Fund
will attempt to meet its objective by investing in the securities of companies
which are undervalued in the marketplace relative to those companies' assets,
breakup value, earnings, or potential earnings growth.
Evergreen VA Foundation Fund: Seeks, in order of priority, reasonable
income, conservation of capital and capital appreciation. The Fund invests
principally in income-producing common and preferred stocks, securities
convertible into or exchangeable for common stocks and fixed income securities.
Evergreen VA Global Leaders Fund: Seeks to achieve capital appreciation by
investing primarily in a diversified portfolio of U.S. and non-U.S. equity
securities of companies located in the world's major industrialized countries.
The Fund's investment adviser will attempt to screen the largest companies in
the world's major industrialized countries and cause the Fund to invest, in the
opinion of the Fund's investment adviser, in the 100 best based on certain
qualitative and quantitative criteria.
Evergreen VA Strategic Income Fund: Seeks high current income from interest
on debt securities and, secondarily, considers potential for growth of capital
in selecting securities.
Evergreen VA Aggressive Growth Fund: Seeks long-term capital appreciation
by investing primarily in common stocks of emerging growth companies and in
larger, more well established companies, all of which are viewed by the Fund's
investment adviser as having above average appreciation potential.
Evergreen VA Small Cap Value Fund (formerly Evergreen VA Small Cap Equity
Income Fund): Seeks to achieve a return consisting of current income and capital
appreciation in the value of its shares. The Fund invests in common and
preferred stocks, securities convertible into or exchangeable for common stocks
and fixed income securities. In attempting to achieve its objective, the Fund
invests primarily in companies with total market capitalizations of less than
$500 million.
Evergreen VA International Growth Fund: Seeks long-term growth of capital
and, as a secondary objective, seeks modest income. The Fund invests primarily
in equity securities issued by well-established, quality companies located in
countries with developed markets.
Evergreen VA Masters Fund: Seeks long-term capital appreciation by
investing at least 65% of its assets in equity securities. The Fund's investment
program is based on a manager of managers strategy. Evergreen Investment
Management, the Fund's investment adviser, allocates the Fund's portfolio assets
on an approximately equal basis among a number of investment management firms
(currently four), each of which employs a different investment style.
Evergreen Asset Management Corp. is the investment adviser to Evergreen VA
Fund, Evergreen VA Growth and Income Fund, Evergreen VA Foundation Fund,
Evergreen VA Global Leaders Fund, and Evergreen VA Small Cap Equity Income Fund.
Keystone Investment Management Company is the investment adviser to Evergreen VA
Strategic Income Fund and Evergreen VA International Growth Fund. Evergreen
Investment Management (formerly the Capital Management Group of First Union
National Bank) is the investment adviser to Evergreen VA Aggressive Growth Fund
and, pursuant to a manager of managers strategy, Evergreen VA Masters Fund.
Evergreen Asset Management Corp., MFS Institutional Advisors, Inc., Oppenheimer
Funds, Inc., and Putnam Investment Management Inc. currently serve as managers
of segments of the Evergreen VA Masters Fund.
Lieber & Company serves as sub-adviser to Evergreen VA Fund, Evergreen VA
Growth and Income Fund, Evergreen VA Foundation Fund, Evergreen VA Global
Leaders Fund, Evergreen VA Small Cap Value Fund and Evergreen VA Masters Fund
(with respect to the segment of the portfolio managed by Evergreen Asset
Management).
GOLDMAN SACHS VARIABLE INSURANCE TRUST
The Portfolios of the Goldman Sachs Variable Insurance Trust in which the
Separate Account invests are summarized below:
Goldman Sachs International Equity Fund: Seeks long-term capital
appreciation through investments in equity securities of companies that are
organized outside the U.S. or whose securities are principally traded outside
the U.S.
Goldman Sachs Global Income Fund: Seeks a high total return, emphasizing
current income, and, to a lesser extent, providing opportunities for capital
appreciation by investing primarily in a portfolio of high quality fixed-income
securities of U.S. and foreign issuers and foreign currencies.
Goldman Sachs Asset Management International, an affiliate of Goldman,
Sachs & Co., serves as investment adviser to the Goldman Sachs International
Equity Fund and the Goldman Sachs Global Income Fund.
11
<PAGE> 15
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
The Portfolios of the Morgan Stanley Dean Witter Universal Funds, Inc. in
which the Separate Account invests are summarized below:
High Yield Portfolio: Seeks above-average total return over a market cycle
of three to five years by investing primarily in a diversified portfolio of high
yield securities, including corporate bonds and other fixed income securities
and derivatives. High yield securities are rated below investment grade and are
commonly referred to as "junk bonds." The Portfolio's average weighted maturity
will ordinarily exceed five years and will usually be between five and fifteen
years.
U.S. Real Estate Portfolio: Seeks above-average current income and
long-term capital appreciation by investing primarily in equity securities of
U.S. and non-U.S. companies principally engaged in the U.S. real estate
industry, including real estate investment trusts ("REITs").
Miller Anderson & Sherrerd, LLP serves as investment adviser to the High
Yield Portfolio. Morgan Stanley Dean Witter Investment Management Inc. serves as
investment adviser to the U.S. Real Estate Portfolio.
FIDELITY'S VARIABLE INSURANCE PRODUCTS FUND
The Portfolios of Fidelity's Variable Insurance Products Fund in which the
Separate Account invests are summarized below:
VIP Money Market Portfolio: Seeks as high a level of current income as is
consistent with the preservation of capital and liquidity.
VIP Overseas Portfolio: Seeks long-term growth of capital.
Fidelity Management & Research Company ("FMR") serves as the investment
adviser to Money Market Portfolio and Overseas Portfolio. Fidelity Investments
Money Management, Inc., a subsidiary of FMR, chooses investments for Money
Market Portfolio. Fidelity Management & Research (U.K.) Inc. ("FMR U.K."), in
London, England, Fidelity Management & Research (Far East) Inc. ("FMR Far
East"), in Tokyo, Japan, Fidelity International Investment Advisors, in
Pembroke, Bermuda, and Fidelity International Investment Advisors (U.K.) Limited
("FIIA(U.K.)L"), in London, England, serve as sub-advisers to Overseas
Portfolio.
FIDELITY'S VARIABLE INSURANCE PRODUCTS FUND II
The Portfolios of Fidelity's Variable Insurance Products Fund II in which
the Separate Account invests are summarized below:
VIP II Contrafund Portfolio: Seeks long-term capital appreciation.
VIP II Index 500 Portfolio: Seeks investment results that correspond to the
total return of common stocks publicly traded in the United States as
represented by the S&P 500.
FMR serves as the investment adviser to Contrafund Portfolio and Index 500
Portfolio. FMR U.K., FMR Far East, and FIIA(U.K.)L serve as sub-advisers to
Contrafund Portfolio. Bankers Trust Company, a wholly-owned subsidiary of
Bankers Trust New York Corporation, currently serves as the sub-adviser to Index
500 Portfolio.
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, accompanying this Prospectus,
and statements of additional information, available from Us upon request. (See
also "Charges and Deductions--Other Charges").
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 sole 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
12
<PAGE> 16
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 interests under
the Policy, the Separate Account may be: (a) operated as a management company
under the 1940 Act; (b) deregistered under that Act in the event such
registration is no longer required; or (c) combined with Our other separate
accounts. To the extent permitted by law, We may also transfer assets of the
Separate Account associated with the Policy 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.
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 and Cumulative
Adjusted Premiums Paid. (See "Charges and Deductions--Mortality and Expense Risk
Charge."). As a result, amounts at any given 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. Pursuant to state insurance law, We may defer payment of any surrender
proceeds, withdrawal amounts, or loan amounts from the Fixed Account for a
period up to six (6) months.
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 85 who supply satisfactory evidence of insurability.
Acceptance of an application is subject to Our underwriting requirements.
After underwriting is complete and the Policy is delivered to its Owner,
insurance coverage begins as of the Policy Date. (See "Premiums.") A
Survivorship Policy is owned
- jointly by the two Insureds
- by the surviving Insured, or
- by a different Owner named in the application or subsequently changed.
If the Policy is jointly owned, both Owners must join in the exercise of
rights under the Policy.
PREMIUMS
We must receive premiums at Our home office. (See "Distribution of
Policies.") Checks must be made payable to KILICO.
Planned Premiums. An Owner specifies a Planned Premium payment on the
application that provides for the payment of level premiums over a specified
period of time. However, the Owner is not required to pay Planned Premiums.
The minimum monthly premium is $50. Other minimums are: single premium
$5,000; annual $600; semi-annual $300; quarterly $150; and unscheduled $150. The
maximum amount of premium that may be paid at any
13
<PAGE> 17
time is the maximum permitted under tax law to qualify the Policy as a life
insurance contract. The amount, frequency and period of time over which an Owner
pays premiums may affect whether the Policy will be classified as a modified
endowment contract. Accordingly, variations from the Planned Premiums 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 duration of the Policy depends upon the Policy's Surrender
Value. Even if Planned Premiums are paid, the Policy will lapse any time
Surrender Value is insufficient to pay the current monthly deductions and a
grace period expires without sufficient payment. (See "The Policy--Policy
Termination, Lapse and Reinstatement.")
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. We may reject or limit any premium payment that is 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. We will not reject a premium payment which is required to keep a Policy in
force. (See "The Policy--Policy Termination, Lapse and Reinstatement.")
Certain charges are deducted from each premium payment. (See "Charges and
Deductions.") The remainder of the premium is Net Premium and is allocated as
described below under "The Policy--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. If this date is the 29th, 30th, or 31st of a month, the Policy Date will
be the first of the following month.
In the event We decline an application, We will refund Cash Value in the
Fidelity VIP Money Market Subaccount plus the total amount of monthly deductions
and deductions against premiums.
ALLOCATION OF PREMIUMS AND SEPARATE ACCOUNT VALUE
Allocation of Premiums. For Policies issued in those jurisdictions that
require a return of premium during the Free Look Period, including Policies
which replace an existing insurance policy issued in certain jurisdictions, the
initial Net Premium is allocated to the Fidelity VIP Money Market Subaccount.
Separate Account Value remains in the Fidelity VIP Money Market Subaccount until
the Trade Date. On the Trade Date, the Separate Account Value in the Fidelity
VIP Money Market Subaccount is allocated among the Subaccounts and the Fixed
Account as specified in the application. The initial Net Premium in other
jurisdictions will be allocated on the Issue Date to the Subaccounts and the
Fixed Account as specified in the application. Additional premium received will
be allocated as specified in the application or in later written instructions
received from the Owner. The minimum amount of any premium that may be allocated
to a Subaccount is $50. Cash Value may be allocated to a total of ten (10)
Subaccounts at any given time.
Separate Account Value will vary with the investment experience of the
chosen Subaccounts. The Owner bears the entire investment risk.
Transfers. After the Trade Date, if the initial Net Premium is allocated to
the Fidelity VIP Money Market Subaccount, or the Issue Date, if the initial Net
Premium has been allocated to the Subaccounts, Separate Account Value may be
transferred among the Subaccounts and into the Fixed Account. These transfers
are limited to one transfer every fifteen (15) 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 up to 30% of the Fixed Account Value may be made once each Policy
Year in the thirty day period following the end of a Policy Year.
Transfers are based on the Accumulation Unit Values next determined
following Our receipt of valid, complete transfer instructions. 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 the Owner's 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. We may
suspend, modify or terminate the transfer provision. 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, an Owner bears the risk of
loss in the event of a fraudulent telephone transfer.
14
<PAGE> 18
If an Owner authorizes a third party to transact transfers on the Owner's
behalf, We will reallocate 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. An Owner may elect to have transfers made
automatically among the Subaccounts on an annual, semi-annual, quarterly, or
monthly basis so that Cash Value is reallocated to match the percentage
allocations in the Owner's predefined premium allocation elections. Transfers
under this program are not subject to the $500 minimum transfer limitations. An
election to participate in the automatic asset reallocation program must be in
writing on Our form and returned to Our home office.
POLICY TERMINATION, LAPSE AND REINSTATEMENT
Termination and Lapse. All coverage under the Policy terminates when any
one of the following events occurs:
- the Owner requests termination of coverage;
- the Insured dies (last surviving Insured in the case of a Survivorship
Policy);
- the Policy matures; or
- a lapse occurs.
The Policy will lapse when the 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 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. However, the Owner may
voluntarily repay a portion of Debt to avoid lapse. The Owner 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 Surrender Value
to cover the monthly deductions, and it has not been surrendered for its
Surrender Value, it may be reinstated at any time within three years after the
date of lapse. Tax consequences may affect the decision to reinstate.
Reinstatement is subject to:
(1) receipt of evidence of insurability satisfactory to Us (if the Policy
is a Survivorship Policy, We must receive satisfactory evidence of
insurability for both Insureds or evidence for the last surviving
Insured and due proof of the first death prior to the date of lapse);
(2) payment of a minimum premium sufficient to cover monthly deductions for
the grace period and to keep the Policy in force three months; and
(3) 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.
15
<PAGE> 19
POLICY BENEFITS AND RIGHTS
DEATH BENEFIT
While the Policy is in force (see "Policy Termination, Lapse and
Reinstatement--Termination and Lapse," above), a Death Benefit will be paid upon
the death of the Insured (the last surviving Insured in the case of a
Survivorship Policy). The Death Benefit is based on the Death Benefit option,
the Death Benefit qualification test, the Specified Amount and the Table of
Death Benefit Factors (see Appendix A) applicable at the time of death. The
Death Benefit proceeds equal the Death Benefit minus any Debt and minus any
monthly deductions due during any grace period.
An Owner makes two elections in the application to determine the Death
Benefit. First, the Owner chooses one of two Death Benefit options--Option A or
Option B. Second, the Owner chooses the Death Benefit qualification test--the
cash value accumulation test or guideline premium test. The Death Benefit
qualification test is the method for qualifying the Policy as a life insurance
contract under federal tax law. If no Death Benefit option or qualification test
is designated, We assume that Option A under the guideline premium test,
described below, has been selected. Subject to certain restrictions, the Owner
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.
The Owner chooses the Specified Amount on the application. The Specified
Amount is stated in the Policy Specifications. The minimum Specified Amount
under an Individual Policy is $50,000 (or a lower amount based upon a single
premium payment and which satisfies the requirements of applicable tax law to
qualify the Policy as a life insurance contract). The minimum Specified Amount
under a Survivorship Policy is $1,000,000.
We reserve the right to reduce the Death Benefit arising from application
of the required Death Benefit Factors when We cannot obtain reinsurance
coverage. The reductions are effected by requiring partial withdrawals of Cash
Value. We will exercise this right according to administrative procedures
designed to insure it is used in a non-discriminatory manner. The partial
withdrawals may be taxable to the Owners. (See "Federal Tax Matters.")
Option A. For Policies issued under the cash value accumulation test,
described below, the Option A 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 or last surviving Insured dies) multiplied by the Death
Benefit Factor. For Policies issued under the guideline premium test, the Option
A 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 or
last surviving Insured dies) multiplied by the Death Benefit Factor. The Death
Benefit Factors under both tests vary according to the age(s) of the Insured(s).
For example, under the guideline premium test, the Death Benefit Factor is 250%
for an Insured at Age 40 or under, and it declines for older Insureds. In
setting the Death Benefit Factors, We seek to ensure that the Policy will
qualify for favorable federal income tax treatment. A table showing the Death
Benefit Factors under the guideline premium test 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 or last surviving Insured dies). For Policies issued under the
cash value accumulation test, the Death Benefit will not be less that the Cash
Value (determined as of the end of the Valuation Period during which the Insured
or last surviving Insured dies) multiplied by the Death Benefit Factor. For
Policies issued under the guideline premium test, the Death Benefit will not be
less than the Cash Value multiplied by the Death Benefit Factor. The Death
Benefit Factors are the same as those used in connection with Option A. The
Death Benefit under Option B always varies as Cash Value varies.
The Owner also chooses from two Death Benefit qualification tests available
under the Policy. Once selected, the Death Benefit qualification test cannot be
changed.
Cash Value Accumulation Test. Under the cash value accumulation test, the
Death Benefit must be sufficient so that the cash surrender value, as defined in
Section 7702 of the Internal Revenue Code, at no time exceeds the net single
premium required to fund the future Policy benefits. If Cash Value is at any
time greater than the net single premium at the Insured's age and sex for the
proposed Death Benefit, the Death Benefit will be increased automatically by
multiplying the Cash Value by the corridor percentage computed in compliance
with the Internal Revenue Code. The corridor percentages vary according to the
age, sex, and underwriting classification of the Insured(s). The resulting Death
Benefit at least equals the amount required for the Policy to be deemed life
insurance under Section 7702 of the Internal Revenue Code. The corridor
percentage is calculated using a four percent (4%) interest rate or the
contractually guaranteed interest rate, whichever is greater, and mortality
charges specified in the prevailing Commissioner's standard table as of the time
the Policy is issued.
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<PAGE> 20
Guideline Premium Test. The guideline premium test limits the amount of
premiums payable for an Insured of a particular age and sex. The test also
applies a prescribed corridor percentage to determine a minimum ratio of Death
Benefit to Cash Value.
There are two main differences between the guideline premium test and the
cash value accumulation test. First, the guideline premium test limits the
amount of premium that may be paid. These limits do not apply under the cash
value accumulation test. (However, any premium that would increase the net
amount at risk is subject to evidence of insurability satisfactory to us.)
Second, the factors that determine the minimum Death Benefit relative to Cash
Value are different. Required increases in the minimum Death Benefit due to
growth in Cash Value will generally be greater under the cash value accumulation
test than under the guideline premium test. Owners who desire to pay premiums in
excess of the guideline premium test limitations should select the cash value
accumulation test. Owners who do not desire to pay premiums in excess of the
guideline premium test limitations should consider the guideline premium test.
Applicants should consult a qualified tax adviser in making their Death Benefit
selections.
Examples of Options A and B. The following examples demonstrate the
determination of the Death Benefit under Options A and B for the cash value
accumulation test and the guideline premium test. The examples show an
Individual Policy and a Survivorship Policy, with the same Specified Amount and
Cash Value. The Individual Policy examples assume a male, non-tobacco Insured
who is Age 50 and Age 70, respectively, at the time of death and that there is
no outstanding Debt. The Survivorship Policy examples assume one male
non-tobacco Insured Age 55 and one female non-tobacco Insured Age 50, and one
male non-tobacco Insured Age 75 and one female non-tobacco Insured Age 70. The
Policy is in its tenth (10th) Policy Year with both Insureds having attained Age
55 at the time of death, and there is no outstanding Debt.
INDIVIDUAL POLICY--AGE 50
<TABLE>
<CAPTION>
CASH VALUE GUIDELINE
ACCUMULATION PREMIUM
TEST TEST
------------ ---------
<S> <C> <C>
Specified Amount............................................ $250,000 $250,000
Cash Value.................................................. $150,000 $150,000
Death Benefit (corridor) Factor............................. 262.251% 185%
Death Benefit Option A...................................... $393,377 $277,500
Death Benefit Option B...................................... $400,000 $400,000
</TABLE>
INDIVIDUAL POLICY--AGE 70
<TABLE>
<CAPTION>
CASH VALUE GUIDELINE
ACCUMULATION PREMIUM
TEST TEST
------------ ----------
<S> <C> <C>
Specified Amount.......................................... $1,000,000 $1,000,000
Cash Value................................................ $ 700,000 $ 700,000
Death Benefit (corridor) Factor........................... 151.548% 115%
Death Benefit Option A.................................... $1,060,836 $1,000,000
Death Benefit Option B.................................... $1,700,000 $1,700,000
</TABLE>
SURVIVORSHIP POLICY--AGES MALE 55 AND FEMALE 50
<TABLE>
<CAPTION>
CASH VALUE GUIDELINE
ACCUMULATION PREMIUM
TEST TEST
------------ ----------
<S> <C> <C>
Specified Amount.......................................... $1,000,000 $1,000,000
Cash Value................................................ $ 500,000 $ 500,000
Death Benefit (corridor) Factor........................... 336.783% 185%
Death Benefit Option A.................................... $1,683,915 $1,000,000
Death Benefit Option B.................................... $1,683,915 $1,500,000
</TABLE>
17
<PAGE> 21
SURVIVORSHIP POLICY--AGES MALE 75 AND FEMALE 70
<TABLE>
<CAPTION>
CASH VALUE GUIDELINE
ACCUMULATION PREMIUM
TEST TEST
------------ ----------
<S> <C> <C>
Specified Amount.......................................... $2,000,000 $2,000,000
Cash Value................................................ $1,500,000 $1,500,000
Death Benefit (corridor) Factor........................... 169.985% 115%
Death Benefit Option A.................................... $2,549,775 $2,000,000
Death Benefit Option B.................................... $3,500,000 $3,500,000
</TABLE>
The Cash Values shown in these examples are illustrative only and not based
on any specific assumed investment return.
All calculations of Death Benefit are made as of the end of the Valuation
Period during which the Insured or last surviving Insured dies. Death Benefit
proceeds may be paid to a Beneficiary in a lump sum or under the Policy's
settlement options.
Death Benefits ordinarily are paid within seven days after We receive all
required documentation. For Survivorship Policies, We require due proof of the
first death. Due proof of death is required within 60 days of death or as soon
thereafter as possible. Written proof of death must be in the form of a
certified copy of the death certificate, a physician's statement or any other
proof satisfactory to Us. Payments may be postponed in certain circumstances.
(See "General Provisions--Postponement of Payments").
CHANGES IN DEATH BENEFIT OPTION
After the first Policy Year, an Owner 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 Cash Value will then be
added to the new Specified Amount, and the Death Benefit then varies with Cash
Value.
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 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, 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, the net
amount at risk is the amount by which the Death Benefit exceeds Cash Value. (See
"Charges and Deductions--Cost of Insurance Charge.") If the Death Benefit does
not equal Cash Value times a Death Benefit Factor under either Option A or
Option 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
an Insured's Age.
CHANGES IN SPECIFIED AMOUNT
After the first Policy Year, an Owner 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
for an Individual Policy and $100,000 for a Survivorship Policy. Increases are
not allowed after an Insured attains Age 85. 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 an Owner's cost of insurance charge. Separate cost of
insurance rates apply to increases
18
<PAGE> 22
in Specified Amount. Conversely, a decrease in Specified Amount may decrease the
net amount at risk, thereby decreasing an Owner's cost of insurance charge.
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. Suicide and incontestability provisions apply from the
effective date of any 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 $50,000 for an Individual Policy or $1,000,000 for a
Survivorship Policy. 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 a decrease would cause the Policy to fail the
tax-related guideline premium limitations, resulting in the Policy's
termination or
- Our determination that the decrease would cause the Policy to fail the
tax-related guideline premium limitations because the payments from Cash
Value required to effect the decrease exceed 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 (or, if the Policy is a Survivorship Policy, the last
surviving Insured is living on the Policy Date anniversary nearest the last
surviving 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. See "Optional Insurance Benefits" at page 26
regarding extending the Maturity Date.
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
- Policy charges.
An Owner may make partial withdrawals of Cash Value or surrender the Policy
and receive the Policy's Surrender Value. (See "Surrender Privilege.") Cash
Value is not guaranteed.
Calculation of Cash Value. Cash Value is the total of
- Separate Account Value
- Fixed Account Value
- 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 Premium received and allocated to the Subaccount during
the current Valuation Period; plus
19
<PAGE> 23
(3) All 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 and
any other charges assessed to the Subaccount (see "Charges and
Deductions--Cost of Insurance Charge"); minus
(5) All amounts transferred from the Subaccount during the current
Valuation Period; minus
(6) All amounts withdrawn from the Subaccount during the current
Valuation Period; minus
(7) All 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 earns daily interest at a
rate equal to the Adjustable Loan Interest Rate reduced by not more than 1%.
(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%.
Accumulation Unit Value. Each Subaccount has its own Accumulation Unit
Value. When Net Premium 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 Fund. 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) and (4) from the result, where:
(1) is the net result of:
a. The net asset value per share of the investments 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 credit or charge for any taxes reserved for the current Valuation
Period which We determine has 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.")
(4) is the factor representing the Account Maintenance Fee (See "Charges
and Deductions--Policy and Separate Account Administration Charges.")
POLICY LOANS
After the first Policy Year, the Owner may borrow all or part of the
Policy's maximum loan amount. The maximum loan amount is 90% of Cash Value. The
amount of any new loan may not exceed the maximum loan amount less Debt on the
date a loan is granted. The minimum amount of a loan is $500. The Loan
ordinarily is paid within 7 days after We receive a written loan request,
although payments may be postponed under certain circumstances. (See
"Postponement of Payments" and "Federal Tax Matters.") If Debt equals or exceeds
Cash
20
<PAGE> 24
Value, the Policy terminates 61 days after We send notice to the Owner, unless
We receive payment sufficient to keep the Policy in force for three months.
On the date a loan is made, the loan amount is transferred from the
Separate Account and Fixed Account to the Loan Account. Unless the Owner directs
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.
Loan interest is charged at an adjustable rate We determine at the
beginning of each Policy Year. The Policy guarantees the loan interest rate will
not exceed the greater of the interest rate shown in the Policy and a published
monthly average, currently Moody's Corporate Bond Yield Average-Monthly Average
Corporates, as published by Moody's Investors Service, Inc., or any successor to
that service, for the calendar month that ends two months before We determine
the loan interest rate (the "Adjustable Loan Interest Rate"). 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 interest at a declared rate equal to
the Adjustable Loan Interest Rate reduced by not more than 1%. Such interest is
allocated to the Loan Account.
Loan Repayment. All or any portion of a loan may be repaid at any time. An
Owner 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 the Owner's 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 Surrender Value and,
therefore, the amount available to pay Policy charges. If Surrender Value on the
day preceding a Monthly Processing Date is less than the next monthly
deductions, We will notify the Owner. (See "General Provisions--Written Notices
and Requests.") The Policy will lapse and terminate without value, unless We
receive payment sufficient to keep the Policy in force for three months within
61 days of the date notice is sent. (See "The Policy--Policy Termination, 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 Policy
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 (or, if the Policy is a Survivorship Policy, at any
time before the earlier of the death of the last surviving Insured and the
Maturity Date), the Owner may surrender the Policy for its Surrender Value. To
surrender the Policy, the Owner must return the Policy to Us, along with a
written request. Surrender Value equals Cash Value minus Debt.
Partial Withdrawals. After the first Policy Year, an Owner may withdraw a
portion of Surrender Value. The minimum amount of each withdrawal is $500. A
withdrawal decreases Cash Value by the amount of the withdrawal and, if Death
Benefit Option A is in effect, reduces the Specified Amount by the amount of the
withdrawal.
FREE-LOOK PERIOD AND EXCHANGE RIGHTS
During the Free-Look Period, the Owner 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 the Policy is received by the Owner or
generally 30 days (45 days in North Carolina) after the Owner completes the
application for insurance, whichever is later. The amount of the refund also
depends on where the Policy is issued, but is
21
<PAGE> 25
generally the sum of the Cash Value in the Subaccounts and the Fixed Account. An
Owner seeking a refund should return the Policy to Us or to the agent who sold
the Policy.
In certain states, at any time during the first two years after the Issue
Date, the Owner may exchange the Policy for a non-variable permanent fixed
benefit life insurance policy then currently offered by KILICO or an affiliate.
Evidence of insurability is not required. The amount of the new policy may be,
at the election of the Owner, 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 state and local premium tax charge equal to the actual state
tax rate 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 2.18%, but the actual premium tax attributable
to a Policy may be more or less. This charge may be increased or decreased to
reflect any changes in state and local premium tax rates. In addition, before
Net Premium is allocated, We deduct a charge for federal taxes equal to 1% of
each premium payment to compensate Us for higher corporate income taxes under
the current Internal Revenue Code.
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, unless otherwise requested,
is allocated pro rata among the Subaccounts and the Fixed Account.
We deduct the cost of insurance by cancelling units 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
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 (or attained age in the case of increases in Specified Amount),
sex, rate class of the Insured(s) 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(s). 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. Separate costs
of insurance rates apply to any increases in Specified Amount.
Rate Class. The rate class of an Insured will affect the cost of insurance
rate. We currently place Insureds in premier and 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 premier and
preferred rates. (See "Charges and Deductions--Cost of Insurance Rate," above.)
MORTALITY AND EXPENSE RISK CHARGE
We deduct a daily charge from the Subaccounts for mortality and expense
risks We assume. 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. We may use any profits from this charge for legitimate corporate
purposes, including distribution.
The amount of the Mortality and Expense Risk Charge is determined based
upon "Cumulative Adjusted Premiums Paid". Cumulative Adjusted Premiums Paid
equals the cumulative amount of premiums paid, net of any partial withdrawals or
Policy Loans. The following table reflects the current Mortality and Expense
Risk Charge rates, expressed as an effective annual rate. These current rates
are subject to change, but the Mortality and Expense Risk Charge is guaranteed
never to exceed an effective annual rate of 0.90% of the average net assets of
the Subaccounts. The Mortality and Expense Risk Charge is assessed at a daily
rate equal to the effective annual
22
<PAGE> 26
rate divided by 365. The effects of simple compounding may cause charges to
slightly exceed the effective annual rate.
<TABLE>
<CAPTION>
CUMULATIVE ADJUSTED MORTALITY AND EXPENSE
PREMIUMS PAID RISK CHARGE
------------------- ---------------------
<S> <C>
Up to $100,000..................................... 0.65%
$100,001 - $250,000................................ 0.50%
$250,001 - $500,000................................ 0.40%
$500,001 and higher................................ 0.30%
</TABLE>
For the purpose of determining Cumulative Adjusted Premiums Paid, We
reserve the right to combine total Cumulative Adjusted Premiums Paid on one or
more Policies by a common grantor, Owner, sponsor (such as in split dollar
arrangements), or other group arrangement.
POLICY AND SEPARATE ACCOUNT ADMINISTRATION CHARGES
We perform or delegate all administrative functions for the Policies and
the Separate Account. Expenses of Policy administration include:
- those associated with preparing the Policies and confirmation
- maintaining Owner records
- other Owner servicing costs
Separate Account administration expenses include:
- preparing annual reports and statements
- maintaining Subaccount records
- filing fees
In addition, certain expenses, such as administrative personnel costs,
mailing costs, data processing costs, legal fees, accounting fees, and costs
associated with accounting, valuation, regulatory and reporting requirements,
are attributable to both the Policies and Separate Account maintenance. As
compensation for these administrative expenses, We deduct a Monthly
Administrative Charge and an Account Maintenance Charge.
Monthly Administrative Charge. We deduct a Monthly Maintenance Charge from
Cash Value on each Monthly Processing Date. The charge is $20 per month during
the first Policy Year and the first 12 months following an increase in Specified
Amount, and $5 per month at all other times.
Account Maintenance Charge. To further defray administrative costs, We
deduct a daily charge from the Subaccounts at an effective annual rate of 0.45%
of the average net assets of the Subaccounts. The charge is assessed at a daily
rate equal to the effective annual rate divided by 365. The effects of simple
compounding may cause fees to slightly exceed the effective annual rate.
Under an administrative services agreement, Life Insurance Solutions,
L.L.C. ("LIS") provides Us with certain services in connection with the Policy
and Separate Account management. LIS is a broker-dealer registered under the
Securities Exchange Act of 1934, as amended (the "1934 Act"), and is a member of
the National Association of Securities Dealers, Inc ("NASD"). LIS conducts its
securities business as LIS Securities. LIS receives a fee from Us based on the
services it renders. We are solely responsible for payment of the fee.
In addition, We and Our affiliates have other business relationships with
affiliated and unaffiliated service providers who may have business
relationships with prospective Policy purchasers. For example, We and Our
affiliates have certain significant financial arrangements with LIS for the
development and implementation of administrative and informational systems,
product design, and the development of marketing materials for the Policy and
other insurance and investment products. LIS may be called upon to perform other
services for Us and Our affiliates in connection with the sale of the Policy. We
and Our affiliates also may enter into other business and investment
arrangements with LIS.
OTHER CHARGES
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.")
23
<PAGE> 27
Charges Against the Funds. Under the 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. Investment advisory fees and expenses
differ with respect to each of the Portfolios. (See "Summary--Fees and Expenses"
and "The Funds.")
We may receive compensation from the investment advisers of the Funds for
services related to the Funds. This compensation will be consistent with the
services rendered or the cost savings resulting from the arrangement.
Compensation may differ among Funds. For more information concerning investment
advisory fees and other charges against the Portfolios, see the prospectuses for
the Funds accompanying this Prospectus and the statements of additional
information of the Funds available from Us upon request.
GENERAL PROVISIONS
SETTLEMENT OPTIONS
The Owner, or Beneficiary at the death of the Insured (or last surviving
Insured) if no election by the Owner 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 payment, 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 the Death Benefit or the 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--Income For Specified Period. We pay income for the period and
payment mode elected. The period elected must be as least 5 years but not more
than 30 years.
Option 2--Life Income. 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 Income 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 Income. 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 the time this
option is elected. Payments terminate automatically and immediately upon the
death of the surviving payee without regard to the number or total amount of
payments received.
Our consent is necessary for 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 (or last surviving 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.
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Transfers may also be postponed under these circumstances.
Death Benefit payments are generally not subject to deferral. However, We
may defer payment of surrender proceeds, withdrawal amounts, or loan amounts
from the Fixed Account, for up to six months, unless otherwise required by law.
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, the application, and any supplemental
application(s) constitute the entire contract between Us and the Owner. All
statements made by an Owner or Insured or contained in the application and any
supplemental application(s) 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 an 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 or any supplemental application(s). However, a
Policy will be incontestable after it has been in force during the lifetime of
the Insured (or, if the Policy is a Survivorship Policy, during the lifetimes of
both Insureds) for two years from the Issue Date. A new two-year contestability
period will apply to increases in Specified Amount and to reinstatements,
beginning with the effective date of the increase or reinstatement.
SUICIDE
Suicide by an 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. If the Policy is a Survivorship
Policy and there is a surviving Insured, We will make a new Policy available to
the surviving Insured, without evidence of insurability. The new Policy will
have the same amount of insurance coverage, issue age, Policy Date, and rate
class as the original Policy when it was issued. A new two-year period will
apply to increases in Specified Amount and to reinstatements, beginning with the
effective date of the increase or reinstatement.
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, the rights of the Owner and Beneficiary are subject to the rights of
the assignee of record. An assignment of coverage may have tax consequences.
(See "Federal Tax Matters.")
NONPARTICIPATING
The Policy does not pay dividends. It does not participate in any of
KILICO's surplus or earnings.
OWNER AND BENEFICIARY
Unless otherwise provided in the application or subsequently changed, the
Insured is the Policy Owner. The Owner has exclusive right to cancel or amend
the Policy by agreement with Us and may exercise every option or right conferred
by the Policy, including the right of assignment.
The Owner designates one or more primary and secondary Beneficiaries in the
application. We rely on the latest filed change of Beneficiary. Policy proceeds
are paid in equal shares to the survivors in the appropriate
25
<PAGE> 29
beneficiary class, unless otherwise requested by the Owner. If the Insured dies
and, no designated Beneficiary is alive at that time, We will pay the Insured's
estate. If the Policy is a Survivorship Policy and no Beneficiary is living when
the last surviving Insured dies, We will pay the estate of the last surviving
Insured. If a Beneficiary dies within ten days after the Insured dies, We will
pay the proceeds of the Policy as if the Insured had survived the Beneficiary.
The interest of any Beneficiary may be subject to that of an assignee.
In order to change the Owner or a designated Beneficiary, the Owner must
sign Our form. Any change must not be prohibited by the terms of an existing
assignment, Beneficiary designation or other restriction. We reserve the right
to require the return of the Policy for endorsement. The change is effective
when the Owner signs the form, but We will not be liable for payments made or
actions taken before We receive the signed form. A change of ownership may have
tax consequences. (See "Federal Tax Matters.")
RECORDS AND REPORTS
We keep the Separate Account records. We send Policy Owners, at their last
known address of record, an annual report showing:
- Death Benefit
- Accumulation Unit Values
- Cash Value
- Surrender Value
- additional premium payments
- partial withdrawals
- transfers
- Policy Loans and repayments
- Policy charges
Confirmations and acknowledgments of various transactions are also sent to
Owners. We also send annual and semi-annual Fund reports.
WRITTEN NOTICES AND REQUESTS
Send written notices or requests to our home office at 1 Kemper Drive, Long
Grove, Illinois 60049. Please include the Policy number and the full name(s) of
the Insured(s). We send notices to an Owner's 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:
- continuation of the Policy with an extended Maturity Date
- acceleration of a portion of the Death Benefit due to the Insured's
terminal illness
The cost of these benefits, if any, is added to the monthly deduction.
Currently, the Maturity Date may be extended at no cost. Certain restrictions
and administrative fees may apply. These benefits, restrictions and fees 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 or
the Fidelity VIP Money Market Subaccount ("DCA Account") is automatically
transferred monthly to other Subaccounts and the Fixed Account. An Owner may
enroll any time by completing Our Dollar Cost Averaging form. Transfers are made
on the 10(th) of the month. We must receive the enrollment form at least five
(5) business days before the transfer date.
Transfers commence on the first transfer date following the Trade Date if
the initial Net Premium has been allocated to the Fidelity VIP Money Market
Subaccount. In all other cases, transfers will commence on the first Transfer
Date following the Issue Date, subject to the requirements stated above. The
minimum transfer amount is $500 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
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<PAGE> 30
- Cash Value attributable to the DCA Subaccount is insufficient to complete
the next transfer
- We receive the Owner's written termination at least five (5) business
days before the next transfer date
- the Policy is surrendered
We will give 30 days notice if We amend the Dollar Cost Averaging program. We
may terminate the program at any time.
An Owner may change Dollar Cost Averaging instructions by completing Our
enrollment form. We must receive the enrollment form at least five (5) business
days (ten (10) business days for Fixed Account transfers) before the next
transfer date.
To participate in Dollar Cost Averaging, an Owner may have Cash Value in
the Fixed Account and no more than eight (8) non-DCA Subaccounts.
SYSTEMATIC WITHDRAWAL PLAN
We offer a Systematic Withdrawal Plan ("SWP") allowing Owners to
preauthorize periodic withdrawals after the first Policy Year. Owners instruct
Us to withdraw selected amounts from the Fixed Account or up to two (2)
Subaccounts, on a monthly, quarterly, semi-annual or annual basis. The Owner's
periodic payment must be at least $500. These periodic payments are partial
withdrawals. (See "Policy Benefits and Rights--Surrender Privileges.") 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 the Owner's representative or Us. We will give 30 days notice if
We amend the SWP. The SWP may be terminated at any time by the Owner or Us.
DISTRIBUTION OF POLICIES
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 Policy is distributed
through the principal underwriter, LIS Securities ("LIS"). We are affiliated
with LIS through Zurich's ownership. Pursuant to a Distribution Agreement with
Us, LIS may enter into Selling Group Agreements with broker-dealers that are
registered under the 1934 Act and members of the NASD. LIS is engaged in the
distribution of other variable life policies and annuities.
The Policy is available for distribution through entities or persons that
provide separate trust or consultative estate and business planning services on
a fee basis. The fees are not a part of the Policy and We are not responsible
for payment of the fees. Under special circumstances with Our consent, the
Policy may be distributed through entities or persons that do not provide such
additional services.
While no direct sales charge is imposed, We indirectly pay, through LIS, up
to 5% of premiums paid as compensation to selected broker-dealers. Part of the
compensation is used to cover the broker-dealer's costs including those
associated with sales, training and other marketing support, record keeping,
compliance oversight, and general office related overhead. Our distribution
expenses, such as commissions and marketing allowances, printing, and preparing
sales literature, may be covered from sources such as profits from the Mortality
and Expense Risk Charge, administrative, cost of insurance, and other charges.
GROUP OR SPONSORED ARRANGEMENTS
Policies may be purchased under group or sponsored arrangements or on an
individual basis. A "group arrangement" includes a program under which a
trustee, employer or similar entity purchases Individual Policies covering a
group of individuals on a group basis. Examples of these arrangements are
employer-sponsored benefit plans and deferred compensation plans. A "sponsored
arrangement" includes a program under which an employer permits group
solicitation of its employees or an association permits group solicitation of
its members for individual Policy purchases.
We may reduce the following types of charges for Policies issued under
group or sponsored arrangements:
- the cost of insurance charge
- Mortality and Expense Risk Charge
- account maintenance charge
- monthly administrative charge
We may also issue Policies under group or sponsored arrangements on a
"non-medical" or guaranteed issue basis. Due to the underwriting criteria
established for Policies issued on a non-medical, guaranteed issue basis, actual
monthly cost of insurance charges may be higher than the current cost of
insurance charges under otherwise
27
<PAGE> 31
identical Policies that are medically underwritten. We may also specify
different minimum initial premiums for Policies issued in connection with group
or sponsored arrangements.
The amount of any reduction, the charges to be reduced, the elimination or
modification of underwriting requirements, and the criteria for applying a
reduction or modification will generally reflect the reduced sales and
administrative effort, costs and differing mortality experience appropriate to
the circumstances giving rise to the reduction or modification. We will reduce
charges in accordance with Our practices in effect when the Policy is issued. We
will eliminate or modify underwriting requirements in accordance with Our
underwriting procedures in effect when the Policy is issued. Reductions and
modifications will not be made where prohibited by law and will not be unfairly
discriminatory against any person.
FEDERAL TAX MATTERS
INTRODUCTION
This discussion of the federal income tax treatment of the Policy is not
exhaustive, does not purport to 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 (the "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 judicial decisions.
This discussion does not address state or local 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 Values. 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.
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 Values that can accumulate relative to the Death Benefit.
We believe that the Policy meets this definition. We reserve the right to refund
premiums, 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 the
Owner, 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 the Owner is 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 the Separate
Account. Income and gains from the Separate Account would then be includible in
the Policy owners' gross income. The 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. As of the date of
this Prospectus, no investor control guidance is available.
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<PAGE> 32
We 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 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 the Policy owner unless amounts are received (or are
deemed to be received) from the Policy prior to the Insured's death. If the
Policy is surrendered, the excess of Cash Value over the "investment in the
contract" is includible in the owner's income. The "investment in the contract"
generally is premium payments minus non-taxable distributions. Distributions may
be taxable to the owner if the Policy is considered a "modified endowment
contract" ("MEC").
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 premiums 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 the Owner if the Policy remains in force. However, when the
interest rate credited to the Loan Account is the same as the interest rate
charged for the loan, some or all of the loan proceeds may be includible in
income. 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.
Interest on an individual's Policy loans and interest on any loans of a
Policy owner that is a business entity are subject to possible disallowance
under complex rules. Consult a tax adviser on these issues.
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 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. The Owner 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 if Cash Value
exceeds the investment in the contract. A Policy loan is treated as a withdrawal
for tax purposes.
If the Policy owner assigns or pledges Cash Value under a MEC (or agrees 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
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<PAGE> 33
of the assignment, pledge, or loan (including its release or repayment). Before
assigning, pledging, or requesting a loan under a MEC, an Owner should consult a
qualified 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 the owner attains age 59 1/2 (2)
because the owner has become disabled (as defined in the Code), or (3) as
substantially equal periodic payments over the life or life expectancy of the
owner (or the joint lives or life expectancies of the owner and his or her
beneficiary.)
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 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.
SURVIVORSHIP POLICIES. Although We believe that the Policy, when issued as
a Survivorship Policy, complies the statutory definition of life insurance, the
manner in which the definition should be applied to Survivorship Policies is not
directly addressed by the Code. In the absence of final regulations or other
guidance, it is uncertain whether a Survivorship Policy will meet the statutory
definition of life insurance. Prospective owners considering the purchase of a
Survivorship Policy should consult a qualified tax adviser.
Where the Owner is the last surviving Insured, the Death Benefit is
generally includible in the Owner's estate on his or her death for federal
estate tax purposes. If the Owner dies and was not the last surviving Insured,
the fair market value of the Policy is included in the Owner's estate. In
general, the Policy's value is includible in the last surviving Insured's estate
if he or she had no incidents of ownership at death and had not given up
ownership within three years before death.
TREATMENT OF MATURITY BENEFITS AND EXTENSION OF MATURITY DATE. At the
Maturity Date, the Surrender Value is paid to the Owner. This payment is taxable
in the same manner as a Policy Surrender. If the Owner elects an extended
Maturity Date rider, the IRS could treat the Owner as being in constructive
receipt of the Cash Value when the Insured reaches age 100. If so, an amount
equal to the excess of the Cash Value over the investment in the contract could
be includible in the Owner's income at that time.
ACTIONS TO ENSURE COMPLIANCE WITH THE TAX LAW. We reserve the right to
refund premiums which exceed those permitted under the definition of life
insurance. We also reserve the right to increase the Death Benefit (which may
result in higher Policy charges) or to take any other action We deem necessary
to ensure the Policy's compliance with the definition of life insurance.
OTHER CONSIDERATIONS. Changing the Owner, exchanging the Policy, changing
from one Death Benefit option to another, and other changes under the Policy may
have tax consequences (other than those discussed herein) depending on the
circumstances of such change or withdrawal. Federal estate and state and local
estate, inheritance and other tax consequences of ownership or receipt of Policy
proceeds depend on the circumstances of each Owner or Beneficiary.
FEDERAL INCOME TAX WITHHOLDING
We withhold and send to the federal government a part of the taxable
portion of withdrawals unless the Owner notifies Us in writing at the time of
withdrawal that he or she elects no withholding. The Owner is always responsible
for the payment of any taxes and early distribution penalties that may be due on
the amounts received. The Owner may also be required to pay penalties under the
estimated tax rules, if the Owner's withholding and estimated tax payments are
insufficient to satisfy the Owner's 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 described in this Prospectus 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.
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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. An Owner will receive proxy material, reports, and other materials
relating to the appropriate Portfolio of the Funds.
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 of the Fund. 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 of a Fund 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 may 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 1 of
each year covering Our operations and reporting on Our financial condition as of
December 31 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.
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.
<TABLE>
<CAPTION>
NAME AND AGE
POSITION WITH KILICO
YEAR OF ELECTION OTHER BUSINESS EXPERIENCE DURING PAST 5 YEARS OR MORE
-------------------- -----------------------------------------------------
<S> <C>
John B. Scott (54) Chief Executive Officer, President and Director of Federal
Chief Executive Officer since Kemper Life Assurance Company (FKLA) and Fidelity Life
February 1992. President since Association (FLA) since 1988. Chief Executive Officer,
November 1993. Director since 1992. President and Director of Zurich Life Insurance Company of
America (ZLICA) and Zurich Direct, Inc. (ZD) since March
1996. Chairman of the Board and Director of Investors
Brokerage Services, Inc. (IBS) and Investors Brokerage
Services Insurance Agency, Inc. (IBSIA) since 1993. Chairman
of the Board of FKLA and FLA from April 1988 to January
1996. Chairman of the Board of KILICO from February 1992 to
January 1996. Executive Vice President and Director of
Kemper Corporation (Kemper) since January 1994 and March
1996, respectively. Executive Vice President of Kemper
Financial Companies, Inc. from January 1994 to January 1996
and Director from 1992 to January 1996.
</TABLE>
31
<PAGE> 35
<TABLE>
<CAPTION>
NAME AND AGE
POSITION WITH KILICO
YEAR OF ELECTION OTHER BUSINESS EXPERIENCE DURING PAST 5 YEARS OR MORE
-------------------- -----------------------------------------------------
<S> <C>
Eliane C. Frye (51) Executive Vice President of FKLA and FLA since 1995.
Executive Vice President since 1995. Executive Vice President of ZLICA and ZD since March 1996.
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 (47) 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 since March
1996. Senior Vice President and Chief Financial Officer of
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.
James C. Harkensee (40) Senior Vice President of FKLA and FLA since January 1996.
Senior Vice President since January Senior Vice President of ZLICA since 1995. Senior Vice
1996. President of ZD since 1995. Director of ZD from April 1993
to March 1997 and since March 1998. Vice President of ZLICA
from 1992 to 1995. Chief Actuary of ZLICA from 1991 to 1994.
Assistant Vice President of ZLICA from 1990 to 1992. Vice
President of ZD from 1994 to 1995.
James E. Hohmann (43) 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.
Consultant/Principal (Partner) of Tillinghast-Towers Perrin
from November 1986 to January 1991.
Edward K. Loughridge (44) 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.
Debra P. Rezabek (43) 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 since March 1996. Senior Vice
President, General Counsel and Corporate Secretary of 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. Assistant General Counsel of
FKLA and FLA from 1988 to 1992. General Counsel and
Assistant Secretary of KILICO, FKLA and FLA from 1992 to
1996. Assistant Secretary of Kemper since January 1996.
Kenneth M. Sapp (53) Senior Vice President of FKLA, FLA and ZLICA since January
Senior Vice President since January 1998. Director of IBS since May 1998. Director of IBSIA
1998. since September 1998. Vice President--Aetna Life Brokerage
of Aetna Life & Annuity Company from February 1992 to
January 1998.
</TABLE>
32
<PAGE> 36
<TABLE>
<CAPTION>
NAME AND AGE
POSITION WITH KILICO
YEAR OF ELECTION OTHER BUSINESS EXPERIENCE DURING PAST 5 YEARS OR MORE
-------------------- -----------------------------------------------------
<S> <C>
George Vlaisavljevich (56) 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.
Loren J. Alter (60) Director of FKLA, FLA and Scudder Kemper Investments, Inc.
Director since January 1996. (SKI) since January 1996. Director of ZLICA since May 1979.
Executive Vice President and Chief Financial Officer of
Zurich U.S. since 1979. President, Chief Executive Officer
and Director of Kemper since January 1996.
William H. Bolinder (55) Chairman of the Board and Director of FKLA and FLA since
Chairman of the Board and Director January 1996. Chairman of the Board of ZLICA and ZD since
since January 1996. March 1995. 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 since 1986. Manager of Zurich Insurance
Company, U.S. Branch from 1986 to 1998. Underwriter for
Zurich American Lloyds since 1986.
David A. Bowers (52) 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 (54) 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.
</TABLE>
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 Debra P. Rezabek, Our Senior Vice
President, General Counsel, and Corporate Secretary. 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.
33
<PAGE> 37
YEAR 2000 COMPLIANCE
Many existing computer programs were originally designed without
considering the impact of the year 2000 and currently use only two digits to
identify the year in the date field. This issue affects nearly all companies and
organizations and could cause computer applications and systems to fail or
create erroneous results for any transaction with a date of January 1, 2000, or
later.
Many companies must undertake major projects to address the year 2000
issue. Each company's costs and uncertainties will depend on a number of
factors, including its software and hardware, and the nature of the industry.
Companies must also coordinate with other entities with which they
electronically interact, including suppliers, customers, creditors and other
financial services institutions.
If a company does not successfully address its year 2000 issues, it could
face material adverse consequences in the form of lawsuits against the company,
lost business, erroneous results and substantial operating problems after
January 1, 2000.
We have taken substantial steps over the last several years to ensure that
Our systems will be compliant for the year 2000. Such steps have included the
replacement of older systems with new systems which are already compliant. In
1996, We replaced Our investment accounting system, and, in 1997, We replaced
Our general ledger and accounts payable system. We have also ensured that new
systems developed to support new product introductions in 1997, 1998 and beyond
are already year 2000 compliant. Data processing expenses related solely to
bringing Our systems in compliance with the year 2000 amounted to $1.3 million
in 1998. We anticipate that it will cost an additional $662 thousand to bring
all remaining systems into compliance.
Our policy administration systems have been completely renovated to be year
2000 compliant and are currently running in a test environment. Approximately 75
percent of Our ancillary systems confirmed to be year 2000 compliant were in
production at December 31, 1998. We anticipate that all such systems will be in
production at April 30, 1999 or sooner. Testing procedures have confirmed the
performance, functionality, and integration of converted or replaced platforms,
applications, databases, utilities, and interfaces in an operational
environment. Our testing and verification for year 2000 compliance has
encompassed the following:
- mainframe computing systems
- mainframe hardware and systems software
- PC/LAN computing systems
- PC/LAN hardware and systems software
- end-user computing systems
- interfaces to and from third parties, and
- other miscellaneous electronic non-information systems
We have also taken steps requiring all other entities with which We
electronically interact, including suppliers and other financial services
institutions, to attest to Us in writing that their systems are year 2000
compliant.
If We do not successfully address Our year 2000 issues, We could face
material adverse consequences from lawsuits, lost business, erroneous results
and substantial operating problems after January 1, 2000. Although We fully
expect to be year 2000 compliant by the close of 1999, We are currently
developing contingency plans to handle the most reasonably likely worst case
scenarios. These contingency plans are scheduled for completion in the third
quarter of 1999.
EXPERTS
The consolidated balance sheets of KILICO as of December 31, 1998 and 1997
and the related consolidated statements of operations, comprehensive income,
stockholder's equity, and cash flows for the years ended December 31, 1998 and
1997 have been included herein and in the registration statement in reliance
upon the report of PricewaterhouseCoopers, LLP, independent public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing. The consolidated statements of operations,
comprehensive income, stockholder's equity, and cash flows of KILICO and
subsidiaries for the period from January 4, 1996 to December 31, 1996 and the
financial statement schedules as of December 31, 1996 have been included herein
and in the registration statement in reliance upon the report of KPMG LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
34
<PAGE> 38
Actuarial matters included in this Prospectus have been examined by Steven
D. Powell, 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 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.
FINANCIAL STATEMENTS
No financial statements are included for the Separate Account. As of
December 31, 1998, the end of KILICO's most recent fiscal year, the Separate
Account had not yet commenced operations, had no assets or liabilities, and had
received no income or incurred any expense. Our included financial statements
should be considered only as bearing upon Our ability to meet Our contractual
obligations under the Policy. The investment experience of the Separate Account
does not affect our financial statements.
CHANGE OF ACCOUNTANTS
On September 12, 1997, KILICO appointed the accounting firm of
PricewaterhouseCoopers LLP ("PricewaterhouseCoopers"), formerly Coopers &
Lybrand L.L.P., as independent accountants for the year ended December 31, 1997
to replace KPMG LLP effective with such appointment. Our Board of Directors
approved the selection of PricewaterhouseCoopers as the new independent
accountants. Management had not consulted with PricewaterhouseCoopers on any
accounting, auditing or reporting matter, prior to that time.
During the fiscal year ended December 31, 1996, there were no disagreements
with KPMG LLP on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure or any reportable events.
KPMG LLP's report on the financial statements for 1996 contained no adverse
opinion or disclaimer of opinion and was not qualified or modified as to
uncertainty, audit scope or accounting principles.
There were no disagreements with PricewaterhouseCoopers on accounting or
financial disclosures for the years ended December 31, 1998 or 1997.
35
<PAGE> 39
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors and Stockholder of
Kemper Investors Life Insurance Company:
In our opinion, the accompanying consolidated balance sheets as of December
31, 1998 and 1997 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, 1998 and 1997, and the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles. 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 generally accepted
auditing standards 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. The financial
statements of the Company for the period from January 4, 1996 to December 31,
1996 were audited by other independent accountants whose report, dated March 21,
1997, expressed an unqualified opinion on those statements.
PricewaterhouseCoopers LLP
Chicago, Illinois
March 12, 1999
36
<PAGE> 40
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors and Stockholder
Kemper Investors Life Insurance Company:
We have audited the accompanying consolidated statements of operations,
comprehensive income, stockholder's equity, and cash flows of Kemper Investors
Life Insurance Company and subsidiaries for the period from January 4, 1996 to
December 31, 1996. In connection with our audit of the consolidated financial
statements, we also have audited the financial statement schedules as of
December 31, 1996 as listed in the accompanying index. These financial statement
schedules are incorporated by reference to a previously filed Form 10-K. These
consolidated financial statements and the financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and schedules based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the aforementioned consolidated financial statements
present fairly, in all material respects, the results of operations and the cash
flows of Kemper Investors Life Insurance Company and subsidiaries for the period
from January 4, 1996 to December 31, 1996, in conformity with generally accepted
accounting principles. Also, in our opinion, the aforementioned supplementary
financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.
KPMG LLP
Chicago, Illinois
March 21, 1997
37
<PAGE> 41
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Fixed maturities, available for sale, at fair value
(amortized cost: December 31, 1998, $3,421,535; December
31, 1997, $3,644,075)..................................... $ 3,482,820 $ 3,668,643
Trading account securities at fair value (amortized cost:
December 31, 1998, $99,095)............................... 101,781 --
Short-term investments...................................... 58,334 236,057
Joint venture mortgage loans................................ 65,806 72,663
Third-party mortgage loans.................................. 76,520 102,974
Other real estate-related investments....................... 22,049 44,409
Policy loans................................................ 271,540 282,439
Equity securities........................................... 66,854 24,839
Other invested assets....................................... 23,645 20,820
----------- -----------
Total investments................................. 4,169,349 4,452,844
Cash........................................................ 13,486 23,868
Accrued investment income................................... 124,213 117,789
Goodwill.................................................... 216,651 229,393
Value of business acquired.................................. 118,850 138,482
Deferred insurance acquisition costs........................ 91,543 59,459
Deferred income taxes....................................... 35,059 39,993
Reinsurance recoverable..................................... 344,837 382,609
Receivable on sales of securities........................... 3,500 20,076
Other assets and receivables................................ 23,029 3,187
Assets held in separate accounts............................ 7,099,204 5,121,950
----------- -----------
Total assets...................................... $12,239,721 $10,589,650
=========== ===========
LIABILITIES
Future policy benefits...................................... $ 3,906,391 $ 4,239,480
Benefits and funds payable.................................. 318,369 150,524
Other accounts payable and liabilities...................... 61,898 212,133
Liabilities related to separate accounts.................... 7,099,204 5,121,950
----------- -----------
Total liabilities................................. 11,385,862 9,724,087
----------- -----------
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.................................. 804,347 806,538
Accumulated other comprehensive income...................... 32,975 12,637
Retained earnings........................................... 14,037 43,888
----------- -----------
Total stockholder's equity........................ 853,859 865,563
----------- -----------
Total liabilities and stockholder's equity........ $12,239,721 $10,589,650
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
38
<PAGE> 42
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
REVENUE
Net investment income....................................... $273,512 $296,195 $299,688
Realized investment gains................................... 51,868 10,546 13,602
Premium income.............................................. 22,346 22,239 7,822
Separate account fees and charges........................... 61,982 85,413 25,309
Other income................................................ 10,031 11,087 9,786
-------- -------- --------
Total revenue..................................... 419,739 425,480 356,207
-------- -------- --------
BENEFITS AND EXPENSES
Interest credited to policyholders.......................... 176,906 199,782 223,094
Claims incurred and other policyholder benefits............. 28,029 28,372 14,255
Taxes, licenses and fees.................................... 30,292 52,608 2,173
Commissions................................................. 39,046 32,602 25,962
Operating expenses.......................................... 44,575 36,837 24,678
Deferral of insurance acquisition costs..................... (46,565) (38,177) (27,820)
Amortization of insurance acquisition costs................. 12,082 3,204 2,316
Amortization of value of business acquired.................. 17,677 24,948 21,530
Amortization of goodwill.................................... 12,744 15,295 10,195
-------- -------- --------
Total benefits and expenses....................... 314,786 355,471 296,383
-------- -------- --------
Income before income tax expense............................ 104,953 70,009 59,824
Income tax expense.......................................... 39,804 31,292 25,403
-------- -------- --------
Net income........................................ $ 65,149 $ 38,717 $ 34,421
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
39
<PAGE> 43
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
NET INCOME.................................................. $ 65,149 $ 38,717 $ 34,421
-------- -------- --------
OTHER COMPREHENSIVE INCOME (LOSS), BEFORE TAX:
Unrealized holding gains (losses) on investments arising
during period:
Unrealized holdings gains (losses) on investments...... 25,372 60,802 (84,036)
Adjustment to value of business acquired............... (9,332) (28,562) 16,735
Adjustment to deferred insurance acquisition costs..... (2,862) (2,680) 1,307
-------- -------- --------
Total unrealized holding gains (losses) on
investments arising during period............... 13,178 29,560 (65,994)
-------- -------- --------
Less reclassification adjustments for items included in
net income:
Adjustment for (gains) losses included in realized
investment gains..................................... 6,794 (9,016) 3,963
Adjustment for amortization of premium on fixed
maturities included in net investment income......... (17,064) (17,866) (26,036)
Adjustment for (gains) losses included in amortization
of value of business acquired........................ (7,378) (2,353) (4,212)
Adjustment for (gains) losses included in amortization
of insurance acquisition costs....................... (463) (355) --
-------- -------- --------
Total reclassification adjustments for items
included in net income.......................... (18,111) (29,590) (26,285)
-------- -------- --------
Other comprehensive income (loss), before related income tax
expense (benefit) 31,289 59,150 (39,709)
Related income tax expense (benefit)........................ 10,952 (985) 7,789
-------- -------- --------
Other comprehensive income (loss), net of tax..... 20,337 60,135 (47,498)
-------- -------- --------
Comprehensive income (loss)....................... $ 85,486 $ 98,852 $(13,077)
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
40
<PAGE> 44
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(in thousands)
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CAPITAL STOCK, beginning and end of period.................. $ 2,500 $ 2,500 $ 2,500
-------- -------- --------
ADDITIONAL PAID-IN CAPITAL, beginning of period............. 806,538 761,538 743,104
Capital contributions from parent........................... 4,261 45,000 18,434
Adjustment to prior period capital contribution from
parent.................................................... (6,452) -- --
-------- -------- --------
End of period..................................... 804,347 806,538 761,538
-------- -------- --------
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS), beginning of
period.................................................... 12,637 (47,498) --
Other comprehensive income (loss), net of tax............... 20,338 60,135 (47,498)
-------- -------- --------
End of period..................................... 32,975 12,637 (47,498)
-------- -------- --------
RETAINED EARNINGS, beginning of period...................... 43,888 34,421 --
Net income.................................................. 65,149 38,717 34,421
Dividends to parent......................................... (95,000) (29,250) --
-------- -------- --------
End of period..................................... 14,037 43,888 34,421
-------- -------- --------
Total stockholder's equity........................ $853,859 $865,563 $750,961
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
41
<PAGE> 45
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.......................................... $ 65,149 $ 38,717 $ 34,421
Reconcilement of net income to net cash provided:
Realized investment gains........................ (51,868) (10,546) (13,602)
Net change in trading account securities......... (6,727) -- --
Interest credited and other charges.............. 173,958 198,206 230,298
Deferred insurance acquisition costs............. (34,483) (34,973) (25,504)
Amortization of value of business acquired....... 17,677 24,948 21,530
Amortization of goodwill......................... 12,744 15,295 10,195
Amortization of discount and premium on
investments.................................... 17,353 17,866 25,743
Deferred income taxes............................ (12,469) (99,370) (897)
Net change in current federal income taxes....... (73,162) 97,386 108,806
Benefits and premium taxes due related to
separate account bank-owned life insurance..... 123,884 180,546 --
Other, net....................................... (41,477) 17,168 (22,283)
----------- --------- -----------
Net cash provided from operating
activities................................ 190,579 445,243 368,707
----------- --------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash from investments sold or matured:
Fixed maturities held to maturity................ 491,699 229,208 264,383
Fixed maturities sold prior to maturity.......... 882,596 633,872 891,995
Equity securities................................ 107,598 -- --
Mortgage loans, policy loans and other invested
assets......................................... 180,316 131,866 168,727
Cost of investments purchased or loans originated:
Fixed maturities................................. (1,319,119) (606,028) (1,369,091)
Equity securities................................ (83,303) -- --
Mortgage loans, policy loans and other invested
assets......................................... (66,331) (76,350) (119,044)
Short-term investments, net......................... 177,723 (164,361) 300,819
Net change in receivable and payable for securities
transactions..................................... (677) 29,746 (31,667)
Net change in other assets.......................... -- 244 115
----------- --------- -----------
Net cash provided by investing activities... 370,502 178,197 106,237
----------- --------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Policyholder account balances:
Deposits......................................... 180,124 145,687 141,159
Withdrawals...................................... (649,400) (745,510) (700,084)
Capital contributions from parent................... 4,261 45,000 18,434
Dividends to parent................................. (95,000) (29,250) --
Other............................................... (11,448) (18,275) 42,512
----------- --------- -----------
Net cash used in financing activities....... (571,463) (602,348) (497,979)
----------- --------- -----------
Net increase (decrease) in cash........ (10,382) 21,092 (23,035)
CASH, beginning of period............................. 23,868 2,776 25,811
----------- --------- -----------
CASH, end of period................................... $ 13,486 $ 23,868 $ 2,776
=========== ========= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
42
<PAGE> 46
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"). Effective January 4, 1996, Zurich Insurance Company
("Zurich"), Insurance Partners, L.P. ("IP") and Insurance Partners Offshore
(Bermuda), L.P. (together with IP, "Insurance Partners") owned 80 percent and 20
percent, respectively, of Kemper and therefore the Company. On February 27,
1998, Zurich acquired Insurance Partner's remaining 20 percent interest for
cash. As a result of this transaction, Kemper and the Company became
wholly-owned subsidiaries of Zurich.
Effective September 7, 1998, the businesses of Zurich merged with the
financial services business of B.A.T. Industries forming 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,
representing the financial interest of the former Zurich Group, is listed on the
Swiss Market Index, replacing Zurich. Allied Zurich p.l.c., representing the
financial interest of B.A.T. Industries, 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 1997 and 1996
consolidated financial statements in order for them to conform to the 1998
presentation.
Basis of Accounting
The acquisition of the Company on January 4, 1996, was accounted for using
the purchase method of accounting. The consolidated financial statements of the
Company prior to January 4, 1996, were prepared on a historical cost basis in
accordance with generally accepted accounting principles. The accompanying
consolidated financial statements of the Company as of and for the years ended
December 31, 1996, 1997 and 1998, have been prepared in conformity with
generally accepted accounting principles.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles 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 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,
1998, the Company believes that no such adjustment is necessary.
The Company began to amortize goodwill during 1996 on a straight-line basis
over twenty-five years. In December of 1997, the Company changed its
amortization period 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.
43
<PAGE> 47
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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, 2003 are as follows:
<TABLE>
<CAPTION>
PROJECTED
(IN THOUSANDS) BEGINNING ACCRETION OF ENDING
YEAR ENDED DECEMBER 31 BALANCE AMORTIZATION INTEREST BALANCE
- ---------------------------------------------------- --------- ------------ ------------ ---------
<S> <C> <C> <C> <C>
1996 (actual)....................................... $190,222 $(31,427) $9,897 $168,692
1997 (actual)....................................... 168,692 (34,906) 9,958 143,744
1998 (actual)....................................... 143,744 (26,807) 9,129 126,066
1999................................................ 126,066 (24,926) 7,741 108,881
2000................................................ 108,881 (22,649) 6,619 92,851
2001................................................ 92,851 (20,736) 5,577 77,692
2002................................................ 77,692 (17,096) 4,695 65,291
2003................................................ 65,291 (15,504) 3,948 53,735
</TABLE>
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. As of December 31, 1998 and 1997, this adjustment decreased the value of
business acquired by $7.2 million and $5.3 million, respectively, and
accumulated other comprehensive income by approximately $4.7 million and $3.4
million, respectively.
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.
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.
44
<PAGE> 48
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 7.5 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 6.8
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
1998 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: (1) notes
receivable from real estate ventures; (2) investments in real estate ventures,
adjusted for the equity in the operating income or loss of such ventures, and
(3) real estate owned at December 31, 1997, carried at fair value. 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. 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
45
<PAGE> 49
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
For the period January 1 through January 4, 1996, the Company's federal
income tax return was consolidated with Kemper and Kemper's other wholly-owned
life insurance subsidiary, Federal Kemper Life Assurance Company ("FKLA"). The
Boards of Directors of Kemper, KILICO and FKLA, adopted a written plan that
provided that federal income taxes would be paid to or recovered from Kemper on
the basis of each company's taxable income or loss as shown on its respective
federal income tax return. In the event of a federal income tax credit which is
greater than the amount recoverable from the other life insurance company or
from the Internal Revenue Service, the funds available would be apportioned
among the life companies entitled to a recovery on the basis of the relationship
of each company's tax credit to the total of all of the life insurance companies
in a deficit position. For the period January 5 through December 31, 1996, and
subsequent years, the Company has filed 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 $126.0 million, $29.0 million and $28.1
million directly to the United States Treasury Department during 1998, 1997 and
1996 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:
<TABLE>
<CAPTION>
ESTIMATED UNREALIZED
CARRYING AMORTIZED --------------------
VALUE COST GAINS LOSSES
(in thousands) -------- --------- ----- ------
<S> <C> <C> <C> <C>
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)
========== ========== ======= ========
DECEMBER 31, 1997
U.S. treasury securities and obligations of U.S.
government agencies and authorities................. $ 6,258 $ 6,298 $ 4 $ (44)
Obligations of states and political subdivisions,
special revenue and nonguaranteed................... 29,330 29,308 160 (138)
Debt securities issued by foreign governments......... 92,563 92,722 188 (347)
Corporate securities.................................. 1,861,655 1,846,588 24,733 (9,666)
Mortgage and asset-backed securities.................. 1,678,837 1,669,159 10,035 (357)
---------- ---------- ------- --------
Total fixed maturities......................... $3,668,643 $3,644,075 $35,120 $(10,552)
========== ========== ======= ========
</TABLE>
46
<PAGE> 50
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) INVESTED ASSETS AND RELATED INCOME (CONTINUED)
The carrying value and amortized cost of fixed maturity investments, by
contractual maturity at December 31, 1998, are shown below. Actual maturities
will differ from contractual maturities because borrowers may 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.
<TABLE>
<CAPTION>
CARRYING AMORTIZED
VALUE COST
(in thousands) -------- ---------
<S> <C> <C>
One year or less............................................ $ 44,816 $ 44,745
Over one year through five years............................ 814,646 802,147
Over five years through ten years........................... 891,767 866,613
Over ten years.............................................. 261,968 254,753
Securities not due at a single maturity date, primarily
mortgage and asset-backed securities(1)................... 1,469,623 1,453,277
---------- ----------
Total fixed maturities............................... $3,482,820 $3,421,535
========== ==========
</TABLE>
- ---------------
(1) Weighted average maturity of 4.0 years.
Proceeds from sales of investments in fixed maturities prior to maturity
were $882.6 million, $633.9 million and $892.0 million during 1998, 1997 and
1996, respectively. Gross gains of $10.1 million, $3.1 million and $9.9 million
and gross losses of $8.0 million, $13.7 million and $16.2 million were realized
on sales and write-downs of fixed maturities in 1998, 1997 and 1996,
respectively.
At December 31, 1998, the Company had 12 separate asset-backed securities
included in fixed maturity investments from trusts formed to collateralize
assets underwritten by Green Tree Financial Corporation, which in aggregate
amounted to $97.7 million. No other individual investments exceeded ten percent
of stockholder's equity at December 31, 1998.
At December 31, 1998, securities carried at approximately $6.4 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 $164.4 million real estate portfolio at December 31, 1998
consists of joint venture and third-party mortgage loans and other real
estate-related investments. At December 31, 1998 and 1997, total impaired real
estate-related loans were as follows:
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31
1998 1997
(in millions) ----------- -----------
<S> <C> <C>
Impaired loans without reserves--gross...................... $83.9 $39.3
Impaired loans with reserves--gross......................... 21.5 2.2
----- -----
Total gross impaired loans........................... 105.4 41.5
Reserves related to impaired loans.......................... (18.5) (2.1)
----- -----
Net impaired loans................................... $86.9 $39.4
===== =====
</TABLE>
47
<PAGE> 51
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) INVESTED ASSETS AND RELATED INCOME (CONTINUED)
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
$54.6 million and $45.2 million in impaired loans for 1998 and 1997,
respectively. Cash payments received on impaired loans are generally applied to
reduce the outstanding loan balance.
At December 31, 1998 and 1997, loans on nonaccrual status, before reserves
and write-downs, amounted to $37.4 million and $47.4 million, respectively. The
Company's nonaccrual loans are generally included in impaired loans.
The sources of net investment income were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
(in thousands) -------- -------- --------
<S> <C> <C> <C>
Interest and dividends on fixed maturities.................. $232,707 $250,170 $250,683
Dividends on equity securities.............................. 2,143 2,123 646
Income from short-term investments.......................... 5,391 4,128 9,130
Income from mortgage loans.................................. 14,964 16,283 20,257
Income from policy loans.................................... 21,096 20,549 20,700
Income from other real estate-related investments........... 352 6,631 4,917
Income from other loans and investments..................... 2,223 2,045 2,480
-------- -------- --------
Total investment income.............................. 278,876 301,929 308,813
Investment expense.......................................... (5,364) (5,734) (9,125)
-------- -------- --------
Net investment income................................ $273,512 $296,195 $299,688
======== ======== ========
</TABLE>
Net realized investment gains (losses) for the years ended December 31,
1998, 1997 and 1996, were as follows:
<TABLE>
<CAPTION>
REALIZED GAINS (LOSSES)
-------------------------------------
1998 1997 1996
(in thousands) -------- -------- -------
<S> <C> <C> <C>
Real estate-related......................................... $ 41,362 $ 19,758 $17,462
Fixed maturities............................................ 2,158 (10,656) (6,344)
Trading account securities--gross gains on transfer......... 3,254 -- --
Trading account securities--gross losses on transfer........ (417) -- --
Trading account securities--holding losses.................. (151) -- --
Equity securities........................................... 5,496 914 --
Other....................................................... 166 530 2,484
-------- -------- -------
Realized investment gains before income tax expense....... 51,868 10,546 13,602
Income tax expense.......................................... (18,154) (3,691) (4,761)
-------- -------- -------
Net realized investment gains............................. $ 33,714 $ 6,855 $ 8,841
======== ======== =======
</TABLE>
48
<PAGE> 52
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) INVESTED ASSETS AND RELATED INCOME (CONTINUED)
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
difference between fair value and cost. The change in net unrealized investment
gains (losses) by class of investment for the years ended December 31, 1998,
1997 and 1996 were as follows:
<TABLE>
<CAPTION>
CHANGE IN UNREALIZED GAINS (LOSSES)
-----------------------------------------
DECEMBER 31 DECEMBER 31 DECEMBER 31
1998 1997 1996
(in thousands) ------------ ------------ -----------
<S> <C> <C> <C>
Fixed maturities............................................ $ 36,717 $ 87,787 $(63,219)
Equity and other securities................................. (1,074) (103) 1,256
Adjustment to deferred insurance acquisition costs.......... (2,399) (2,325) 1,307
Adjustment to value of business acquired.................... (1,954) (26,209) 20,947
-------- -------- --------
Unrealized gain (loss) before income tax expense
(benefit).............................................. 31,290 59,150 (39,709)
Income tax expense (benefit)................................ 10,952 (985) 7,789
-------- -------- --------
Net unrealized gain (loss) on investments............ $ 20,338 $ 60,135 $(47,498)
======== ======== ========
</TABLE>
(4) UNCONSOLIDATED INVESTEES
At December 31, 1998 and 1997 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, 1998 and 1997, the Company's net equity investment in
unconsolidated investees amounted to $1.2 million and $19.3 million,
respectively. The Company's share of net income related to such unconsolidated
investees amounted to $241 thousand, $835 thousand and $223 thousand in 1998,
1997 and 1996, 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 28.0 percent of the Company's investment-grade fixed
maturities at December 31, 1998 were mortgage-backed securities, down from 35.1
percent at December 31, 1997, due to sales and paydowns during 1998. 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 15.4 percent and 10.8 percent of the Company's
investment-grade fixed maturities at December 31, 1998 and 1997, respectively,
consisted of corporate asset-backed securities. The majority of the Company's
investments in asset-backed securities were backed by home equity loans (21.9%),
auto loans (8.2%), manufactured housing loans (14.8%), equipment loans (5.2%),
and commercial mortgage backed securities (22.1%).
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, 1998 was as follows: California (31.5%), Hawaii
(16.2%), Washington (9.9%) and Colorado (9.4%). The property type distribution
of a majority of the real estate portfolio as of December 31, 1998 was as
follows: hotels (39.9%), land (30.9%) and residential (15.5%).
49
<PAGE> 53
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) CONCENTRATION OF CREDIT RISK (CONTINUED)
Undeveloped land represented approximately 30.9 percent of the Company's
real estate portfolio at December 31, 1998. 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 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.
Approximately 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, 1998, 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 $64.5 million, or
39.3 percent, of the Company's real estate portfolio. The Nesbitt ventures
consist of nine hotel properties and two office buildings. At December 31, 1998,
the Company did not have any Nesbitt-related off-balance-sheet legal funding
commitments outstanding.
At December 31, 1998, 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 $51.6
million, or 31.4 percent, of the Company's real estate portfolio. Kemper's
interest is 75 percent at December 31, 1998. At December 31, 1998, MLP-related
commitments accounted for approximately $6.1 million of the Company's
off-balance-sheet legal commitments.
The remaining significant real estate-related investments amounted to $27.3
million at December 31, 1998 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
the Company completely disposes of all of its investments in Hawaii.
At December 31, 1998, 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, 1998.
(6) INCOME TAXES
Income tax expense (benefit) was as follows for the years ended December
31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
(in thousands) -------- -------- --------
<S> <C> <C> <C>
Current................................................... $ 52,274 $130,662 $ 26,300
Deferred.................................................. (12,470) (99,370) (897)
-------- -------- --------
Total........................................... $ 39,804 $ 31,292 $ 25,403
======== ======== ========
</TABLE>
50
<PAGE> 54
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) INCOME TAXES (CONTINUED)
Additionally, the deferred income tax expense (benefit) related to items
included in other comprehensive income was as follows for the years ended
December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
(in thousands) ------- ------- ------
<S> <C> <C> <C>
Unrealized gains and losses on investments.................. $12,475 $ 9,002 $ --
Value of business acquired.................................. (684) (9,173) 7,331
Deferred insurance acquisition costs........................ (840) (814) 457
------- ------- ------
Total............................................. $10,952 $ (985) $7,789
======= ======= ======
</TABLE>
The actual income tax expense for 1998, 1997 and 1996 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 1998, 1997, and 1996 to income before income tax expense.
<TABLE>
<CAPTION>
1998 1997 1996
(in thousands) ------- ------- -------
<S> <C> <C> <C>
Computed expected tax expense............................... $36,734 $24,503 $20,938
Difference between "expected" and actual tax expense:
State taxes............................................... (434) 1,801 913
Amortization of goodwill.................................. 4,460 5,353 3,568
Dividend received deduction............................... (540) -- --
Foreign tax credit........................................ (250) (278) --
Other, net................................................ (166) (87) (16)
------- ------- -------
Total actual tax expense.......................... $39,804 $31,292 $25,403
======= ======= =======
</TABLE>
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 other investments to the amount
that, based upon available evidence, is, in management's judgment, more likely
than not, to be realized. 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.
51
<PAGE> 55
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) INCOME TAXES (CONTINUED)
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:
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31 DECEMBER 31
1998 1997 1996
(in thousands) ----------- ------------ ------------
<S> <C> <C> <C>
Deferred federal tax assets:
Deferred insurance acquisition costs..................... $ 86,332 $ 75,522 $ 4,520
Unrealized losses on investments......................... -- -- 16,624
Life policy reserves..................................... 27,240 43,337 46,452
Unearned revenue......................................... 42,598 37,243 --
Real estate-related...................................... 13,944 13,400 20,642
Other investment-related................................. 5,770 3,298 5,409
Other.................................................... 4,923 4,371 3,639
-------- -------- --------
Total deferred federal tax assets..................... 180,807 177,171 97,286
Valuation allowance...................................... (15,201) (15,201) (31,825)
-------- -------- --------
Total deferred federal tax assets after valuation
allowance........................................... 165,606 161,970 65,461
-------- -------- --------
Deferred federal tax liabilities:
Value of business acquired............................... 41,598 48,469 66,373
Deferred insurance acquisition costs..................... 32,040 20,811 9,384
Depreciation and amortization............................ 19,111 20,201 15,473
Other investment-related................................. 14,337 18,774 28,855
Unrealized gains on investments.......................... 21,477 9,002 --
Other.................................................... 1,984 4,720 5,738
-------- -------- --------
Total deferred federal tax liabilities................ 130,547 121,977 125,823
-------- -------- --------
Net deferred federal tax assets (liabilities).............. $ 35,059 $ 39,993 $(60,362)
======== ======== ========
</TABLE>
The net deferred tax assets relate primarily to unearned revenue and the
tax on deferred insurance acquisition costs ("DAC Tax") associated with $1.5
billion and $2.7 billion of new and renewal sales in 1998 and 1997, 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,
$45.0 million and $18.4 million during 1998, 1997 and 1996, respectively. The
Company paid cash dividends of $95.0 million and $29.3 million to Kemper during
1998 and 1997, respectively. The Company did not pay any cash dividends to
Kemper during 1996.
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, 1998 and 1997, joint venture mortgage loans
totaled $65.8 million and $72.7 million, respectively, and during 1998, 1997 and
1996, the Company earned interest income on these joint venture loans of $6.8
million, $7.5 million and $9.5 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 1998, 1997 and 1996, expenses allocated to the Company from SKI and KSvC
amounted to $43 thousand,
52
<PAGE> 56
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(7) RELATED-PARTY TRANSACTIONS (CONTINUED)
$114 thousand and $1.7 million, respectively. The Company also paid to SKI
investment management fees of $3.1 million, $3.5 million and $3.6 million during
1998, 1997 and 1996, respectively. In addition, expenses allocated to the
Company from FKLA during 1998, 1997 and 1996 amounted to $35.5 million, $30.0
million and $10.5 million, respectively. The Company also paid to Kemper real
estate subsidiaries $1.5 million, $2.2 million and $1.8 million in 1998, 1997
and 1996, respectively, related to the management of the Company's real estate
portfolio.
(8) 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.
As of December 31, 1998 and 1997, the reinsurance recoverable related to
fixed-rate annuity liabilities ceded to an affiliate amounted to $344.8 million
and $382.6 million, respectively.
In December 1996, the Company assumed on a yearly renewable term basis
approximately $14.4 billion (face amount) of term life insurance from FKLA. As a
result of this transaction, the Company recorded premiums and reserves of
approximately $7.3 million. The difference between the cash transferred, which
represents the statutory reserves of the business assumed, and the reserves
recorded under generally accepted accounting principles ("GAAP"), of
approximately $18.4 million, was deemed to be a capital contribution from Kemper
and was recorded as additional paid-in-capital during 1996. As of the date of
this transaction, no deferred tax impact was recorded on the difference between
the statutory and GAAP reserves. This deferred tax impact of $6.5 million was
recorded in 1998 as a reduction to the original capital contribution. Premiums
assumed during 1998 under the terms of the treaty amounted to $21.6 million and
the face amount which remained outstanding at December 31, 1998 amounted to
$11.7 billion.
Effective January 1, 1997, the Company ceded 90 percent of all new term
life insurance premiums to outside reinsurers. Term life reserves ceded to
outside reinsurers on the Company's direct business amounted to approximately
$293 thousand and $139 thousand as of December 31, 1998 and 1997, respectively.
During December 1997, the Company entered into a funds withheld reinsurance
agreement with a Zurich affiliated company, ZC Life Reinsurance Limited ("ZC
Life"), formerly EPICENTRE Reinsurance (Bermuda) Limited. Under the terms of
this agreement, the Company ceded, on a yearly renewable term basis, ninety
percent of the net amount at risk (death benefit payable to the insured less the
insured's separate account cash surrender value) related to the new BOLI product
developed in 1997, which is held in the Company's separate accounts. During
1997, the Company issued $59.3 billion (face amount) of new BOLI business and
ceded $51.1 billion (face amount) to ZC Life under the terms of the treaty.
During 1997, the Company also ceded $24.3 million of separate account fees (cost
of insurance charges) to ZC Life. The Company has also withheld approximately
$23.4 million of such funds due to ZC Life under the terms of the reinsurance
agreement as a component of benefits and funds payable in the accompanying
consolidated balance sheet as of December 31, 1997.
During 1998, the Company modified the reinsurance agreement to increase the
reinsurance from ninety percent to one hundred percent. During 1998, the Company
issued $6.9 billion (face amount) of new BOLI business and ceded $11.1 billion
(face amount) to ZC Life under the terms of the modified treaty. During 1998,
the Company also ceded $175.5 million of separate account fees (cost of
insurance charges) to ZC Life. The Company has also withheld approximately
$170.9 million of such funds due to ZC Life under the terms of the reinsurance
agreement as a component of benefits and funds payable in the accompanying
consolidated balance sheet as of December 31, 1998.
KILICO has a large and growing 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 is now marked-to-market
based upon the Total Return of the Governmental Bond Division of the KILICO
Variable Series I Separate Account.
53
<PAGE> 57
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(8) REINSURANCE (CONTINUED)
During 1998, the Company recorded a $2.5 million increase to the FWA related to
this mark-to-market. To properly match revenue and expenses, the Company has
placed assets supporting the FWA in a segmented portion of its General Account.
This portfolio is classified as "trading" under Statement of Financial
Accounting Standards No. 115 ("FAS 115"). 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 $151
thousand related to the changes in fair value of this portfolio during 1998. The
fair value of this portfolio was $101.8 million at December 31, 1998, and the
amortized cost was $99.1 million. The Company periodically purchases assets into
this segmented portfolio to support changes in the FWA.
(9) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
FKLA sponsors a welfare plan that provides medical and life insurance
benefits to its retired and active employees and 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 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 $2.0 million and $1.9 million at December 31, 1998 and 1997,
respectively.
The discount rate used in determining the allocated postretirement benefit
obligation was 7.0 percent and 7.25 percent for 1998 and 1997, respectively. The
assumed health care trend rate used was based on projected experience for 1998,
8.0 percent for 1999, gradually declining to 6.4 percent by the year 2003 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, 1998 and 1997 by $312 thousand and $242 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, 1998, the Company had future legal loan commitments and
stand-by financing agreements totaling $64.4 million to support the financing
needs of various real estate investments. To the extent these
54
<PAGE> 58
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(11) FINANCIAL INSTRUMENTS--OFF BALANCE-SHEET (CONTINUED)
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.
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 1998 and 1997 to be 4.75 percent and 5.25 percent,
respectively, while the assumed average market crediting rate was 5.0 percent
and 6.0 percent in 1998 and 1997, respectively.
55
<PAGE> 59
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(12) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The carrying values and estimated fair values of the Company's financial
instruments at December 31, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
------------------------ ------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
(in thousands) ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Financial instruments recorded as assets:
Fixed maturities.............................. $3,482,820 $3,482,820 $3,668,643 $3,668,643
Trading account securities.................... 101,781 101,781 -- --
Cash and short-term investments............... 71,820 71,820 259,925 259,925
Mortgage loans and other real estate-related
assets..................................... 164,375 164,375 220,046 220,046
Policy loans.................................. 271,540 271,540 282,439 282,439
Equity securities............................. 66,854 66,854 24,839 24,839
Other invested assets......................... 23,645 27,620 20,820 24,404
Financial instruments recorded as liabilities:
Life policy benefits, excluding term life
reserves................................... 3,551,050 3,657,510 3,846,023 4,050,852
Funds withheld account........................ 170,920 170,920 23,420 23,420
</TABLE>
(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 1999 is $64.9 million. The
Company paid cash dividends of $95.0 million and $29.3 million to Kemper during
1998 and 1997, respectively. The Company paid no cash dividends in 1996.
The Company's net income and capital and surplus as determined in
accordance with statutory accounting principles were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
(in thousands) -------- -------- --------
<S> <C> <C> <C>
Net income.................................................. $ 64,871 $ 58,372 $ 37,287
======== ======== ========
Statutory capital and surplus............................... $455,213 $476,924 $411,837
======== ======== ========
</TABLE>
56
<PAGE> 60
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(14) UNAUDITED INTERIM FINANCIAL INFORMATION
The following table sets forth the Company's unaudited quarterly financial
information:
(in thousands)
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------------- -------- ------- ------------ -----------
<S> <C> <C> <C> <C>
1998 OPERATING SUMMARY
Net investment income.............................. $70,551 $68,467 $ 66,892 $ 67,602
Realized investment gains.......................... 1,854 15,673 8,951 25,390
Premium income..................................... 5,203 5,941 5,278 5,924
Separate account fees and other income............. 20,418 19,922 17,631 14,042
------- ------- -------- --------
Total revenue.............................. 98,026 110,003 98,752 112,958
------- ------- -------- --------
Interest credited and benefits to policyholders.... 57,930 57,939 54,251 34,815
Commissions, taxes, licenses and fees.............. 13,885 13,922 12,282 29,251
Operating expenses................................. 10,094 12,157 10,528 11,794
Net deferral of insurance acquisition costs........ (7,973) (11,983) (9,669) (4,858)
Amortization of value of business acquired......... 4,427 7,121 6,359 (230)
Amortization of goodwill........................... 3,186 3,186 3,186 3,186
------- ------- -------- --------
Total benefits and expenses................ 81,549 82,342 76,937 73,958
------- ------- -------- --------
Income before income tax expense................... 16,477 27,661 21,815 39,000
Income tax expense................................. 7,247 11,774 8,828 11,955
------- ------- -------- --------
Net income................................. $ 9,230 $15,887 $ 12,987 $ 27,045
======= ======= ======== ========
1997 OPERATING SUMMARY
Net investment income.............................. $74,249 $74,050 $ 72,950 $ 74,946
Realized investment gains (losses)................. 889 8,161 (3,032) 4,528
Premium income..................................... 5,008 4,121 3,938 9,172
Separate account fees and other income............. 8,909 12,961 12,215 62,415(1)
------- ------- -------- --------
Total revenue.............................. 89,055 99,293 86,071 151,061
------- ------- -------- --------
Interest credited and benefits to policyholders.... 57,859 56,643 57,965 55,687
Commissions, taxes, licenses and fees.............. 8,023 9,475 8,389 59,323(1)
Operating expenses................................. 7,175 8,780 10,014 10,868
Net deferral of insurance acquisition costs........ (7,216) (6,877) (7,471) (13,409)
Amortization of value of business acquired......... 4,821 6,991 6,743 6,393
Amortization of goodwill........................... 2,547 2,552 2,549 7,647(2)
------- ------- -------- --------
Total benefits and expenses................ 73,209 77,564 78,189 126,509
------- ------- -------- --------
Income before income tax expense................... 15,846 21,729 7,882 24,552
Income tax expense................................. 5,678 8,723 3,778 13,113
------- ------- -------- --------
Net income................................. $10,168 $13,006 $ 4,104 $ 11,439
======= ======= ======== ========
</TABLE>
- ---------------
Notes:
(1) Reflects premium tax expense loads received and premium taxes incurred of
$49.1 million related to new BOLI sales of $2.6 billion in the fourth
quarter of 1997.
(2) Reflects the effect of the change in amortization of goodwill from 25 to 20
years.
(15) OPERATING SEGMENTS AND RELATED INFORMATION
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information. SFAS No. 131 establishes standards for
how to report information about operating segments. It also establishes
standards for related disclosures about products and services, geographic areas
and major customers. The Company adopted SFAS No. 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, SFAS No. 131 requires comparative information for earlier years to be
restated, unless impracticable to do so.
57
<PAGE> 61
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(15) OPERATING SEGMENTS AND RELATED INFORMATION (CONTINUED)
In connection with the acquisition by Zurich, the Company, FKLA, ZLICA, and
Fidelity Life Association ("FLA"), a Mutual Legal Reserve Company, owned by its
policyholders, began to operate under the trade name Zurich Kemper Life. For
purposes of this operating segment disclosure, Zurich Kemper Life will also
include the 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 SBU's to consolidated revenues, operating
results and certain balance sheet data pertaining thereto, are shown in the
following tables on the basis of generally accepted accounting principles.
Zurich Kemper Life's SBU's were formed in 1996, subsequent to the acquisition by
Zurich, however, financial information was not produced by SBU until 1997.
Therefore, Zurich Kemper Life has not provided segment information for 1996, as
it would be impracticable to do so.
Zurich Kemper Life is segregated into the Agency, Financial, Group
Retirement and Direct SBU's. The SBU's are not managed at the legal entity
level, but rather at the Zurich Kemper Life level. Zurich Kemper Life's SBU's
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 Group Retirement SBU's.
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 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 SBU's are as
follows:
AGENCY: The Agency 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.
GROUP RETIREMENT: The Group Retirement 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.
58
<PAGE> 62
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Summarized financial information for ZKL's SBU's are as follows:
As of and for the period ending December 31, 1998:
(in thousands)
<TABLE>
<CAPTION>
GROUP
AGENCY FINANCIAL RETIREMENT DIRECT TOTAL
INCOME STATEMENT ---------- ---------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C>
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
========== ========== ========== ======== ===========
</TABLE>
<TABLE>
<CAPTION>
NET
REVENUE INCOME ASSETS
----------- -------- -----------
<S> <C> <C> <C> <C> <C>
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 Zurich Direct.............. 23,548 885 4,322
----------- -------- -----------
Totals per the Company's consolidated financial
statements............................................. $ 419,739 $ 65,149 $12,239,721
=========== ======== ===========
</TABLE>
59
<PAGE> 63
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the period ending December 31, 1997:
(in thousands)
<TABLE>
<CAPTION>
GROUP
AGENCY FINANCIAL RETIREMENT DIRECT TOTAL
INCOME STATEMENT ---------- ---------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C>
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.................. 361,420 247,532 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
========== ========== ========== ======== ===========
</TABLE>
<TABLE>
<CAPTION>
NET
REVENUE INCOME ASSETS
----------- -------- -----------
<S> <C> <C> <C> <C> <C>
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
=========== ======== ===========
</TABLE>
60
<PAGE> 64
APPENDIX A
TABLE OF DEATH BENEFIT FACTORS
<TABLE>
<CAPTION>
ATTAINED ATTAINED ATTAINED ATTAINED
AGE* PERCENT AGE* PERCENT AGE* PERCENT AGE* PERCENT
- -------- ------- -------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
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+ 100
</TABLE>
* ATTAINED AGE IS THE AGE NEAREST BIRTHDAY AS OF THE BEGINNING OF THE POLICY
YEAR.
A-1
<PAGE> 65
PART II
UNDERTAKING TO FILE REPORTS
Subject to the terms and conditions of Section 15(d) of the Securities and
Exchange Act of 1934, 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.
UNDERTAKING PURSUANT TO RULE 484(b)(1)
UNDER THE SECURITIES ACT OF 1933
Pursuant to the Distribution Agreement filed as Exhibit 1.(3)(a) to this
Registration Statement, Kemper Investors Life Insurance Company (KILICO) will
agree to indemnify LIS Securities (LIS) against any claims, liabilities and
expenses to which LIS may become subject under any statute, regulation, at
common law or otherwise, arising out of or based upon any alleged untrue
statements of material fact contained in any registration statement or
prospectus relating to the Policies, or any omission to state a material fact
therein, the omission of which makes any statement contained therein misleading.
LIS will agree to indemnify KILICO against any and all claims, damages,
liabilities and expenses to which KILICO may become subject, arising out of or
based upon any violation by LIS of federal or state securities laws(s) or
regulation(s), applicable banking law(s) or regulation(s), insurance law(s) or
regulation(s) or any rule or requirement of the NASD.
Insofar as indemnification for liability arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of
KILICO or the Separate Account (by virtue of the fact that they may also be
agents, employees or controlling persons of LIS) pursuant to the foregoing
provisions, or otherwise, KILICO and the Separate Account have been advised that
in the opinion of the Securities and Exchange Commission such indemnification
may be against public policy as expressed in the Act and may be, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by KILICO or the Separate Account of
expenses incurred or paid by a director, officer or controlling person of KILICO
or the Separate Account 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, KILICO and the Separate Account
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 Act and will be governed by the final adjudication of such
issue.
REPRESENTATION REGARDING FEES AND CHARGES PURSUANT TO
SECTION 26 OF THE INVESTMENT COMPANY ACT OF 1940
Kemper Investors Life Insurance Company (KILICO) represents that the fees
and charges deducted under the Policy, in the aggregate, are reasonable in
relation to the services rendered, the expenses expected to be incurred, and the
risks assumed by KILICO.
II-1
<PAGE> 66
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 61 pages.
The undertaking to file reports.
The undertaking pursuant to Rule 484(b)(1) under the Securities Act
of 1933.
Representation regarding fees and charges pursuant to Section 26
of the Investment Company Act of 1940.
The signatures.
Written consents of the following persons:
(6)A. Steven D. Powell, FSA (Exhibit 6.)
B. PricewaterhouseCoopers LLP, independent accountants (Exhibit
7.)
C. KPMG LLP, independent auditors (Exhibit 8.)
The following exhibits:
1. Exhibits required by paragraph A of the instructions to exhibits in Form
N-8B-2:
<TABLE>
<S> <C> <C>
(1) KILICO Resolution establishing the Separate Account(3)
(2) Not Applicable
(3)(a) Second Amended and Restated Distribution Agreement between KILICO and LIS Securities
(3)(b) Specimen Selling Group Agreement of LIS Securities
(3)(c) Not Applicable
(3)(d) General Agent Agreement(2)
(4) Not Applicable
(5)(a) Form of Individual Policy(5)
(5)(b) Form of Survivorship Policy(5)
(5)(c) Extended Maturity Option Rider(4)
(5)(d) Accelerated Death Benefit Option Rider(4)
(6)(a) KILICO Articles of Incorporation(1)
(6)(b) By-Laws of KILICO(2)
(7) Not Applicable
(8)(a)(i) Participation Agreement among KILICO and Evergreen Variable Annuity Trust
(8)(a)(ii) Administrative Services Agreement between KILICO and Evergreen Asset Management
Corp., First Union National Bank of North Carolina and Keystone Investment
Management Company
(8)(b)(i) Participation Agreement among KILICO, Goldman Sachs Variable Insurance Trust and
Goldman, Sachs & Co.
(8)(b)(ii) Administrative Services Agreement between KILICO, Goldman, Sachs & Co. and Goldman
Sachs Asset Management International
(8)(c)(i) Participation Agreement among KILICO and Morgan Stanley Universal Funds, Inc.,
Morgan Stanley Asset Management Inc. and Miller Anderson & Sherrerd, LLP
(8)(c)(ii) Administrative Services Agreement between KILICO, Morgan Stanley Asset Management,
Inc. and Miller Anderson & Sherrerd, LLP
(8)(d) Second Amendment to Participation Agreement among KILICO, Variable Insurance
Products Fund and Fidelity Distributors Corporation
</TABLE>
II-2
<PAGE> 67
<TABLE>
<S> <C> <C>
(8)(e) Second Amendment to Participation Agreement among KILICO, Variable Insurance Products
Fund II and Fidelity Distributors Corporation
(8)(f) Administrative Services Agreement between KILICO and Life Insurance Solutions, L.L.C.
(9) Not Applicable
(10)(a) Form of Application for Individual Policy(4)
(10)(b) Form of Application for Survivorship Policy(4)
2. Opinion and consent of legal officer of KILICO as to legality of policies being
registered(3)
3. Not Applicable
4. Not Applicable
5. Not Applicable
6. Opinion and consent of actuarial officer of KILICO regarding prospectus illustrations
and actuarial matters(6)
7. Consent of PricewaterhouseCoopers LLP, independent accountants
8. Consent of KPMG LLP, independent auditors
9. Procedures Memorandum, pursuant to Rule 6e-3(T)(b)(12)(iii)(10)
10. Illustrations of Cash Value, Surrender Value and Death Benefit(5)
11.(a) Schedule IV: Reinsurance (year ended December 31, 1998)(7)
11.(b) Schedule IV: Reinsurance (year ended December 31, 1997)(8)
11.(c) Schedule IV: Reinsurance (year ended December 31, 1996)(9)
12.(a) Schedule V: Valuation and qualifying accounts (year ended December 31, 1998)(7)
12.(b) Schedule V: Valuation and qualifying accounts (year ended December 31, 1997)(8)
12.(c) Schedule V: Valuation and qualifying accounts (year ended December 31, 1996)(9)
</TABLE>
- -------------------------
(1) Incorporated herein 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 herein 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.
(3) Incorporated herein by reference to the Registration Statement of the
Registrant on Form S-6 filed on or about September 8, 1997 (File No.
333-35159).
(4) Incorporated herein by reference to Post-Effective Amendment No. 1 to the
Registration Statement of the Registrant on Form S-6 filed on or about
April 27, 1998 (File No. 333-35159).
(5) Incorporated herein by reference to Post-Effective Amendment No. 2 to the
Registration Statement of the Registrant on Form S-6 filed on August 25,
1998 (File No. 333-35159).
(6) Incorporated herein by reference to Post-Effective Amendment No. 3 to the
Registration Statement of the Registrant on Form S-6 filed on or about
October 30, 1998 (File No. 333-35159).
(7) Incorporated herein by reference to Amendment No. 4 to the Registration
Statement on Form S-1 (file No. 333-02491) filed on or about April 20,
1999.
(8) Incorporated herein by reference to Post-Effective Amendment No. 11 to the
Registration Statement on Form N-4 for KILICO Variable Annuity Separate
Account (File No. 33-43501) filed on or about April 16, 1998.
(9) Incorporated herein by reference to Form 10-K for Kemper Investors Life
Insurance Company for fiscal year ended 12/31/96 filed on or about March
25, 1997.
(10) To be filed by amendment.
II-3
<PAGE> 68
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant,
KILICO Variable Separate Account-2, 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 29th day of April, 1999.
KILICO VARIABLE SEPARATE ACCOUNT-2
(Registrant)
By: Kemper Investors Life Insurance
Company
(Depositor)
By: /s/ JOHN B. SCOTT
------------------------------------
John B. Scott, Chief Executive
Officer
and President
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 29th day of April, 1999.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ JOHN B. SCOTT Chief Executive Officer, President and Director
- ----------------------------------------------- (Principal Executive Officer)
John B. Scott
/s/ W. H. BOLINDER Chairman of the Board and Director
- -----------------------------------------------
William H. Bolinder
/s/ FREDERICK L. BLACKMON Senior Vice President and Chief Financial
- ----------------------------------------------- Officer (Principal Financial Officer and
Frederick L. Blackmon Principal Accounting Officer)
/s/ LOREN J. ALTER Director
- -----------------------------------------------
Loren J. Alter
/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
</TABLE>
II-4
<PAGE> 69
EXHIBIT INDEX
<TABLE>
<S> <C>
(3)(a) Second Amended and Restated Distribution Agreement between
KILICO and LIS Securities
(3)(b) Specimen Selling Group Agreement of LIS Securities
(8)(a)(i) Participation Agreement among KILICO and Evergreen Variable
Annuity Trust
(8)(a)(ii) Administrative Services Agreement between KILICO and
Evergreen Asset Management Corp., First Union National Bank
of North Carolina and Keystone Investment Management Company
(8)(b)(i) Participation Agreement among KILICO, Goldman Sachs Variable
Insurance Trust and Goldman, Sachs & Co.
(8)(b)(ii) Administrative Services Agreement between KILICO, Goldman,
Sachs & Co. and Goldman Sachs Asset Management International
(8)(c)(i) Participation Agreement among KILICO and Morgan Stanley
Universal Funds, Inc., Morgan Stanley Asset Management, Inc.
and Miller Anderson & Sherrerd, LLP
(8)(c)(ii) Administrative Services Agreement between KILICO, Morgan
Stanley Asset Management, Inc., and Miller Anderson &
Sherrerd, LLP
(8)(d) Second Amendment to Participation Agreement among KILICO,
Variable Insurance Products Fund and Fidelity Distributors
Corporation
(8)(e) Second Amendment to Participation Agreement among KILICO,
Variable Insurance Products Fund II and Fidelity
Distributors Corporation
(8)(f) Administrative Services Agreement between KILICO and Life
Insurance Solutions, L.L.C.
7. Consent of PricewaterhouseCoopers LLP, independent
accountants
8. Consent of KPMG LLP, independent auditors
</TABLE>
<PAGE> 1
SECOND AMENDED AND RESTATED
DISTRIBUTION AGREEMENT
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
SECTION 1. Additional Definitions................................ 2
SECTION 2. Distribution Activities -- Authority.................. 3
SECTION 3. Distribution Activities -- Appointment................ 5
SECTION 4. Distribution Activities -- Duties..................... 6
SECTION 5. Limitations on Authority.............................. 6
SECTION 6. Sales Agreements...................................... 7
SECTION 7. Forms, Applications, and Licensing.................... 7
SECTION 8. Marketing Materials................................... 8
SECTION 9. The Distributor's Compensation........................ 11
SECTION 10. Representations and Warranties........................ 12
SECTION 11. Indemnification....................................... 14
SECTION 12. Records............................................... 19
SECTION 13. Investigations and Proceedings........................ 19
SECTION 14. Term and Termination.................................. 20
SECTION 15. Rights Upon Termination............................... 21
SECTION 16. Independent Contractor................................ 23
SECTION 17. Notices............................................... 23
SECTION 18. Arbitration........................................... 24
SECTION 19. Confidentiality....................................... 24
SECTION 20. Severability.......................................... 25
SECTION 21. Choice of Law......................................... 25
SECTION 22. No Waiver............................................. 25
SECTION 23. Agreement Non-Assignable.............................. 26
SECTION 24. Exhibits and Schedules................................ 26
SECTION 25. Headings.............................................. 26
SECTION 26. Entire Agreement...................................... 26
</TABLE>
<PAGE> 3
SECOND AMENDED AND RESTATED
DISTRIBUTION AGREEMENT
AGREEMENT made as of the 8th day of March, 1999, by and between Kemper
Investors Life Insurance Company, an Illinois insurance company (the "Insurance
Company"), and Life Insurance Solutions, L.L.C., a Delaware limited liability
company d/b/a LIS Securities (the "Distributor"), on its own behalf and on
behalf of the individuals and entities listed on Schedule 1 to this Agreement
(the "Distributor Agency Affiliates"), as that Schedule may be amended from time
to time in accordance with this Agreement.
RECITALS:
WHEREAS, the Insurance Company and the Distributor have previously entered
into an Amended and Restated Distribution Agreement dated November 1, 1998, and
intend this Agreement to supersede and replace that agreement;
WHEREAS, the Insurance Company issues certain variable annuity contracts
and variable life insurance policies; and
WHEREAS, certain of the variable annuity contracts and variable life
insurance policies issued by the Insurance Company (the "Private Placements")
are being offered and sold in reliance upon exemptions from the registration
requirements of the Securities Act of 1933 (the "1933 Act") and the Investment
Company Act of 1940 (the "1940 Act"), while certain other variable annuity
contracts and variable life insurance policies issued by the Insurance Company
are being offered and sold pursuant to Registration Statements (the "Registered
Products") and their related Prospectuses filed with and declared effective by
the Securities and Exchange Commission (the "Commission") under the provisions
of the 1933 Act and the 1940 Act (collectively, the Private Placements and the
Registered Products are referred to as the "Variable Products") (Variable
Products are identified in Schedule 2 to this Agreement); and
WHEREAS, the Distributor is registered as a broker-dealer with the
Commission under the Securities Exchange Act of 1934, as amended (the "1934
Act"), and is a member in good standing of the National Association of
Securities Dealers, Inc. (the "NASD") that engages in the distribution of
insurance products; and
WHEREAS, the Insurance Company desires to retain the Distributor to
distribute the Variable Products through registered broker-dealers
("Broker-Dealers") and their registered representatives ("Representatives"); and
<PAGE> 4
WHEREAS, the Distributor desires to be retained by the Insurance Company to
distribute the Variable Products on the terms and conditions hereinafter set
forth.
NOW, THEREFORE, in consideration of mutual promises contained herein, the
parties hereto agree as follows:
1. ADDITIONAL DEFINITIONS
(a) AFFILIATE -- With respect to a person, any other person controlling,
controlled by, or under common control with, such person.
(b) APPLICATIONS -- The forms used by the prospective purchaser to apply
for a variable life insurance policy or a variable annuity contract.
(c) CONTRACTS -- The variable annuity contracts and certificates set forth
in Schedule 2 to this Agreement as in effect at the time this Agreement is
executed, and such other variable annuity products that may be added to
Schedule 2 from time to time.
(d) POLICIES -- The variable life insurance policies set forth in Schedule
2 to this Agreement as in effect at the time this Agreement is executed,
and such other variable life insurance products that may be added to
Schedule 2 from time to time.
(e) PREMIUM -- A payment made under a Policy by an applicant or purchaser
to purchase the Policy.
(f) PRIVATE PLACEMENT GUIDELINES -- The guidelines set forth in Schedule 3
to this Agreement, as that Schedule may be amended from time to time.
(g) PRIVATE PLACEMENT MEMORANDUM -- The document through which the
Insurance Company offers Private Placements. For purposes of Section 11 of
this Agreement, the term "any Private Placement Memorandum" means any
document which is or at any time was a Private Placement Memorandum within
the meaning of this Section 1(g).
(h) PRIVATE PLACEMENTS -- Contracts and Policies being offered and sold
in reliance upon exemptions from the registration requirements of the 1933
Act and the 1940 Act for non-public offerings.
(i) PROSPECTUS -- The prospectus if any, included within a Registration
Statement or, if more recent, the prospectus filed pursuant to Rule 497
under the 1933 Act. For purposes of Section 11 of this Agreement, the term
"any Prospectus" means any
2
<PAGE> 5
document which is or at any time was a Prospectus within the meaning of
this Section 1(i).
(j) PURCHASE PAYMENT -- A payment made under a Contract by an applicant or
purchaser to purchase benefits under the Contract.
(k) REGISTRATION STATEMENT -- At any time that this Agreement is in
effect, each currently effective registration statement, or currently
effective post-effective amendment thereto, relating to the Contracts or
Policies, including financial statements included in, and all exhibits to,
that registration statement or post-effective amendment. For purposes of
Section 11 of this Agreement, the term "Registration Statement" means any
document which is or at any time was a Registration Statement within the
meaning of this Section 1(k).
(l) REGULATIONS -- The rules and regulations promulgated by the Commission
under the 1933 Act, the 1934 Act and the 1940 Act as in effect at the time
this Agreement is executed or thereafter promulgated.
(m) VARIABLE ACCOUNTS -- Separate accounts established pursuant to
Illinois state insurance law supporting the Variable Products specified in
Schedule 2 as in effect at the time this Agreement is executed, or as it
may be amended from time to time.
2. DISTRIBUTION ACTIVITIES -- AUTHORITY
(a) The Insurance Company authorizes the Distributor, and the Distributor
accepts the authority, to act as a distributor of the Variable Products,
subject to any applicable requirements of the 1933 Act and the 1940 Act.
The Insurance Company hereby authorizes the Distributor to select persons
that will be authorized to engage in solicitation activities with respect
to the Variable Products, including the recruitment and appointment of
Broker-Dealers and Representatives which in turn may be authorized to
engage in solicitation activities involving the solicitation of
Applications, Premiums and Purchase Payments directly from prospective
purchasers.
The Distributor shall enter into separate written "Sales Agreements" with
Broker-Dealers for distribution of the Variable Products. The Distributor
shall notify the Insurance Company of its intention to enter into a Sales
Agreement with a Broker-Dealer by providing to the Insurance Company a copy
of that Sales Agreement at least five (5) business days prior to the date
on which the Sales Agreement is to be executed by the
3
<PAGE> 6
parties thereto. The Distributor shall not enter into a Sales Agreement
with a Broker-Dealer if the Insurance Company reasonably objects within
five (5) days after delivery of the proposed Sales Agreement with the
Broker-Dealer by notifying the Distributor of its objection and reasons
therefor in writing.
(b) The Insurance Company shall not offer for sale or sell any Variable
Products to or through any of the persons listed on Schedule 4 to this
Agreement, as that Schedule may be amended from time to time, or any of the
successors or assigns of those persons, or to or through any affiliate of
such person (unless otherwise indicated on Schedule 4 that the use of an
affiliate is not precluded) other than sales (through Broker-Dealers or
directly) pursuant to this Agreement without the prior written consent of
the Distributor. It is understood that Schedule 4 will be re-evaluated
quarterly after the effective date of this Agreement and will be amended to
add persons with whom a Sales Agreement has been executed (or is reasonably
expected to be executed within one year of the quarterly re-evaluation) or
to delete persons for which no Sales Agreement has been executed during the
one year or longer period that person has been listed on Schedule 4.
Any person included on or added to Schedule 4 shall be subject to an annual
minimum production standard for the period beginning on the effective date
of that person's Sales Agreement through the end of this Agreement. The
annual minimum production standard for each such person shall be mutually
agreed to by the parties to this Agreement in writing and shall be reset
annually on the anniversary of the effective date of that person's Sales
Agreement. In the event that the parties cannot agree on terms or the
annual minimum production standard is not met with respect to any person,
such person shall be permanently deleted from Schedule 4 unless the
Insurance Company, in its discretion, consents in writing to the addition
of such person to Schedule 4 in a subsequent year.
(c) Any Sales Agreement between the Distributor and a Broker-Dealer shall
require the Broker-Dealer to prepare a monthly activity report in form and
substance mutually acceptable to the Distributor and the Insurance Company.
That Sales Agreement shall further require the Broker-Dealer to provide
those monthly activity reports to the Distributor no later than the fifth
business day following the end of each month. The Distributor shall provide
a copy of the monthly activity report to the Insurance Company no later
than the seventh business day following the end of each month.
(d) Nothing in this Agreement precludes additional distribution and
compensation arrangements among the parties to this Agreement, including
ones that may have compensation arrangements that reward the Insurance
Company for identifying and recruiting new Broker-Dealers to sell the
Variable Products, for identifying potential
4
<PAGE> 7
purchasers of the Variable Products, or for providing superior support
under this Agreement.
3. DISTRIBUTION ACTIVITIES -- APPOINTMENT
(a) Where required by applicable state insurance law, the Insurance
Company hereby appoints the Distributor as its agent under that state
insurance law to represent the Insurance Company in the distribution
activities contemplated by this Agreement. The Insurance Company hereby
authorizes the Distributor under applicable securities laws to engage in
the activities contemplated by this Agreement relating to the distribution
of the Variable Products.
(b) In states where the Distributor is not licensed as an insurance agent
and applicable state insurance law requires that the Distributor be so
licensed, the Insurance Company hereby appoints each Distributor Agency
Affiliate listed on Schedule 1 to this Agreement (as that Schedule may be
amended from time to time by the Distributor when required by applicable
state insurance law to reflect changes in the licensing status of the
Distributor or the Distributor Agency Affiliates) as its agent under
applicable state insurance laws to represent the Insurance Company in the
distribution activities contemplated by this Agreement.
(c) The Distributor is hereby vested with the power and authority to
authorize Broker-Dealers to recommend Representatives for appointment as
agents of the Insurance Company. The Insurance Company shall appoint in the
appropriate states or jurisdictions the Representatives recommended by the
Broker-Dealers, provided that the Insurance Company reserves the right,
which right shall not be exercised unreasonably, to refuse to appoint as
agent any Representative, and, once appointed, to terminate the same at any
time for cause. The Distributor shall submit to the Insurance Company a
"certificate of good standing" executed by a principal of the Broker-Dealer
for each Representative recommended for appointment. The Insurance Company
shall notify the Distributor of its intent to terminate a Representative
and the reasons therefor not less than two (2) business days prior to
delivering any notice of termination to the Representative and the
Broker-Dealer with whom the Representative is associated.
(d) The Insurance Company shall not enter into any agent or agency
agreement (an "Agent Agreement") with any Representative, Broker-Dealer, or
affiliate (contractual or otherwise) of a Broker-Dealer (a "Broker-Dealer
Affiliate") in connection with this Agreement for the sale of the Variable
Products, unless that Agent Agreement (i) is substantially identical to the
form of Agent Agreement attached hereto as Schedule 7 or (ii) is approved
by the Distributor, provided that the approval of the Distributor shall be
5
<PAGE> 8
deemed to have been given if no written objection to the Agent Agreement
has been delivered by the Distributor to the Insurance Company within five
(5) business days after being provided with a copy of the proposed Agent
Agreement. After entering into an Agent Agreement, the Insurance Company
shall not amend or supplement that agreement without the Distributor's
prior written consent, which consent shall not be unreasonably withheld.
The Insurance Company shall notify the Distributor of its intent to
terminate an Agent Agreement and the reasons therefor not less than two (2)
business days prior to delivering any notice of termination to the other
party to that agreement.
4. DISTRIBUTION ACTIVITIES -- DUTIES
(a) The Distributor shall use its best efforts to actively market the
Variable Products (except Series I-E Private Placement Group Variable Life
Insurance Policies and Series I-EF Private Placement Group Variable Life
Insurance Policies) through Broker-Dealers and Representatives in
accordance with the terms and conditions of this Agreement, subject to
applicable material market and regulatory conditions.
(b) The Distributor shall assist and provide information to Broker-Dealers
and Representatives in connection with servicing the Variable Products sold
or marketed by those Broker-Dealers and Representatives.
(c) Under no circumstances shall the Insurance Company or the Distributor
be responsible under this Agreement for any failure by Broker-Dealers or
Representatives to comply with applicable law.
(d) Under no circumstances shall the Distributor be responsible under this
Agreement for any failure by the Insurance Company to comply with
applicable law.
(e) Under no circumstances shall the Insurance Company be responsible
under this Agreement for any failure by the Distributor to comply with
applicable law.
5. LIMITATIONS ON AUTHORITY
(a) The Distributor shall not have the authority, and shall not grant
authority to Broker-Dealers or Representatives, on behalf of the Insurance
Company:
(1) to make, alter or discharge any Variable Product or other
contract entered into pursuant to a Variable Product;
(2) to waive any Variable Product forfeiture provision;
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(3) to extend the time of paying any Purchase Payments or Premiums
due under the Variable Products; and
(4) to receive any monies, Purchase Payments or Premiums (except for
the sole purpose of forwarding monies, Purchase Payments or Premiums
to the Insurance Company).
(b) The Distributor shall not expend, nor contract for the expenditure of,
funds of the Insurance Company.
(c) The Distributor shall not possess or exercise any authority on behalf
of the Insurance Company other than that expressly conferred on the
Distributor by this Agreement.
6. SALES AGREEMENTS
(a) The Distributor shall not enter into any Sales Agreement with a
Broker-Dealer relating to the distribution of any Variable Product, unless
that Sales Agreement (i) is substantially identical to the form of Sales
Agreement attached hereto as Schedule 10 or (ii) is approved by the
Insurance Company, provided that the approval of the Insurance Company
shall be deemed to have been given if no written objection to the Sales
Agreement has been delivered by the Insurance Company to the Distributor
within five (5) business days after being provided by facsimile or express
courier with a copy of the proposed Sales Agreement.
(b) The Distributor shall provide to the Insurance Company a copy of each
Sales Agreement entered into by the Distributor and a Broker-Dealer within
five (5) business days following execution thereof.
7. FORMS, APPLICATIONS, AND LICENSING
(a) The Insurance Company, or its agent, shall forward to the Distributor,
Applications, Policies, Contracts, subscription agreements, certificates,
other administrative forms, and any amendments or supplements to the
foregoing, necessary to carry out the Distributor's distribution authority
and responsibilities with respect to the Variable Products.
(b) The Insurance Company shall obtain all requisite regulatory approvals
of such materials furnished to the Distributor and shall comply with all
applicable laws, rules,
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regulations and orders of any governmental authority relating to the
issuance or sale of the Variable Products.
(c) All Premiums and Purchase Payments paid by check or money order that
are collected by the Distributor, any Broker-Dealer or Representative shall
be remitted promptly, and in any event not later than two business days, in
full, together with any subscription agreements, Applications, forms, and
any other required documentation, to the Insurance Company. Checks or money
orders in payment of Premiums and Purchase Payments shall be drawn to the
order of "Kemper Investors Life Insurance Company." Premiums and Purchase
Payments may be transmitted by wire order from the purchaser of the
Variable Products, Broker-Dealer or any Representative to the Insurance
Company. If any Premium or Purchase Payment is held at any time by the
Distributor, Broker-Dealer, or any Representative, the Distributor,
Broker-Dealer, or Representative shall hold that Premium or Purchase
Payment in a fiduciary capacity. All Premiums and Purchase Payments whether
by check, money order or wire, shall be the property of the Insurance
Company.
(d) The Distributor acknowledges that the Insurance Company shall have the
unconditional right to reject, in whole or in part, any Application. The
Insurance Company shall return any monies received by it from an applicant
or purchaser whose Application has been rejected. The Insurance Company
shall notify the Distributor in writing one business day prior to taking
any action to return any such monies, which notice shall identify, if
applicable, the Broker-Dealer whose Representative submitted the rejected
Application.
(e) If a purchaser exercises its "free look right" under a Variable
Product, any refund of Premiums or Purchase Payments, due as provided in
that Variable Product, shall be made by the Insurance Company to the
purchaser. The Insurance Company shall notify the Distributor in writing
one business day prior to taking any action to refund any such Premiums or
Purchase Payments, which notice shall identify, if applicable, the
Broker-Dealer through which the Variable Product had been purchased.
8. MARKETING MATERIALS
(a) REGISTERED PRODUCTS
(1) The Distributor shall design, develop, produce, make the
determination whether to file and, if necessary, file for and obtain
all necessary regulatory approvals for, all advertising, sales
literature, and other promotional material
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(which shall not be deemed to include any Prospectus) required in
connection with its distribution of the Registered Products.
(2) Prior to use of any advertising, sales literature, or other
promotional material for the Registered Products, the following
procedures shall be observed:
(i) The Distributor shall provide to the Insurance Company
copies of all advertising, sales literature, and other
promotional material developed by the Distributor at least 10
days prior to first use;
(ii) The Insurance Company shall have the right to disapprove
use of any such promotional material, provided that written
notice of the disapproval and basis therefor is provided to the
Distributor within 10 days of receipt by the Insurance Company of
the promotional material;
(iii) If any advertising, sales literature, or other promotional
material names an investment company or an investment company's
investment adviser, the Distributor shall furnish such material
to that investment company or that investment company's
distributor or investment adviser, and written approval shall be
obtained from that investment company or its distributor or
investment adviser before use or authorization of use by the
Broker-Dealers or Representatives;
(iv) Any advertising, sales literature, or other promotional
material relating to the Registered Products required to be filed
with the Commission, NASD Regulation, Inc. ("NASDR"), and any
other appropriate securities and insurance regulatory
authorities, shall be timely filed by the Distributor. The
Distributor shall provide the Insurance Company with a copy of
any comments provided by the NASDR or any securities or insurance
regulatory authority on such material, and the Insurance Company
will cooperate in resolving and implementing any comments, as
applicable.
(b) PRIVATE PLACEMENTS
(1) The Distributor acknowledges that the Private Placements may only
be offered for sale or sold in transactions not involving any public
offering and may not be offered for sale or sold by any form of
general solicitation or general advertising within the meaning of Rule
502(c) of Regulation D under the 1933 Act, and the Distributor agrees
that the Private Placements may only be offered
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through the use of Private Placement Memoranda and
prospective-purchaser-specific supplemental information.
(2) The Distributor shall design, develop, and produce, and obtain
all necessary regulatory approvals for, all prospective-
purchaser-specific supplemental information (which shall not be deemed
to include any Private Placement Memorandum) required in connection
with its distribution of the Private Placements.
(3) Any Sales Agreement between the Distributor and a Broker-Dealer
in respect of Series I-B Private Placement Group Variable Life
Insurance Policies, Series I-E Private Placement Group Variable Life
Insurance Policies (which is limited under this Agreement to one
existing case whose compensation schedule is included in Schedule 5
hereto), Series I-EF Private Placement Group Variable Life Insurance
Policies (which is limited under this Agreement to one existing case
whose compensation schedule is included in Schedule 5 hereto), Series
I-F Private Placement Group Variable Life Insurance Policies, Series
I-I Private Placement Group Variable Life Insurance Policies, Series
I-K Private Placement Group Variable Life Insurance Policies, and any
future variations of those Policies (collectively referred to herein
as "Series I Policies") and any other Private Placements shall require
that the form of all sales, training, explanatory, or other materials
prepared by that Broker-Dealer in connection with Private Placements
must be approved by the Distributor and the Insurance Company prior
to use. That Sales Agreement shall further require the Broker-Dealer
to submit to the Distributor and the Insurance Company, for written
approval at least ten days prior to use, all materials developed by
the Broker-Dealer to be used in connection with the sale of the Series
I Policies that describe the Series I Policies, or describe the terms
of the Series I Policies' offering, or contain Series I Policy
illustrations. The Sales Agreement shall further provide that the
Distributor and the Insurance Company have the right to disapprove the
use of any materials submitted to them by the Broker-Dealer, provided,
that written notice of the disapproval and the basis therefor is
PROVIDED to the Broker-Dealer within ten days of receipt of the
materials by the Distributor and the Insurance Company. The Sales
Agreement shall further require that all written communications
between the Broker-Dealer and prospective clients or Series I Policy
owners shall be maintained by the Broker-Dealer for a period of at
least 5 years and the Distributor and the Insurance Company shall have
the right to inspect those files during normal business hours.
(c) ALLOCATION OF COSTS
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(1) The Distributor shall pay for the development and printing of all
advertising, sales literature, and other promotional material (other
than those materials set forth in paragraph 2, below) and all fees
related to NASDR filings. The Distributor shall also bear the cost of
printing and distributing to prospective purchasers of Variable
Contracts or to owners of Variable Contracts all Prospectuses
(including, for this purpose, prospectuses of registered open-end
management investment companies that serve as funding media for the
Variable Contracts, to the extent not paid by those investment
companies) and Private Placement Memoranda.
(2) The Insurance Company shall bear the cost of registration and
qualification of the Registered Products; the preparation of all
Private Placement Memoranda; the preparation and filing of all
Prospectuses and Registration Statements; setting the Prospectuses and
Private Placement Memoranda in type; the preparation, filing,
printing, and distributing to existing owners of Policies or Contracts
of any proxy materials and reports and of all statements and notices
required by any state or federal law.
(3) The Insurance Company shall bear the cost of any review by it, or
on its behalf, of any advertising, sales literature, or other
promotional material.
(4) The Distributor shall bear the cost of any review by it, or on
its behalf, of any Prospectuses or Private Placement Memoranda.
9. THE DISTRIBUTOR'S COMPENSATION
(a) In consideration for the services rendered by the Distributor pursuant
to this Agreement, the Insurance Company shall pay the Distributor the
compensation set forth in Schedule 5 to this Agreement, as that schedule
may be amended from time to time, provided, that, any such amendments are
in writing and signed by the parties.
(b) With respect to Variable Products in connection with which the
Insurance Company has paid sales commissions as a percentage of Purchase
Payments or Premiums, as the case may be, to the Distributor, to a
Broker-Dealer, or to a Representative, in the event a Contract or Policy on
a Variable Product terminates within twelve (12) months of the date of
receipt of Premium or a Purchase Payment and no contingent deferred sales
charge is received by the Insurance Company, the Insurance Company reserves
the right to recover: (1) one hundred percent (100%) of the compensation
paid to Distributor respecting the sale of the Variable Product if that
Variable Product terminates for reasons other than death during the first
six (6) months
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following receipt of Premium or a Purchase Payment; (2) fifty percent (50%)
of the compensation paid to the Distributor if the Variable Product
terminates after six (6) months but before twelve (12) months have elapsed
following receipt of Premium or a Purchase Payment; and (3) nothing from
the Distributor (i.e., no charge back) if the Variable Product terminates
thereafter. With respect to any other terminations, the Insurance Company
has no right to recover any portion of the compensation paid to the
Distributor. In no event shall the Insurance Company have the right to
recover any portion of any compensation received by the Distributor as a
basis point charge against investment values under the contracts. The
Insurance Company shall have the right to set off any amounts owed by the
Distributor under this Section 9(b) against any amounts owed by the
Insurance Company to the Distributor.
(c) In the event that the Insurance Company exercises its right to assess
a front-end sales charge against Premium under the Private Placements
specified in Schedule 2, as may be amended from time to time, which right
it has reserved in the Private Placement Memoranda, the front-end sales
charge will be paid by the Insurance Company to the Distributor. The
Distributor will generally use the front-end sales charge to finance sales
commissions to Broker-Dealers and Registered Representatives.
10. REPRESENTATIONS AND WARRANTIES
(a) BY THE DISTRIBUTOR
The Distributor represents and warrants to, and covenants with, the
Insurance Company as follows:
(1) The Distributor has taken all action necessary including without
limitation, those necessary under its articles of incorporation,
by-laws and applicable state corporate law, to authorize the
execution, delivery and performance of this Agreement and all
transactions contemplated hereunder.
(2) The Distributor is and shall remain registered during the term of
this Agreement as a broker-dealer under the 1934 Act, a member in good
standing of the NASD, and duly registered under applicable state
securities laws.
(3) The Distributor is and shall remain during the term of this
Agreement in compliance with the eligibility requirements for certain
affiliated persons and underwriters found in Section 9(a) of the 1940
Act.
(4) The Distributor and each Distributor Agency Affiliate has all
necessary licenses and regulatory approvals to perform the services
required by this
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Agreement and that the Distributor will notify the Insurance Company
within three business days of obtaining actual knowledge of any change
in the status of such licenses or regulatory approvals.
(5) The Distributor has, or will have, the authority to bind the
Distributor Agency Affiliates to the terms of this Agreement.
(b) BY THE INSURANCE COMPANY
The Insurance Company represents and warrants to, and covenants
with, the Distributor as follows:
(1) All necessary regulatory approvals and licenses from any state or
federal governmental body having jurisdiction over the Insurance
Company or the Variable Products have been obtained, and the Insurance
Company will notify the Distributor within one business day of
obtaining actual knowledge of any change in the status of any
approvals or licenses related to the marketing, sale or distribution
of the Variable Products.
(2) The Insurance Company has taken all action necessary including,
without limitation, those necessary under its articles of
incorporation, bylaws and applicable state corporate law, to authorize
the execution, delivery and performance of this Agreement and all
transactions contemplated hereunder.
(3) The Insurance Company is and shall remain during the term of this
Agreement in compliance with the eligibility requirements for certain
affiliated persons and underwriters found in Section 9(a) of the 1940
Act.
(4) With respect to the cost of insurance rates for "HNW Policies"
(i.e., Policies other than Series I Policies), the Insurance Company
shall utilize the applicable current single life cost of insurance
rates contained in Schedule 8 to this Agreement. With respect to the
cost of insurance rates for HNW Policies issued on a survivorship
basis, the Insurance Company shall "fraserize" the applicable current
single life cost of insurance rates as described in Schedule 9 to this
Agreement. The Insurance Company shall notify the Distributor, in the
manner provided for in Section 17 of this Agreement, at least thirty
(30) days in advance of the anticipated implementation date of any
proposed changes to (i) the current single life cost of insurance
rates contained in Schedule 8 to this Agreement or (ii) the
"fraserization" process contained in Schedule 9 to this Agreement, and
the resulting changes, if any, to the cost of insurance rates. The
Insurance Company
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shall include with its notification to the Distributor a copy of the
proposed changes.
11. INDEMNIFICATION
(a) BY THE DISTRIBUTOR
(1) The Distributor agrees to indemnify and hold harmless the
Insurance Company and each director, officer, employee or agent of the
Insurance Company, and each person, if any, who controls the Insurance
Company within the meaning of the federal securities laws
(collectively, the "Indemnified Parties" for purposes of this Section
11(a)) against any and all losses, claims, damages, liabilities
(including amounts paid in settlement with the written consent of the
Insurance Company) or litigation (including legal and other expenses)
to which the Indemnified Parties may become subject under any statute,
regulation, at common law or otherwise, insofar as such losses,
claims, damages, liabilities or expenses (or actions in respect
thereof) or settlements are related to the offer or sale of the
Variable Products or the operation of the Variable Accounts and:
(i) arise out of, or are based upon, violation(s) by the
Distributor or a Distributor Agency Affiliate of federal or state
securities law(s) or regulation(s), applicable banking law(s) or
regulation(s), insurance law(s) or regulation(s) or any rule or
requirement of the NASD; or
(ii) arise out of, or are based upon, any oral or written
misrepresentation, or any unlawful sales practices concerning the
Variable Products by the Distributor; or
(iii) arise out of, or are based upon, any untrue statement or
alleged untrue statement of a material fact or omission or
alleged omission to state a material fact required to be stated
therein or necessary to make the statements therein not
misleading, in light of the circumstances in which they were
made, contained in any advertising, sales literature, or other
promotional material designed, developed, and produced by the
Distributor and used by it in the distribution of the Variable
Products; provided that the Distributor shall not be liable in
any such case to the extent that such losses, claims, damages,
liabilities or expenses arises out of, or are based upon, an
untrue statement or alleged untrue statement or omission or
alleged omission made in reliance upon information furnished in
writing to the Distributor by the Insurance Company specifically
for use in the preparation of any such promotional material; or
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(iv) arise out of, or are based upon, claims by the
Representatives or agents or representatives of the Distributor
for commissions or other compensation or remuneration of any
type; or
(v) arise as a result of any failure on the part of the
Distributor to submit Premiums, Purchase Payments, or
Applications to the Insurance Company, or to submit the correct
amount of a Premium or Purchase Payment, on a timely basis and in
accordance with this Agreement, subject to applicable law; or
(vi) arise as a result of any failure on the part of the
Distributor to deliver the Variable Products to purchasers
thereof on a timely basis; provided that the Distributor shall
not be liable in any such case to the extent that such losses,
claims, damages, liabilities or expenses arise as a result of any
failure on the part of the Insurance Company to perform its
obligations under this Agreement on a timely basis; or
(vii) arise as a result of a material breach by the Distributor
of any provisions of this Agreement; or
(viii) arise as a result of actions of a Broker-Dealer or its
Representatives, if, and to the extent that, the Distributor has
received monies from the Broker-Dealer as indemnification for
losses by, or expenses incurred by, the Insurance Company;
as limited by and in accordance with the provisions of Sections
11(a)(2) and 11(a)(3) hereof.
(2) The Distributor shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or
litigation ("Losses" for purposes of this Section 11(a)(2)) incurred
or assessed against an Indemnified Party that may arise from any
Indemnified Party's willful misfeasance or bad faith. The
Distributor's liability for Losses in the event of its breach of this
Agreement shall be limited to that portion of Losses caused by its
breach, and the Distributor shall not be liable for that portion of
Losses caused by breach of this Agreement by an Indemnified Party or
from any act or omission by an Indemnified Party.
(3) The Distributor shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party
unless that Indemnified Party shall have notified the Distributor in
writing within five (5)
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business days after the summons or other first legal process giving
information of the nature of the claim shall have been served upon
that Indemnified Party (or after the Indemnified Party shall have
received notice of such service on any designated agent).
Notwithstanding the foregoing, the failure of any Indemnified Party to
give notice as provided herein shall not relieve the Distributor of
its obligations hereunder except to the extent that the Distributor
has been prejudiced by such failure to give notice. In addition, any
failure by the Indemnified Party to notify the Distributor of any such
claim shall not relieve the Distributor from any liability which it
may have to the Indemnified Party against whom the action is brought
otherwise than on account of this indemnification provision. In case
any such action is brought against the Indemnified Parties, the
Distributor shall be entitled to participate, at its own expense, in
the defense of the action. The Distributor also shall be entitled to
assume the defense thereof, with counsel satisfactory to the party
named in the action; provided, however, that if the Indemnified Party
shall have reasonably concluded that there may be defenses available
to it which are different from or additional to those available to the
Distributor, the Distributor shall not have the right to assume said
defense, but shall pay the costs and expenses thereof (except that in
no event shall the Distributor be liable for the fees and expenses of
more than one counsel for Indemnified Parties in connection with any
one action or separate but similar or related actions in the same
jurisdiction arising out of the same general allegations or
circumstances). After notice from the Distributor to the Indemnified
Party of the Distributor's election to assume the defense thereof, and
in the absence of such a reasonable conclusion that there may be
different or additional defenses available to the Indemnified Party,
the Indemnified Party shall bear the fees and expenses of any
additional counsel retained by it, and the Distributor will not be
liable to that party under this Agreement for any legal or other
expenses subsequently incurred by the party independently in
connection with the defense thereof other than reasonable costs of
investigation.
(4) The Indemnified Parties will notify the Distributor within
five (5) business days of the commencement of any litigation or
proceedings against them in connection with the offer or sale of
the Variable Products or the operation of the Variable Accounts.
(b) BY THE INSURANCE COMPANY
(1) The Insurance Company agrees to indemnify and hold harmless the
Distributor and each director, officer, employee or agent of the
Distributor, and each person, if any, who controls the Distributor
within the meaning of the federal securities laws (collectively, the
"Indemnified Parties" for purposes of this
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Section 11(b)) against any and all losses, claims, damages,
liabilities (including amounts paid in settlement with the written
consent of the Insurance Company) or litigation (including legal and
other expenses) to which the Indemnified Parties may become subject
under any statute, regulation, at common law or otherwise, insofar as
such losses, claims, damages, liabilities or expenses (or actions in
respect thereof) or settlements are related to the offer or sale of
the Variable Products or the operation of the Variable Accounts and:
(i) arise out of or are based upon any untrue statement or
alleged untrue statement of a material fact or omission or
alleged omission to state a material fact required to be stated
therein or necessary to make the statements therein not
misleading, in light of the circumstances in which they were
made, contained in any: (A) Registration Statement or Prospectus;
(B) blue-sky application or other document executed by the
Insurance Company specifically for the purpose of exempting the
Private Placements from, or qualifying any or all of the
Registered Products for sale under, the securities laws of any
jurisdiction; or (C) information furnished in writing to the
Distributor specifically for the purpose of being included in any
advertising, sales literature, or other promotional material to
be used in connection with the distribution of the Variable
Products; provided that the Insurance Company shall not be liable
in any such case to the extent that such losses, claims, damages,
liabilities or expenses arise out of, or are based upon, an
untrue statement or alleged untrue statement or omission or
alleged omission made in reliance upon information furnished in
writing to the Insurance Company by the Distributor specifically
for use in the preparation of any such document, application, or
promotional material; or
(ii) result because of the provisions of any Variable Product
or because of any material breach by the Insurance Company of any
provision of this Agreement or of any Variable Product or which
result from any activities of the Insurance Company's officers,
directors, employees or agents (except Life Insurance Solutions,
L.L.C. in its capacity as administrator of certain Variable
Products) or their failure to take any action in connection with
the sale, processing or administration of the Variable Products
including, without limitation, obtaining auditors' reports,
computing accurate separate account and/or underlying fund
performance data, preparation and timely filing and delivery, as
required, of annual and semiannual reports and reports on Form
N-SAR and the timely payment of all state and federal
registration fees;
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as limited by and in accordance with the provisions of Sections
11(b)(1) and 11(b)(2) hereof.
(2) The Insurance Company shall not be liable under this
indemnification provision with respect to any losses, claims, damages,
liabilities or litigation ("Losses" for purposes of this Section
11(b)(2)) incurred or assessed against an Indemnified Party that may
arise from any Indemnified Party's willful misfeasance or bad faith.
The Insurance Company's liability for Losses in the event of its
breach of this Agreement shall be limited to that portion of Losses
caused by its breach, and that party shall not be liable for that
portion of Losses caused by breach of this Agreement by an Indemnified
Party or from any act or omission by an Indemnified Party.
(3) The Insurance Company shall not be liable under this
indemnification provision with respect to any claim made against an
Indemnified Party unless that Indemnified Party shall have notified
the Insurance Company in writing within five (5) business days after
the summons or other first legal process giving information of the
nature of the claim shall have been served upon that Indemnified Party
(or after the Indemnified Party shall have received notice of such
service on any designated agent). Notwithstanding the foregoing, the
failure of any Indemnified Party to give notice as provided herein
shall not relieve the Insurance Company of its obligations hereunder
except to the extent that the Insurance Company has been prejudiced by
such failure to give notice. In addition, any failure by the
Indemnified Party to notify the Insurance Company of any such claim
shall not relieve the Insurance Company from any liability which it
may have to the Indemnified Party against whom the action is brought
otherwise than on account of this indemnification provision. In case
any such action is brought against the Indemnified Parties, the
Insurance Company shall be entitled to participate, at its own
expense, in the defense of the action. The Insurance Company also
shall be entitled to assume the defense thereof, with counsel
satisfactory to the party named in the action; provided, however, that
if the Indemnified Party shall have reasonably concluded that there
may be defenses available to it which are different from or additional
to those available to the Insurance Company, the Insurance Company
shall not have the right to assume said defense, but shall pay the
costs and expenses thereof (except that in no event shall the
Insurance Company be liable for the fees and expenses of more than one
counsel for Indemnified Parties in connection with any one action or
separate but similar or related actions in the same jurisdiction
arising out of the same general allegations or circumstances). After
notice from the Insurance Company to the Indemnified Party of the
Insurance Company's election to assume the defense thereof, and in the
absence of such a reasonable conclusion that there may be
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different or additional defenses available to the Indemnified Party,
the Indemnified Party shall bear the fees and expenses of any
additional counsel retained by it, and the Insurance Company will not
be liable to that party under this Agreement for any legal or other
expenses subsequently incurred by the party independently in
connection with the defense thereof other than reasonable costs of
investigation.
(4) The Indemnified Parties will notify the Insurance Company within
five (5) business days of the commencement of any litigation or
proceedings against them in connection with the offer or sale of the
Variable Products or the operation of the Variable Accounts.
12. RECORDS
The Insurance Company and the Distributor each shall maintain such
accounts, books and other documents as are required to be maintained by each of
them by applicable laws and regulations and shall preserve such accounts, books
and other documents for the periods prescribed by such laws and regulations. The
accounts, books and records of the Insurance Company as to all transactions
hereunder shall be maintained so as to clearly and accurately disclose the
nature and details of the transactions, including such accounting information as
necessary to support the reasonableness of the amounts paid by the Insurance
Company hereunder. Each party shall have the right to inspect and audit such
accounts, books and records of the other party during normal business hours upon
reasonable written notice to the other party. Any party that requests an audit
of the accounts, books and records of the other party shall bear the expense of
conducting such an audit, including the expenses of the other party reasonably
incurred in connection with the audit, but not including the costs associated
with the time spent on audit-related matters by directors, officers, or
employees of the other party and the associated overhead expenses incurred by
such party.
13. INVESTIGATIONS AND PROCEEDINGS
(a) COOPERATION
The Distributor and the Insurance Company shall notify each other
promptly of and cooperate fully in any insurance regulatory investigation
or proceeding or judicial proceeding arising in connection with the
offering, sale or distribution of the Variable Products pursuant to this
Agreement. Further, the Distributor and the Insurance Company shall
cooperate fully in any securities regulatory investigation or proceeding or
judicial proceeding with respect to the Insurance Company, the Distributor,
their affiliates, agents or employees to the extent that such investigation
or proceeding is in connection with the offering, sale or distribution of
the Variable Products pursuant to this Agreement.
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(b) COMPLAINTS
The Insurance Company and the Distributor shall notify each other
promptly of any complaint received by any party with respect to the
Insurance Company, the Distributor or any of their affiliates, agents or
employees or which may affect the Insurance Company's issuance of any
Variable Product marketed under this Agreement. In the case of a
substantive complaint, the Distributor and the Insurance Company shall
cooperate in investigating such complaint and any such response by any
party to such complaint shall be sent to the other party for written
approval not less than five (5) business days prior to its being sent to
the complainant or any regulatory authority. In any event, neither party
shall release any such response without the other party's prior written
approval.
14. TERM AND TERMINATION
(a) TERM -- This Agreement shall be effective from the date hereof through
December 31, 2001, which term shall automatically be extended for a period
of three years and tri-annually thereafter for an additional period of
three years until this Agreement is sooner terminated in accordance with
the terms of the Agreement.
(b) TERMINATION -- No party hereto may terminate this Agreement except as
expressly provided in this Section 14(b).
(1) Any party hereto may terminate this Agreement effective the date
that the term of this Agreement would otherwise automatically be
renewed upon written notice delivered to the other party not less than
30 nor more than 60 days prior to such effective date, which notice
shall specify that it is being given pursuant to this Section
14(b)(1).
(2) A party (the "Terminating Party") may terminate this Agreement
for cause if:
(i) another party (the "Breaching Party") materially breaches
this Agreement,
(ii) the Terminating Party has delivered to the Breaching Party
a notice specifying that it is a notice of breach being given
pursuant to this Section 14(b)(2), and
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<PAGE> 23
(iii) the Breaching Party has not cured that breach within 30
days after the delivery of the notice.
(3) A Terminating Party may terminate this Agreement for cause (upon
30 days written notice to the other party) if, as a result of
(i) the voluntary institution by the Distributor of bankruptcy
proceedings or the voluntary institution by the Insurance Company
of insolvency or rehabilitation proceedings under any state
insurance laws or regulations (each an "Insolvent Party") or
(ii) a formal order or written finding by a court of competent
jurisdiction that the Insolvent Party is bankrupt or insolvent,
there is a degradation of the Insolvent Party's reputation that would
materially impair the ability of the Insolvent Party to carry out its
obligations under this Agreement.
(4) The Insurance Company may terminate this Agreement if: (i) 50% or
more of the voting interests in the Distributor ceases to be held by
an Affiliate of the Insurance Company; or (ii) the voting manager of
the Distributor who represents an Affiliate of the Insurance Company
is changed to a person who is unacceptable to the Insurance Company.
(c) ACTIVITIES AFTER TERMINATION -- Upon termination of this Agreement for
any reason, the Distributor agrees that it will not take any action
designed or calculated to result in the transfer or exchange of Contracts
or Policies.
(d) SURVIVAL -- The provisions of Sections 10, 11, 14(c), 18 and 19
(Representations and Warranties, Indemnification, Activities after
Termination, Arbitration and Confidentiality, respectively) shall survive
the termination of this Agreement.
15. RIGHTS UPON TERMINATION
(a) In no event will any further compensation be paid to the Distributor
should the Insurance Company terminate this Agreement for cause pursuant to
Section 14(b)(2) or Section 14(b)(3).
(b) As of the date of termination, the Insurance Company shall have the
right to set off against any monies it owes the Distributor any amounts
owed by the Distributor to the
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<PAGE> 24
Insurance Company. In the event that the amounts owed by the Distributor
exceed the amounts owed by the Insurance Company, the difference shall
become immediately due and payable by the Distributor.
(c) In the event that either party does not pay within two weeks after
termination the net amount it owes, then the net amount owed will accrue
interest, compounded daily, at the fluctuating prime interest rate charged
by The Chase Manhattan Bank, N.A., plus two percent (2%).
(d) The parties acknowledge and agree that the damages that the
Distributor would suffer were the Distributor to terminate this Agreement,
pursuant to Section 14(b)(2) or 14(b)(3), are uncertain in amount and
difficult to establish. Therefore, if this Agreement is terminated in the
foregoing manner, the Insurance Company agrees to pay the Distributor
termination fees in the amount and in the manner set forth in Schedule 6
and Schedule 6(a) to this Agreement.
(e) If the Insurance Company terminates this Agreement pursuant to Section
14(b)(1) or Section 14(b)(4), the Insurance Company, after the termination
of this Agreement, shall continue to:
(1) pay the Distributor the compensation set forth in Schedule 5 to
this Agreement; and
(2) offer all of the Variable Products identified on Schedule 2 to
this Agreement for a period of one (1) year from the date of
termination of this Agreement, during which period of time (i) the
Insurance Company shall employ at least the same level of efforts in
offering and supporting the Variable Products as it did before the
termination of this Agreement and (ii) the terms of this Agreement
shall remain in full force and effect as though the Agreement had not
been terminated.
(f) If the Distributor terminates this Agreement pursuant to Section
14(b)(1), or if the Insurance Company terminates this Agreement pursuant to
Section 14(b)(4), the Insurance Company, after the termination of this
Agreement, shall continue to pay the Distributor the compensation set forth
in Schedule 5 to this Agreement.
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<PAGE> 25
16. INDEPENDENT CONTRACTOR
The Distributor shall act as an independent contractor in the performance
of its duties and obligations under this Agreement and nothing herein contained
shall constitute the Distributor, Broker-Dealers, Representatives or employees
or officers of the Distributor or Broker-Dealers as employees of the Insurance
Company in connection with the distribution of the Variable Products.
17. NOTICES
Any notice required or permitted under this Agreement shall be delivered
personally or sent by facsimile or by registered or certified mail, return
receipt requested, with all postage prepaid:
(a) TO THE DISTRIBUTOR:
LIS Securities
One Chase Manhattan Plaza
New York, New York 10005
Attention: Michael Hartnett
Fax: (212) 859-2671
(b) TO THE INSURANCE COMPANY:
Kemper Investors Life Insurance Company
1 Kemper Drive
Long Grove, Illinois 60049
Attention: General Counsel
Fax: (847) 969-3529
A party may change its address or fax number for the delivery of notices by
delivering a written notice to the other party at its last specified address.
All notices shall be effective upon delivery; provided that any notice sent by
facsimile shall be deemed ineffective unless a copy of the notice is also
delivered personally or sent by express courier or mail for delivery on the same
or next business day.
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<PAGE> 26
18. ARBITRATION
Any dispute between the Distributor and the Insurance Company arising under
or relating to this Agreement shall be settled by compulsory arbitration before
a panel of three (3) arbitrators in accordance with the Commercial Arbitration
Rules then in force of the American Arbitration Association. The arbitration
shall take place in Chicago, Illinois, unless some other location is mutually
agreed upon by the parties in dispute. Each party shall bear its own costs and
expenses in any such arbitration, except that the Distributor and the Insurance
Company shall bear the expenses of the arbitrators' services equally.
19. CONFIDENTIALITY
(a) GENERALLY. Each party will hold the other party's Confidential
Information (as defined below) in confidence and will safeguard it as
provided herein. The party receiving Confidential Information will not,
directly or indirectly, report, publish, distribute, disclose, or otherwise
disseminate the Confidential Information, or any portion thereof, to any
third party including its affiliates, and will not use the Confidential
Information, or any portion thereof, for the benefit of itself or any third
party including its affiliates or for any purpose, except only as necessary
to perform its duties and exercise its rights hereunder, or as expressly
authorized in writing by the party who owns such Confidential Information.
Disclosure of Confidential Information internally by a recipient will be
limited to those of its and its affiliates' officers, directors, employees,
and agents on a "need to know" basis who must have access to the
Confidential Information to enable such party to perform its duties and
exercise its rights hereunder. In order to safeguard the Confidential
Information, each party shall (i) inform each recipient of the Confidential
Information of the confidential nature thereof and of the requirements of
this Agreement, (ii) direct such recipients to comply with the terms of
this Agreement, and (iii) exercise any other precautions necessary to
prevent any improper use or disclosure of Confidential Information.
(b) DEFINITION. "Confidential Information" shall mean: (i) information
regarding a party's or such party's affiliates', financial condition,
information systems, business operations, plans and strategies, products or
services, customers and prospective customers, and marketing and
distribution plans, methods and techniques; (ii) information that is marked
"confidential", "proprietary" or in like words, or that is summarized in
writing as being confidential prior to or promptly after disclosure to the
other party; (iii) any and all related research; and (iv) any and all
designs, ideas, concepts, and technology embodied therein. Confidential
Information of the Distributor or its affiliates that is to be kept
confidential by the Insurance Company shall also include: (v) any
information regarding the pricing strategies of each Broker-Dealer; (vi)
specific marketing and training
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<PAGE> 27
materials of each Broker-Dealer; (vii) any information of the Distributor
or its affiliates in any form whatsoever that is covered by a patent issued
by the United States Patent and Trademark Office; and (viii) any
information relating to the Skycomp illustration and case management
system.
Information is not considered confidential or proprietary if such
information: (1) is or becomes generally available to the public other than
as a result of disclosure by the recipient; (2) was available to or already
known by the recipient on a non-confidential basis prior to its receipt
from the party claiming confidentiality; (3) is developed by the recipient
independently of any information or data acquired from the party claiming
confidentiality; or (4) is disclosed pursuant to a court order or the
requirement of any federal or state regulatory, judicial, or government
authority.
(c) REMEDIES. Each party acknowledges and agrees that monetary damages
would not be a sufficient or adequate remedy for a breach or anticipated
breach of this Section and that, in addition to any other legal or
equitable remedies which may be available, each party shall be entitled to
specific performance and injunctive relief for any breach or anticipated
breach of this Section.
(d) SURVIVAL. The provisions of this Section shall survive the expiration
or other termination of this Agreement.
20. SEVERABILITY
If any provision of this Agreement is held to be unenforceable or invalid,
that provision shall be severed from this Agreement and the remainder of this
Agreement shall remain in full force and effect.
21. CHOICE OF LAW
This Agreement and any disputes, actions or other proceedings arising under
or relating to it shall be governed by law of the State of Illinois without
regard to its principles of conflicts of law.
22. NO WAIVER
No failure or delay on the part of any party hereto in exercising any power
or right under this Agreement shall operate as a waiver thereof, nor shall any
single or partial exercise of such power or right preclude any other or further
exercise thereof or the exercise of any other power or right. No waiver by any
party of any provision of this Agreement, nor of any breach or
25
<PAGE> 28
default, shall be effective unless in writing and signed by the party against
whom such waiver is to be enforced.
23. AGREEMENT NON-ASSIGNABLE
Any assignment of this Agreement in whole or in part by a party without the
prior written consent of the other parties thereto shall be void and shall vest
no rights in the assignee.
24. EXHIBITS AND SCHEDULES
The Exhibits and Schedules to this Agreement are a part of this Agreement
as if set forth in full herein.
25. HEADINGS
The headings herein are for the purpose of convenience only and have no
legal force, meaning or effect.
26. ENTIRE AGREEMENT
This Agreement constitutes the entire agreement of the parties with respect
to the subject matter hereof and supersedes all prior and contemporaneous
agreements, understandings, negotiations and discussions, whether oral or
written, of the parties and there are no warranties, representations and/or
agreements between the parties in conjunction with the subject matter hereof
except as set forth in this Agreement. This Agreement, including any Schedule
or Exhibit hereto, may be amended or modified only by written instrument,
executed by duly authorized officers of the parties.
IN WITNESS WHEREOF, the parties to this Agreement have caused it to be
executed as of the date first above written.
<TABLE>
<CAPTION>
LIFE INSURANCE SOLUTIONS, L.L.C. KEMPER INVESTORS LIFE INSURANCE
D/B/A LIS SECURITIES COMPANY
<S> <C>
By: /s/ Michael Hartnett By: /s/ James E. Hohmann
-------------------------- --------------------------
Name: Michael Hartnett Name: James Hohmann
Title: President, LIS Securities, and Title: SVP
Chief Operating Officer, Life ------------------------
Insurance Solutions, L.L.C.
</TABLE>
26
<PAGE> 1
EXHIBIT (3)(b)
LIFE INSURANCE SOLUTIONS, LLC
D/B/A LIS SECURITIES
SELLING GROUP AGREEMENT
THIS AGREEMENT ("Agreement") is made by and between Life Insurance
Solutions, LLC, a Delaware limited liability company d/b/a LIS Securities
("LIS"), and the undersigned broker-dealer ("Broker-Dealer").
RECITALS:
A. LIS, pursuant to the provisions of a Distribution Agreement
("Distribution Agreement") between LIS and Kemper Investors Life
Insurance Company ("KILICO"), acts as a distributor of certain variable
annuity contracts and/or variable life insurance policies and any
certificates under those contracts and/or policies (the "variable
products" or "Contracts") issued by KILICO. Such Contracts are
identified in the Schedule of Products attached to this Agreement at
the time that this Agreement is executed, and such other Contracts that
may be added to the Schedule of Products from time to time in
accordance with Section 1.5 of this Agreement. The Schedule of Products
is a part of this Agreement as if set forth herein.
B. Certain of the Contracts identified in the Schedule of Products with
the designation "Private Placement" (the "Private Placement Contracts")
are to be offered pursuant to a disclosure document ("private placement
memorandum" or "PPM") to be delivered to the prospective purchaser of
the variable product described therein in reliance upon certain
exemptions from the requirements of federal securities law for
placements of securities other than by means of a public offering.
Interests in the Private Placement Contracts will not be registered
under the Securities Act of 1933, as amended ("1933 Act"), or the
Investment Company Act of 1940, as amended ("1940 Act"), in reliance
upon exemptions therein.
C. LIS desires that Broker-Dealer distribute KILICO's variable products in
those states or jurisdictions in which Broker-Dealer, LIS, KILICO and
the Contracts are appropriately licensed, qualified or approved, and
Broker-Dealer desires to sell those Contracts, through its agents in
those states or jurisdictions, on the terms and conditions set forth
hereinafter. KILICO has authorized LIS to enter into separate written
agreements with broker-dealers that are registered under the Securities
Exchange Act of 1934, as amended ("1934 Act"), and are members in good
standing of the National Association of Securities Dealers, Inc.
("NASD") and pursuant to which the broker-dealers would be authorized
to participate in the distribution of the Contracts and would agree to
use their best efforts to solicit applications for the Contracts in
accordance with the terms of those agreements.
D. KILICO, pursuant to a General Agent Agreement, has authorized
Broker-Dealer or affiliates to act as a general agent ("General
Agent"), collectively if more than one, for the solicitation of
applications for the Contracts and to engage in the distribution
activities contemplated by this Agreement and that General Agent
Agreement.
E. The parties to this Agreement desire that Broker-Dealer be authorized
to solicit applications for the sale of the Private Placement Contracts
only to "Qualified Purchasers" or "Accredited Investors," as those
terms are defined herein, and the balance of the Contracts to the
general public, subject to the terms and conditions set forth herein.
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<PAGE> 2
NOW, THEREFORE, in consideration of the premises and of the mutual
promises and covenants hereinafter set forth, the parties agree as follows:
Section 1: Representations and Warranties; Authorizations
1.1 Broker-Dealer agrees to use its best efforts on behalf of LIS while
performing the functions set forth herein. Broker-Dealer shall be free
to exercise its own judgment as to whom and the time, place, and manner
of solicitation except, (a) Broker-Dealer shall only offer the Private
Placement Contracts to (i) an Accredited Investor, which is either an
individual, a corporation, or a trust which applies to KILICO for
insurance upon the life or lives of individuals that it desires to have
insured, and which meets the definition of accredited investor in Rule
501 of the 1933 Act, and (ii) a Qualified Purchaser, which is an
Accredited Investor that satisfies the definition of qualified
purchaser in Section 2(a)(51) of the 1940 Act; and (b) Broker-Dealer
shall not solicit applications for the Private Placement Contracts in
any manner which constitutes a public offering or involves any form of
general solicitation or general advertising. With respect to Qualified
Purchasers, Broker-Dealer shall use a questionnaire in substantially
the form included as Exhibit B to this Agreement to require each
prospective purchaser to represent and warrant that it owns sufficient
"investments" (as defined in Rule 2a51-1 under the 1940 Act) to meet
the financial requirements and otherwise meet the requirements of the
appropriate definition of "qualified purchaser" in Section 2(a)(51) of
the 1940 Act. Each Registered Representative (as defined below) of
Broker-Dealer shall keep a record of prospective purchasers with whom
the Private Placement Contracts are discussed or to whom the offering
materials are sent. Broker-Dealer shall also require each Registered
Representative to comply with the requirements of a non-public offering
of the Private Placement Contracts. Broker-Dealer shall pay all
expenses incurred by it hereunder and shall comply in all material
respects with all applicable federal and state laws, ordinances and
regulations relating thereto.
1.2 Broker-Dealer may recommend persons associated with it who are duly
licensed and qualified under applicable law and regulation to act in
the offer or sale of variable products ("Registered Representatives")
for appointment as insurance agents of KILICO. Broker-Dealer is
authorized, except as hereinafter specifically provided, to cause its
Registered Representatives to sell the Contracts in the states and
jurisdictions in which Broker-Dealer and its Registered Representatives
are appropriately licensed, registered or otherwise qualified and in
which the Contracts are duly authorized; provided, however,
Broker-Dealer shall be solely responsible for assuring that no
Registered Representative shall be allowed to participate in the
solicitation or sale of the Contracts unless at the time of the
solicitation or sale that person: (a) is of good character and business
repute as contemplated by the Principles and Code of Ethical Market
Conduct of the Insurance Marketplace Standards Association (the "Code
of Ethical Market Conduct"); (b) has been trained on how to use
information-gathering and analytical tools (including, but are not
limited to, questionnaires, financial plans, customer profiles, and
capital needs and financial needs analyses) for determining clients'
insurable needs and financial objectives and agrees to evaluate
carefully the insurance needs and financial objectives of clients and
use information-gathering and analytical tools to determine that the
insurance or annuity product being proposed meets those needs; (c)
agrees not to make any recommendation to an applicant or prospective
purchaser to purchase a Contract without having reasonable grounds to
believe that the purchase of the Contract is suitable for the applicant
or prospective purchaser or, with respect to the Private Placement
Contracts, in a manner inconsistent with the terms and conditions of
this Agreement; (d) possesses all necessary qualifications to sell the
Contracts, including appropriate licensure by the NASD and all other
applicable state insurance and securities regulatory authorities, has
been appointed as an insurance agent of KILICO, and agrees to maintain
all licenses necessary in connection with the solicitation and sale of
the Contracts; (e) agrees to
2
<PAGE> 3
report promptly in writing to KILICO and LIS all customer or regulatory
complaints or inquiries, whether written or oral, and to assist KILICO
and LIS in resolving any complaint to the satisfaction of all parties;
and (f) agrees to abide by the Code of Ethical Market Conduct.
Broker-Dealer shall not have the authority nor shall it grant such
authority to any of its Registered Representatives, on behalf of LIS
and KILICO: to make, alter or discharge any Contract or other contract
entered into pursuant to a Contract; to waive any Contract's forfeiture
provisions; to extend the time of paying any premiums; or to receive
any monies or premiums from applicants for or purchasers of the
Contracts (except for the sole purpose of forwarding monies or premiums
to KILICO). If Broker-Dealer or its Registered Representatives
inadvertently receive any monies from applicants for or purchasers of
the Contracts, as payment of any premium, loan interest, loan
principal, or other payments, they shall hold them in a fiduciary
capacity only and promptly submit them to KILICO. KILICO, in its sole
discretion, may reject any application for a Contract submitted to it
by the Broker-Dealer or any of its Registered Representatives.
1.3 LIS, subject to the terms and conditions contained herein, hereby
authorizes Broker-Dealer as an independent contractor, on a
non-exclusive basis, to make sales of the Contracts for which LIS acts
as distributor. Broker-Dealer agrees to instruct and train its
Registered Representatives in the marketing of the Contracts and the
legal requirements applicable to such marketing. Broker-Dealer shall
direct the sales activities of its Registered Representatives and shall
be solely responsible for the conduct of its Registered Representatives
in the solicitation of applications, subscription agreements, premium
and purchase payments. Further, Broker-Dealer shall be solely
responsible for the supervision of its Registered Representatives and
shall enforce written supervisory procedures to assure strict
compliance with applicable rules and regulations under the 1934 Act,
NASD rules, and other applicable federal and state statutes and
regulations. Further, Broker-Dealer agrees to abide by the Code of
Ethical Market Conduct, a copy of which is attached as Exhibit A to
this Agreement. Broker-Dealer also agrees to engage in active and fair
competition as contemplated by the Code of Ethical Market Conduct.
1.4 Nothing herein contained shall constitute Broker-Dealer or any of its
Registered Representatives as employees of LIS or KILICO in connection
with the solicitation of applications for the Contracts.
1.5 The Schedule of Products may be amended by LIS at its sole discretion
from time to time to include other Contracts distributed by LIS
pursuant to the Distribution Agreement or other distribution agreements
with KILICO, or to delete Contracts from the Schedule. The provisions
of this Agreement shall be equally applicable to each Contract listed
on the Schedule of Products unless the context otherwise requires.
Section 2: Representations and Warranties; Registration, Licensing and
Compliance
2.1 Broker-Dealer represents and warrants to, and covenants with, LIS that:
a. It is and will remain at all times during the term of this
Agreement a member in good standing of the NASD and a
broker-dealer duly registered with the Securities and Exchange
Commission ("SEC") under the 1934 Act and licensed as a
broker-dealer in each state or other jurisdiction in which
Broker-Dealer intends to perform its functions and fulfill its
obligations under this Agreement.
b. It is in compliance in all material respects, and during the term
of this Agreement, will remain in compliance in all material
respects, with all applicable federal and state securities laws
and regulations and the requirements of the NASD and any
applicable securities exchanges of which it is a member.
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<PAGE> 4
c. It is a corporation organized, existing and in good standing under
applicable state law and is qualified to do business as a
corporation in those states or jurisdictions where it is or will
be doing business pursuant to this Agreement.
d. Only Registered Representatives of Broker-Dealer who are agents of
KILICO, and who are licensed, registered, or otherwise qualified
to offer and sell the variable products, may do so under this
Agreement and as permitted under the applicable insurance laws of
such state or jurisdiction under which the Registered
Representatives are authorized to perform their activities.
e. It, or a General Agent or an affiliate of Broker-Dealer, is in
compliance in all material respects with all applicable insurance
laws and regulations, including without limitation state insurance
laws and regulations imposing insurance licensing requirements.
f. It shall carry out its sales and administrative obligations under
this Agreement in continued compliance in all material respects
with federal and state laws and regulations, including those
governing securities and/or insurance-related activities or
transactions, as applicable.
g. It shall give LIS full and unfettered access to data gathered by
it or its Registered Representatives with respect to or arising
out of the solicitation and sale of Contracts pursuant to this
Agreement.
h. It will solicit sales of the Contracts only in those states or
jurisdictions and the manner in which the Contracts may be
lawfully sold.
i. All solicitation and sales activities of Broker-Dealer and its
Registered Representatives will be in compliance with all
applicable state and federal securities laws and regulations, all
applicable insurance laws and regulations, as well as all
applicable NASD rules and regulations.
2.2 Broker-Dealer will be responsible for the training, supervision and
control of its Registered Representatives engaged in the offer and sale
of the Contracts and will supervise strict compliance with applicable
federal and state securities laws, NASD rules, insurance licensing, and
general regulatory requirements. Neither LIS nor any issuer or
principal underwriter of the Contracts shall have any responsibility in
connection with Broker-Dealer's program of supervision and compliance
or any responsibility for failure by Broker-Dealer or its Registered
Representatives to comply with applicable law or regulation.
2.3 Broker-Dealer, through its Registered Representatives or otherwise,
shall not make any recommendations to an applicant or prospective
purchaser to purchase a Contract without having reasonable grounds to
believe that the purchase of the Contract is suitable for the applicant
or prospective purchaser. While not limited to the following, a
determination of suitability shall be based on information supplied to
a Registered Representative after a reasonable inquiry concerning the
applicant's or prospective purchaser's insurance and investment
objectives, financial situation and needs, and where applicable, the
suitability requirements referenced in Section 1.1 of this Agreement.
2.4 Broker-Dealer, through its Registered Representatives or otherwise,
shall not make any misrepresentation or incomplete comparison relating
a Contract for the purpose of inducing an applicant or prospective
purchaser to lapse, forfeit or surrender an existing
4
<PAGE> 5
insurance or annuity product in favor of purchasing a Contract or
another insurance or annuity product.
2.5 Broker-Dealer or its Registered Representatives may solicit exchanges
of other insurance contracts for Contracts only when Broker-Dealer can
demonstrate that the exchange would be beneficial to the prospective
purchaser or class of purchasers, provided that the exchange offer is
approved in advance by an NASD-licensed principal of Broker-Dealer.
Broker-Dealer shall maintain records of the basis for any determination
that an exchange would be beneficial to the prospective purchaser,
including the name of the principal approving the exchange offer.
2.6 Broker-Dealer, through its Registered Representatives or otherwise,
shall not: (a) give any information or make any representations or
statements in regard to the Contracts in connection with the offer or
sale of the Contracts that is not in accordance with any PPM,
registration statement, prospectus or statement of additional
information ("SAI") relating to the Contracts, as that PPM,
registration statement, prospectus or SAI may be amended or
supplemented from time to time, or the then effective prospectus or SAI
for an investment company, or in current advertising, sales literature
or other promotional material approved by LIS; or (b) provide
prospective purchasers any written materials other than Prospectuses,
Private Placement Memoranda, and advertising, sales literature, and
other promotional material, approved by LIS in writing.
2.7 If General Agent is an affiliate of Broker-Dealer as reflected in
Recital D to this Agreement, then by engaging in the distribution
activities contemplated by this Agreement, Broker-Dealer represents and
warrants that Broker-Dealer:
a. has obtained a letter from the Staff of the SEC advising
Broker-Dealer that the Staff will not recommend enforcement action
if General Agent is not registered as a broker-dealer with the
SEC; or
b. is relying upon a no-action letter issued by the Staff of the SEC
at the request of a broker-dealer that, also, has a licensed
insurance agent or agency engaged in distribution activities
similar to those contemplated by this Agreement, and where the
Staff did not recommend enforcement action if the insurance agent
or agency was not registered as a broker-dealer with the SEC; and
c. is complying and will continue to comply with the conditions set
forth in that letter at all times while this Agreement is in
effect.
2.8 Broker-Dealer shall notify LIS and KILICO immediately in writing if
Broker-Dealer fails to comply with any of the applicable provisions set
forth above.
2.9 LIS represents and warrants to, and covenants with, Broker-Dealer that:
a. interests in the Private Placement Contracts are exempt from
registration under the provisions of the 1933 Act;
b. the balance of the Contracts are duly registered under applicable
securities laws;
c. all Contracts are legally issued and filed as required by
applicable state insurance laws; and
d. each PPM and all promotional materials issued or approved by LIS
and provided to Broker-Dealer:
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<PAGE> 6
(i) are and will be true, accurate and complete in
all material respects,
(ii) do not and will not contain any false or
misleading statements of material fact or omit any material
facts necessary to make statements contained therein not
misleading in light of the circumstances under which they
are made,
(iii) do and will fully and adequately disclose all
material terms, conditions, limitations and restrictions,
and
(iv) comply and will comply with all applicable laws
and regulations of those jurisdictions in which the
Contracts will be offered.
Section 3: Sales Materials
3.1 Interests in the Private Placement Contracts shall be sold in reliance
upon certain exemptions from federal securities law requirements for
placement of securities other than by means of a public offering.
Consequently, no advertising, sales literature, or other promotional
material will be employed in the sale of the Private Placement
Contracts, other than a PPM, the Private Placement Contract, statements
contained therein, certain client specific analyses and information,
and any authorized supplemental information provided by KILICO or LIS.
Material that has been approved for distribution by LIS may be provided
only to existing Broker-Dealer clients or clients of an affiliate of
Broker-Dealer who are known personally by Broker-Dealer or that
affiliate or their respective representatives, or to lawyers,
accountants or investment advisers of those clients ("Acceptable
Private Placement Clients"). Broker -Dealer and its Registered
Representatives shall not with respect to any Private Placement
Contracts: (i) engage in cold calling; (ii) publish any advertisement,
article, notice or other communication in any newspaper, magazine,
newsletter or similar media or broadcast on TV, radio or cable; and
(iii) hold any seminars or meetings unless each invitee is known to be
an Acceptable Private Placement Client.
3.2 Broker-Dealer and its Registered Representatives are not authorized to
develop or use any sales, training, explanatory, or other materials
without the prior written consent of LIS, and shall use only such
sales, training, explanatory, or other materials that have been
approved by LIS. Broker-Dealer shall submit to LIS, for written
approval in advance of use, all advertising, sales literature, and
other promotional material, as well as all signs, involving the use of
LIS' of KILICO's name or pertaining to the sale of any Contract.
3.3 LIS will file such materials or will cause such materials to be filed
with the SEC, the NASD, and with any state securities regulatory
authorities, as appropriate.
Section 4: Compensation
4.1 Except as otherwise stated herein, Broker-Dealer shall be entitled to
commissions and allowances with respect to sales of the Contracts it
shall make in accordance with the Schedule of Commissions and
Allowances attached to this Agreement, as amended from time to time.
The Schedule of Commissions and Allowances is a part of this Agreement
as if set forth herein. Commissions are payable by LIS or as otherwise
permitted by law or regulations.
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Section 5: Term of Agreement
5.1 This Agreement shall be subject to immediate termination at any time by
Broker-Dealer, or by LIS, upon receipt of written notice to the other
party. The notice shall be delivered personally or mailed to the last
known address of the other party via United States Mail.
5.2 This Agreement shall automatically terminate if Broker-Dealer ceases
doing business in the legal format indicated above its signature on
this Agreement.
5.3 This Agreement may be terminated for cause if Broker-Dealer or its
employees or Registered Representatives have wrongfully withheld any
funds, property or documents belonging to KILICO or LIS; have
misrepresented any product or service offered by or through KILICO; or
have failed to comply with the terms of this Agreement. Upon
termination for cause, Broker-Dealer shall have no further rights or
privileges under this Agreement.
5.4 In the event of termination as provided in this Agreement:
a. Any commissions or allowances remaining payable to Broker-Dealer
and charge-backs payable to LIS shall be paid in accordance with
the provisions contained in the Schedule of Commissions and
Allowances.
b. LIS reserves the right at its discretion to appoint a licensed
broker-dealer to service the business produced under this
Agreement;
c. Broker-Dealer agrees, upon demand, to deliver all of LIS' property
to LIS and shall, upon demand, repay any existing indebtedness
owed to LIS;
d. Broker-Dealer shall carry out all residual obligations which arose
while this Agreement was in force;
e. All compensation payable by LIS to Broker-Dealer with respect to
policies or contracts issued by KILICO shall be paid to
Broker-Dealer until the expiration or other termination of the
Agreement.
f. Broker-Dealer and its Registered Representatives shall promptly
return to KILICO all necessary records that it or they are
required to maintain and that are deemed to be the property of
KILICO.
5.5 This Agreement shall terminate contemporaneously with the termination of the
Distribution Agreement.
Section 6: Complaints and Investigations
6.1 Broker-Dealer shall report promptly in writing to KILICO and LIS all
customer complaints or inquiries relating to the offer and sale of the
Contract or made by or on behalf of any owner of a Contract, whether
written or oral, and shall assist KILICO and LIS in resolving those
complaints to the satisfaction of all parties.
6.2 Broker-Dealer shall cooperate fully in any securities or insurance
regulatory investigation or proceeding or judicial proceeding with
respect to LIS, KILICO, and/or Broker-Dealer and its Registered
Representatives or any affiliate, to the extent that the investigation or
proceeding is in connection with the Contracts marketed under this
Agreement.
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Section 7: Assignment
7.1 Broker-Dealer may not assign this Agreement without the prior written
approval of LIS.
7.2 This Agreement is exclusively for and shall inure to the benefit of the
parties hereto, their successors and assigns, and shall not be deemed
to create any rights for the benefit of third parties.
Section 8: Confidentiality
8.1 Generally. Each party will hold the other party's Confidential
Information (as defined below) in confidence and will safeguard it as
provided herein. The party receiving Confidential Information will not,
directly or indirectly, report, publish, distribute, disclose, or
otherwise disseminate the Confidential Information, or any portion
thereof, to any third party including its affiliates, and will not use
the Confidential Information, or any portion thereof, for the benefit
of itself or any third party including its affiliates or for any
purpose, except only as necessary to perform its duties and exercise
its rights hereunder, or as expressly authorized in writing by the
party who owns the Confidential Information. Disclosure of Confidential
Information internally by a recipient will be limited to those of its
and its affiliates' officers, directors, employees, and agents on a
"need to know" basis who must have access to the Confidential
Information to enable the party to perform its duties and exercise its
rights hereunder. In order to safeguard Confidential Information, each
party shall (a) inform each recipient of Confidential Information of
the confidential nature thereof and of the requirements of this
Agreement, (b) direct the recipients to comply with the terms of this
Agreement, and (c) exercise any other precautions necessary to prevent
any improper use or disclosure of Confidential Information.
8.2 Definition. "Confidential Information" shall mean: (a) information
regarding a party's or the party's affiliates', financial condition,
information systems, business operations, plans and strategies,
products or services, customers and prospective customers, and
marketing and distribution plans, methods and techniques; (b)
information that is marked "confidential," "proprietary" or in like
words, or that is summarized in writing as being confidential prior to
or promptly after disclosure to the other party; (c) any and all
related research; and (d) any and all designs, ideas, concepts, and
technology embodied therein. With respect to the Broker-Dealer,
Confidential Information shall include (e) any information regarding
customers that is provided to LIS hereunder and (f) any information
concerning premium, losses, profitability, expiration dates, and
insured demographics. Information is not considered confidential or
proprietary if that information: (1) is or becomes generally available
to the public other than as a result of disclosure by the recipient;
(2) was available to or already known by the recipient on a
non-confidential basis prior to its receipt from the party claiming
confidentiality; (3) is developed by the recipient independently of any
information or data acquired from the party claiming confidentiality;
or (4) is disclosed pursuant to a court order or the requirement of any
federal or state regulatory, judicial, or government authority.
8.3 Remedies. Each party acknowledges and agrees that monetary damages
would not be a sufficient or adequate remedy for a breach or
anticipated breach of this Section and that, in addition to any other
legal or equitable remedies which may be available, each party shall be
entitled to specific performance and injunctive relief for any breach
or anticipated breach of this Section.
8.4 Survival. The provisions of this Section shall survive the expiration
or other termination of this Agreement.
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Section 9: Modification of Agreement
9.1 This Agreement may not be modified in any way unless by written
agreement signed by all of the parties, except for any amendment of the
Schedule of Products pursuant to the terms of Section 1.5 hereof or of
the Schedule of Commissions and Allowances pursuant to the terms of
Section 4 hereof.
Section 10: Indemnification
10.1 Broker-Dealer shall indemnify and hold harmless LIS and each of its
members, managers, officers, employees, affiliates (including, but not
limited to, KILICO), agents, representatives, successors and assigns,
against any loss or expense, including reasonable attorneys' fees,
which arises out of, is based upon, or relates to: (i) any breach by
Broker-Dealer of any representation, warranty, covenant or agreement
contained in this Agreement; (ii) any negligent act or omission or
willful misconduct by Broker-Dealer or any of its Registered
Representatives or affiliates in carrying out their obligations under
this Agreement; or (iii) any failure by Broker-Dealer or any of its
Representatives or affiliates to comply with applicable law.
10.2 If any action or proceeding shall be brought against Broker-Dealer or
any of its Registered Representatives or affiliates relating to a
Contract sold pursuant to this Agreement, Broker-Dealer shall give
prompt written notice to LIS.
10.3 In the event of any dispute with a Contract owner, LIS shall have the
right, with prior written notice and consultation with Broker-Dealer,
to take such action as LIS may deem necessary to promptly effect a
mitigation of damages or limitation of losses, and without waiving or
electing to relinquish any rights or remedies LIS may have against
Broker-Dealer.
10.4 LIS shall have the right to settle with any Contract owner engaged in a
dispute with LIS or Broker-Dealer without the prior consent of
Broker-Dealer and without waiving or electing to relinquish any rights
or remedies LIS may have against Broker-Dealer.
10.5 The provisions of this Section shall survive the expiration or other
termination of this Agreement. All rights and remedies of the parties
hereunder shall be cumulative and in addition to all rights and
remedies available to those parties at law or in equity.
Section 11: Rights, Remedies etc. are Cumulative
11.1 The rights, remedies and obligations contained in this Agreement are
cumulative and are in addition to any and all rights, remedies and
obligations, at law or in equity, which the parties hereto are entitled
to under state and federal laws. Failure of either party to insist upon
strict compliance with any of the conditions of this Agreement shall
not be construed as a waiver of any of the conditions, but the same
shall remain in full force and effect. No waiver of any of the
provisions of this Agreement shall be deemed, or shall constitute a
waiver of any other provisions, whether or not similar, nor shall any
waiver constitute a continuing waiver.
Section 12: Notices
12.1 Any notice required or permitted under this Agreement shall be
delivered personally or sent by facsimile or by registered or certified
mail, return receipt requested, with all postage prepaid:
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a. TO LIS:
LIS Securities
One Chase Manhattan Plaza
New York, New York 10005
Attention: Michael Hartnett
Fax: (212) 859-2671
b. TO BROKER-DEALER:
Attention: General Counsel
Fax:
12.2 A party may change its address or fax number for the delivery of
notices by delivering a written notice to the other parties at its last
specified address. All notices shall be effective upon delivery, except
as otherwise provided in Section 5.2 of this Agreement; provided that
any notice sent by facsimile shall be deemed ineffective unless a copy
of the notice is also delivered personally or sent by express courier
or mail for delivery on the same or next business day.
Section 13: Arbitration
13.1 Any disagreement, dispute, claim or controversy arising out of or
relating to this Agreement, performance hereunder or the breach hereof,
or otherwise arising between Broker-Dealer and LIS, shall be subject to
mandatory arbitration under the auspices, rules and bylaws of the NASD,
to the full extent applicable and as may be amended from time to time.
13.2 Where the NASD Code of Arbitration Procedure is not applicable, any
dispute between Broker-Dealer and LIS arising under or relating to this
Agreement shall be settled by compulsory arbitration before one
arbitrator in accordance with the Commercial Arbitration Rules then in
force of the American Arbitration Association. The arbitration shall
take place in New York unless the parties agree on another location.
The arbitrator shall have no authority to issue any decision or award
for punitive damages or for treble or any other type of multiple
damages, consequential damages, or any compensatory damages based on a
claim of lost profits or similar claim. Each party shall bear its own
costs and expenses incurred by it in any such arbitration, except that
the parties shall bear the expenses of the arbitrator's services
equally. The provisions of this Section shall survive the expiration or
other termination of this Agreement.
Section 14: Audit
14.1 Each party shall, upon reasonable notice to the other party, have the
right to audit the books and records of the other party regarding
information directly related to this Agreement, during the other
party's normal business hours or by appointment, at such times as the
auditing party reasonably deems necessary. The party being audited
shall permit reasonable access to any of its facilities or any of its
affiliates' facilities in which information pertaining to this
Agreement is being processed or stored. Upon the auditing party's
request, the other party shall provide reasonable assistance in
performing the audit, including any audit required or requested by any
federal, state, or local regulatory
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authority having jurisdiction over the auditing party's business. The
auditing party shall reimburse the party being audited for its
reasonable out-of-pocket costs and expenses incurred in connection with
the audit. The provisions of this Section shall survive the expiration
or other termination of this Agreement.
Section 15: Interpretation, Jurisdiction, etc.
15.1 This Agreement constitutes the whole agreement between the parties
hereto with respect to the subject matter hereof, and supersedes all
prior oral or written understandings, agreements or negotiations
between the parties with respect to the subject matter hereof. No prior
writings by or between the parties hereto with respect to the subject
matter hereof shall be used by either party in connection with the
interpretation of any provisions of this Agreement.
15.2 This Agreement is made in the State of New York, and all questions
concerning its validity, construction or otherwise shall be determined
under the laws of New York without giving effect to principles of
conflict of laws.
Section 16: Headings
16.1 The headings in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions
hereof or otherwise affect their construction or effect.
Section 17: Counterparts
17.1 This Agreement may be executed in two or more counterparts, all of
which taken together shall constitute one and the same instrument.
Section 18: Severability
18.1 This is a severable Agreement. In the event that any provisions of this
Agreement would require a party to take action prohibited by applicable
federal or state law or prohibit a party from taking action required by
applicable federal or state law, then it is the intention of the
parties hereto that the provisions shall be enforced to the extent
permitted under the law, and, in any event, that all other provisions
of this Agreement shall remain valid and duly enforceable as if the
provision at issue had never been a part hereof.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year indicated below.
LIFE INSURANCE SOLUTIONS, LLC D/B/A LIS SECURITIES
By: Date:
---------------------------- -------------------------
Title:
--------------------------
BROKER-DEALER
("BROKER-DEALER")
By: Date:
---------------------------- -------------------------
Title:
--------------------------
12
<PAGE> 1
EXHIBIT (8)(a)(i)
EVERGREEN VARIABLE ANNUITY TRUST
PARTICIPATION AGREEMENT
THIS AGREEMENT is made this 1st day of September, 1998 between EVERGREEN
VARIABLE ANNUITY TRUST, an open-end management investment company organized as a
Delaware business trust (the "Trust"), and Kemper Investors Life Insurance
Company, a life insurance company organized under the laws of the State of
Illinois (the "Company"), on its own behalf and on behalf of each segregated
asset account of the Company set forth on Schedule A, as may be amended from
time to time (the "Accounts").
W I T N E S S E T H:
WHEREAS, the Trust is registered as an open-end management investment
company under the Investment Company Act of 1940, as amended (the "1940 Act"),
and the offer and sale of its shares are registered under the Securities Act of
1933, as amended (the "1933 Act"); and
WHEREAS, the Trust desires to act as an investment vehicle for separate
accounts established for variable life insurance policies and variable annuity
contracts to be offered by insurance companies that have entered into
participation agreements with the Trust (the "Participating Insurance
Companies); and
WHEREAS, the beneficial interest in the Trust is divided into several
series of shares, each series representing an interest in a particular managed
portfolio of securities and other assets (the "Portfolios"); and
WHEREAS, the Trust has obtained an order from the Securities and Exchange
Commission granting Participating Insurance Companies and their separate account
exemptions from the provisions of section 9(a), 13(a), 15(a) and 15(b) of the
1940 Act and rules 6e-2(b)(15) and 6e-3(T)(b)(15) thereunder, to the extent
necessary to permit shares of the Trust to be sold to and held by variable
annuity and variable life insurance separate accounts of both affiliated and
nonaffiliated life insurance companies and certain qualified pension and
retirement plans (the "Shared Trust Exemptive Order"); and
WHEREAS, the Company has registered or will register certain variable life
insurance policies and/or variable annuity contracts under the 1933 Act (the
"Contracts"); and
WHEREAS, the Company has registered or will register certain Accounts as
unit investment trusts under the 1940 Act;
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WHEREAS, the Company relies on certain provisions of the 1940 and 1933 Acts
that exempt certain Accounts and Contracts from the registration requirements of
the Acts in connection with the sale of Contracts under certain private
placement offerings; and
WHEREAS, the Company desires to utilize shares of one or more Portfolios as
an investment vehicle of the Accounts;
NOW, THEREFORE, in consideration of their mutual promises, the parties
agree as follows:
ARTICLE I
Sale of Trust Shares
1.1. The Trust shall make shares of its Portfolios available to the
Accounts at the net asset value next computed after receipt of such purchase
order by the Trust (or its agent), as established in accordance with the
provisions of the then current prospectus of the Trust. Shares of a particular
Portfolio of the Trust shall be ordered in such quantities and at such times as
determined by the Company to be necessary to meet the requirements of the
Contracts. The Trustees of the Trust (the "Trustees") may refuse to sell shares
of any Portfolio to any person or suspend or terminate the offering of shares of
any Portfolio if such action is required by law or by regulatory authorities
having jurisdiction or is, in the sole discretion of the Trustees acting in good
faith and in light of their fiduciary duties under federal and any applicable
state laws, necessary and in the best interest of the shareholders of such
Portfolio.
1.2. The Trust will redeem any full or fractional shares of any Portfolio
when requested by the Company on behalf of an Account at the net asset value
next computed after receipt by the Trust (or its agent) of the request for
redemption, as established in accordance with the provisions of the then current
prospectus of the Trust. The Trust shall make payment for such shares in the
manner established from time to time by the Trust, but in no event shall payment
be delayed for a greater period than is permitted by the 1940 Act.
1.3. For the purposes of Sections 1.1 and 1.2, the Trust hereby appoints
the Company as its agent for the limited purpose of receiving and accepting
purchase and redemption orders resulting from investment in and payments under
the Contracts. Receipt by the Company shall constitute receipt by the Trust
provided that (i) such orders are received by the Company in good order prior to
the close of the regular trading session of the New York Stock Exchange and (ii)
the Trust receives notice of such orders by 10:00 a.m. New York time on the next
following Business Day. "Business Day" shall mean any day on which the New York
Stock Exchange is open for trading and on which
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the Trust calculates its net asset value pursuant to the rules of the Securities
and Exchange Commission.
1.4. Purchase orders that are transmitted to the Trust in accordance with
Section 1.3 shall be paid for on the same Business Day that the Trust receives
notice of the order. Payments shall be made in federal funds transmitted by
wire.
1.5. The Trust shall furnish prompt notice to the Company of any income
dividends or capital gain distributions payable on shares of any Portfolio of
the Trust. The Company hereby elects to receive all such income dividends and
capital gain distributions as are payable on a Portfolio's shares in additional
shares of that Portfolio. The Trust shall notify the Company of the number of
shares so issued as payment of such dividends and distributions.
1.6. The Trust shall make the net asset value per share for each Portfolio
available to the Company on a daily basis as soon as reasonably practical after
the net asset value per share is calculated and shall use its best efforts to
make such net asset value per share available by 7:00 p.m. New York time.
1.7. The Trust agrees that it shares will be sold only to Participating
Insurance Companies and their separate accounts and to certain qualified pension
and retirement plans to the extent permitted by the Shared Trust Exemptive
Order. No shares of any Portfolio will be sold directly to the general public.
The Company agrees that the trust shares will be used only for the purposes of
funding the Contracts and Accounts listed in Schedule A, as amended from time to
time.
1.8. The Trust agrees that all participating Insurance Companies shall have
the obligations and responsibilities regarding pass-through voting and conflicts
of interest corresponding to those contained in Section 2.9 and Article IV of
this Agreement.
ARTICLE II
Obligations of the Parties
2.1. The Trust shall prepare and be responsible for filing with the
Securities and Exchange Commission and any state regulators requiring such
filing all shareholder reports, notices, proxy materials (or similar materials
such as voting instruction solicitation materials), prospectuses and statements
of additional information of the Trust. The Trust shall bear the costs of
registration and qualification of its shares, preparation and filing of the
documents listed in this Section 2.1. and all taxes to which an issuer is
subject on the issuance and transfer of its shares.
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2.2. The Trust will bear or cause to be borne the printing costs (or
duplicating costs with respect to the statement of additional information) and
mailing costs associated with the delivery of the Trust's current prospectus,
statement of additional information, annual report, semi-annual report, Trust
sponsored proxy material or other shareholder communications, including any
amendments or supplements to any of the foregoing.
2.3. The Company will bear the printing costs (or duplicating costs with
respect to the statement of additional information) and mailing costs associated
with the delivery of the Accounts' current prospectuses and statements of
additional information, private placement memorandums, annual and semi-annual
reports, Contracts, Contract applications, Account sponsored proxy materials and
voting solicitation instructions.
The Company agrees to provide the Trust or its designee with such information as
may be resaonably requested by the Trust to asure that the Trust's expenses do
not include the cost of printing any prospectuses or statements of additional
information other than those actually distributed to existing owners of the
Contracts.
2.4. The Company agrees and acknowledges Evergreen Asset Management Corp.
("Evergreen Asset"), is the sole owner of the name and mark "Evergreen" and that
all use of any designation comprised in whole or in part of Evergreen (an
"Evergreen Mark") under this Agreement shall inure to the benefit of Evergreen
Asset. Except as provided in Section 2.5., the Company shall not use any
Evergreen Mark on its own behalf or on behalf of the Accounts or Contracts in
any registration statement, advertisement, sales literature or other materials
relating to the Accounts or Contracts without the prior written consent of
Evergreen Asset. Upon termination of this Agreement for any reason, the Company
shall cease all use of any Evergreen Asset Mark(s) as soon as reasonably
practicable.
2.5. The Company shall furnish, or cause to be furnished, to the Trust or
its designee, a copy of each Contract prospectus or statement of additional
information in which the Trust or an investment adviser to the Trust is named
prior to the filing of such document with the Securities and Exchange
Commission. The Company shall furnish, or shall cause to be furnished, to the
Trust or its designee, each piece of sales literature or other promotional
material including private placement memorandums, in which the Trust or its
investment adviser is named, at least ten Business Days prior to its use. No
such material shall be used if the Trust or its designee reasonably objects to
such use within ten Business Days after receipt of such material.
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2.6. The Company shall not give any information or make any representations
or statements on behalf of the Trust or concerning the Trust or its investment
advisers in connection with the sale of the Contracts other than information or
representations contained in and accurately derived from the registration
statement or prospectus for the Trust shares (as such registration statement and
prospectus may be amended or supplemented from time to time), annual and
semi-annual reports of the Trust, Trust-sponsored proxy statements, or in sales
literature or other promotional material approved by the Trust or its designee,
except as required by legal process or regulatory authorities or with the
written permission of the Trust or its designee.
2.7. The Trust shall furnish or cause to be furnished, to the Company or
its designee, a copy of each Trust prospectus or statement of additional
information in which the Company or the Accounts are named prior to the filing
of such document with the Securities and Exchange Commission. The Trust shall
furnish, or shall cause to be furnished, to the Company or its designee, each
piece of sales literature or other promotional material in which the Company or
the Accounts are named, at least ten Business Days prior to its use. No such
material shall be used if the Company or its designee reasonably objects to such
use within ten Business Days after receipt of such material.
2.8. The Trust shall not give any information or make any representations
or statements on behalf of the Company or concerning the Company, the Accounts
or the Contracts other than information or representations contained in and
accurately derived from the registration statement, prospectus or private
placement memorandum for the Contracts (as such registration statement,
prospectus or private placement memorandum may be amended or supplemented from
time to time), or in materials approved by the Company for distribution
including sales literature or other promotional materials, except as required by
legal process or regulatory authorities or with the written permission of the
Company.
2.9. With respect to Contracts sold under private placement offerings, the
Company shall vote shares held by it in accordance with Section 3.4 of this
Agreement. Other wise, so long as, and to the extent that the Securities and
Exchange Commission interprets the 1940 Act to require pass-through voting
privileges for variable policy owners, the Company will provide pass-through
voting privileges to owners of policies whose cash values are invested, through
the Accounts, in shares of the Trust. The Trust shall require all Participating
Insurance Companies to calculate voting privileges in the same manner and the
Company shall be responsible for assuring that the Accounts calculated voting
privileges in the manner established by the Trust. With respect to each Account,
the Company will vote shares of the Trust held by the Account and for which no
timely voting instructions from policy owners are received as well as shares it
owns that are held by that Account, in the same proportion as those shares for
which voting
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instructions are received. The Company and its agents will in no way recommend
or oppose or interfere with the solicitation of proxies for Trust shares held by
Contract owners without the prior written consent of the Trust, which consent
may be withheld in the Trust's sole discretion.
ARTICLE III
Representations and Warranties
3.1. The Company represents and warrants that it is an insurance company
duly organized and in good standing under the laws of the State of Illinois and
that it has legally and validly established each Account as a segregated asset
account under such law on the dates set forth in Schedule A.
3.2. The Company represents and warrants that, unless an exemption from
registration is available, it has registered or, prior to any issuance or sale
of the Contracts, will register each Account as a unit investment trust in
accordance with the provisions of the 1940 Act to serve as a segregated
investment account for the Contracts.
3.3. The Company represents and warrants that, unless an exemption from
registration is available, the Contracts will be registered under the 1933 Act
to the extent required by the 1933 Act prior to any issuance or sale of the
Contracts; the Contracts will be issued and sold in compliance in all material
respects with all applicable federal and state laws; and the sale of the
Contracts shall comply in all material respects with state insurance suitability
requirements.
3.4. With respect to the Accounts which are exempt from registration under
the 1940 Act in reliance upon Sections 3(c)(1) or 3(c)(7) thereof, the Company
represents and warrants that:
(a) The principal underwritrer for each such unregistered Account and any
subaccount thereof is registered as a broker-dealer under the
Securities Exchange Act of 1934, as amended;
(b) Trust Shares are and will continue to be the only investment
securities held by the corresponding Account subaccount(s); and
(c) with regard to each Portfolio, the Company, on behalf of the
corresponding Account subaccount, will;
(1) vote such shares held by it in the same portion as the vote of
all other holders of such shares; and
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(2) refrain from substituting shares of another security for such
shares unless the Securities and Exchange Commission has approved
such substitution in the manner provided in Section 26 of the
1940 Act.
3.5. The Trust represents and warrants that it is duly organized and
validly existing under the laws of the State of Delaware.
3.6. The Trust represents and warrants that the Trust shares offered and
sold pursuant to this Agreement will be registered under the 1933 Act and the
Trust is registered under the 1940 Act prior to any issuance or sale of such
shares. The Trust shall amend its registration statement under the 1933 Act and
the 1940 Act from time to time as required in order to effect the continuous
offering of its shares. The Trust shall register and qualify its shares for sale
in accordance with the laws of the various states only if and to the extent
deemed advisable by the Trust.
3.7. The Trust represents and warrants that the investments of each
Portfolio will comply with the diversification requirements set forth in Section
817(h) of the Internal Revenue Code of 1986, as amended, and the rules and
regulations thereunder. The Trust shall provide the Company, or cause to be
provided, a letter from the appropriate office within ten Business Days
following the end of each calendar quarter of the Trust, certifying the Trust's
compliance during that calendar quarter with the diversification requirements
and qualification as a regulated investment company, including a detailed
listing of individual securities held by each Portfolio of the Trust. In the
event of a breach of this Section 3.6 by the Trust, it will take all reasonable
steps (a) to immediately notify the Company of such breach and (b) to adequately
diversify the Trust so as to achieve compliance within the grace period afforded
by Regulation 817-5.
ARTICLE IV
Potential Conflicts
4.1. The parties acknowledge that the Trust's shares may be made available
for investment to other Participating Insurance Companies. In such event, the
Trustees will monitor the Trust for the existence of any material irreconcilable
conflict between the interests of the contract owners of all Participating
Insurance Companies. An irreconcilable material conflict may arise for a variety
of reasons, including: (a) an action by any state insurance regulatory
authority; (b) a change in applicable federal or state insurance, tax, or
securities laws or regulations, or a public ruling, private letter ruling,
no-action or interpretative letter, or any similar action by insurance, tax, or
securities regulatory authorities; (c) an administrative or judicial decision in
any relevant proceeding; (d) the manner in which the investments of any
Portfolio are being managed; (e) a difference in voting instructions given by
variable annuity contract and variable life insurance contract owners; or (f) a
decision by an insurer to disregard the voting
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instructions of contract owners. The Trustees shall promptly inform the Company
if they determine that an irreconcilable material conflict exists and the
implications thereof.
4.2. The Company agrees to promptly report any potential or existing
conflicts of which it is aware to the Trustees. The Company will assist the
Trustees in carrying out their responsibilities under the Shared Trust Exemptive
Order by providing the Trustees with all information reasonably necessary for
the Trustees to consider any issues raised including, but not limited to,
information as to a decision by the Company to disregard Contract owner voting
instructions.
4.3. If it is determined by a majority of the Trustees, or a majority of
its disinterested Trustees, that an irreconcilable material conflict exists that
affects the interests of Contract owners, the Company shall, in cooperation with
other Participating Insurance Companies whose contract owners are also affected,
at its expense and to the extent reasonably practicable (as determined by the
Trustees) take whatever steps are necessary to remedy or eliminate the
irreconcilable material conflict, which steps could include: (a) withdrawing the
assets allocable to some or all of the Accounts from the Trust or any Portfolio
and reinvesting such assets in a difference investment medium, including (but
not limited to) another Portfolio of the Trust, or submitting the question of
whether or not such segregation should be implemented to a vote of all affected
Contract owners and, as appropriate, segregating the assets of any appropriate
group (i.e., annuity contract owners, life insurance contract owners, or
variable contract owners of one or more Participating Insurance Companies) that
votes in favor of such segregation, or offering to the affected Contract owners
the option of making such a change; and (b) establishing a new registered
management investment company or managed separate account.
4.4. If an irreconcilable material conflict arises because of a decision by
the Company to disregard Contract owner voting instructions and that decision
represents a minority position or would preclude a majority vote, the Company
may be required, at the Trust's election, to withdraw the affected Account's
investment in the Trust and terminate this Agreement with respect to such
Account; provided, however, that such withdrawal and termination shall be
limited to the extent required by the foregoing irreconcilable material conflict
as determined by a majority of the disinterested Trustees. Any such withdrawal
and termination must take place within six (6) months after the Trust gives
written notice that this provision is being implemented. Until the end of such
six (6) month period, the Trust shall continue to accept and implement orders by
the Company for the purchase and redemption of shares of the Trust.
4.5. If any irreconcilable material conflict arises because a particular
state insurance regulator's decision applicable to the Company conflicts with
the majority of other state regulators, then the Company will withdraw the
affected Account's investment in the Trust and terminate this Agreement with
respect to such Account within six (6)
8
<PAGE> 9
months after the Trustees inform the Company in writing that it had determined
that such decision has created an irreconcilable material conflict; provided,
however, that such withdrawal and termination shall be limited to the extent
required by the foregoing irreconcilable material conflict as determined by a
majority of the disinterested Trustees. Until the end of such six (6) month
period, the Trust shall continue to accept and implement orders by the Company
for the purchase and redemption of shares of the Trust.
4.6. For purposes of Section 4.3. through 4.6. of this Agreement, a
majority of the disinterested Trustees shall determine whether any proposed
action adequately remedies any irreconcilable material conflict, but in no event
will the Company be required to establish a new funding medium for the Contracts
if any offer to do so has been declined by vote of a majority of Contract owners
materially adversely affected by the irreconcilable material conflict. In the
event that the Trustees determine that any proposed action does not adequately
remedy any irreconcilable material conflict, then the Company will withdraw the
Account's investment in the Trust and terminate this Agreement within six (6)
months after the Trustees inform the Company in writing of the foregoing
determination; provided, however, that such withdrawal and termination shall be
limited to the extent required by any such irreconcilable material conflict as
determined by a majority of the disinterested Trustees.
4.7. The Company shall at least annually submit to the trustees such
reports, materials or data as the Trustees may reasonably request so that the
trustees may fully carry out the duties imposed upon them by the Shared Trust
Exemptive Order, and said reports, materials and data shall be submitted more
frequently if deemed appropriate by the Trustees.
4.8. If and to the extent that Rule 6e-2 and Rule 6e-3(l) are amended, or
Rule 6e-3 is adopted, to provide exemptive relief from any provision of the 1940
Act or the rules promulgated thereunder with respect to mixed or shared funding
(as defined in the Shared Trust Exemptive Order) on terms and conditions
materially different from those contained in the Shared Trust Exemptive Order,
then the Trust and/or the Participating Insurance Companies, as appropriate,
shall take such steps as may be necessary to comply with Rules 6e-2 and 6e-3(l),
as amended, and Rule 6e-3, as adopted, to the extent such rules are applicable.
ARTICLE V
Indemnification
5.1. The Company agrees to indemnify and hold harmless the Trust and each
of its Trustees, officers, employees and agents and each person, if any, who
controls the Trust within the meaning of Section 15 of the 1933 Act
(collectively, the "Indemnified Parties" for purposes of this Article V) against
any and all losses, claims, damages, liabilities
9
<PAGE> 10
(including amounts paid in settlement with the written consent of the Company)
or expenses (including the reasonable costs of investigating or defending any
alleged loss, claim, damage, liability or expense and reasonable legal counsel
fees incurred in connection therewith) (collectively, "Losses"), to which the
Indemnified Parties may become subject under any statute or regulation, or at
common law or otherwise, insofar as such Losses:
(a) arise out of or are based upon any untrue statements or alleged untrue
statements of any material fact contained in a registration statement,
prospectus or private placement memorandum for the Contracts or in the Contracts
themselves or in sales literature generated or approved by the Company on behalf
of the Contracts or Accounts (or any amendment or supplement to any of the
foregoing) (collectively, "Company Documents" for the purposes of this Article
V), or arise out of or are based upon the omission or the alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, provided that this indemnity shall not
apply as to any Indemnified Party if such statement or omission or such alleged
statement or omission was made in reliance upon and was accurately derived from
written information furnished to the Company by or on behalf of the Trust for
use in Company Documents or otherwise for use in connection with the sale of the
Contracts or Trust shares; or
(b) arise out of or result from statements or representations (other than
statements or representations contained in and accurately derived from Trust
Documents as defined in Section 5.2.(a)) or wrongful conduct of the Company or
persons under its control, with respect to the sale or acquisition of the
Contracts or Trust shares; or
(c) arise out of or result from any untrue statement or alleged untrue
statement of a material fact contained in Trust Documents as defined in Section
5.2(a) or the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading if such statement or omission was made in reliance upon and
accurately derived from written information furnished to the Trust by or on
behalf of the Company; or
(d) arise out of or result from any failure by the Company to provide the
services or furnish the materials required under the terms of this Agreement; or
(e) arise out of or result from any material breach of any representation
and/or warranty made by the Company in this Agreement or arise out of or result
from any other material breach of this Agreement by the Company.
5.2. The Trust agrees to indemnify and hold harmless the Company and each
of its directors, officers, employees and agents and each person, if any, who
controls the
10
<PAGE> 11
Company within the meaning of Section 15 of the 1933 Act (collectively, the
"Indemnified Parties" for purposes of this Article V) against any and all
losses, claims, damages, liabilities (including amounts paid in settlement with
the written consent of the Trust) or expenses (including the reasonable costs of
investigating or defending any alleged loss, claim, damage, liability or expense
and reasonable legal counsel fees incurred in connection therewith)
(collectively, "Losses"), to which the Indemnified Parties may become subject
under any statute or regulation, or at common law or otherwise, insofar as such
Losses:
(a) arise out of or are based upon any untrue statements or alleged untrue
statements of any material fact contained in the registration statement or
prospectus for the Trust (or any amendment or supplement thereto),
(collectively, "Trust Documents" for the purposes of this Article V), or arise
out of or are based upon the omission or the alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, provided, that this indemnity shall not apply as to any
Indemnified Party if such statement or omission or such alleged statement or
omission was made in reliance upon and was accurately derived from written
information furnished to the Trust by or on behalf of the Company for use in
Trust Documents or otherwise for use in connection with the sale of the
Contracts or Trust shares; or
(b) arise out of or result from statements or representations (other than
statements or representations contained in and accurately derived from Company
Documents) or wrongful conduct of the Trust or persons under its control, with
respect to the sale or acquisition of the Contracts or Trust shares; or
(c) arise out of or result from any untrue statement or alleged untrue
statement of a material fact contained in Company Documents or the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading if such statement or
omission was made in reliance upon and accurately derived form written
information furnished to the Company by or on behalf of the Trust; or
(d) arise out of or result from any failure by the Trust to provide the
services or furnish the materials required under the terms of this Agreement; or
(e) arise out of or result from any material breach of any representation
and/or warranty made by the Trust in this Agreement or arise out of or result
from any other material breach of this Agreement by the Trust.
5.3. Neither the Company nor the Trust shall be liable under the
indemnification provisions of Section 5.1. or 5.2., as applicable, with respect
to any Losses incurred or
11
<PAGE> 12
assessed against an Indemnified Party that arise from such Indemnified Party's
willful misfeasance, bad faith or gross negligence in the performance of such
Indemnified Party's duties or by reason of such Indemnified Party's reckless
disregard of obligations or duties under this Agreement.
5.4. Neither the Company nor the Trust shall be liable under the
indemnification provisions of Section 5.1. or 5.2., as applicable, with respect
to any claim made against an Indemnified Party unless such Indemnified Party
shall have notified the other party in writing within a reasonable time after
the summons, or other first written notification, giving information of the
nature of the claim which shall have been served upon or otherwise received by
such Indemnified Party (or after such Indemnified Party shall have received
notice of service upon or other notification to any designated agent), but
failure to notify the party against whom indemnification is sought of any such
claim or shall not relieve that party from any liability which it may have to
the Indemnified Party int he absence of Sections 5.1. and 5.2.
5.5. In case any such action is brought against the Indemnified Parties,
the indemnifying party shall be entitled to participate, at its own expense, in
the defense of such action. The indemnifying party also shall be entitled to
assume the defense thereof, with counsel reasonably satisfactory to the party
named in the action. After notice from the indemnifying party to the Indemnified
Party of an election to assume such defense, the Indemnified Party shall bear
the fees and expenses of any additional counsel retained by it, and the
indemnifying party will not be liable to the Indemnified Party under this
Agreement for any legal or other expenses subsequently incurred by such party
independently in connection with the defense thereof other than reasonable costs
of investigation.
ARTICLE VI
Termination
6.1. This Agreement shall continue in full force and effect until the first
to occur of:
(a) termination by any party for any reason by six (6) months' advance
written notice delivered to the other party; or
(b) termination by the Company by written notice to the Trust with respect
to any Portfolio based upon the Company's determination that shares of such
Portfolio are not reasonably available to meet the requirements of the Contracts
or not consistent with the Company's obligations to Contract owners; or
12
<PAGE> 13
(c) termination by the Company by written notice to the Trust with respect
to any Portfolio in the event any of the Portfolio's shares are not registered,
issued or sold in accordance with applicable state and/or federal law or such
law precludes the use of such shares as the underlying investment media of the
Contracts issued or to be issued by the Company; or
(d) termination by the Company by written notice to the Trust with respect
to any Portfolio in the event that such Portfolio ceases to qualify as a
Regulated Investment Company under Subchapter M of the Code or any independent
or resulting failure under Section 817 of the Code, or under any successor or
similar provision of either, or if the Company reasonably believes that the
Trust may fail to so qualify; or
(e) termination by the Trust by written notice to the Company if the Trust
shall determine, in its sole judgment exercised in good faith, that the Company
and/or its affiliated companies has suffered a material adverse change in its
business, operations, financial condition or prospects since the date of this
Agreement or is the subject of material adverse publicity, but no such
termination shall be effective under this subsection (e) until the Company has
been afforded a reasonable opportunity to respond to a statement by the Trust
concerning the reason for notice of termination hereunder; or
(f) termination by the Company by written notice to the Trust if the
Company shall determine, in its sole judgment exercised in good faith, that
either the Trust or an investment adviser to the Trust has suffered a material
adverse change in its business, operations, financial condition or prospects
since the date of this Agreement or is the subject of material adverse
publicity; but no such termination shall be effective under this subsection (f)
until the Trust has been afforded a reasonable opportunity to respond to a
statement by the Company concerning the reason for notice of termination
hereunder.
6.2. Notwithstanding any termination of this Agreement, the Trust shall, at
the option of the Company, continue to make available additional shares of the
Trust (or any Portfolio) pursuant to the terms and conditions of this Agreement
for all Contracts in effect on the effective date of termination of this
Agreement, provided that the Company continues to pay the costs set forth in
Section 2.3.
6.3. The provisions of Article V shall survive the termination of this
Agreement, and the provisions of Article IV and Section 2.9 shall survive the
termination of this Agreement as long as shares of the Trust are held on behalf
of Contract owners in accordance with Section 6.2.
13
<PAGE> 14
ARTICLE VII
Notices
Any notice shall be sufficiently given when sent by registered or certified
mail to the other party at the address of such party set forth below or at such
other address as such party may from time to time specify in writing to the
other party.
If to the Trust:
200 Berkeley Street
Boston, Massachusetts 02116
Attention: Legal Department
If to the Company:
One Kemper Drive
Long Grove, Illinois 60049
Attention: General Counsel
ARTICLE VIII
Miscellaneous
8.1. The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.
8.2. This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
8.3. If any provision of this Agreement shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of the Agreement shall
not be affected thereby.
8.4. This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the State of Illinois.
8.5. The parties to this Agreement acknowledge and agree that all
liabilities of the Trust arising directly or indirectly under this Agreement, of
any and every nature whatsoever, shall be satisfied solely out of the assets of
the Trust and that no Trustee, officer, agent or holder of shares of beneficial
interest of the Trust shall be personally liable for any such liabilities.
14
<PAGE> 15
8.6. Each party shall cooperate with each other party and all appropriate
governmental authorities (including without limitation the Securities and
Exchange Commission, the National Association of Securities Dealers, Inc. and
state insurance regulators) and shall permit such authorities reasonable access
to its books and records in connection with any investigation or inquiry
relating to this Agreement or the transactions contemplated hereby.
8.7. The rights, remedies and obligations contained in this Agreement are
cumulative and are in addition to any and all rights, remedies and obligations,
at law or in equity, which the parties hereto are entitled to under state and
federal laws.
8.8. The parties to this Agreement acknowledge and agree that this
Agreement shall not be exclusive in any respect.
8.9. Neither this Agreement nor any rights or obligations hereunder may be
assigned by either party without the prior written approval of the other party.
8.10. No provisions of this Agreement may be amended or modified in any
manner except by a written agreement properly authorized and executed by both
parties.
IN WITNESS WHEREOF, the parties have caused their duly authorized officers
to execute this Participation Agreement as of the date and year first above
written.
KEMPER INVESTORS LIFE INSURANCE COMPANY
By: /s/ Otis R. Heldman
-------------------
Name: Otis R. Heldman
Title: Marketing Officer
EVERGREEN VARIABLE ANNUITY TRUST
By: /s/ D'Ray Moore
---------------
Name: D'Ray Moore
Title: Secretary
15
<PAGE> 16
SCHEDULE A
Separate Accounts, Contracts and Associated Portfolios
Name of Separate Accounts and Date
Established by Board of Directors
1. KILICO Variable Separate Account - 2
(KV SA-2)(est.06/17/97)
2 KILICO Variable Series III Separate Account
(Series III SA)(est 01/30/97)
3. KILICO Variable Series VI Separate Account
(Series VI SA)(est. 01/30/98)
Contracts Funded by Separate Account
1. First Fondation VUL (KV SA-2)
2. Series IV VUL (Individual)(Series III SA)
3. Series VII VUL (Survivorship)(Series VI SA)
Designated Portfolios
1. First Foundation VUL
- Evergreen VA Fund
- Evergreen VA Growth and Income Fund
- Evergreen VA Foundation Fund
- Evergreen VA Global Leaders Fund
- Evergreen VA Strategic Income Fund
- Evergreen VA Aggressive Growth Fund
- Evergreen VA Small Cap Equity Income Fund
- Evergreen VA International Growth Fund
2. Series IV VUL
- Evergreen VA Fund
- Evergreen VA Growth and Income Fund
- Evergreen VA Foundation Fund
- Evergreen VA Global Leaders Fund
- Evergreen VA Strategic Income Fund
- Evergreen VA Aggressive Growth Fund
- Evergreen VA Small Cap Equity Income Fund
16
<PAGE> 17
3. Series VII VUL
- Evergreen VA Fund
- Evergreen VA Growth and Income Fund
- Evergreen VA Foundation Fund
- Evergreen VA Global Leaders Fund
- Evergreen VA Strategic Income Fund
- Evergreen VA Aggressive Growth Fund
- Evergreen VA Small Cap Equity Income Fund
17
<PAGE> 1
EXHIBIT (8)(a)(ii)
September 1, 1998
Mr. James Hohmann
President - Financial SBU
Kemper Investor Life Insurance Company
1 Kemper Drive
Long Grove, IL 60049-0001
Dear Mr. Hohmann:
We are please that Kemper Investors Life Insurance Company (the "Company") has
entered into an agreement dated Sept. 1, 1998, with Evergreen Variable Annuity
Trust (the "Trust") providing for the purchase by the Company of shares of the
Trust for certain of the Company's separate accounts to fund benefits for
Variable Insurance Products (the "Participation Agreement"). This letter sets
forth the agreement between the Company and Evergreen Asset Management Corp.,
First Union National Bank of North Carolina and Keystone Investment Management
Company (collectively the "Advisers" and individually the "Adviser") concerning
certain administrative services the Company will provide the Trust and its
Portfolios.
1. Administrative Services and Expenses. Administrative services for the
separate accounts of the Company (the "Accounts") which invest in one or
more portfolios (collectively, the "Portfolios") of the Trust pursuant to
the Participation Agreement, and for purchasers of certain Variable
Insurance Products issued through the Accounts, are the responsibility of
the Company. Administrative services for the Portfolios, in which the
Account invests, and for purchasers of shares of the Portfolios, are the
responsibility of the Trust. Notwithstanding the foregoing, however, the
Company will provide to the Trust and its Portfolios certain administrative
services, as set forth below and which may be amended from time to time,
including, but not limited to, the following:
a) Aggregate allocation, transfer, and liquidation orders of the Account.
b) Print and mail to owners of Variable Insurance Products copies of the
Portfolios' prospectuses and other materials that the Trust is
required by law or otherwise to provide to its shareholders, but that
the Company is not otherwise required to provide to owners of Variable
Insurance Products.
c) Provide financial consultants with advice with respect to inquiries
related to the Portfolios (not including information related to
sales).
d) Provided such other administrative support for the Trust as mutually
agreed to by the Company and the Advisers to the extent permitted or
required under applicable statutes, and relieve the Trust of other
usual or incidental administrative services provided to individual
owners of Variable Insurance Products.
<PAGE> 2
2. Service fee. In consideration of the anticipated administrative expense
savings resulting to the Trust from the Company's services, the Advisers
agree to pay the Company at the end of each calendar month a fee ("Service
Fee") which will accrue daily at an annual rate of 25 basis points (.25%)
of the first $50,000,000 of the aggregate net asset value of all of the
issued and outstanding shares of the Portfolios held in the subaccounts of
the Accounts, reduced to 20 basis points (.20%) per annum of such aggregate
net asset value in excess of $50,000,000 up to $100,000,000 and further
reduced to eighteen basis points (.18%) of such aggregate net asset value
in excess of $100,000,000.
3. Nature of Payments. The parties to this letter agreement recognize and
agree that the Advisers' payments to the Company relate to administrative
services only and do not constitute payment in any manner for
administrative services provided by the Company to the Account or to the
Variable Insurance Products, for investment advisory services or for costs
of distribution of Variable Insurance Products or of shares of the Portfo-
lios and that these payments are not otherwise related to investment advi-
sory or distribution services or expenses.
4. Representations and Warranties:
a) Each Adviser represents and warrants that in the event the Trustees
of the Trust approve the payment of all or any portion of the Service
Fee by the Trust, the Trust will calculate in the same manner the
Service Fee to all insurance companies that have entered into Service
Fee arrangements with the Adviser and/or the Trust (the "Participating
Insurance Companies").
b) The Company represents and warrants that: (1) it and its employees and
agents meet the requirements of applicable law, including but not
limited to federal and state securities law and state law, for the
performance of services contemplated herein; and (2) it will not
purchase Trust shares of the Portfolios with Account assets derived
from tax-qualified retirement plans except indirectly, through
Variable Insurance Products purchased in connection with such plans
and that the Service Fee does not include any payment to the Company
that is prohibited under the Employee Retirement Income Securities Act
of 1974 ("ERISA") with respect to any assets of an owner of a Variable
Insurance Product invested in a Variable Insurance Product using the
Portfolios as investment vehicles.
c) The Company represents, warrants and agrees that: (1) the payment of
the Service Fee by the Advisers is designed to reimburse the Company
for providing administrative services to the Trust that the Trust
would customarily pay and does not represent reimbursement to the
Company for providing administrative services to the Variable
Insurance Products or Accounts; (2) no portion of the Service Fee will
be rebated by the Company to any owners of Variable Insurance
Products; and (3) if the Company or the Adviser, with advice of
counsel, determines that it is required or appropriate under
applicable law, the Company will disclose to each owner of a Variable
Insurance Product the existence of the Service Fee received by
<PAGE> 3
the Company pursuant to this letter agreement and will disclose the
amount of the Service Fee, if any, that is paid by the Trust.
5. Indemnification.
a) The Company agrees to indemnify and hold harmless the Advisers and
their directors, officers, and employees from any and all loss,
liability and expense resulting from any gross negligence or willful
wrongful act of the Company in performing its services under this
letter agreement, from the inaccuracy or breach of any representation
made in this letter agreement, or from a breach of a material
provision of this letter agreement, except to the extent such loss,
liability or expense is the result of the Advisers' willful
misfeasance, bad faith or gross negligence in the performance of
their duties.
b) The Advisers agree to indemnify and hold harmless the Company and its
directors, officers, agents and employees from any and all loss,
liability and expense resulting from any gross negligence or willfil
wrongful act of the Advisers in performing their services under this
letter agreement, from the inaccuracy or breach of any provision of
this letter agreement, except to the extent such loss, liability or
expense is the result of the Company's willful misfeasance, bad faith
or gross negligence in the performance of its duties. The Advisers
also agree to indemnify and hold harmless the Company and its
directors, officers, agents, and employees from any and all loss,
liability and expense resulting from the Trust's failure, whether
unintentional or in good faith or otherwise, to comply with the
diversification requirements set forth in Section 817(h) of the
Internal Revenue Code of 1986, as amended, and the rules and
regulations thereunder.
6. Termination.
a) Any party may terminate this letter agreement, without penalty, on
sixty (60) days' written notice to the other parties.
b) This letter agreement will terminate at the option of any party in the
event of the termination of the Participation Agreement.
c) This letter agreement will terminate immediately upon the
determination of any party, with the advice of counsel, that the
payment of the Service Fee is in conflict with applicable law.
7. Amendment. This letter agreement may be amended only upon mutual agreement
of the parties hereto in writing.
8. Confidentiality. The terms of this letter agreement will be treated as
confidential and will not be disclosed to the public or any outside party
except with each party's prior written consent, as required by law or
judicial process or as process or as provided in paragraph 4c herein.
<PAGE> 4
9. Assignment. This letter agreement may not be assigned (as that term is
defined in the Investment Company Act of 1940) by any party without the
prior written approval of the other parties, which approval will not be
unreasonably withheld, except that the Advisers may assign their
obligations under this letter agreement, including the payment of all or
any portion of the Service Fee, to the Trust or to an entity under common
control with the Advisers or that serves as a successor investment adviser
to the Trust, in each case upon thirty (30)days' written notice to the
Company.
10. Governing Law. This letter agreement will be construed and the provisions
hereof interpreted under and in accordance with the laws of the State of
Illinois.
11. Counterparts. This letter agreement may be executed in counterparts, each
of which will be deemed an original but all of which will together
constitute one and the same instrument.
If you agree to the foregoing, please sign the enclosed copy of this letter and
return it to Michael H. Koonce, The Evergreen Fund, 200 Berkeley Street, Boston,
MA 02116.
Sincerely,
Evergreen Asset Management Corp. Keystone Investment Management Company
By: /s/ Nola M. Falcone By: /s/ Albert H. Elfner
------------------------ -------------------------
Name: Name:
Title: Title:
AGREED
First Union National Bank Kemper Investors Life Insurance
of North Carolina Company
By: /s/ David C. Francis By: /s/ Otis R. Heldman, Jr.
------------------------ ---------------------------
Name: David C. Francis Name: Otis R. Heldman, Jr.
Title: Senior Vice President Title: Vice President
<PAGE> 1
EXHIBIT(8)(b)(i)
PARTICIPATION AGREEMENT
THIS AGREEMENT, made and entered into this 24th day of September, 1998
by and between GOLDMAN SACHS VARIABLE INSURANCE TRUST, an unincorporated
business trust formed under the laws of Delaware (the "Trust"), GOLDMAN, SACHS &
CO., a New York limited partnership (the "Distributor"), and KEMPER INVESTORS
LIFE INSURANCE COMPANY, an Illinois life insurance company (the "Company"), on
its own behalf and on behalf of each separate account of the Company identified
herein.
WHEREAS, the Trust is a series-type mutual fund offering shares of
beneficial interest (the "Trust shares") consisting of one or more separate
series ("Series") of shares, each such Series representing an interest in a
particular investment portfolio of securities and other assets (a "Fund"), and
which Series may be subdivided into various classes ("Classes") with each such
Class supporting a distinct charge and expense arrangement; and
WHEREAS, the Trust was established for the purpose of serving as an
investment vehicle for insurance company separate accounts supporting variable
annuity contracts and variable life insurance policies to be offered by
insurance companies and may also be utilized by qualified retirement plans; and
WHEREAS, the Distributor has the exclusive right to distribute Trust
shares to qualifying investors; and
WHEREAS, the Company desires that the Trust serve as an investment
vehicle for a certain separate account(s) of the Company and the Distributor
desires to sell shares of certain Series and/or Class(es) to such separate
account(s);
NOW, THEREFORE, in consideration of their mutual promises, the Trust,
the Distributor and the Company agree as follows:
ARTICLE I
ADDITIONAL DEFINITIONS
1.1. "Account" -- the separate account of the Company described more
specifically in Schedule 1 to this Agreement. If more than one separate account
is described on Schedule 1, the term shall refer to each separate account so
described.
1.2. "Business Day" -- each day that the Trust is open for business as
provided in the Trust's Prospectus.
1.3. "Code" -- the Internal Revenue Code of 1986, as amended, and any
successor thereto.
1.4. "Contracts" -- the class or classes of variable annuity contracts
and/or variable life insurance policies issued by the Company and described more
specifically on Schedule 2 to this Agreement.
1.5. "Contract Owners" -- the owners of the Contracts, as distinguished
from all Product Owners.
<PAGE> 2
1.6. "Participating Account" -- a separate account investing all or a
portion of its assets in the Trust, including the Account.
1.7. "Participating Insurance Company" -- any insurance company
investing in the Trust on its behalf or on behalf of a Participating Account,
including the Company.
1.8. "Participating Plan" -- any qualified retirement plan investing in
the Trust.
1.9. "Participating Investor" -- any Participating Account,
Participating Insurance Company or Participating Plan, including the Account and
the Company.
1.10. "Products" -- variable annuity contracts and variable life
insurance policies supported by Participating Accounts, including the Contracts.
1.11. "Product Owners" -- owners of Products, including Contract
Owners.
1.12. "Trust Board" -- the board of trustees of the Trust.
1.13. "Registration Statement" -- with respect to the Trust shares or a
class of Contracts, the registration statement filed with the SEC to register
such securities under the 1933 Act, or the most recently filed amendment
thereto, in either case in the form in which it was declared or became
effective. The Contracts' Registration Statement for each class of Contracts is
described more specifically on Schedule 2 to this Agreement. The Trust's
Registration Statement is filed on Form N-1A (File No. 333-35883).
1.14. "1940 Act Registration Statement" -- with respect to the Trust or
the Account, the registration statement filed with the SEC to register such
person as an investment company under the 1940 Act, or the most recently filed
amendment thereto. The Account's 1940 Act Registration Statement is described
more specifically on Schedule 1 to this Agreement. The Trust's 1940 Act
Registration Statement is filed on Form N-1A (File No. 811-08361).
1.15. "Prospectus" -- with respect to shares of a Series (or Class) of
the Trust or a class of Contracts, each version of the definitive prospectus or
supplement thereto filed with the SEC pursuant to Rule 497 under the 1933 Act.
With respect to any provision of this Agreement requiring a party to take action
in accordance with a Prospectus, such reference thereto shall be deemed to be to
the version for the applicable Series, Class or Contracts last so filed prior to
the taking of such action. For purposes of Article IX, the term "Prospectus"
shall include any statement of additional information incorporated therein.
1.16. "Statement of Additional Information" -- with respect to the
shares of the Trust or a class of Contracts, each version of the definitive
statement of additional information or supplement thereto filed with the SEC
pursuant to Rule 497 under the 1933 Act. With respect to any provision of this
Agreement requiring a party to take action in accordance with a Statement of
Additional Information, such reference thereto shall be deemed to be the last
version so filed prior to the taking of such action.
1.17. "SEC" -- the Securities and Exchange Commission.
1.18. "NASD" -- The National Association of Securities Dealers, Inc.
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1.19. "1933 Act" -- the Securities Act of 1933, as amended.
1.20. "1940 Act" -- the Investment Company Act of 1940, as amended.
ARTICLE II
SALE OF TRUST SHARES
2.1. AVAILABILITY OF SHARES
(a) The Trust has granted to the Distributor exclusive authority
to distribute the Trust shares and to select which Series or Classes of
Trust shares shall be made available to Participating Investors.
Pursuant to such authority, and subject to Article X hereof, the
Distributor shall make available to the Company for purchase on behalf
of the Account, shares of the Series and Classes listed on Schedule 3
to this Agreement, such purchases to be effected at net asset value in
accordance with Section 2.3 of this Agreement. Such Series and Classes
shall be made available to the Company in accordance with the terms and
provisions of this Agreement until this Agreement is terminated
pursuant to Article X or the Distributor suspends or terminates the
offering of shares of such Series or Classes in the circumstances
described in Article X.
(b) Notwithstanding clause (a) of this Section 2.1, Series or
Classes of Trust shares in existence now or that may be established in
the future will be made available to the Company only as the
Distributor may so provide, subject to the Distributor's rights set
forth in Article X to suspend or terminate the offering of shares of
any Series or Class or to terminate this Agreement.
(c) The parties acknowledge and agree that: (i) the Trust may
revoke the Distributor's authority pursuant to the terms and conditions
of its distribution agreement with the Distributor; provided, however,
in such event the Trust shall make alternative distribution
arrangements so that shares of the Series and Classes listed on
Schedule 3, as amended from time to time, shall continue to be
available to the Company for purchase and redemption on behalf of the
Account in accordance with this Agreement; and (ii) the Trust reserves
the right in its sole discretion to refuse to accept a request for the
purchase of Trust shares in accordance with the Trust's Prospectus.
2.2. REDEMPTIONS. The Trust shall redeem, at the Company's request, any
full or fractional Trust shares held by the Company on behalf of the Account,
such redemptions to be effected at net asset value in accordance with Section
2.3 of this Agreement. Notwithstanding the foregoing, (i) the Company shall not
redeem Trust shares attributable to Contract Owners except in the circumstances
permitted in Article X of this Agreement, and (ii) the Trust may delay
redemption of Trust shares of any Series or Class to the extent permitted by the
1940 Act, any rules, regulations or orders thereunder, or the Prospectus for
such Series or Class.
2.3. PURCHASE AND REDEMPTION PROCEDURES
(a) The Trust hereby appoints the Company as its designee for the
limited purpose of receiving purchase and redemption requests on behalf
of the Account (but not with respect to any Trust shares that may be
held in the general account of the Company) for shares of those Series
or Classes made available hereunder, based on allocations of amounts to
the Account or subaccounts thereof under the Contracts, other
transactions relating to the Contracts or the Account and customary
processing of the Contracts. Receipt of any such requests (or
effectuation of such transaction or processing) on any
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Business Day by the Company as such designee prior to the Trust's close
of business as defined from time to time in the applicable Prospectus
for such Series or Class (which as of the date of execution of this
Agreement is defined as the close of regular trading on the New York
Stock Exchange (normally 4:00 p.m. New York Time)) shall constitute
receipt by the Trust on that same Business Day, provided (i) with
respect to all Funds listed on Schedule 3 (other than the International
Equity Fund and the Global Income Fund), the Trust receives actual and
sufficient notice of such request by 10:00 a.m. New York time on the
next following Business Day, and (ii) with respect to the International
Equity Fund and the Global Income Fund, the Trust receives actual and
sufficient notice of such request by 9:30 a.m. New York time on the
next following Business Day.
(b) In the event the Company's order results in a net purchase of
Trust shares, the Company shall pay for shares of each Series or Class
on the same day that it provides actual notice to the Trust of a
purchase request for such shares. Payment for Series or Class shares
shall be made in Federal funds transmitted to the Trust by wire to be
received by the Trust by 3:30 p.m. New York Time on the day the Trust
receives actual notice of the purchase request for Series or Class
shares (unless the Trust determines and so advises the Company that
sufficient proceeds are available from redemption of shares of other
Series or Classes effected pursuant to redemption requests tendered by
the Company on behalf of the Account). In no event may proceeds from
the redemption of shares requested pursuant to an order received by the
Company after the Trust's close of business on any Business Day be
applied to the payment for shares for which a purchase order was
received prior to the Trust's close of business on such day. If the
issuance of shares is canceled because Federal funds are not timely
received, the Company shall indemnify the respective Fund and
Distributor with respect to all costs, expenses and losses relating
thereto. Upon the Trust's receipt of Federal funds so wired, such funds
shall cease to be the responsibility of the Company and shall become
the responsibility of the Trust. If Federal funds are not received on
time, such funds will be invested, and Series or Class shares purchased
thereby will be issued, as soon as practicable after actual receipt of
such funds but in any event not on the same day that the purchase order
was received.
(c) In the event that the Company's order results in a net
redemption of Trust shares, payment for Series or Class shares redeemed
by the Account or the Company shall be made in Federal funds
transmitted by wire to the Company or any other person properly
designated in writing by the Company, such funds normally to be
transmitted by 6:00 p.m. New York Time on the next Business Day after
the Trust receives actual notice of the redemption order for Series or
Class shares (unless redemption proceeds are to be applied to the
purchase of Trust shares of other Series or Classes in accordance with
Section 2.3(b) of this Agreement), except that the Trust reserves the
right to redeem Series or Class shares in assets other than cash and to
delay payment of redemption proceeds to the extent permitted by the
1940 Act, any rules or regulations or orders thereunder, or the
applicable Prospectus. The Trust shall not bear any responsibility
whatsoever for the proper disbursement or crediting of redemption
proceeds received by the Company; the Company alone shall be
responsible for such action.
(d) Any purchase or redemption request for Series or Class shares
held or to be held in the Company's general account shall be effected
at the net asset value per share next determined after the Trust's
actual receipt of such request, provided that, in the case of a
purchase request, payment for Trust shares so requested is received by
the Trust in Federal funds prior to close of business for determination
of such value, as defined from time to time in the Prospectus for such
Series or Class.
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(e) Prior to the first purchase of any Trust shares hereunder, the
Company and the Trust shall provide each other with all information
necessary to effect wire transmissions of Federal funds to the other
party and all other designated persons pursuant to such protocols and
security procedures as the parties may agree upon. Should such
information change thereafter, the Trust and the Company, as
applicable, shall notify the other in writing of such changes,
observing the same protocols and security procedures, at least three
Business Days in advance of when such change is to take effect. The
Company and the Trust shall observe customary procedures to protect the
confidentiality and security of such information, but neither the Trust
nor the Company shall be liable to the other for any breach of
security.
(f) The procedures set forth herein are subject to any additional
terms set forth in the applicable Prospectus for the Series or Class or
by the requirements of applicable law.
2.4. NET ASSET VALUE. The Trust shall provide to the Company a closing
net asset value per share for each Series or Class available hereunder as of the
close of trading each Business Day. The Trust shall use its best efforts to
inform the Company of such net asset value as soon as reasonably practicable
after the net asset values are calculated and shall use its best efforts to
provide each such net asset value by 6:30 p.m. New York Time. The Trust shall
calculate net asset value in accordance with the Prospectus for such Series or
Class.
2.5. DIVIDENDS AND DISTRIBUTIONS. The Trust shall furnish notice to the
Company as soon as reasonably practicable of any income dividends or capital
gain distributions payable on any Series or Class shares. The Company, on its
behalf and on behalf of the Account, hereby elects to receive all such dividends
and distributions as are payable on any Series or Class shares in the form of
additional shares of that Series or Class. The Company reserves the right, on
its behalf and on behalf of the Account, to revoke this election and to receive
all such dividends and capital gain distributions in cash; to be effective, such
revocation must be made in writing and received by the Trust at least ten
Business Days prior to a dividend or distribution date. The Trust shall notify
the Company or its designee promptly of the number of Series or Class shares so
issued as payment of such dividends and distributions. The Trust shall to the
extent practicable provide advance notice to the Company of any date on which
the Trust reasonably expects to make a dividend distribution.
2.6. BOOK ENTRY. Issuance and transfer of Trust shares shall be by book
entry only. Stock certificates will not be issued to the Company or the Account.
Purchase and redemption orders for Trust shares shall be recorded in an
appropriate ledger for the Account or the appropriate subaccount of the Account.
2.7. PRICING ERRORS. Each party to this Agreement shall be responsible
for pricing errors that are attributable to it in the event that under SEC
standards, the Company and the Account are required to make Contract Owners
whole; provided that each party shall have the right to rely on information or
confirmations provided by any other party (or by any affiliate of any other
party) which is reasonably believed to be genuine, including information
supplied by or on behalf of the Company or any other Participating Insurance
Company to the Trust or the Distributor, and shall not be liable in the event
that an error results from any incorrect information or confirmations supplied
by any other party.
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2.8. LIMITS ON PURCHASERS. The Distributor and the Trust shall sell Trust shares
only to insurance companies and their separate accounts and to persons or plans
("Qualified Persons") that qualify to purchase shares of the Trust under Section
817(h) of the Code and the regulations thereunder without impairing the ability
of the Account to consider the portfolio investments of the Trust as
constituting investments of the Account for the purpose of satisfying the
diversification requirements of Section 817(h) Trust shares will not be sold
directly to the general public. The Distributor and the Trust shall not sell
Trust shares to any insurance company and its separate account unless an
agreement defining the responsibilities of the parties is in effect to govern
such sales. The Company hereby represents and warrants that it and the Account
are Qualified Persons.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
3.1. COMPANY. The Company represents and warrants that: (i) the Company
is an insurance company duly organized and in good standing under Illinois
insurance law; (ii) the Account is a validly existing separate account, duly
established and maintained in accordance with applicable law; (iii) the
Account's 1940 Act Registration Statement has been filed with the SEC in
accordance with the provisions of the 1940 Act and the Account is duly
registered as a unit investment trust thereunder; (iv) the Contracts'
Registration Statement has been, or will be prior to the sale of any Contracts,
declared effective by the SEC; (v) the Contracts will be issued in compliance in
all material respects with all applicable federal and state laws; (vi) the
Contracts have been filed, qualified and/or approved for sale, as applicable,
under the insurance laws and regulations of the states in which the Contracts
will be offered; (vii) the Account will maintain its registration under the 1940
Act and will comply in all material respects with the 1940 Act; (viii) the
Contracts currently are, and at the time of issuance and for so long as they are
outstanding will be, treated as annuity contracts or life insurance policies,
whichever is appropriate, under applicable provisions of the Code; (ix) the
Company's entering into and performing its obligations under this Agreement does
not and will not violate its charter documents or by-laws, rules or regulations,
or any agreement to which it is a party; (x) the principal underwriter for each
Account and any subaccount thereof is registered as a broker-dealer under the
Securities Exchange Act of 1934, as amended; and (xi) the Trust shares are and
will continue to be the only investment securities held by the corresponding
Account subaccount(s). The Company will notify the Trust promptly if for any
reason it is unable to perform its obligations under this Agreement.
3.2. TRUST. The Trust represents and warrants that: (i) the Trust is an
unincorporated business trust duly formed and validly existing under Delaware
law; (ii) the Trust's 1940 Act Registration Statement has been filed with the
SEC in accordance with the provisions of the 1940 Act and the Trust is duly
registered as an open-end management investment company thereunder; (iii) the
Trust's Registration Statement has been declared effective by the SEC; (iv) the
Trust shares will be issued in compliance in all material respects with all
applicable federal and state laws; (v) the Trust will remain registered under
and will comply in all material respects with the 1940 Act during the term of
this Agreement; (vi) each Fund of the Trust intends to qualify as a "regulated
investment company" under Subchapter M of the Code and shall comply with the
diversification standards prescribed in Section 817(h) of the Code and the
regulations thereunder as set forth in Section 6.1 of this Agreement; and (vii)
the investment policies of each Fund are in material compliance with any
investment restrictions set forth on Schedule 4 to this Agreement. The Trust,
however, makes no representation as to whether any
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aspect of its operations (including, but not limited to, fees and expenses and
investment policies) otherwise complies with the insurance laws or regulations
of any state.
3.3. DISTRIBUTOR. The Distributor represents and warrants that: (i) the
Distributor is a limited partnership duly organized and in good standing under
New York law; (ii) the Distributor is registered as a broker-dealer under
federal and applicable state securities laws and is a member of the NASD; and
(iii) the Distributor is registered as an investment adviser under federal
securities laws.
3.4. LEGAL AUTHORITY. Each party represents and warrants that the
execution and delivery of this Agreement and the consummation of the
transactions contemplated herein have been duly authorized by all necessary
corporate, partnership or trust action, as applicable, by such party, and, when
so executed and delivered, this Agreement will be the valid and binding
obligation of such party enforceable in accordance with its terms.
3.5. BONDING REQUIREMENT. Each party represents and warrants that all
of its directors, officers, partners and employees dealing with the money and/or
securities of the Trust are and shall continue to be at all times covered by a
blanket fidelity bond or similar coverage for the benefit of the Trust in an
amount not less than the amount required by the applicable rules of the NASD and
the federal securities laws. The aforesaid bond shall include coverage for
larceny and embezzlement and shall be issued by a reputable bonding company. All
parties shall make all reasonable efforts to see that this bond or another bond
containing these provisions is always in effect, shall provide evidence thereof
promptly to any other party upon written request therefor, and shall notify the
other parties promptly in the event that such coverage no longer applies.
ARTICLE IV
REGULATORY REQUIREMENTS
4.1. TRUST FILINGS. The Trust shall amend the Trust's Registration
Statement and the Trust's 1940 Act Registration Statement from time to time as
required in order to effect the continuous offering of Trust shares in
compliance with applicable law and to maintain the Trust's registration under
the 1940 Act for so long as Trust shares are sold.
4.2. CONTRACTS FILINGS. The Company shall amend the Contracts'
Registration Statement and the Account's 1940 Act Registration Statement from
time to time as required in order to effect the continuous offering of the
Contracts in compliance with applicable law or as may otherwise be required by
applicable law, but in any event shall maintain a current effective Contracts'
Registration Statement and the Account's registration under the 1940 Act for so
long as the Contracts are outstanding unless the Company has supplied the Trust
with an SEC no-action letter or opinion of counsel satisfactory to the Trust's
counsel to the effect that maintaining such Registration Statement on a current
basis is no longer required. The Company shall be responsible for filing all
such Contract forms, applications, marketing materials and other documents
relating to the Contracts and/or the Account with state insurance commissions,
as required or customary, and shall use its best efforts: (i) to obtain any and
all approvals thereof, under applicable state insurance law, of each state or
other jurisdiction in which Contracts are or may be offered for sale; and (ii)
to keep such approvals in effect for so long as the Contracts are outstanding.
4.3. VOTING OF TRUST SHARES. With respect to any matter put to vote by
the holders of Trust shares ("Voting Shares"), the Company will provide
"pass-through" voting privileges to owners of Contracts registered with the SEC
as long as the 1940 Act requires such privileges in
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such cases. In cases in which "pass-through" privileges apply, the Company will
(i) solicit voting instructions from Contract Owners of SEC-registered
Contracts; (ii) vote Voting Shares attributable to Contract Owners in accordance
with instructions or proxies timely received from such Contract Owners; and
(iii) vote Voting Shares held by it that are not attributable to reserves for
SEC-registered Contracts or for which it has not received timely voting
instructions in the same proportion as instructions received in a timely fashion
from Owners of SEC-registered Contracts. The Company shall be responsible for
ensuring that it calculates "pass-through" votes for the Account in a manner
consistent with the provisions set forth above and with other Participating
Insurance Companies. Neither the Company nor any of its affiliates will in any
way recommend action in connection with, or oppose or interfere with, the
solicitation of proxies for the Trust shares held for such Contract Owners,
except with respect to matters as to which the Company has the right under Rule
6e-2 or 6e-3(T) under the 1940 Act, to vote Voting Shares without regard to
voting instructions from Contract Owners.
4.4. STATE INSURANCE RESTRICTIONS. The Company acknowledges and agrees
that it is the responsibility of the Company and other Participating Insurance
Companies to determine investment restrictions and any other restrictions,
limitations or requirements under state insurance law applicable to any Fund or
the Trust or the Distributor, and that neither the Trust nor the Distributor
shall bear any responsibility to the Company, other Participating Insurance
Companies or any Product Owners for any such determination or the correctness of
such determination. Schedule 4 sets forth the investment restrictions and any
other restrictions, limitations or requirements that the Company and/or other
Participating Insurance Companies have determined are applicable to any Fund and
with which the Trust has agreed to comply as of the date of this Agreement. The
Company shall inform the Trust of any investment restrictions and any other
restrictions, limitations or requirements imposed by state insurance law that
the Company determines may become applicable to the Trust or a Fund from time to
time as a result of the Account's investment therein, other than those set forth
on Schedule 4 to this Agreement. Upon receipt of any such information from the
Company or any other Participating Insurance Company, the Trust shall determine
whether it is in the best interests of shareholders to comply with any such
restrictions. If the Trust determines that it is not in the best interests of
shareholders (it being understood that "shareholders" for this purpose shall
mean Product Owners) to comply with a restriction determined to be applicable by
the Company, the Trust shall so inform the Company, and the Trust and the
Company shall discuss alternative accommodations in the circumstances. If the
Trust determines that it is in the best interests of shareholders to comply with
such restrictions, the parties hereto shall amend Schedule 4 to this Agreement
to reflect such restrictions, subject to obtaining any required shareholder
approval thereof.
4.5. DRAFTS OF FILINGS. The Trust and the Company shall provide to each
other copies of draft versions of any Registration Statements, Prospectuses,
Statements of Additional Information, periodic and other shareholder or Contract
Owner reports, proxy statements, solicitations for voting instructions,
applications for exemptions, requests for no-action letters, and all amendments
or supplements to any of the above, prepared by or on behalf of either of them
and that mentions the other party by name. Such drafts shall be provided to the
other party sufficiently in advance of filing such materials with regulatory
authorities in order to allow such other party a reasonable opportunity to
review the materials.
4.6. COPIES OF FILINGS. The Trust and the Company shall provide to each
other at least one complete copy of all Registration Statements, Prospectuses,
Statements of Additional Information, periodic and other shareholder or Contract
Owner reports, proxy statements, solicitations of voting instructions,
applications for exemptions, requests for no-action letters, and all amendments
or supplements to any of the above, that relate to the Trust, the Contracts or
the Account, as the case may be, promptly after the filing by or on behalf of
each such party of
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such document with the SEC or other regulatory authorities (it being understood
that this provision is not intended to require the Trust to provide to the
Company copies of any such documents prepared, filed or used by Participating
Investors other than the Company and the Account).
4.7. REGULATORY RESPONSES. Each party shall promptly provide to all
other parties copies of responses to no-action requests, notices, orders and
other rulings received by such party with respect to any filing covered by
Section 4.6 of this Agreement.
4.8. COMPLAINTS AND PROCEEDINGS
(a) The Trust and/or the Distributor shall immediately notify the
Company of: (i) the issuance by any court or regulatory body of any
stop order, cease and desist order, or other similar order (but not
including an order of a regulatory body exempting or approving a
proposed transaction or arrangement) with respect to the Trust's
Registration Statement or the Prospectus of any Series or Class; (ii)
any request by the SEC for any amendment to the Trust's Registration
Statement or the Prospectus of any Series or Class; (iii) the
initiation of any proceedings for that purpose or for any other
purposes relating to the registration or offering of the Trust shares;
or (iv) any other action or circumstances that may prevent the lawful
offer or sale of Trust shares or any Class or Series in any state or
jurisdiction, including, without limitation, any circumstance in which
(A) such shares are not registered and, in all material respects,
issued and sold in accordance with applicable state and federal law or
(B) such law precludes the use of such shares as an underlying
investment medium for the Contracts. The Trust will make every
reasonable effort to prevent the issuance of any such stop order, cease
and desist order or similar order and, if any such order is issued, to
obtain the lifting thereof at the earliest possible time.
(b) The Company shall immediately notify the Trust and the
Distributor of: (i) the issuance by any court or regulatory body of any
stop order, cease and desist order, or other similar order (but not
including an order of a regulatory body exempting or approving a
proposed transaction or arrangement) with respect to the Contracts'
Registration Statement or the Contracts' Prospectus; (ii) any request
by the SEC for any amendment to the Contracts' Registration Statement
or Prospectus; (iii) the initiation of any proceedings for that purpose
or for any other purposes relating to the registration or offering of
the Contracts; or (iv) any other action or circumstances that may
prevent the lawful offer or sale of the Contracts or any class of
Contracts in any state or jurisdiction, including, without limitation,
any circumstance in which such Contracts are not registered, qualified
and approved, and, in all material respects, issued and sold in
accordance with applicable state and federal laws. The Company will
make every reasonable effort to prevent the issuance of any such stop
order, cease and desist order or similar order and, if any such order
is issued, to obtain the lifting thereof at the earliest possible time.
(c) Each party shall immediately notify the other parties when it
receives notice, or otherwise becomes aware of, the commencement of any
litigation or proceeding against such party or a person affiliated
therewith in connection with the issuance or sale of Trust shares or
the Contracts.
(d) The Company shall provide to the Trust and the Distributor any
complaints it has received from Contract Owners pertaining to the Trust
or a Fund, and
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the Trust and Distributor shall each provide to the Company any
complaints it has received from Contract Owners relating to the
Contracts.
4.9. COOPERATION. Each party hereto shall cooperate with the other
parties and all appropriate government authorities (including without limitation
the SEC, the NASD and state securities and insurance regulators) and shall
permit such authorities reasonable access to its books and records in connection
with any investigation or inquiry by any such authority relating to this
Agreement or the transactions contemplated hereby. However, such access shall
not extend to attorney-client privileged information.
ARTICLE V
SALE, ADMINISTRATION AND SERVICING OF THE CONTRACTS
5.1. SALE OF THE CONTRACTS. The Company shall be fully responsible for
the sale and marketing of the Contracts. The Company shall provide Contracts,
the Contracts' and Trust's Prospectuses, Contracts' and Trust's Statements of
Additional Information, and all amendments or supplements to any of the
foregoing to Contract Owners and prospective Contract Owners, all in accordance
with federal and state laws. The Company shall ensure that all persons offering
the Contracts are duly licensed and registered under applicable insurance and
securities laws. The Company shall ensure that each sale of a Contract satisfies
applicable suitability requirements under insurance and securities laws and
regulations, including without limitation the rules of the NASD. The Company
shall adopt and implement procedures reasonably designed to ensure that
information concerning the Trust and the Distributor that is intended for use
only by brokers or agents selling the Contracts (i.e., information that is not
intended for distribution to Contract Owners or offerees) is so used.
5.2. ADMINISTRATION AND SERVICING OF THE CONTRACTS. The Company shall
be fully responsible for the underwriting, issuance, service and administration
of the Contracts and for the administration of the Account, including, without
limitation, the calculation of performance information for the Contracts, the
timely payment of Contract Owner redemption requests and processing of Contract
transactions, and the maintenance of a service center, such functions to be
performed in all respects at a level commensurate with those standards
prevailing in the variable insurance industry. The Company shall provide to
Contract Owners all Trust reports, solicitations for voting instructions
including any related Trust proxy solicitation materials, and updated Trust
Prospectuses as required under the federal securities laws.
5.3. CUSTOMER COMPLAINTS. The Company shall promptly address all
customer complaints and resolve such complaints consistent with high ethical
standards and principles of ethical conduct.
5.4. TRUST PROSPECTUSES AND REPORTS. In order to enable the Company to
fulfill its obligations under this Agreement and the federal securities laws,
the Trust shall provide the Company with a copy, in camera-ready form or form
otherwise suitable for printing or duplication or, at the Company's request, as
a diskette in the form sent to the financial printer, of: (i) the Trust's
Prospectus for the Series and Classes listed on Schedule 3 and any supplement
thereto; (ii) each Statement of Additional Information and any supplement
thereto; (iii) any Trust proxy soliciting material for such Series or Classes;
and (iv) any Trust periodic shareholder reports. The Trust and the Company may
agree upon alternate arrangements, but in all cases, the Trust reserves the
right to approve the printing of any such material. The Trust shall provide the
Company at least 10 days advance written notice when any such material shall
become available, provided, however, that in the case of a supplement, the Trust
shall provide the Company notice reasonable in the circumstances, it being
understood that circumstances surrounding such supplement may not allow for
advance notice. The Company may not alter any material so
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provided by the Trust or the Distributor (including without limitation
presenting or delivering such material in a different medium, e.g., electronic
or Internet) without the prior written consent of the Distributor.
5.5. TRUST ADVERTISING MATERIAL. No piece of advertising or sales
literature or other promotional material in which the Trust or the Distributor
is named (including, without limitation, material for prospects, existing
Contract Owners, brokers, rating or ranking agencies, or the press, whether in
print, radio, television, video, Internet, or other electronic medium) shall be
used by the Company or any person directly or indirectly authorized by the
Company, including without limitation, underwriters, distributors, and sellers
of the Contracts, except with the prior written consent of the Trust or the
Distributor, as applicable, as to the form, content and medium of such material.
Any such piece shall be furnished to the Trust for such consent prior to its
use. The Trust or the Distributor shall respond to any request for written
consent on a prompt and timely basis, but failure to respond shall not relieve
the Company of the obligation to obtain the prior written consent of the Trust
or the Distributor. After receiving the Trust's or Distributor's consent to the
use of any such material, no further changes may be made without obtaining the
Trust's or Distributor's consent to such changes. The Trust or Distributor may
at any time in its sole discretion revoke such written consent, and upon
notification of such revocation, the Company shall no longer use the material
subject to such revocation. Until further notice to the Company, the Trust has
delegated its rights and responsibilities under this provision to the
Distributor.
5.6. CONTRACTS ADVERTISING MATERIAL. No piece of advertising or sales
literature or other promotional material in which the Company is named shall be
used by the Trust or the Distributor, except with the prior written consent of
the Company. Any such piece shall be furnished to the Company for such consent
prior to its use. The Company shall respond to any request for written consent
on a prompt and timely basis, but failure to respond shall not relieve the Trust
or the Distributor of the obligation to obtain the prior written consent of the
Company. The Company may at any time in its sole discretion revoke any written
consent, and upon notification of such revocation, neither the Trust nor the
Distributor shall use the material subject to such revocation. The Company, upon
prior written notice to the Trust, may delegate its rights and responsibilities
under this provision to the principal underwriter for the Contracts.
5.7. TRADE NAMES. No party shall use any other party's names, logos,
trademarks or service marks, whether registered or unregistered, without the
prior written consent of such other party, or after written consent therefor has
been revoked. No party shall use in advertising, publicity or otherwise the name
of any other party or any affiliate thereof nor its or their trade name,
trademark, trade device, service mark, symbol or any abbreviation, contraction
or simulation thereof without the prior written consent of such other party in
each instance.
5.8. REPRESENTATIONS BY COMPANY. Except with the prior written consent
of the Trust, the Company shall not give any information or make any
representations or statements about the Trust or the Funds, nor shall it
authorize or allow any other person to do so, except information or
representations contained in the Trust's Registration Statement or the Trust's
Prospectuses or in reports or proxy statements for the Trust, or in sales
literature or other promotional material approved in writing by the Trust or its
designee in accordance with this Article V, or in published reports or
statements of the Trust in the public domain.
5.9. REPRESENTATIONS BY TRUST. Except with the prior written consent of
the Company, the Trust shall not give any information or make any
representations or statements on behalf of the Company or concerning the
Company, the Account or the Contracts nor shall it authorize or allow any other
person to do so other than information or representations contained in the
Contracts' Registration Statement or Contracts' Prospectus or in published
reports of the
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Account which are in the public domain or in sales literature or other
promotional material approved in writing by the Company in accordance with this
Article V.
5.10. ADVERTISING. For purposes of this Article V, the phrase "sales
literature or other promotional material" includes, but is not limited to, any
material constituting sales literature or advertising under the NASD rules, the
1940 Act or the 1933 Act.
ARTICLE VI
COMPLIANCE WITH CODE
6.1. SECTION 817(H). Each Fund of the Trust shall comply with Section
817(h) of the Code and the regulations issued thereunder ("817(h) Requirements")
to the extent applicable to the Fund as an investment company underlying the
Account, and the Trust shall notify the Company immediately upon having a
reasonable basis for believing that a Fund has ceased to so qualify or that it
might not so qualify in the future and will immediately take all steps necessary
to adequately diversify the Fund to achieve compliance.
6.2. SUBCHAPTER M. Each Fund of the Trust shall maintain the
qualification of the Fund as a regulated investment company ("RIC") (under
Subchapter M or any successor or similar provision), and the Trust shall notify
the Company immediately upon having a reasonable basis for believing that a Fund
has ceased to so qualify or that it might not so qualify in the future. The
Trust acknowledges that failure to qualify as a RIC may result in failure to
comply with the 817(h) Requirements.
6.3. CONTRACTS. The Company shall ensure the continued treatment of the
Contracts as annuity contracts or life insurance policies, whichever is
appropriate, under applicable provisions of the Code and shall notify the Trust
and the Distributor immediately upon having a reasonable basis for believing
that the Contracts have ceased to be so treated or that they might not be so
treated in the future.
ARTICLE VII
EXPENSES
7.1. EXPENSES. All expenses incident to each party's performance under
this Agreement (including expenses expressly assumed by such party pursuant to
this Agreement) shall be paid by such party to the extent permitted by law.
7.2. TRUST EXPENSES. Expenses incident to the Trust's performance of
its duties and obligations under this Agreement include, but are not limited to,
the costs of:
(a) registration and qualification of the Trust shares under the
federal securities laws;
(b) preparation and filing with the SEC of the Trust's Prospectuses,
Trust's Statement of Additional Information, Trust's Registration
Statement, Trust proxy materials and shareholder reports, and
preparation of a camera-ready or other copy of the foregoing as
provided in Section 5.4;
(c) preparation of all statements and notices required by any federal
or state securities law;
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(d) printing and mailing of all materials and reports required to be
provided by the Trust to its existing shareholders;
(e) all taxes on the issuance or transfer of Trust shares;
(f) payment of all applicable fees relating to the Trust, including,
without limitation, all fees due under Rule 24f-2 under the 1940
Act in connection with sales of Trust shares to qualified
retirement plans, custodial, auditing, transfer agent and advisory
fees, fees for insurance coverage and Trustees' fees; and
(g) any expenses permitted to be paid or assumed by the Trust pursuant
to a plan, if any, under Rule 12b-1 under the 1940 Act.
7.3. COMPANY EXPENSES. Expenses incident to the Company's performance
of its duties and obligations under this Agreement include, but are not limited
to, the costs of:
(a) registration and qualification of the Contracts under the federal
securities laws;
(b) preparation and filing with the SEC of the Contracts' Prospectus
and Contracts' Registration Statement;
(c) the sale, marketing and distribution of the Contracts, including
printing and dissemination of Contracts' and the Trust's
Prospectuses and compensation for Contract sales;
(d) administration of the Contracts;
(e) solicitation of voting instructions with respect to Trust proxy
materials;
(f) payment of all applicable fees relating to the Contracts,
including, without limitation, all fees due under Rule 24f-2;
(g) preparation, printing and dissemination of all statements and
notices to Contract Owners required by any federal or state
insurance law other than those paid for by the Trust; and
(h) preparation, printing and dissemination of all marketing materials
for the Contracts and Trust (to the extent it relates to the
Contracts) except where other arrangements are made in advance.
7.4. 12B-1 PAYMENTS. The Trust shall pay no fee or other compensation
to the Company under this Agreement, except that if the Trust or any Series or
Class adopts and implements a plan pursuant to Rule 12b-1 under the 1940 Act to
finance distribution expenses, then payments may be made to the Company in
accordance with such plan. The Trust currently does not intend to make any
payments to finance distribution expenses pursuant to Rule 12b-1 under the 1940
Act or in contravention of such rule, although it may make payments pursuant to
Rule 12b-1 in the future. To the extent that it decides to finance distribution
expenses pursuant to Rule 12b-1 and such formulation is required by the 1940 Act
or any rules or order thereunder, the Trust undertakes to have a Board of
Trustees, a majority of whom are not interested persons of the Trust, formulate
and approve any plan under Rule 12b-1 to finance distribution expenses.
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ARTICLE VIII
POTENTIAL CONFLICTS
8.1. EXEMPTIVE ORDER. The parties to this Agreement acknowledge that
the Trust has obtained an order (the "Exemptive Order") granting relief from
various provisions of the 1940 Act and the rules thereunder to the extent
necessary to permit Trust shares to be sold to and held by variable annuity and
variable life insurance separate accounts of both affiliated and unaffiliated
Participating Insurance Companies and other Qualified Persons (as defined in
Section 2.8 hereof). The Exemptive Order requires the Trust and each
Participating Insurance Company to comply with conditions and undertakings
substantially as provided in this Article VIII. The Trust will not enter into a
participation agreement with any other Participating Insurance Company unless it
imposes the same conditions and undertakings on that company as are imposed on
the Company pursuant to this Article VIII.
8.2. COMPANY MONITORING REQUIREMENTS. The Company will monitor its
operations and those of the Trust for the purpose of identifying any material
irreconcilable conflicts or potential material irreconcilable conflicts between
or among the interests of Participating Plans, Product Owners of variable life
insurance policies and Product Owners of variable annuity contracts.
8.3. COMPANY REPORTING REQUIREMENTS. The Company shall report any
conflicts or potential conflicts to the Trust Board and will provide the Trust
Board, at least annually, with all information reasonably necessary for the
Trust Board to consider any issues raised by such existing or potential
conflicts or by the conditions and undertakings required by the Exemptive Order.
The Company also shall assist the Trust Board in carrying out its obligations
including, but not limited to: (a) informing the Trust Board whenever it
disregards Contract Owner voting instructions with respect to variable life
insurance policies, and (b) providing such other information and reports as the
Trust Board may reasonably request. The Company will carry out these obligations
with a view only to the interests of Contract Owners.
8.4. TRUST BOARD MONITORING AND DETERMINATION. The Trust Board shall
monitor the Trust for the existence of any material irreconcilable conflicts
between or among the interests of Participating Plans, Product Owners of
variable life insurance policies and Product Owners of variable annuity
contracts and determine what action, if any, should be taken in response to
those conflicts. A majority vote of Trustees who are not interested persons of
the Trust as defined in the 1940 Act (the "disinterested trustees") shall
represent a conclusive determination as to the existence of a material
irreconcilable conflict between or among the interests of Product Owners and
Participating Plans and as to whether any proposed action adequately remedies
any material irreconcilable conflict. The Trust Board shall give prompt written
notice to the Company and Participating Plan of any such determination.
8.5. UNDERTAKING TO RESOLVE CONFLICT. In the event that a material
irreconcilable conflict of interest arises between Product Owners of variable
life insurance policies or Product Owners of variable annuity contracts and
Participating Plans, the Company will, at its own expense, take whatever action
is necessary to remedy such conflict as it adversely affects Contract Owners up
to and including (1) establishing a new registered management investment
company, and (2) withdrawing assets from the Trust attributable to reserves for
the Contracts subject to the conflict and reinvesting such assets in a different
investment medium (including another Fund of the Trust) or submitting the
question of whether such withdrawal should be implemented to a vote of all
affected Contract Owners, and, as appropriate, segregating the assets supporting
the Contracts of any group of such owners that votes in favor of such
withdrawal, or offering to such owners the option of making such a change. The
Company will carry out the responsibility to take the foregoing action with a
view only to the interests of Contract Owners.
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8.6. EXPENSES ASSOCIATED WITH REMEDIAL ACTION. In no event shall the
Trust be required to bear the expense of establishing a new funding medium for
any Contract. The Company shall not be required by this Article to establish a
new funding medium for any Contract if an offer to do so has been declined by
vote of a majority of the Contract Owners materially adversely affected by the
irreconcilable material conflict.
8.7. SUCCESSOR RULES. If and to the extent that Rule 6e-2 and Rule
6e-3(T) are amended, or Rule 6e-3 is adopted, to provide exemptive relief from
any provisions of the 1940 Act or the rules promulgated thereunder with respect
to mixed and shared funding on terms and conditions materially different from
those contained in the Exemptive Order, then (i) the Trust and/or the Company,
as appropriate, shall take such steps as may be necessary to comply with Rules
6e-2 and 6e-3(T), as amended, or Rule 6e-3, as adopted, as applicable, to the
extent such rules are applicable, and (ii) Sections 8.2 through 8.5 of this
Agreement shall continue in effect only to the extent that terms and conditions
substantially identical to such Sections are contained in such Rule(s) as so
amended or adopted.
ARTICLE IX
INDEMNIFICATION
9.1. INDEMNIFICATION BY THE COMPANY. The Company hereby agrees to, and
shall, indemnify and hold harmless the Trust, the Distributor and each person
who controls or is affiliated with the Trust or the Distributor within the
meaning of such terms under the 1933 Act or 1940 Act (but not any Participating
Insurance Companies or Qualified Persons) and any officer, trustee, partner,
director, employee or agent of the foregoing, against any and all losses,
claims, damages or liabilities, joint or several (including any investigative,
legal and other expenses reasonably incurred in connection with, and any amounts
paid in settlement of, any action, suit or proceeding or any claim asserted), to
which they or any of them may become subject under any statute or regulation, at
common law or otherwise, insofar as such losses, claims, damages or liabilities:
(a) arise out of or are based upon any untrue statement of any
material fact contained in the Contracts' Registration Statement,
Contracts' Prospectus, sales literature or other promotional
material for the Contracts or the Contracts themselves (or any
amendment or supplement to any of the foregoing), or arise out of
or are based upon the omission to state therein a material fact
required to be stated therein or necessary to make the statements
therein not misleading in light of the circumstances in which they
were made; provided that this obligation to indemnify shall not
apply if such statement or omission was made in reliance upon and
in conformity with information furnished in writing to the Company
by the Trust or the Distributor for use in the Contracts'
Registration Statement, Contracts' Prospectus or in the Contracts
or sales literature or promotional material for the Contracts (or
any amendment or supplement to any of the foregoing) or otherwise
for use in connection with the sale of the Contracts or Trust
shares; or
(b) arise out of any untrue statement of a material fact contained in
the Trust Registration Statement, any Prospectus for Series or
Classes or sales literature or other promotional material of the
Trust (or any amendment or supplement to any of the foregoing), or
the omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not
misleading in light of the circumstances in which they were made,
if such statement or omission was
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made in reliance upon and in conformity with information furnished
to the Trust or Distributor in writing by or on behalf of the
Company; or
(c) arise out of or are based upon any wrongful conduct of, or
violation of federal or state law by, the Company, its directors
or officers or persons under its or their control or subject to
its authorization, including without limitation, any
broker-dealers or agents authorized to sell the Contracts, with
respect to the sale, marketing or distribution of the Contracts or
Trust shares, including, without limitation, any impermissible use
of broker-only material, unsuitable or improper sales of the
Contracts or unauthorized representations about the Contracts or
the Trust; or
(d) arise as a result of any failure by the Company or persons under
its control (or subject to its authorization) to provide services,
furnish materials or make payments as required under the terms of
this Agreement; or
(e) arise out of any material breach by the Company or persons under
its control (or subject to its authorization) of this Agreement,
including any breach of any warranties contained in Article III
hereof or any unauthorized use of the names or trade names of the
Trust or Distributor; or
(f) arise out of any failure by the Company to transmit payment for
purchase of Trust shares on a timely basis in accordance with the
procedures set forth in Article II, including costs which result
from the Trust being required to break an order to purchase
portfolio securities originally made in reliance on such
forthcoming payment or borrow funds to make payment on any such
order.
This indemnification is in addition to any liability that the Company may
otherwise have; provided, however, that no party shall be entitled to
indemnification if such loss, claim, damage or liability is caused by the
willful misfeasance, bad faith, gross negligence or reckless disregard of duty
by the party seeking indemnification.
9.2. INDEMNIFICATION BY THE TRUST. The Trust hereby agrees to, and
shall, indemnify and hold harmless the Company and each person who controls or
is affiliated with the Company within the meaning of such terms under the 1933
Act or 1940 Act and any officer, director, employee or agent of the foregoing,
against any and all losses, claims, damages or liabilities, joint or several
(including any investigative, legal and other expenses reasonably incurred in
connection with, and any amounts paid in settlement of, any action, suit or
proceeding or any claim asserted), to which they or any of them may become
subject under any statute or regulation, at common law or otherwise, insofar as
such losses, claims, damages or liabilities:
(a) arise out of or are based upon any untrue statement of any
material fact contained in the Trust Registration Statement, any
Prospectus for Series or Classes or sales literature or other
promotional material of the Trust (or any amendment or supplement
to any of the foregoing), or arise out of or are based upon the
omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading
in light of the circumstances in which they were made; provided
that this obligation to indemnify shall not apply if such
statement or omission was made in reliance upon and in conformity
with information furnished in writing by the Company to the Trust
or the Distributor for use in the Trust Registration Statement,
Trust Prospectus or sales literature or promotional material for
the Trust (or any amendment or supplement to any of the
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foregoing) or otherwise for use in connection with the sale of the
Contracts or Trust shares; or
(b) arise out of any untrue statement of a material fact contained in
the Contracts' Registration Statement, Contracts' Prospectus or
sales literature or other promotional material for the Contracts
(or any amendment or supplement to any of the foregoing), or the
omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading
in light of the circumstances in which they were made, if such
statement or omission was made in reliance upon information
furnished in writing by or on behalf of the Trust to the Company;
or
(c) arise out of or are based upon wrongful conduct of the Trust, its
Trustees or officers, or persons under its or their control, with
respect to the sale of Trust shares; or
(d) arise as a result of any failure by the Trust or persons under its
control (or subject to its authorization, it being understood that
any Participating Insurance Company will not be deemed to be a
person subject to the Trust's authorization) to provide services,
furnish materials or make payments as required under the terms of
this Agreement; or
(e) arise out of any material breach by the Trust or persons under its
control (or subject to its authorization, it being understood that
any Participating Insurance Company will not be deemed to be a
person subject to the Trust's authorization) of this Agreement
(including any breach of Section 6.1 of this Agreement and any
warranties contained in Article III hereof); or
(f) arise out of any unauthorized use of the names or trade names of
the Company.
it being understood that in no way shall the Trust be liable to the Company with
respect to any violation of insurance law, compliance with which is a
responsibility of the Company under this Agreement or otherwise or as to which
the Company failed to inform the Trust in accordance with Section 4.4 hereof.
This indemnification is in addition to any liability that the Trust may
otherwise have; provided, however, that no party shall be entitled to
indemnification if such loss, claim, damage or liability is caused by the
willful misfeasance, bad faith, gross negligence or reckless disregard of duty
by the party seeking indemnification.
9.3. INDEMNIFICATION BY THE DISTRIBUTOR. The Distributor hereby agrees
to, and shall, indemnify and hold harmless the Company and each person who
controls or is affiliated with the Company within the meaning of such terms
under the 1933 Act or 1940 Act and any officer, director, employee or agent of
the foregoing, against any and all losses, claims, damages or liabilities, joint
or several (including any investigative, legal and other expenses reasonably
incurred in connection with, and any amounts paid in settlement of, any action,
suit or proceeding or any claim asserted), to which they or any of them may
become subject under any statute or regulation, at common law or otherwise,
insofar as such losses, claims, damages or liabilities:
(a) arise out of or are based upon any untrue statement of any
material fact contained in the Trust Registration Statement, any
Prospectus for Series or Classes or sales literature or other
promotional material of the Trust (or any amendment or supplement
to any of the foregoing), or arise out of or are based upon the
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omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading
in light of the circumstances in which they were made; provided
that this obligation to indemnify shall not apply if such
statement or omission was made in reliance upon and in conformity
with information furnished in writing by the Company to the Trust
or Distributor for use in the Trust Registration Statement, Trust
Prospectus or sales literature or promotional material for the
Trust (or any amendment or supplement to any of the foregoing) or
otherwise for use in connection with the sale of the Contracts or
Trust shares; or
(b) arise out of any untrue statement of a material fact contained in
the Contracts' Registration Statement, Contracts' Prospectus or
sales literature or other promotional material for the Contracts
(or any amendment or supplement to any of the foregoing), or the
omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading
in light of the circumstances in which they were made, if such
statement or omission was made in reliance upon and in conformity
with information furnished in writing by or on behalf of the
Distributor to the Company; or
(c) arise out of or are based upon wrongful conduct of the
Distributor, its partners or persons under its or their control
with respect to the sale of Trust shares; or
(d) arise as a result of any failure by the Distributor or persons
under its control (or subject to its authorization, it being
understood that any Participating Insurance Company will not be
deemed to be a person subject to the Distributor's authorization)
to provide services, furnish materials or make payments as
required under the terms of this Agreement; or
(e) arise out of any material breach by the Distributor or persons
under its control (or subject to its authorization, it being
understood that any Participating Insurance Company will not be
deemed to be a person subject to the Distributor's authorization)
of this Agreement (including any breach of Section 6.1 of this
Agreement and any warranties contained in Article III hereof);
it being understood that in no way shall the Distributor be liable to the
Company with respect to (i) any violation of insurance law, compliance with
which is a responsibility of the Company under this Agreement or otherwise or as
to which the Company failed to inform the Distributor in accordance with Section
4.4 hereof, or (ii) any failure by the Company to transmit a request for
redemption or purchase of Trust shares or payment therefor on a timely basis in
accordance with the procedures set forth in Article II. This indemnification is
in addition to any liability that the Distributor may otherwise have; provided,
however, that no party shall be entitled to indemnification if such loss, claim,
damage or liability is caused by the willful misfeasance, bad faith, gross
negligence or reckless disregard of duty by the party seeking indemnification.
9.4. RULE OF CONSTRUCTION. It is the parties' intention that, in the
event of an occurrence for which the Trust has agreed to indemnify the Company,
the Company shall seek indemnification from the Trust only in circumstances in
which the Trust is entitled to seek indemnification from a third party with
respect to the same event or cause thereof.
9.5. INDEMNIFICATION PROCEDURES. After receipt by a party entitled to
indemnification ("indemnified party") under this Article IX of notice of the
commencement of any action, if a claim in respect thereof is to be made by the
indemnified party against any person obligated to
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provide indemnification under this Article IX ("indemnifying party"), such
indemnified party will notify the indemnifying party in writing of the
commencement thereof as soon as practicable thereafter, provided that the
omission to so notify the indemnifying party will not relieve it from any
liability under this Article IX, except to the extent that the omission results
in a failure of actual notice to the indemnifying party and such indemnifying
party is damaged solely as a result of the failure to give such notice. The
indemnifying party, upon the request of the indemnified party, shall retain
counsel reasonably satisfactory to the indemnified party to represent the
indemnified party and any others the indemnifying party may designate in such
proceeding and shall pay the reasonable fees and disbursements of such counsel
related to such proceeding. In any such proceeding, any indemnified party shall
have the right to retain its own counsel, but the fees and expenses of such
counsel shall be at the expense of such indemnified party unless (i) the
indemnifying party and the indemnified party shall have mutually agreed to the
retention of such counsel or (ii) the named parties to any such proceeding
(including any impleaded parties) include both the indemnifying party and the
indemnified party and representation of both parties by the same counsel would
be inappropriate due to actual or potential differing interests between them.
The indemnifying party shall not be liable for any settlement of any proceeding
effected without its written consent but if settled with such consent or if
there be a final judgment for the plaintiff, the indemnifying party agrees to
indemnify the indemnified party from and against any loss or liability by reason
of such settlement or judgment.
A successor by law of the parties to this Agreement shall be entitled
to the benefits of the indemnification contained in this Article IX. The
indemnification provisions contained in this Article IX shall survive any
termination of this Agreement.
ARTICLE X
RELATIONSHIP OF THE PARTIES; TERMINATION
10.1. RELATIONSHIP OF PARTIES. The Company is to be an independent
contractor vis-a-vis the Trust, the Distributor, or any of their affiliates, and
the Trust and the Distributor are to be independent contractors vis-a-vis the
Company, for all purposes hereunder and neither will have authority to act for
or represent the other (except to the limited extent the Company acts as
designee of the Trust pursuant to Section 2.3(a) of this Agreement). In
addition, no officer or employee of the Company will be deemed to be an employee
or agent of the Trust, Distributor or any of their affiliates and vice versa.
The Company will not act as an "underwriter," "distributor" or "transfer agent"
of the Trust and the Trust and the Distributor will not act as "underwriter,"
"distributor" or "transfer agent" of the Contracts, as those terms variously are
used in the 1940 Act, the 1933 Act, and rules and regulations promulgated
thereunder.
10.2. NON-EXCLUSIVITY AND NON-INTERFERENCE. The parties hereto
acknowledge that the arrangement contemplated by this Agreement is not
exclusive; the Trust shares may be sold to other insurance companies and
investors (subject to Section 2.8 hereof) and the cash value of the Contracts
may be invested in other investment companies, provided, however, that until
this Agreement is terminated pursuant to this Article X:
(a) the Company shall promote the Trust and the Funds made available
hereunder on the same basis as other funding vehicles available
under the Contracts;
(b) the Company shall not, without prior notice to the Distributor
(unless otherwise required by applicable law), take any action to
operate the Account as a management investment company under the
1940 Act;
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(c) the Company shall not, without the prior written consent of the
Distributor, which consent shall not be unreasonably withheld,
solicit, induce or encourage Contract Owners to change or modify
the Trust, or to change the Trust's distributor or investment
adviser (unless otherwise required by applicable law);
(d) the Company shall not solicit, induce or encourage Contract Owners
to transfer or withdraw Contract Values allocated to a Fund or to
exchange their Contract for contracts not allowing for investment
in the Trust, except with 60 days prior written notice to the
Distributor under circumstances where the Company has determined
such solicitation, inducement or encouragement to be in the best
interests of Contract Owners (unless otherwise required by
applicable law);
(e) the Company shall not substitute another investment company for
one or more Funds without providing written notice to the
Distributor at least 60 days in advance of effecting any such
substitution; and
(f) the Company shall not withdraw the Account's investment in the
Trust or a Fund of the Trust except as necessary to facilitate
Contract Owner requests and routine Contract processing and except
as provided in Article VIII of this Agreement.
10.3. TERMINATION OF AGREEMENT. This Agreement shall not terminate
until (i) the Trust is dissolved, liquidated, or merged into another entity, or
(ii) as to any Fund that has been made available hereunder, the Account no
longer invests in that Fund and the Company has confirmed in writing to the
Distributor, if so requested by the Distributor, that it no longer intends to
invest in such Fund. However, certain obligations of, or restrictions on, the
parties to this Agreement may terminate as provided in Sections 10.4 through
10.6 and the Company may be required to redeem Trust shares pursuant to Section
10.7 or in the circumstances contemplated by Article VIII. Article III, Article
IX and Sections 5.7, 10.8 and 10.9 shall survive any termination of this
Agreement.
10.4. TERMINATION OF OFFERING OF TRUST SHARES. The obligation of the
Trust and the Distributor to make Trust shares available to the Company for
purchase pursuant to Article II of this Agreement shall terminate at the option
of the Distributor upon written notice to the Company as provided below:
(a) upon institution of formal proceedings against the Company, or the
Distributor's reasonable determination that institution of such
proceedings is being considered by the NASD, the SEC, the
insurance commission of any state or any other regulatory body
regarding the Company's duties under this Agreement or related to
the sale of the Contracts, the operation of the Account, the
administration of the Contracts or the purchase of Trust shares,
or an expected or anticipated ruling, judgment or outcome which
would, in the Distributor's reasonable judgment exercised in good
faith, materially impair the Company's or Trust's ability to meet
and perform the Company's or Trust's obligations and duties
hereunder, such termination effective upon 15 days prior written
notice;
(b) in the event any of the Contracts are not registered, issued or
sold in accordance with applicable federal and/or state law, such
termination effective immediately upon receipt of written notice;
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(c) if the Distributor shall determine, in its reasonable judgment
exercised in good faith, that either (1) the Company shall have
suffered a material adverse change in its business or financial
condition or (2) the Company shall have been the subject of
material adverse publicity which is likely to have a material
adverse impact upon the business and operations of either the
Trust or the Distributor, such termination effective upon 30 days
prior written notice; provided that the Company has been afforded
a reasonable opportunity to respond to a statement by the
Distributor concerning the reason for notice of termination
hereunder during such notice period;
(d) if the Distributor suspends or terminates the offering of Trust
shares of any Series or Class to all Participating Investors or
only designated Participating Investors, if such action is
required by law or by regulatory authorities having jurisdiction
or if, in the sole discretion of the Distributor acting in good
faith, suspension or termination is necessary in the best
interests of the shareholders of any Series or Class (it being
understood that "shareholders" for this purpose shall mean Product
Owners), such notice effective immediately upon receipt of written
notice, it being understood that a lack of Participating Investor
interest in a Series or Class may be grounds for a suspension or
termination as to such Series or Class and that a suspension or
termination shall apply only to the specified Series or Class;
(e) upon the Company's assignment of this Agreement (including,
without limitation, any transfer of the Contracts or the Account
to another insurance company pursuant to an assumption reinsurance
agreement) unless the Trust consents thereto, such termination
effective upon 30 days prior written notice;
(f) if the Company is in material breach of any provision of this
Agreement, which breach has not been cured to the satisfaction of
the Trust within 30 days after written notice of such breach has
been delivered to the Company, such termination effective upon
expiration of such 30-day period;
(g) upon the determination of the Trust s Board to dissolve, liquidate
or merge the Trust as contemplated by Section 10.3(i), upon
termination of the Agreement pursuant to Section 10.3(ii), or upon
notice from the Company pursuant to Section 10.5 or 10.6, such
termination pursuant hereto to be effective upon 30 days prior
written notice; or
(h) at any time more than 18 months after the date of this Agreement,
upon six months written notice.
Except in the case of an option exercised under clause (b), (d) or (g), the
obligations shall terminate only as to new Contracts and the Distributor shall
continue to make Trust shares available to the extent necessary to permit owners
of Contracts in effect on the effective date of such termination (hereinafter
referred to as "Existing Contracts") to reallocate investments in the Trust,
redeem investments in the Trust and/or invest in the Trust upon the making of
additional purchase payments under the Existing Contracts.
10.5. TERMINATION OF INVESTMENT IN A FUND. The Company may elect to
cease investing in a Fund, promoting a Fund as an investment option under the
Contracts, or withdraw its investment or the Account's investment in a Fund,
subject to compliance with applicable law, upon written notice to the Trust
within 15 days of the occurrence of any of the following events (unless provided
otherwise below):
21
<PAGE> 22
(a) if the Trust informs the Company pursuant to Section 4.4 that it
will not cause such Fund to comply with investment restrictions or
other restrictions, limitations or requirements as requested by
the Company and the Trust and the Company are unable to agree upon
any reasonable alternative accommodations;
(b) if shares in such Fund are not reasonably available to meet the
requirements of the Contracts as determined by the Company
(including any non-availability as a result of notice given by the
Distributor pursuant to Section 10.4(d)), and the Distributor,
after receiving written notice from the Company of such
non-availability, fails to make available, within 10 days after
receipt of such notice, a sufficient number of shares in such Fund
to meet the requirements of the Contracts; or
(c) if such Fund fails to comply with the diversification requirements
specified in Section 817(h) of the Code and any regulations
thereunder.
Such termination shall apply only as to the affected Fund and shall not apply to
any other Fund in which the Company or the Account invests.
10.6. TERMINATION OF INVESTMENT BY THE COMPANY. The Company may elect
to cease investing in all Series or Classes of the Trust made available
hereunder, promoting the Trust as an investment option under the Contracts, or
withdraw its investment or the Account's investment in the Trust, subject to
compliance with applicable law, upon written notice to the Trust within 15 days
of the occurrence of any of the following events (unless provided otherwise
below):
(a) upon institution of formal proceedings against the Trust or the
Distributor (but only with regard to the Trust) by the NASD, the
SEC or any state securities or insurance commission or any other
regulatory body; or upon the Company's reasonable determination
that institution of such proceedings is being considered by the
NASD, the SEC, the insurance commission of any state or any other
regulatory body regarding the Trust's or the Distributor's duties
under this Agreement, the sale of Trust shares, or an expected or
anticipated ruling, judgment or outcome which would, in the
Company's reasonable judgment exercised in good faith, materially
impair the Trust's or the Distributor's ability to meet and
perform the Trust's or the Distributor's obligations and duties
hereunder, such termination effective upon 15 days prior written
notice;
(b) if, with respect to the Trust or a Fund, the Trust or the Fund
ceases to qualify as a regulated investment company under
Subchapter M of the Code, as defined therein, or any successor or
similar provision, or if the Company reasonably believes that the
Trust may fail to so qualify, and the Trust, upon written request,
fails to provide reasonable assurance that it will take action to
cure or correct such failure within 30 days;
(c) if the Trust or Distributor is in material breach of a provision
of this Agreement, which breach has not been cured to the
satisfaction of the Company within 30 days after written notice of
such breach has been delivered to the Trust or the
22
<PAGE> 23
Distributor, as the case may be, such termination effective upon
expiration of such 30-day period; or
(d) at any time more than 18 months after the date of this Agreement,
upon six months written notice.
10.7. COMPANY REQUIRED TO REDEEM. The parties understand and
acknowledge that it is essential for compliance with Section 817(h) of the Code
that the Contracts qualify as annuity contracts or life insurance policies, as
applicable, under the Code. Accordingly, if any of the Contracts cease to
qualify as annuity contracts or life insurance policies, as applicable, under
the Code, or if the Trust reasonably believes that any such Contracts may fail
to so qualify, the Trust shall have the right to require the Company to redeem
Trust shares attributable to such Contracts upon notice to the Company and the
Company shall so redeem such Trust shares in order to ensure that the Trust
complies with the provisions of Section 817(h) of the Code applicable to
ownership of Trust shares. Notice to the Company shall specify the period of
time the Company has to redeem the Trust shares or to make other arrangements
satisfactory to the Trust and its counsel, such period of time to be determined
with reference to the requirements of Section 817(h) of the Code. In addition,
the Company may be required to redeem Trust shares pursuant to action taken or
request made by the Trust Board in accordance with the Exemptive Order described
in Article VIII or any conditions or undertakings set forth or referenced
therein, or other SEC rule, regulation or order that may be adopted after the
date hereof. The Company agrees to redeem shares in the circumstances described
herein and to comply with applicable terms and provisions. Also, in the event
that the Distributor suspends or terminates the offering of a Series or Class
pursuant to Section 10.4(d) of this Agreement, the Company, upon request by the
Distributor, will cooperate in taking appropriate action to withdraw the
Account's investment in the respective Fund.
10.8. CONFIDENTIALITY. Each party will keep confidential any
information acquired as a result of this Agreement regarding the business and
affairs of the other parties and their affiliates.
ARTICLE XI
APPLICABILITY TO NEW ACCOUNTS AND NEW CONTRACTS
The parties to this Agreement may amend the schedules to this Agreement
from time to time to reflect, as appropriate, changes in or relating to the
Contracts, any Series or Class, additions of new classes of Contracts to be
issued by the Company and separate accounts therefor investing in the Trust.
Such amendments may be made effective by executing the form of amendment
included on each schedule attached hereto. The provisions of this Agreement
shall be equally applicable to each such class of Contracts, Series, Class or
separate account, as applicable, effective as of the date of amendment of such
Schedule, unless the context otherwise requires. The parties to this Agreement
may amend this Agreement from time to time by written agreement signed by all of
the parties.
ARTICLE XII
NOTICE, REQUEST OR CONSENT
Any notice, request or consent to be provided pursuant to this
Agreement is to be made in writing and shall be given:
If to the Trust:
Douglas C. Grip
President
23
<PAGE> 24
Goldman Sachs Variable Insurance Trust
One New York Plaza
New York, NY 10004
If to the Distributor:
Douglas C. Grip
Vice President
Goldman Sachs & Co.
One New York Plaza
New York, NY 10004
If to the Company:
General Counsel
Kemper Investors Life Insurance Company
One Kemper Drive
Long Grove, IL 60049
or at such other address as such party may from time to time specify in writing
to the other party. Each such notice, request or consent to a party shall be
sent by registered or certified United States mail with return receipt requested
or by overnight delivery with a nationally recognized courier, and shall be
effective upon receipt. Notices pursuant to the provisions of Article II may be
sent by facsimile to the person designated in writing for such notices.
ARTICLE XIII
MISCELLANEOUS
13.1. INTERPRETATION. This Agreement shall be construed and the
provisions hereof interpreted under and in accordance with the laws of the State
of Delaware, without giving effect to the principles of conflicts of laws,
subject to the following rules:
(a) This Agreement shall be subject to the provisions of the 1933 Act,
1940 Act and Securities Exchange Act of 1934, as amended, and the
rules, regulations and rulings thereunder, including such
exemptions from those statutes, rules, and regulations as the SEC
may grant, and the terms hereof shall be limited, interpreted and
construed in accordance therewith.
(b) The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the
provisions hereof or otherwise affect their construction or
effect.
(c) If any provision of this Agreement shall be held or made invalid
by a court decision, statute, rule or otherwise, the remainder of
the Agreement shall not be affected thereby.
(d) The rights, remedies and obligations contained in this Agreement
are cumulative and are in addition to any and all rights, remedies
and obligations, at law or in equity, which the parties hereto are
entitled to under state and federal laws.
13.2. COUNTERPARTS. This Agreement may be executed simultaneously in
two or more counterparts, each of which together shall constitute one and the
same instrument.
24
<PAGE> 25
13.3. NO ASSIGNMENT. Neither this Agreement nor any of the rights and
obligations hereunder may be assigned by the Company, the Distributor or the
Trust without the prior written consent of the other parties.
13.4. DECLARATION OF TRUST. A copy of the Declaration of Trust of the
Trust is on file with the Secretary of State of the State of Delaware, and
notice is hereby given that this instrument is executed on behalf of the
Trustees of the Trust as trustees, and is not binding upon any of the Trustees,
officers or shareholders of the Trust individually, but binding only upon the
assets and property of the Trust. No Series of the Trust shall be liable for the
obligations of any other Series of the Trust.
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed in its name and behalf by its duly authorized officer
on the date specified below.
GOLDMAN SACHS VARIABLE INSURANCE TRUST
(Trust)
Date: By: /s/ Michael J. Richman
----------------- --------------------------------------
Name: Michael J. Richman
Title: Secretary
GOLDMAN, SACHS & CO.
(Distributor)
Date: By: /s/ Valerie A. Zondorak
----------------- --------------------------------------
Name: Valerie A. Zondorak
Title: Vice President
KEMPER INVESTORS LIFE INSURANCE COMPANY
(Company)
Date: 9/24/98 By: /s/ Otis R. Heldman, Jr.
----------------- --------------------------------------
Name: Otis R. Heldman, Jr.
Title: Marketing Officer
25
<PAGE> 26
SCHEDULE 1
Accounts of the Company
Investing in the Trust
Effective as of the date the Agreement was executed, the following separate
accounts of the Company are subject to the Agreement:
<TABLE>
<CAPTION>
===================================================================================================================
Date Established by
Name of Account and Board of Directors of the SEC 1940 Act Registration Type of Product Supported
Subaccounts Company Number by Account
===================================================================================================================
<S> <C> <C> <C>
KILICO Variable Separate June 17, 1997 Flexible Premium
Account -2 Variable Life Insurance
Policy (Individual Life
and Survivorship)
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
===================================================================================================================
===================================================================================================================
</TABLE>
[Form of Amendment to Schedule 1]
Effective as of, the following separate accounts of the Company are hereby
added to this Schedule 1 and made subject to the Agreement:
<TABLE>
<CAPTION>
======================================================================================================================
Date Established by
Name of Account and Board of Directors of the SEC 1940 Act Registration Type of Product Supported
Subaccounts Company Number by Account
======================================================================================================================
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
======================================================================================================================
</TABLE>
IN WITNESS WHEREOF, the Trust, the Distributor and the Company hereby amend this
Schedule 1 in accordance with Article XI of the Agreement.
- -------------------------------------- ------------------------------
Goldman Sachs Variable Insurance Trust Kemper Investors
Life Insurance Company
- --------------------------------------
Goldman, Sachs & Co.
26
<PAGE> 27
SCHEDULE 2
Classes of Contracts
Supported by Separate Accounts
Listed on Schedule 1
Effective as of the date the Agreement was executed, the following classes of
Contracts are subject to the Agreement:
<TABLE>
<CAPTION>
======================================================================================================================
SEC 1933 Act
Policy Marketing Name Registration Number Contract Form Number Annuity or Life
======================================================================================================================
<S> <C> <C> <C>
First Foundation VUL 333-35159 L-8161, L-8161CV, Life
L-8162, L-8162CV
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
======================================================================================================================
======================================================================================================================
</TABLE>
[Form of Amendment to Schedule 2]
Effective as of , the following classes of Contracts are hereby added to
this Schedule 2 and made subject to the Agreement:
<TABLE>
<CAPTION>
======================================================================================================================
SEC 1933 Act Name of Supporting
Policy Marketing Name Registration Number Account Annuity or Life
======================================================================================================================
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
======================================================================================================================
</TABLE>
IN WITNESS WHEREOF, the Trust, the Distributor and the Company hereby amend this
Schedule 2 in accordance with Article XI of the Agreement.
- -------------------------------------- ---------------------------------
Goldman Sachs Variable Insurance Trust Kemper Investors
Life Insurance Company
- --------------------------------------
Goldman, Sachs & Co.
27
<PAGE> 28
SCHEDULE 3
Trust Classes and Series
Available Under
Each Class of Contracts
Effective as of the date the Agreement was executed, the following Trust Classes
and Series are available under the Contracts:
<TABLE>
<CAPTION>
===========================================================================================================
Contracts Marketing Name Trust Classes and Series
===========================================================================================================
<S> <C>
First Foundation VUL Goldman Sachs International Equity Fund,
Goldman Sachs Global Income Fund
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
===========================================================================================================
======================================================================================================================
</TABLE>
[Form of Amendment to Schedule 3]
Effective as of , this Schedule 3 is hereby amended to reflect
the following changes in Trust Classes and Series:
<TABLE>
<CAPTION>
===========================================================================================================
Contracts Marketing Name Trust Classes and Series
===========================================================================================================
<S> <C>
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
===========================================================================================================
</TABLE>
IN WITNESS WHEREOF, the Trust, the Distributor and the Company hereby amend this
Schedule 3 in accordance with Article XI of the Agreement.
- -------------------------------------- ------------------------------
Goldman Sachs Variable Insurance Trust Kemper Investors
Life Insurance Company
- --------------------------------------
Goldman, Sachs & Co.
28
<PAGE> 29
SCHEDULE 4
Investment Restrictions
Applicable to the Trust
Effective as of the date the Agreement was executed, the following investment
restrictions are applicable to the Trust:
================================================================================
[Form of Amendment to Schedule 4]
Effective as of , this Schedule 4 is hereby amended to
reflect the following changes:
IN WITNESS WHEREOF, the Trust, the Distributor and the Company hereby amend this
Schedule 4 in accordance with Article XI of the Agreement.
- -------------------------------------- ------------------------------
Goldman Sachs Variable Insurance Trust Kemper Investors
Life Insurance Company
- --------------------------------------
Goldman, Sachs & Co.
29
<PAGE> 1
EXHIBIT (8)(b)(ii)
Goldman, Sachs & Co.
One New York Plaza
New York, NY 10004
Sept. 24, 1998
Kemper Investors Life Insurance Company
One Kemper Drive
Long Grove, IL 60049
Ladies and Gentlemen:
This letter sets forth the agreement between Kemper Investors Life
Insurance Company ("you" or the "Company") and the undersigned ("we" or
"Goldman, Sachs & Co.") concerning certain administrative services to be
provided by you, with respect to the Goldman Sachs Variable Insurance Trust (the
"Trust").
1. The Trust. The Trust is a Delaware business trust registered with
the Securities and Exchange Commission (the "SEC") under the Investment Company
Act of 1940, as amended (the "Act"), as an open-end management investment
company. The Trust consists of one or more separate series ("Portfolios") of
shares and serves as a funding vehicle for variable annuity contracts and
variable life insurance contracts. As such, the Trust sells its shares to
insurance companies and their separate accounts. With respect to various
provisions of the Act, the SEC requires that owners of variable annuity
contracts and variable life insurance contracts be provided with materials and
rights afforded to shareholders of a publicly-available SEC-registered mutual
fund.
2. The Company. The Company is a Illinois life insurance company. The
Company issues variable life insurance policies and variable annuity contracts
(the "Contracts") supported by one or more separate accounts of the Company (the
"Separate Account"; if more than one, the term "Separate Account" shall apply to
each Separate Account subject hereto). The Company has entered into a
participation agreement dated September 24, 1998 (the "Participation Agreement")
with the Trust pursuant to which the Company purchases shares of the Trust for
the registered Separate Account supporting the Company's Contracts.
3. Goldman, Sachs & Co. Goldman, Sachs & Co. serves as the distributor
for the Trust. Goldman Sachs Asset Management International ("GSAMI"), an
affiliate of Goldman, Sachs & Co., serves as the investment adviser to the
International Equity and Global Income Funds. GSAMI supervises and assists in
the overall management of the Trust's affairs under an Investment Management
Agreement with the Trust, subject to the overall authority of the Trust's Board
of Trustees in accordance with Delaware law. Under the Investment Management
Agreements, GSAMI is compensated for providing investment advisory and certain
administrative services.
4. Administrative Services. You have agreed to assist us, as we may
request from time to time, with the provision of administrative services to the
Trust and the Portfolios, as they relate to investment in the Trust by the
Separate Account. It is anticipated that such services may include, but shall
not be limited to: the aggregation of allocation, transfer and liquidation
orders of the Separate Account; the printing and mailing to owners of Contracts
copies of the Portfolios' prospectuses and other materials that the Trust is
required by law or otherwise to provide to its shareholder, but that the Company
is not otherwise required to provide to owners of Contracts;
<PAGE> 2
providing financial consultants with advice with respect to inquiries related to
the Portfolios (not including information about performance or related to
sales); and providing such other administrative support for the Trust as
mutually agreed to by the Company and Goldman, Sachs & Co., to the extent
permitted or required under applicable statutes.
5. Payment for Administrative Services. In consideration of the
services to be provided by you, we shall pay you on a monthly basis, from our
assets, including GSAMI's bona fide profits as investment adviser to the Trust,
an amount equal to 20 basis points (0.20%) per annum of the average aggregate
net asset value of shares of the Trust held by the Separate Account under the
Participation Agreement. For purposes of computing the payment to the Company
contemplated under this Paragraph 5, the average aggregate net asset value of
shares of the Trust held by the Separate Account over a one-month period shall
be computed by totaling the Separate Account's aggregate investment (share net
asset value multiplied by total number of shares held by the Separate Account)
on each calendar day during the month, and dividing by the total number of
calendar days during such month. The payment contemplated by this Paragraph 5
shall be calculated by GSAMI at the end of each calendar month and will be paid
to the Company within ten (10) business days thereafter.
6. Nature of Payments. The parties to this letter agreement recognize
and agree that payments to the Company pursuant to Section 5 hereof relate to
the administrative services detailed herein and do not constitute payment in any
manner for investment advisory services or for costs of distribution of the
Contracts or of Trust shares; and, further, that these payments are not
otherwise related to investment advisory or distribution services or expenses,
or administrative services which the Company is required to provide to owners of
the Contracts pursuant to the terms thereof.
7. Term. This letter agreement shall remain in full force and effect
for an initial term of one year, and shall automatically renew for successive
one-year periods unless either party notifies the other upon sixty (60) days'
written notice of its intent not to continue this agreement. This letter
agreement shall terminate automatically upon the redemption of the Separate
Account's investment in the Trust, or upon termination of the Trust's obligation
to sell its shares under the Participation Agreement.
8. Representations and Warranties. The Company represents and warrants
that:
(a) it is an insurance company duly organized and in good standing
under Illinois insurance law;
(b) its entering into and performing its obligations under this
letter agreement does not and will not violate its charter
documents or by-laws, rules or regulations, or any agreement to
which it is a party;
(c) it will keep confidential any information acquired in connection
with the matters contemplated by this letter agreement regarding
the business and affairs of the Trust, Goldman, Sachs & Co. and
their affiliates; and
(d) it and its employees and agents meet the requirements of
applicable law, including but not limited to federal and state
securities law and state insurance law for the performance of
the services contemplated herein.
2
<PAGE> 3
9. Indemnification.
(a) The Company agrees to indemnify and hold harmless Goldman, Sachs
& Co. and its affiliates, partners, directors, officers, and
employees from any and all loss, liability and expense resulting
from any gross negligence or willful wrongful act of the Company
in performing its services under this letter agreement, from the
inaccuracy or breach of any representation made in this letter
agreement, or from a breach of a material provision of this
letter agreement, except to the extent such loss, liability or
expense is the result of Goldman, Sachs & Co.'s or its
affiliates' willful misfeasance, bad faith or gross negligence
in the performance of its duties.
(b) Goldman, Sachs & Co. and its affiliates agree to indemnify and
hold harmless the Company and its directors, officers, agents
and employees from any and all loss, liability and expenses
resulting from any gross negligence or willful wrongful act of
Goldman, Sachs & Co. or its affiliates in performing its
services under this letter agreement, from the inaccuracy or
breach of any representation made in this letter agreement, or
from a breach of a material provision of this letter agreement,
except to the extent such loss, liability or expense is the
result of the Company's willful misfeasance, bad faith or gross
negligence in the performance of its duties.
10. Assignment. This letter agreement may not be assigned (as that term
is defined in the Act) by any party without the prior written approval of the
other parties, which approval will not be unreasonably withheld.
11. Interpretation. This letter agreement shall be construed in
accordance with the laws of the State of Delaware, without giving effect to the
principles of conflicts of laws, subject to the following rules:
(a) This letter agreement shall be subject to the provisions of the
Act, and the rules, regulations and rulings thereunder,
including such exemptions from that statute, rules and
regulations as the SEC may grant, and the terms herein shall be
limited, interpreted and construed in accordance therewith.
(b) The captions in this letter agreement are included for
convenience of reference and in no way define or delineate any
of the provisions herein or otherwise affect their construction
or effect.
12. Amendment. This letter agreement may be amended only upon mutual
agreement of the parties hereto in writing.
13. Counterparts. This letter agreement may be executed in
counterparts, each of which shall be deemed an original but all of which shall
together constitute one and the same instrument.
3
<PAGE> 4
If this letter agreement is consistent with your understanding of the
matters we discussed concerning your administrative services, kindly sign below
and return a signed copy to us.
Very truly yours,
Goldman, Sachs & Co.
By: /s/ Valerie A. Zondorak
-------------------------------
Name: Valerie A. Zondorak
-------------------------------
Title: Vice President
-------------------------------
GOLDMAN SACHS ASSET MANAGEMENT INTERNATIONAL
By: /s/ David B. Ford
-------------------------------
Name: David B. Ford
-------------------------------
Title: Director
-------------------------------
Acknowledged and Agreed to:
KEMPER INVESTORS LIFE INSURANCE COMPANY
By: /s/ Otis R. Heldman, Jr.
-------------------------------
Name: Otis R. Heldman, Jr.
-------------------------------
Title: Marketing Officer
-------------------------------
4
<PAGE> 1
EXHIBIT (8)(c)(i)
PARTICIPATION AGREEMENT
AMONG
MORGAN STANLEY UNIVERSAL FUNDS, INC.,
MORGAN STANLEY ASSET MANAGEMENT INC.
MILLER ANDERSON & SHERRERD, LLP
AND
KEMPER INVESTORS LIFE INSURANCE COMPANY
DATED AS OF
SEPTEMBER 1, 1998
<PAGE> 2
TABLE OF CONTENTS
Page
ARTICLE I. Purchase of Fund Shares 2
ARTICLE II Representations and Warranties 4
ARTICLE III. Prospectuses, Reports to Shareholders
and Proxy Statements; Voting 6
ARTICLE IV. Sales Material and Information 8
ARTICLE V Fees and Expenses 9
ARTICLE VI. Diversification 10
ARTICLE VII. Potential Conflicts 10
ARTICLE VIII. Indemnification 12
ARTICLE IX. Applicable Law 18
ARTICLE X. Termination 19
ARTICLE XI. Notices 21
ARTICLE XII. Miscellaneous 21
SCHEDULE A Separate Accounts and Contracts A-1
SCHEDULE B Portfolios of Morgan Stanley Universal Funds, Inc. B-1
SCHEDULE C Proxy Voting Procedures C-1
<PAGE> 3
THIS AGREEMENT, made and entered into as of the 1st day of
September, 1998 by and among KEMPER INVESTORS LIFE INSURANCE COMPANY
(hereinafter the "Company"), an Illinois corporation, on its own behalf
and on behalf of each separate account of the Company set forth on
Schedule A hereto as it may be amended from time to time (each such
account hereinafter referred to as the "Account"), and MORGAN STANLEY
UNIVERSAL FUNDS, INC. (hereinafter the "Fund"), a Maryland corporation,
and MORGAN STANLEY ASSET MANAGEMENT INC. and MILLER ANDERSON &
SHERRERD, LLP (hereinafter collectively the "Advisers" and individually
the "Adviser"), a Delaware corporation and a Pennsylvania limited
liability partnership, respectively.
WHEREAS, the Fund engages in business as an open-end management
investment company and is available to act as (i) the investment vehicle for
separate accounts established by insurance companies for individual and group
life insurance policies and annuity contracts with variable accumulation and/or
pay-out provisions (hereinafter referred to individually and/or collectively as
"Variable Insurance Products") and (ii) the investment vehicle for certain
qualified pension and retirement plans (hereinafter "Qualified Plans"); and
WHEREAS, insurance companies desiring to utilize the Fund as an
investment vehicle under their Variable Insurance Products enter into
participation agreements with the Fund and the Advisers (the "Participating
Insurance Companies");
WHEREAS, shares of the Fund are divided into several series of shares,
each representing the interest in a particular managed portfolio of securities
and other assets, any one or more of which may be made available under this
Agreement, as it may be amended from time to time by mutual agreement of the
parties hereto (each such series hereinafter referred to as a "Portfolio"); and
WHEREAS, the Fund has obtained an order from the Securities and
Exchange Commission, dated September 19, 1996 (File No. 812-10118), granting
Participating Insurance Companies and Variable Insurance Product separate
accounts exemptions from the provisions of Sections 9(a), 13(a), 15(a), and
15(b) of the Investment Company Act of 1940, as amended (hereinafter the "1940
Act"), and Rules 6e-2(b)(15) and 6e-3(T)(b)(15) thereunder, to the extent
necessary to permit shares of the Fund to be sold to and held by Variable
Insurance Product separate accounts of both affiliated and unaffiliated life
insurance companies and Qualified Plans (hereinafter the "Shared Funding
Exemptive Order"); and
<PAGE> 4
WHEREAS, the Fund is registered as an open-end management investment
company under the 1940 Act and its shares are registered under the Securities
Act of 1933, as amended (hereinafter the "1933 Act"); and
WHEREAS, each Adviser is duly registered as an investment adviser under
the Investment Advisers Act of 1940, as amended, and any applicable state
securities laws; and
WHEREAS, each Adviser manages certain Portfolios of the Fund; and
WHEREAS, Morgan Stanley & Co. Incorporated (the "Underwriter") is
registered as a broker/dealer under the Securities Exchange Act of 1934, as
amended (hereinafter the "1934 Act"), is a member in good standing of the
National Association of Securities Dealers, Inc. (hereinafter "NASD") and serves
as principal underwriter of the shares of the Fund; and
WHEREAS, the Company has registered or will register certain Variable
Insurance Products under the 1933 Act; and
WHEREAS, each Account is a duly organized, validly existing segregated
asset account, established by resolution or under authority of the Board of
Directors of the Company, on the date shown for such Account on Schedule A
hereto, to set aside and invest assets attributable to the aforesaid Variable
Insurance Products; and
WHEREAS, the Company has registered or will register each Account as a
unit investment trust under the 1940 Act; and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase, on behalf of each Account, shares
in the Portfolios set forth in Schedule B attached to this Agreement, as it may
be amended from time to time, to fund certain of the aforesaid Variable
Insurance Products and the Underwriter is authorized to sell such shares to each
such Account at net asset value;
NOW, THEREFORE, in consideration of their mutual promises, the Company,
the Fund and the Advisers agree as follows:
ARTICLE I. PURCHASE OF FUND SHARES
1.1. The Fund agrees to make available for purchase by the Company
shares of the Fund and shall execute orders placed for each Account on a daily
basis at the net asset value next computed after receipt by the Fund or its
designee of such order. For
2
<PAGE> 5
purposes of this Section 1.1, the Company shall be the designee of the Fund for
receipt of such orders from each Account and receipt by such designee shall
constitute receipt by the Fund; provided that the Fund receives notice of such
order by 10:00 a.m. Eastern time on the next following Business Day. "Business
Day" shall mean any day on which the New York Stock Exchange is open for trading
and on which the Fund calculates its net asset value pursuant to the rules of
the Securities and Exchange Commission.
1.2. The Fund, so long as this Agreement is in effect, agrees to make
its shares available indefinitely for purchase at the applicable net asset value
per share by the Company and its Accounts on those days on which the Fund
calculates its net asset value pursuant to rules of the Securities and Exchange
Commission and the Fund shall use reasonable efforts to calculate such net asset
value on each day which the New York Stock Exchange is open for trading.
Notwithstanding the foregoing, the Board of Directors of the Fund (hereinafter
the "Board") may refuse to permit the Fund to sell shares of any Portfolio to
any person, or suspend or terminate the offering of shares of any Portfolio if
such action is required by law or by regulatory authorities having jurisdiction
or is, in the sole discretion of the Board acting in good faith and in light of
their fiduciary duties under federal and any applicable state laws, necessary in
the best interests of the shareholders of such Portfolio.
1.3. The Fund agrees that shares of the Fund will be sold only to
Participating Insurance Companies and their separate accounts and to certain
Qualified Plans. No shares of any Portfolio will be sold to the general public.
1.4. The Fund agrees to redeem for cash, on the Company's request, any
full or fractional shares of the Fund held by the Company, executing such
requests on a daily basis at the net asset value next computed after receipt by
the Fund or its designee of the request for redemption. For purposes of this
Section 1.4, the Company shall be the designee of the Fund for receipt of
requests for redemption from each Account and receipt by such designee shall
constitute receipt by the Fund, provided that the Fund receives notice of such
request for redemption on the next following Business Day.
1.5. The Company agrees that purchases and redemptions of Portfolio
shares offered by the then current prospectus of the Fund shall be made in
accordance with the provisions of such prospectus. The Variable Insurance
Products issued by the Company, under which amounts may be invested in the Fund
(hereinafter the "Contracts"), are listed on Schedule A attached hereto and
incorporated herein by reference, as such Schedule A may be amended from time to
time by mutual written agreement of all of the parties hereto. The Company will
give the Fund and the Adviser 45 days written notice of its intention to make
available in the future, as a funding vehicle under the Contracts, any other
investment company.
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<PAGE> 6
1.6. The Company shall pay for Fund shares on the next Business Day
after an order to purchase Fund shares is made in accordance with the provisions
of Section 1.1 hereof. Payment shall be in federal funds transmitted by wire.
For purposes of Section 2.10 and 2.11, upon receipt by the Fund of the federal
funds so wired, such funds shall cease to be the responsibility of the Company
and shall become the responsibility of the Fund.
1.7. Issuance and transfer of the Fund's shares will be by book entry
only. Stock certificates will not be issued to the Company or any Account.
Shares ordered from the Fund will be recorded in an appropriate title for each
Account or the appropriate subaccount of each Account.
1.8. The Fund shall furnish same day notice (by telephone, followed by
written confirmation or facsimile) to the Company of any income dividends or
capital gain distributions payable on the Fund's shares. The Company hereby
elects to receive all such income dividends and capital gain distributions as
are payable on the Portfolio shares in additional shares of that Portfolio. The
Company reserves the right to revoke this election and to receive all such
income dividends and capital gain distributions in cash. The Fund shall notify
the Company or its designee promptly of the number of shares so issued as
payment of such dividends and distributions. The Fund shall to the extent
practicable provide advance notice to the Company of any date on which the Fund
reasonably expects to make a dividend distribution.
1.9. The Fund shall provide to the Company a closing net asset value
per share for each Portfolio as of the close of trading each Business Day. The
Fund shall inform the Company of such net asset values as soon as reasonably
practical after the net asset values are calculated and shall use its best
efforts to make such net asset value per share available by 6:30 p.m. Eastern
time.
ARTICLE II. REPRESENTATIONS AND WARRANTIES
2.1. The Company represents and warrants that the Contracts are or will
be registered under the 1933 Act; that the Contracts will be issued and sold in
compliance in all material respects with all applicable federal and state laws
and that the sale of the Contracts shall comply in all material respects with
state insurance suitability requirements. The Company further represents and
warrants that it is an insurance company duly organized and in good standing
under applicable law and that it has legally and validly established each
Account prior to any issuance or sale thereof as a segregated asset account
under 215 ILCS 5/245.21 and has registered or, prior to any issuance or sale of
the Contracts, will register each Account as a unit investment trust in
accordance with the provisions of the 1940 Act to serve as a segregated
investment account for the Contracts.
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<PAGE> 7
2.2. The Fund represents and warrants that Fund shares sold pursuant to
this Agreement shall be registered under the 1933 Act, duly authorized for
issuance and sold in compliance with the laws of the State of Maryland and all
applicable federal and state securities laws and that the Fund is and shall
remain registered under the 1940 Act. The Fund shall amend the registration
statement for its shares under the 1933 Act and the 1940 Act from time to time
as required in order to effect the continuous offering of its shares. The Fund
shall register and qualify the shares for sale in accordance with the laws of
the various states only if and to the extent deemed advisable by the Fund.
2.3. The Fund represents that it is currently qualified as a Regulated
Investment Company under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"), and that it will make every effort to maintain such
qualification (under Subchapter M or any successor or similar provision) and
that it will notify the Company immediately upon having a reasonable basis for
believing that it has ceased to so qualify or that it might not so qualify in
the future.
2.4. The Company represents that the Contracts are currently treated as
life insurance policies or annuity contracts, under applicable provisions of the
Code and that it will make every effort to maintain such treatment and that it
will notify the Fund immediately upon having a reasonable basis for believing
that the Contracts have ceased to be so treated or that they might not be so
treated in the future.
2.5. The Fund represents that to the extent that it decides to finance
distribution expenses pursuant to Rule 12b-1 under the 1940 Act, the Fund
undertakes to have a board of directors, a majority of whom are not interested
persons of the Fund, formulate and approve any plan under Rule 12b-1 to finance
distribution expenses.
2.6. The Fund makes no representation as to whether any aspect of its
operations (including, but not limited to, fees and expenses and investment
policies) complies with the insurance laws or regulations of the various states
except that the Fund represents that the Fund's investment policies, fees and
expenses are and shall at all times remain in compliance with the laws of the
State of Maryland and the Fund represents that its operations are and shall at
all times remain in material compliance with the laws of the State of Maryland
to the extent required to perform this Agreement.
2.7. The Fund represents that it is lawfully organized and validly
existing under the laws of the State of Maryland and that it does and will
comply in all material respects with the 1940 Act.
2.8. Each Adviser represents and warrants that it is and shall remain
duly registered in all material respects under all applicable federal and state
securities laws and that it will perform its obligations for the Fund in
compliance in all material
5
<PAGE> 8
respects with the laws of its state of domicile and any applicable state and
federal securities laws.
2.9. The Fund represents and warrants that its directors, officers,
employees, and other individuals/entities dealing with the money and/or
securities of the Fund are and shall continue to be at all times covered by a
blanket fidelity bond or similar coverage for the benefit of the Fund in an
amount not less than the minimal coverage as required currently by Rule 17g-(1)
of the 1940 Act or related provisions as may be promulgated from time to time.
The aforesaid blanket fidelity bond shall include coverage for larceny and
embezzlement and shall be issued by a reputable bonding company.
2.10. The Company represents and warrants that all of its directors,
officers, employees, investment advisers, and other individuals/entities dealing
with the money and/or securities of the Fund are covered by a blanket fidelity
bond or similar coverage, in an amount not less $5 million. The aforesaid
includes coverage for larceny and embezzlement is issued by a reputable bonding
company. The Company agrees to make all reasonable efforts to see that this bond
or another bond containing these provisions is always in effect, and agrees to
notify the Fund and the Advisers in the event that such coverage no longer
applies.
ARTICLE III. PROSPECTUSES, REPORTS TO SHAREHOLDERS AND PROXY STATEMENTS; VOTING
3.1. The Fund or its designee shall provide the Company with as many
printed copies of the Fund's current prospectus and statement of additional
information as the Company may reasonably request. If requested by the Company,
in lieu of providing printed copies the Fund shall provide camera-ready film or
computer diskettes containing the Fund's prospectus and statement of additional
information, and such other assistance as is reasonably necessary in order for
the Company once each year (or more frequently if the prospectus and/or
statement of additional information for the Fund is amended during the year) to
have the prospectus for the Contracts and the Fund's prospectus printed together
in one document, and to have the statement of additional information for the
Fund and the statement of additional information for the Contracts printed
together in one document. Alternatively, the Company may print the Fund's
prospectus and/or its statement of additional information in combination with
other fund companies' prospectuses and statements of additional information.
3.2 Except as provided in this Section 3.2., all expenses of preparing,
setting in type and printing and distributing Fund prospectuses and statements
of additional information shall be the expense of the Company. For prospectuses
and statements of additional information provided by the Company to its existing
owners of Contracts who currently own shares of one or more of the Fund's
Portfolios, in order to update
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<PAGE> 9
disclosure as required by the 1933 Act and/or the 1940 Act, the cost of printing
and distribution shall be borne by the Fund. If the Company chooses to receive
camera-ready film or computer diskettes in lieu of receiving printed copies of
the Fund's prospectus, the Fund shall bear the cost of typesetting to provide
the Fund's prospectus to the Company in the format in which the Fund is
accustomed to formatting prospectuses, and the Company shall bear the expense of
adjusting or changing the format to conform with any of its prospectuses. In
such event, the Fund will reimburse the Company in an amount equal to the
product of x and y where x is the number of such prospectuses distributed to
owners of the Contracts who currently own shares of one or more of the Fund's
Portfolios, and y is the Fund's per unit cost of typesetting and printing the
Fund's prospectus. The same procedures shall be followed with respect to the
Fund's statement of additional information. The Company agrees to provide the
Fund or its designee with such information as may be reasonably requested by the
Fund to assure that the Fund's expenses do not include the cost of printing,
typesetting, and distributing any prospectuses or statements of additional
information other than those actually distributed to existing owners of the
Contracts who currently own shares of one or more of the Fund's Portfolios.
3.3. The Fund's statement of additional information shall be obtainable
from the Fund, the Company or such other person as the Fund may designate, as
agreed upon by the parties.
3.4. The Fund, at its expense, shall provide the Company with copies of
its proxy statements, reports to shareholders, and other communications (except
for prospectuses and statements of additional information, which are covered in
Section 3.1) to shareholders in such quantity as the Company shall reasonably
require for distributing to Contract owners.
3.5. If and to the extent required by law the Company shall:
(i) solicit voting instructions from Contract owners;
(ii) vote the Fund shares in accordance with
instructions received from Contract owners; and
(iii) vote Fund shares for which no instructions have
been received in the same proportion as Fund
shares of such Portfolio for which instructions
have been received,
so long as and to the extent that the Securities and Exchange Commission
continues to interpret the 1940 Act to require pass-through voting privileges
for Variable Insurance Product owners. The Company reserves the right to vote
Fund shares held in any segregated asset account in its own right, to the extent
permitted by law. The Fund and
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<PAGE> 10
the Company shall follow the procedures, and shall have the corresponding
responsibilities, for the handling of proxy and voting instruction
solicitations, as set forth in Schedule C attached hereto and incorporated
herein by reference. Participating Insurance Companies shall be responsible for
ensuring that each of their separate accounts participating in the Fund
calculates voting privileges in a manner consistent with the standards set forth
on Schedule C, which standards will also be provided to the other Participating
Insurance Companies.
3.6. The Fund will comply with all provisions of the 1940 Act requiring
voting by shareholders, and in particular the Fund will either provide for
annual meetings or comply with Section 16(c) of the 1940 Act (although the Fund
is not one of the trusts described in Section 16(c) of that Act) as well as with
Sections 16(a) and, if and when applicable, 16(b). Further, the Fund will act in
accordance with the Securities and Exchange Commission's interpretation of the
requirements of Section 16(a) with respect to periodic elections of directors
and with whatever rules the Commission may promulgate with respect thereto.
3.7. The Fund shall use reasonable efforts to provide Fund
prospectuses, reports to shareholders, proxy materials and other Fund
communications (or camera-ready equivalents) to the Company sufficiently in
advance of the Company's mailing dates to enable the Company to complete, at
reasonable cost, the printing, assembling and/or distribution of the
communications in accordance with applicable laws and regulations.
ARTICLE IV. SALES MATERIAL AND INFORMATION
4.1. The Company shall furnish, or shall cause to be furnished, to the
Fund or its designee, each piece of sales literature or other promotional
material in which the Fund or the Adviser(s) is named, at least ten Business
Days prior to its use. No such material shall be used if the Fund or its
designee reasonably objects to such use within ten Business Days after receipt
of such material.
4.2. The Company shall not give any information or make any
representations or statements on behalf of the Fund or concerning the Fund in
connection with the sale of the Contracts other than the information or
representations contained in the registration statement or prospectus for the
Fund shares, as such registration statement and prospectus may be amended or
supplemented from time to time, or in reports or proxy statements for the Fund,
or in sales literature or other promotional material approved by the Fund or its
designee, except with the permission of the Fund.
4.3. The Fund or its designee shall furnish, or shall cause to be
furnished, to the Company or its designee, each piece of sales literature or
other promotional material in which the Company and/or its separate account(s)
is named at least ten Business Days
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<PAGE> 11
prior to its use. No such material shall be used if the Company or its designee
reasonably objects to such use within ten Business Days after receipt of such
material.
4.4. The Fund and the Advisers shall not give any information or make
any representations on behalf of the Company or concerning the Company, each
Account, or the Contracts, other than the information or representations
contained in a registration statement or prospectus for the Contracts, as such
registration statement and prospectus may be amended or supplemented from time
to time, or in published reports for each Account which are in the public domain
or approved by the Company for distribution to Contract owners, or in sales
literature or other promotional material approved by the Company or its
designee, except with the permission of the Company.
4.5. The Fund will provide to the Company at least one complete copy of
all registration statements, prospectuses, statements of additional information,
reports, proxy statements, sales literature and other promotional materials,
applications for exemptions, requests for no-action letters, and all amendments
to any of the above, that relate to the Fund or its shares, which are relevant
to the Company or the Contracts.
4.6. The Company will provide to the Fund at least one complete copy of
all registration statements, prospectuses, statements of additional information,
reports, solicitations for voting instructions, sales literature and other
promotional materials, applications for exemptions, requests for no action
letters, and all amendments to any of the above, that relate to the investment
in the Fund under the Contracts.
4.7. For purposes of this Article IV, the phrase "sales literature or
other promotional material" includes, but is not limited to, any of the
following that refer to the Fund or any affiliate of the Fund: advertisements
(such as material published, or designed for use in, a newspaper, magazine, or
other periodical, radio, television, telephone or tape recording, videotape
display, signs or billboards, motion pictures, or other electronic or public
media), sales literature (i.e., any written communication distributed or made
generally available to customers or the public, including brochures, circulars,
research reports, market letters, form letters, seminar texts, reprints or
excerpts of any other advertisement, sales literature, or published article),
educational or training materials or other communications distributed or made
generally available to some or all agents or employees, and registration
statements, prospectuses, statements of additional information, shareholder
reports, and proxy materials.
ARTICLE V. FEES AND EXPENSES
5.1. The Fund shall pay no fee or other compensation to the Company
under this Agreement, except that if the Fund or any Portfolio adopts and
implements a plan
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<PAGE> 12
pursuant to Rule 12b-1 to finance distribution expenses, then the Underwriter
may make payments to the Company or to the underwriter for the Contracts if and
in amounts agreed to by the Underwriter in writing.
5.2. All expenses incident to performance by the Fund under this
Agreement shall be paid by the Fund. The Fund shall see to it that all its
shares are registered and authorized for issuance in accordance with applicable
federal law and, if and to the extent deemed advisable by the Fund, in
accordance with applicable state laws prior to their sale. Except as otherwise
set forth in the Section 3.2 of this Agreement, the Fund shall bear the expenses
for the cost of registration and qualification of the Fund's shares, preparation
and filing of the Fund's prospectus and registration statement, proxy materials
and reports, setting the prospectus in type, setting in type and printing the
proxy materials and reports to shareholders, the preparation of all statements
and notices required by any federal or state law, and all fees and taxes on the
issuance or transfer of the Fund's shares.
5.3. The Fund shall bear the expenses of distributing the Fund's
prospectus, proxy materials and reports to owners of Contracts issued by the
Company who currently own shares of the Fund.
ARTICLE VI. DIVERSIFICATION
6.1. The Fund will at all times invest money from the Contracts in such
a manner as to ensure that the Contracts will be treated as variable contracts
under the Code and the regulations issued thereunder. Without limiting the scope
of the foregoing, the Fund will at all times comply with Section 817(h) of the
Code and Treasury Regulation 1.817-5, relating to the diversification
requirements for variable annuity, endowment, or life insurance contracts and
any amendments or other modifications to such Section or Regulations. In the
event of a breach of this Article VI by the Fund, it will take all steps
necessary (a) to notify Company of such breach and (b) to adequately diversify
the Fund so as to achieve compliance within the grace period afforded by
Regulation 817-5.
ARTICLE VII. POTENTIAL CONFLICTS
7.1. The Board will monitor the Fund for the existence of any material
irreconcilable conflict between the interests of the contract owners of all
separate accounts investing in the Fund. An irreconcilable material conflict may
arise for a variety of reasons, including: (a) an action by any state insurance
regulatory authority; (b) a change in applicable federal or state insurance,
tax, or securities laws or regulations, or a public ruling, private letter
ruling, no-action or interpretative letter, or any similar action by insurance,
tax, or securities regulatory authorities; (c) an
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<PAGE> 13
administrative or judicial decision in any relevant proceeding; (d) the manner
in which the investments of any Portfolio are being managed; (e) a difference in
voting instructions given by Variable Insurance Product owners; or (f) a
decision by a Participating Insurance Company to disregard the voting
instructions of contract owners. The Board shall promptly inform the Company if
it determines that an irreconcilable material conflict exists and the
implications thereof.
7.2. The Company will report any potential or existing conflicts of
which it is aware to the Board. The Company will assist the Board in carrying
out its responsibilities under the Shared Funding Exemptive Order, by providing
the Board with all information reasonably necessary for the Board to consider
any issues raised. This includes, but is not limited to, an obligation by the
Company to inform the Board whenever Contract owner voting instructions are
disregarded.
7.3. If it is determined by a majority of the Board, or a majority of
its disinterested members, that a material irreconcilable conflict exists, the
Company and other Participating Insurance Companies shall, at their expense and
to the extent reasonably practicable (as determined by a majority of the
disinterested directors), take whatever steps are necessary to remedy or
eliminate the irreconcilable material conflict, up to and including: (1)
withdrawing the assets allocable to some or all of the separate accounts from
the Fund or any Portfolio and reinvesting such assets in a different investment
medium, including (but not limited to) another Portfolio of the Fund, or
submitting the question whether such segregation should be implemented to a vote
of all affected Contract owners and, as appropriate, segregating the assets of
any appropriate group (i.e., annuity contract owners, life insurance policy
owners, or variable contract owners of one or more Participating Insurance
Companies) that votes in favor of such segregation, or offering to the affected
contract owners the option of making such a change; and (2) establishing a new
registered management investment company or managed separate account.
7.4. If a material irreconcilable conflict arises because of a decision
by the Company to disregard Contract owner voting instructions and that decision
represents a minority position or would preclude a majority vote, the Company
may be required, at the Fund's election, to withdraw the affected Account's
investment in the Fund and terminate this Agreement with respect to such Account
(at the Company's expense); provided, however that such withdrawal and
termination shall be limited to the extent required by the foregoing material
irreconcilable conflict as determined by a majority of the disinterested members
of the Board.
7.5. If a material irreconcilable conflict arises because a particular
state insurance regulator's decision applicable to the Company conflicts with
the majority of other state regulators, then the Company will withdraw the
affected Account's investment in the
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<PAGE> 14
Fund and terminate this Agreement with respect to such Account within six months
after the Board informs the Company in writing that it has determined that such
decision has created an irreconcilable material conflict; provided, however,
that such withdrawal and termination shall be limited to the extent required by
the foregoing material irreconcilable conflict as determined by a majority of
the disinterested members of the Board. Until the end of the foregoing six month
period, the Underwriter and Fund shall continue to accept and implement orders
by the Company for the purchase (and redemption) of shares of the Fund.
7.6. For purposes of Sections 7.3 through 7.5 of this Agreement, a
majority of the disinterested members of the Board shall determine whether any
proposed action adequately remedies any irreconcilable material conflict, but in
no event will the Fund be required to establish a new funding medium for the
Contracts. The Company shall not be required by Section 7.3 to establish a new
funding medium for the Contracts if an offer to do so has been declined by vote
of a majority of Contract owners materially adversely affected by the
irreconcilable material conflict.
7.7. If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended,
or Rule 6e-3 is adopted, to provide exemptive relief from any provision of the
1940 Act or the rules promulgated thereunder with respect to mixed or shared
funding (as defined in the Shared Funding Exemptive Order) on terms and
conditions materially different from those contained in the Shared Funding
Exemptive Order, then (a) the Fund and/or the Participating Insurance Companies,
as appropriate, shall take such steps as may be necessary to comply with Rules
6e-2 and 6e-3(T), as amended, and Rule 6e-3, as adopted, to the extent such
rules are applicable; and (b) Sections 3.4, 3.5, 7.1, 7.2, 7.3, 7.4, and 7.5 of
this Agreement shall continue in effect only to the extent that terms and
conditions substantially identical to such Sections are contained in such
Rule(s) as so amended or adopted.
ARTICLE VIII. INDEMNIFICATION
8.1. Indemnification By The Company
8.1(a) The Company agrees to indemnify and hold harmless the Fund and
each member of the Board and officers, and each Adviser and each director and
officer of each Adviser, and each person, if any, who controls the Fund or the
Adviser within the meaning of Section 15 of the 1933 Act (collectively, the
"Indemnified Parties" and individually, "Indemnified Party," for purposes of
this Section 8.1) against any and all losses, claims, damages, liabilities
(including amounts paid in settlement with the written consent of the Company)
or litigation (including legal and other expenses), to which the Indemnified
Parties may become subject under any statute, regulation, at
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<PAGE> 15
common law or otherwise, insofar as such losses, claims, damages, liabilities or
expenses (or actions in respect thereof) or settlements are related to the sale
or acquisition of the Fund's shares or the Contracts and:
(i) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in the
registration statement or prospectus for the Contracts or contained in
the Contracts or sales literature for the Contracts (or any amendment
or supplement to any of the foregoing), or arise out of or are based
upon the omission or the alleged omission to state therein a material
fact required to be stated therein or necessary to make the statement
or statements therein not misleading, provided that this agreement to
indemnify shall not apply as to any Indemnified Party if such
statement or omission or such alleged statement or omission was made
in reliance upon and in conformity with information furnished to the
Company by or on behalf of the Fund for use in the registration
statement or prospectus for the Contracts or in the Contracts or sales
literature (or any amendment or supplement) or otherwise for use in
connection with the sale of the Contracts or Fund shares; or
(ii) arise out of or as a result of statements or
representations(other than statements or representations contained in
theregistration statement, prospectus or sales literature of the Fund
not supplied by the Company, or persons under its control and other
than statements or representations authorized by the Fund or an
Adviser) or unlawful conduct of the Company or persons under its
control, with respect to the sale or distribution of the Contracts or
Fund shares; or
(iii) arise out of or as a result of any untrue statement
or alleged untrue statement of a material fact contained in a
registration statement, prospectus, or sales literature of the Fund or
any amendment thereof or supplement thereto or the omission or alleged
omission to state therein a material fact required to be stated
therein or necessary to make the statement or statements therein not
misleading if such a statement or omission was made in reliance upon
and in conformity with information furnished to the Fund by or on
behalf of the Company; or
(iv) arise as a result of any failure by the Company to
provide the services and furnish the materials under the terms of this
Agreement; or
(v) arise out of or result from any material breach of any
representation and/or warranty made by the Company in this
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<PAGE> 16
Agreement or arise out of or result from any other material
breach of this Agreement by the Company, as limited by and in
accordance with the provisions of Sections 8.1(b) and 8.1(c)
hereof.
8.1(b). The Company shall not be liable under this
indemnification provision with respect to any losses, claims,
damages, liabilities or litigation incurred or assessed against
an Indemnified Party as such may arise from such Indemnified
Party's willful misfeasance, bad faith, or gross negligence in
the performance of such Indemnified Party's duties or by reason
of such Indemnified Party's reckless disregard of obligations or
duties under this Agreement.
8.1(c). The Company shall not be liable under this
indemnification provision with respect to any claim made against
an Indemnified Party unless such Indemnified Party shall have
notified the Company in writing within a reasonable time after
the summons or other first legal process giving information of
the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have
received notice of such service on any designated agent), but
failure to notify the Company of any such claim shall not relieve
the Company from any liability which it may have to the
Indemnified Party against whom such action is brought otherwise
than on account of this indemnification provision. In case any
such action is brought against the Indemnified Parties, the
Company shall be entitled to participate, at its own expense, in
the defense of such action. The Company also shall be entitled to
assume the defense thereof, with counsel satisfactory to the
party named in the action. After notice from the Company to such
party of the Company's election to assume the defense thereof,
the Indemnified Party shall bear the fees and expenses of any
additional counsel retained by it, and the Company will not be
liable to such party under this Agreement for any legal or other
expenses subsequently incurred by such party independently in
connection with the defense thereof other than reasonable costs
of investigation.
8.1(d). The Indemnified Parties will promptly notify the
Company of the commencement of any litigation or proceedings
against them in connection with the issuance or sale of the Fund
shares or the Contracts or the operation of the Fund.
8.2. Indemnification by the Advisers
8.2(a). Each Adviser agrees, with respect to each Portfolio
that it manages, to indemnify and hold harmless the Company and
each of its
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<PAGE> 17
directors and officers and each person, if any, who controls the
Company within the meaning of Section 15 of the 1933 Act
(collectively, the "Indemnified Parties" and individually,
"Indemnified Party," for purposes of this Section 8.2) against
any and all losses, claims, damages, liabilities (including
amounts paid in settlement with the written consent of the
Adviser) or litigation (including legal and other expenses) to
which the Indemnified Parties may become subject under any
statute, regulation, at common law or otherwise, insofar as such
losses, claims, damages, liabilities or expenses (or actions in
respect thereof) or settlements are related to the sale or
acquisition of shares of the Portfolio that it manages or the
Contracts and:
(i) arise out of or are based upon any untrue statement
or alleged untrue statement of any material fact contained
in the registration statement or prospectus or sales
literature of the Fund (or any amendment or supplement to
any of the foregoing), or arise out of or are based upon the
omission or the alleged omission to state therein a material
fact required to be stated therein or necessary to make the
statements therein not misleading, provided that this
agreement to indemnify shall not apply as to any Indemnified
Party if such statement or omission or such alleged
statement or omission was made in reliance upon and in
conformity with information furnished to the Fund by or on
behalf of the Company for use in the registration statement
or prospectus for the Fund or in sales literature (or any
amendment or supplement) or otherwise for use in connection
with the sale of the Contracts or Portfolio shares; or
(ii) arise out of or as a result of statements or
representations (other than statements or representations
contained in the registration statement, prospectus or sales
literature for the Contracts not supplied by the Fund or
persons under its control and other than statements or
representations authorized by the Company) or unlawful
conduct of the Fund, Adviser(s) or Underwriter or persons
under their control, with respect to the sale or
distribution of the Contracts or Portfolio shares; or
(iii) arise out of or as a result of any untrue
statement or alleged untrue statement of a material fact
contained in a registration statement, prospectus, or sales
literature
15
<PAGE> 18
covering the Contracts, or any amendment thereof or
supplement thereto, or the omission or alleged omission to
state therein a material fact required to be stated therein
or necessary to make the statement or statements therein not
misleading, if such statement or omission was made in
reliance upon and in conformity with information furnished
to the Company by or on behalf of the Fund; or
(iv) arise as a result of any failure by the Fund to
provide the services and furnish the materials under the
terms of this Agreement; or
(v) arise out of or result from any material breach of
any representation and/or warranty made by the Adviser in
this Agreement or arise out of or result from any other
material breach of this Agreement by the Adviser (including
any breach of Article VI of this Agreement); as limited by
and in accordance with the provisions of Sections 8.2(b) and
8.2(c) hereof.
8.2(b). An Adviser shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or
litigation incurred or assessed against an Indemnified Party as such
may arise from such Indemnified Party's willful misfeasance, bad
faith, or gross negligence in the performance of such Indemnified
Party's duties or by reason of such Indemnified Party's reckless
disregard of obligations and duties under this Agreement.
8.2(c). An Adviser shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party
unless such Indemnified Party shall have notified the Adviser in
writing within a reasonable time after the summons or other first
legal process giving information of the nature of the claim shall have
been served upon such Indemnified Party (or after such Indemnified
Party shall have received notice of such service on any designated
agent), but failure to notify the Adviser of any such claim shall not
relieve the Adviser from any liability which it may have to the
Indemnified Party against whom such action is brought otherwise than
on account of this indemnification provision. In case any such action
is brought against the Indemnified Parties, the Adviser will be
entitled to participate, at its own expense, in the defense thereof.
The Adviser also shall be entitled to assume the defense thereof, with
counsel satisfactory to the party named in the action. After notice
from the Adviser to such party of the Adviser's election to
16
<PAGE> 19
assume the defense thereof, the Indemnified Party shall bear the fees
and expenses of any additional counsel retained by it, and the Adviser
will not be liable to such party under this Agreement for any legal or
other expenses subsequently incurred by such party independently in
connection with the defense thereof other than reasonable costs of
investigation.
8.2(d). The Company agrees promptly to notify the Adviser of the
commencement of any litigation or proceedings against it or any of its
officers or directors in connection with the issuance or sale of the
Contracts or the operation of each Account.
8.3. Indemnification by the Fund
8.3(a). The Fund agrees to indemnify and hold harmless the
Company, and each of its directors and officers and each person, if
any, who controls the Company within the meaning of Section 15 of the
1933 Act (hereinafter collectively, the "Indemnified Parties" and
individually, "Indemnified Party," for purposes of this Section 8.3)
against any and all losses, claims, damages, liabilities (including
amounts paid in settlement with the written consent of the Fund) or
litigation (including legal and other expenses) to which the
Indemnified Parties may become subject under any statute, regulation,
at common law or otherwise, insofar as such losses, claims, damages,
liabilities or expenses (or actions in respect thereof) or settlements
result from the gross negligence, bad faith or willful misconduct of
the Board or any member thereof, are related to the operations of the
Fund and:
(i) arise as a result of any failure by the Fund to
provide the services and furnish the materials under the
terms of this Agreement; or
(ii) arise out of or result from any material breach of
any representation and/or warranty made by the Fund in this
Agreement or arise out of or result from any other material
breach of this Agreement by the Fund (including any breach
of Article VI of this Agreement);
8.3(b). The Fund shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or
litigation incurred or assessed against an Indemnified Party as may
arise from such Indemnified Party's willful misfeasance, bad faith, or
gross negligence in the performance of such Indemnified Party's duties
or by
17
<PAGE> 20
reason of such Indemnified Party's reckless disregard of obligations
and duties under this Agreement.
8.3(c). The Fund shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party
unless such Indemnified Party shall have notified the Fund in writing
within a reasonable time after the summons or other first legal
process giving information of the nature of the claim shall have been
served upon such Indemnified Party (or after such Indemnified Party
shall have received notice of such service on any designated agent),
but failure to notify the Fund of any such claim shall not relieve the
Fund from any liability which it may have to the Indemnified Party
against whom such action is brought otherwise than on account of this
indemnification provision. In case any such action is brought against
the Indemnified Parties, the Fund will be entitled to participate, at
its own expense, in the defense thereof. The Fund also shall be
entitled to assume the defense thereof, with counsel satisfactory to
the party named in the action. After notice from the Fund to such
party of the Fund's election to assume the defense thereof, the
Indemnified Party shall bear the fees and expenses of any additional
counsel retained by it, and the Fund will not be liable to such party
under this Agreement for any legal or other expenses subsequently
incurred by such party independently in connection with the defense
thereof other than reasonable costs of investigation.
8.3(d). The Company agrees promptly to notify the Fund of the
commencement of any litigation or proceedings against it or any of its
officers or directors in connection with this Agreement, the issuance
or sale of the Contracts, with respect to the operation of each
Account, or the sale or acquisition of shares of the Fund.
ARTICLE IX. APPLICABLE LAW
9.1. This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the State of New
York.
9.2. This Agreement shall be subject to the provisions of the
1933, 1934 and 1940 Acts, and the rules and regulations and rulings
thereunder, including such exemptions from those statutes, rules and
regulations as the Securities and Exchange Commission may grant
(including, but not limited to, the Shared Funding Exemptive Order)
and the terms hereof shall be interpreted and construed in accordance
therewith.
18
<PAGE> 21
ARTICLE X. TERMINATION
10.1. This Agreement shall continue in full force and effect
until the first to occur of:
(a) termination by any party for any reason by sixty (60) days
advance written notice delivered to the other parties; or
(b) termination by the Company by written notice to the Fund and
the Adviser with respect to any Portfolio based upon the Company's
determination that shares of such Portfolio are not reasonably
available to meet the requirements of the Contracts; or
(c) termination by the Company by written notice to the Fund and
the Adviser with respect to any Portfolio in the event any of the
Portfolio's shares are not registered, issued or sold in accordance
with applicable state and/or federal law or such law precludes the use
of such shares as the underlying investment media of the Contracts
issued or to be issued by the Company; or
(d) termination by the Company by written notice to the Fund and
the Adviser with respect to any Portfolio in the event that such
Portfolio ceases to qualify as a Regulated Investment Company under
Subchapter M of the Code or under any successor or similar provision,
or if the Company reasonably believes that the Fund may fail to so
qualify; or
(e) termination by the Company by written notice to the Fund and
the Adviser with respect to any Portfolio in the event that such
Portfolio falls to meet the diversification requirements specified in
Article VI hereof; or
(f) termination by the Fund by written notice to the Company if
the Fund shall determine, in its sole judgment exercised in good
faith, that the Company and/or its affiliated companies has suffered a
material adverse change in its business, operations, financial
condition or prospects since the date of this Agreement or is the
subject of material adverse publicity, but no such determination shall
be effective under this Section 10.1(f) until the Company has been
afforded a reasonable opportunity to respond to a statement by the
Fund concerning the reason for notice of termination hereunder; or
19
<PAGE> 22
(g) termination by the Company by written notice to the Fund and
the Adviser, if the Company shall determine, in its sole judgment
exercised in good faith, that either the Fund or the Adviser has
suffered a material adverse change in its business, operations,
financial condition or prospects since the date of this Agreement or
is the subject of material adverse publicity, but no such termination
shall be effective under this Section 10.1(g) until the Fund has been
afforded a reasonable opportunity to respond to a statement by the
Company concerning the reason for notice of termination hereunder.
10.2. Notwithstanding any termination of this Agreement, the Fund
shall at the option of the Company, continue to make available
additional shares of the Fund pursuant to the terms and conditions of
this Agreement for all Contracts in effect on the effective date of
termination of this Agreement (hereinafter referred to as "Existing
Contracts"). Specifically, without limitation, the owners of the
Existing Contracts shall be permitted to direct reallocation of
investments in the Fund, redemption of investments in the Fund and/or
investment in the Fund upon the making of additional purchase payments
under the Existing Contracts. The parties agree that this Section 10.2
shall not apply to any terminations under Article VII and the effect
of such Article VII terminations shall be governed by Article VII of
this Agreement.
10.3. The Company shall not redeem Fund shares attributable to
the Contracts (as distinct from Fund shares attributable to the
Company's assets held in the Account) except (i) as necessary to
implement Contract owner initiated or approved transactions, or (ii)
as required by state and/or federal laws or regulations or judicial or
other legal precedent of general application (hereinafter referred to
as a "Legally Required Redemption") or (iii) as permitted by an order
of the Securities and Exchange Commission pursuant to Section 26(b) of
the 1940 Act. Upon request, the Company will promptly furnish to the
Fund the opinion of counsel for the Company (which counsel shall be
reasonably satisfactory to the Fund) to the effect that any redemption
pursuant to clause (ii) above is a Legally Required Redemption.
Furthermore, except in cases where permitted under the terms of the
Contracts, the Company shall not prevent Contract owners from
allocating payments to a Portfolio that was otherwise available under
the Contracts without first giving the Fund 90 days prior written
notice of its intention to do so.
20
<PAGE> 23
ARTICLE XI. NOTICES
Any notice shall be sufficiently given when sent by
registered or certified mail to the other party at the address of
such party set forth below or at such other address as such party
may from time to time specify in writing to the other party.
If to the Fund:
Morgan Stanley Universal Funds, Inc.
c/oMorgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, New York 10020
Attention: Harold J. Schaaff, Jr., Esq.
If to Adviser:
Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, New York 10020
Attention: Harold J. Schaaff, Jr., Esq.
If to Adviser:
Miller Anderson & Sherrerd, LLP
One Tower Bridge
West Conshohocken, Pennsylvania 19428
Attention: Lorraine Truten
If to the Company:
Kemper Investors Life Insurance Company
1 Kemper Drive
Long Grove, IL 60049-0001
Attention: General Counsel
ARTICLE XII. MISCELLANEOUS
12.1. All persons dealing with the Fund must look solely to
the property of the Fund for the enforcement of any claims
against the Fund as neither the Board, officers, agents or
shareholders assume any personal liability for obligations
entered into on behalf of the Fund.
21
<PAGE> 24
12.2. Subject to the requirements of legal process and
regulatory authority, each party hereto shall treat as
confidential the names and addresses of the owners of the
Contracts and all information reasonably identified as
confidential in writing by any other party hereto and, except as
permitted by this Agreement, shall not disclose, disseminate or
utilize such names and addresses and other confidential
information until such time as it may come into the public domain
without the express written consent of the affected party.
12.3. The captions in this Agreement are included for
convenience of reference only and in no way define or delineate
any of the provisions hereof or otherwise affect their
construction or effect.
12.4. This Agreement may be executed simultaneously in two
or more counterparts, each of which taken together shall
constitute one and the same instrument.
12.5. If any provision of this Agreement shall be held or
made invalid by a court decision, statute, rule or otherwise, the
remainder of the Agreement shall not be affected thereby.
12.6. Each party hereto shall cooperate with each other
party and all appropriate governmental authorities (including
without limitation the Securities and Exchange Commission, the
NASD and state insurance regulators) and shall permit such
authorities reasonable access to its books and records in
connection with any investigation or inquiry relating to this
Agreement or the transactions contemplated hereby.
Notwithstanding the generality of the foregoing, each party
hereto further agrees to furnish the California Insurance
Commissioner with any information or reports in connection with
services provided under this Agreement which such Commissioner
may request in order to ascertain whether the insurance
operations of the Company are being conducted in a manner
consistent with the California Insurance Regulations and any
other applicable law or regulations.
12.7. The rights, remedies and obligations contained in this
Agreement are cumulative and are in addition to any and all
rights, remedies and obligations at law or in equity, which the
parties hereto are entitled to under state and federal laws.
12.8. This Agreement or any of the rights and obligations
hereunder may not be assigned by any party without the prior
written consent of all parties hereto; provided, however, that an
Adviser may
22
<PAGE> 25
assign this Agreement or any rights or obligations hereunder to
any affiliate of or company under common control with the
Adviser, if such assignee is duly licensed and registered to
perform the obligations of the Adviser under this Agreement.
12.9 Upon request by the Fund or the Adviser, the Company
shall furnish, or shall cause to be furnished, to the Fund or its
designee copies of the following reports:
(a) the Company's annual statement (prepared under
statutory accounting principles) and annual report (prepared
under generally accepted accounting principles ("GAAP"), if
any), as soon as practical and in any event within 90 days
after the end of each fiscal year;
(b) the Company's quarterly statements (statutory) (and
GAAP, if any), as soon as practical and in any event within
45 days after the end of each quarterly period:
(c) any financial statement, proxy statement, notice or
report of the Company sent to stockholders and/or
policyholders, as soon as practical after the delivery
thereof to stockholders;
(d) any registration statement (without exhibits) and
financial reports of the Company filed with the Securities
and Exchange Commission or any state insurance regulator, as
soon as practical after the filing thereof;
(e) any other report submitted to the Company by
independent accountants in connection with any annual,
interim or special audit made by them of the books of the
Company, as soon as practical after the receipt thereof.
23
<PAGE> 26
IN WITNESS WHEREOF, each of the parties hereto has
caused this Agreement to be executed in its name and on its
behalf by its duly authorized representative and its seal to
be hereunder affixed hereto as of the date specified above.
KEMPER INVESTORS LIFE INSURANCE COMPANY
By: /s/ Otis R. Heldman
-------------------------------
Name: Otis R. Heldman
Title: Marketing Officer
MORGAN STANLEY UNIVERSAL FUNDS, INC.
By: /s/ Michael Klein
-------------------------------
Name: Michael Klein
Title: President
MORGAN STANLEY ASSET MANAGEMENT INC.
By: /s/ Marna Whittington
-------------------------------
Name: Marna Whittington
Title: Managing Director
MILLER ANDERSON & SHERRERD, LLP
By: /s/ Marna Whittington
-------------------------------
Name: Marna Whittington
Title: Authorized Signatory
24
<PAGE> 27
SCHEDULE A
SEPARATE ACCOUNTS AND CONTRACTS
-------------------------------
NAME OF SEPARATE ACCOUNT AND FORM NUMBER AND NAME OF CONTRACT
DATE ESTABLISHED BY BOARD OF DIRECTORS FUNDED BY SEPARATE ACCOUNT
- -------------------------------------- --------------------------
KILICO Variable Separate Account - 2 First Foundation VUL
6/17/97 Policy Form Nos. L-8161,
L-8161CV, L-8162, and L-8162CV
A-1
<PAGE> 28
SCHEDULE B
PORTFOLIOS OF MORGAN STANLEY
UNIVERSAL FUNDS, INC.
High Yield Portfolio
U.S. Real Estate Portfolio
B-1
<PAGE> 29
SCHEDULE C
PROXY VOTING PROCEDURES
The following is a list of procedures and corresponding responsibilities for the
handling of proxies and voting instructions relating to the Fund. The defined
terms herein shall have the meanings assigned in the Participation Agreement
except that the term "Company" shall also include the department or third party
assigned by the Company to perform the steps delineated below.
. The proxy proposals are given to the Company by the Fund as early as
possible before the date set by the Fund for the shareholder meeting to
enable the Company to consider and prepare for the solicitation of
voting instructions from owners of the Contracts and to facilitate the
establishment of tabulation procedures. At this time the Fund will
inform the Company of the Record, Mailing and Meeting dates. This will
be done verbally approximately two months before meeting.
. Promptly after the Record Date, the Company will perform a "tape run",
or other activity, which will generate the names, addresses and number
of units which are attributed to each contract owner/policyholder (the
"Customer") as of the Record Date. Allowance should be made for account
adjustments made after this date that could affect the status of the
Customers' accounts as of the Record Date.
Note: The number of proxy statements is determined by the activities
described in this Step #2. The Company will use its best efforts to
call in the number of Customers to the Fund , as soon as possible, but
no later than two weeks after the Record Date.
. The Fund's Annual Report must be sent to each Customer by the Company
either before or together with the Customers' receipt of voting
instruction solicitation material. The Fund will provide the last
Annual Report to the Company pursuant to the terms of Section 3.4 of
the Agreement to which this Schedule relates.
. The text and format for the Voting Instruction Cards ("Cards" or
"Card") is provided to the Company by the Fund. The Company, at its
expense, shall produce and personalize the Voting Instruction Cards.
The Fund or its affiliate must approve the Card before it is printed.
Allow approximately 2-4 business days for printing information on the
Cards. Information commonly found on the Cards includes:
C-1
<PAGE> 30
. name (legal name as found on account registration)
. address
. fund or account number
. coding to state number of units
. individual Card number for use in tracking and verification of
votes (already on Cards as printed by the Fund).
(This and related steps may occur later in the chronological process due to
possible uncertainties relating to the proposals.)
. During this time, the Fund will develop, produce and pay for the Notice
of Proxy and the Proxy Statement (one document). Printed and folded
notices and statements will be sent to Company for insertion into
envelopes (envelopes and return envelopes are provided and paid for by
the Company). Contents of envelope sent to Customers by the Company
will include:
. Voting Instruction Card(s)
. One proxy notice and statement (one document)
. return envelope (postage pre-paid by Company) addressed to the
Company or its tabulation agent
. "urge buckslip" - optional, but recommended. (This is a small,
single sheet of paper that requests Customers to vote as
quickly as possible and that their vote is important. One copy
will be supplied by the Fund.)
. cover letter - optional, supplied by Company and reviewed and
approved in advance by the Fund.
. The above contents should be received by the Company approximately 3-5
business days before mail date. Individual in charge at Company reviews
and approves the contents of the mailing package to ensure correctness
and completeness. Copy of this approval sent to the Fund.
. Package mailed by the Company.
* The Fund must allow at least a 15-day solicitation time to the
Company as the shareowner. (A 5-week period is recommended.)
Solicitation time is calculated as calendar days from (but not
including,) the meeting, counting backwards.
. Collection and tabulation of Cards begins. Tabulation usually takes
place in another department or another vendor depending on process
used. An often used procedure is to sort Cards on arrival by proposal
into vote categories of all yes, no, or mixed replies, and to begin
data entry.
C-2
<PAGE> 31
Note: Postmarks are not generally needed. A need for postmark information
would be due to an insurance company's internal procedure and has not been
required by the Fund in the past.
. Signatures on Card checked against legal name on account registration
which was printed on the Card. Note: For Example, if the account
registration is under "John A. Smith, Trustee," then that is the exact
legal name to be printed on the Card and is the signature needed on the
Card.
. If Cards are mutilated, or for any reason are illegible or are not signed
properly, they are sent back to Customer with an explanatory letter and a
new Card and return envelope. The mutilated or illegible Card is
disregarded and considered to be not received for purposes of vote
tabulation. Any Cards that have been "kicked out" (e.g. mutilated,
illegible) of the procedure are "hand verified," i.e., examined as to why
they did not complete the system. Any questions on those Cards are usually
remedied individually.
. There are various control procedures used to ensure proper tabulation of
votes and accuracy of that tabulation. The most prevalent is to sort the
Cards as they first arrive into categories depending upon their vote; an
estimate of how the vote is progressing may then be calculated. If the
initial estimates and the actual vote do not coincide, then an internal
audit of that vote should occur. This may entail a recount.
. The actual tabulation of votes is done in units which is then converted
to shares. (It is very important that the Fund receives the tabulations
stated in terms of a percentage and the number of shares.) The Fund must
review and approve tabulation format.
. Final tabulation in shares is verbally given by the Company to the Fund
on the morning of the meeting not later than 10:00 a.m. Eastern time. The
Fund may request an earlier deadline if reasonable and if required to
calculate the vote in time for the meeting.
. A Certification of Mailing and Authorization to Vote Shares will be
required from the Company as well as an original copy of the final vote.
The Fund will provide a standard form for each Certification.
C-3
<PAGE> 32
. The Company will be required to box and archive the Cards received from
the Customers. In the event that any vote is challenged or if otherwise
necessary for legal, regulatory, or accounting purposes, the Fund will be
permitted reasonable access to such Cards.
. All approvals and "signing-off' may be done orally, but must always be
followed up in writing.
C-4
<PAGE> 33
. The Company will be required to box and archive the Cards received from
the Customers. In the event that any vote is challenged or if otherwise
necessary for legal, regulatory, or accounting purposes, the Fund will be
permitted reasonable access to such Cards.
. All approvals and "signing-off' may be done orally, but must always be
followed up in writing.
Partagr.mas
C-4
<PAGE> 1
EXHIBIT (8)(c)(ii)
[MORGAN STANLEY LETTERHEAD]
September 1, 1998
Kemper Investors Life Insurance Company
1 Kemper Drive
Long Grove, Illinois 60049
Attention: Mr. Philip D. Meserve
Dear Meserve:
As you know, we have entered into a participation agreement (the "Participation
Agreement") among Morgan Stanley Universal Funds, Inc. (the "Fund"), Morgan
Stanley Asset Management Inc., Miller Anderson & Sherrerd, LLP, and Kemper
Investors Life Insurance Company (the "Company"), dated September 1, 1998,
providing for the purchase by the Company of shares of the Fund for its separate
accounts to fund variable life insurance contracts and variable annuity
contracts.
The Company will provide certain administrative services which benefit the Fund
and its portfolios and result in cost savings to them, including, but not
limited to, the following:
a) aggregate allocation, transfer, and liquidation orders of the separate
accounts;
b) print and mail to owners of variable contracts copies of the Fund's
prospectuses and other materials that the Fund is required by law or
otherwise to provide to its shareholders, but that the Company is not
otherwise required to provide to owners of variable contracts;
c) provide financial consultants with advice with respect to inquiries
related to the Fund's portfolios (not including information about
performance or related to sales); and
d) provide such other administrative support for the Fund as mutually
agreed to by us and the Company, to the extent permitted or required
under applicable statutes.
In consideration of the anticipated administrative expense savings resulting to
the Fund from the various fund-related administrative services that the Company
will provide, we will pay to the Company, during the term of the Participation
Agreement, an annual fee of .18% of the assets invested in the then offered
portfolios of the Fund under the variable annuity contracts and
<PAGE> 2
variable life insurance policies sold by the Company (excluding all assets
invested during the guarantee (free look) periods available under the
contracts).
We acknowledge that the fund-related administrative services to be provided by
the Company are ones for which we, or our affiliates, as investment advisers and
administrators to the Fund, would otherwise bear the cost directly. Further, our
payments to the Company relate to cost savings resulting from administrative
services only and do not constitute payment in any manner for administrative
services provided by the Company to the separate accounts or to the variable
contracts, for investment advisory services or for costs of distribution of the
variable contracts or of shares of the portfolios, and that these payments are
not otherwise related to investment advisory or distribution services or
expenses.
Payment will be made on a quarterly basis during the month following the end of
each quarter.
If you agree to the foregoing, please sign the enclosed copy of this letter and
return it to Stefanie Chang at Morgan Stanley Asset Management Inc., 1221 Avenue
of the Americas, New York, New York 10020.
Sincerely,
Morgan Stanley Asset Management Inc.
By: /s/ Marna C. Whittington
-----------------------------------
Name: Marna Whittington
Title: Managing Director
Miller Anderson & Sherrerd, LLP
By: /s/ Marna C. Whittington
-----------------------------------
Name: Marna Whittington
Title: Authorized Signatory
AGREED
Kemper Investors Life Insurance Company
By: /s/ Otis R. Heldman
-----------------------------------
Name: Otis R. Heldman
Title: Marketing Officer
<PAGE> 1
Exhibit (8)(d)
SECOND AMENDMENT TO
PARTICIPATION AGREEMENT
Among
VARIABLE INSURANCE PRODUCTS FUND,
FIDELITY DISTRIBUTORS CORPORATION
and
KEMPER INVESTORS LIFE INSURANCE COMPANY
THIS SECOND AMENDMENT, made and entered into as of the 1st day
of August, 1998, is made a part of the PARTICIPATION AGREEMENT made and entered
into as of the 1st day of May, 1996, as previously amended by Amendment made and
entered into as of the 1st day of May, 1998 (hereinafter the "Agreement"), by
and among KEMPER INVESTORS LIFE INSURANCE COMPANY (hereinafter the "Company"),
an Illinois corporation, on its own behalf and on behalf of each segregated
asset account of the Company set forth on Schedule A hereto, as it may be
amended from time to time (each such account hereinafter referred to as the
"Account"), and the VARIABLE INSURANCE PRODUCTS FUND, an unincorporated business
trust organized under the laws of the Commonwealth of Massachusetts (hereinafter
the "Fund") and FIDELITY DISTRIBUTORS CORPORATION (hereinafter the
"Underwriter"), a Massachusetts corporation.
WHEREAS, the Fund is registered as an open-end management
investment company under the Investment Company Act of 1940, as amended
(hereinafter the "1940 Act") and its shares are registered under the Securities
Act of 1933, as amended (hereinafter the "1933 Act"); and
WHEREAS, the beneficial interest in the Fund is divided into
several series of shares, each representing the interest in a particular managed
portfolio of securities and other assets, any one or more of which may be made
available under the Agreement (each such series hereinafter referred to as a
"Portfolio"); and
WHEREAS, the Company has registered certain variable life
contracts under the 1933 Act; and
WHEREAS, the Company has organized a segregated asset account,
established by resolution of the Board of Directors of the Company, to set aside
and invest assets attributable to the aforesaid variable life contracts, and has
registered such Account as a unit investment trust under the 1940 Act; and
<PAGE> 2
WHEREAS, to the extent permitted by applicable insurance laws
and regulations, the Company intends to purchase shares in the Portfolios on
behalf of the Account to fund certain of the aforesaid variable life contracts
and the Underwriter is authorized to sell such shares to unit investment trusts
such as the Account at net asset value; and
WHEREAS, the Company, the Fund and the Underwriter desire
hereby to further amend the Agreement to effect such changes;
NOW, THEREFORE, in consideration of their mutual promises, the
Company, the Fund and the Underwriter hereby agree as follows:
1. Schedule A (As amended May 1, 1998) Separate Accounts and
Associated Contracts to the Agreement is hereby deleted in its entirety and
replaced with the attached new Schedule A (As amended August 1, 1998) Separate
Accounts and Associated Contracts.
2. Schedule C (As amended May 1, 1998) to the Agreement is
hereby deleted in its entirety and replaced with the attached new Schedule C (As
amended August 1, 1998).
3. Except as amended by this Second Amendment, all other
provisions, conditions and terms of the Agreement shall continue in full force
and effect.
IN WITNESS WHEREOF, each of the parties hereto has caused this
Second Amendment to be executed in its name and on its behalf by its duly
authorized representative and its seal to be hereunder affixed hereto as of the
date first specified above.
KEMPER INVESTORS LIFE INSURANCE COMPANY
By: /s/ Otis R. Heldman, Jr.
-----------------------------------------
Otis R. Heldman, Jr., Marketing Officer
[Signatures Continued on Next Page]
2
<PAGE> 3
VARIABLE INSURANCE PRODUCTS FUND
By: /s/ Robert C. Pozen
----------------------------------------
Robert C. Pozen, Senior Vice President
FIDELITY DISTRIBUTORS CORPORATION
By: /s/ Kevin J. Kelly
----------------------------------------
Kevin J. Kelly, Vice President
3
<PAGE> 4
Schedule A
(As amended August 1, 1998)
Separate Accounts and Associated Contracts
<TABLE>
<S> <C>
Name of Separate Account and Policy Form Numbers of Contracts Funded
Date Established by Board of Directors by Separate Account
KILICO Variable Annuity Separate Kemper Advantage III (Policy Form Series
Account (May 29, 1981) L-1000)
KILICO Variable Separate Account Kemper Power V (Policy Form Series
(January 22, 1987) S-6003)
KILICO Variable Separate Account - 2 First Foundation VLJL (Policy Form Series
(January 17, 1997) L-8161, L-8161CV, L-8162, L-8162CV)
</TABLE>
4
<PAGE> 5
SCHEDULE C
(As amended August 1, 1998)
Other investment companies currently available under variable annuities or
variable life insurance issued by the Company:
Kemper Advantage III
Investors Fund Series (formerly Kemper Investors Fund)
Kemper Money Market Portfolio
Kemper Total Return Portfolio
Kemper High Yield Portfolio
Kemper Growth Portfolio (formerly Equity Portfolio)
Kemper Government Securities Portfolio
Kemper International Portfolio
Kemper Small Cap Growth Portfolio (formerly Small Capitalization Equity
Portfolio)
Kemper Investment Grade Bond Portfolio
Kemper Small Cap Value Portfolio
Kemper Contrarian Value Portfolio (formerly Value Portfolio)
Kemper Horizon 5 Portfolio
Kemper Horizon 10+ Portfolio
Kemper Horizon 20 + Portfolio
Kemper Value & Growth Portfolio
Janus Aspen Series
Aggressive Growth Portfolio
Growth Portfolio
Worldwide Growth Portfolio
Balanced Portfolio
Short-Term Bond Portfolio
Lexington Natural Resources Trust
Lexington Emerging Markets Fund
Fidelity Insurance Products Fund II
Asset Manager Portfolio
Index 500 Portfolio
Contrafund Portfolio
5
<PAGE> 6
SCHEDULE C
(As amended August 1, 1998)
(Continued)
Kemper Power V
Investors Fund Series (formerly Kemper Investors Fund)
Kemper Money Market Portfolio Kemper Total Return Portfolio
Kemper High Yield Portfolio
Kemper Growth Portfolio
Kemper Government Securities Portfolio
Kemper International Portfolio
Kemper Small Cap Growth Portfolio
American Skandia Trust
Lord Abbett Growth and Income Portfolio
JanCap Growth Portfolio
T. Rowe Price International Equity Portfolio
T. Rowe Price Asset Allocation Portfolio
Founders Capital Appreciation Portfolio
INVESCO Equity Income Portfolio
PIMCO Total Return Bond Portfolio
PIMCO Limited Maturity Bond Portfolio
Neuberger & Berman Mid-Cap Growth Portfolio
Fidelity Variable Insurance Products Fund II
Contrafund Portfolio
Index 500 Portfolio
Fidelity Variable Insurance Products Fund III
Growth Opportunities Portfolio
Scudder Variable Life Investment Fund
International (B-Shares) Portfolio
Growth and Income (B-Shares) Portfolio
6
<PAGE> 7
SCHEDULE C
(As amended August 1, 1998)
(Continued)
First Foundation VUL
Evergreen Variable Annuity Trust
Evergreen VA Fund
Evergreen VA Growth and Income Fund
Evergreen VA Foundation Fund
Evergreen VA Global Leaders Fund
Evergreen VA Strategic Income Fund
Evergreen VA Aggressive Growth Fund
Evergreen VA Small Cap Equity Income Fund
Evergreen VA International Growth Fund
Goldman Sachs Variable Insurance Trust
Goldman Sachs International Equity Fund
Goldman Sachs Global Income Fund
Morgan Stanley Universal Funds, Inc.
Morgan Stanley High Yield Portfolio
Morgan Stanley U.S. Real Estate Portfolio
Fidelity Variable Insurance Products Fund II
Contrafund Portfolio
Index 500 Portfolio
fidamend
7
<PAGE> 1
EXHIBIT (8)(e)
SECOND AMENDMENT TO
PARTICIPATION AGREEMENT
Among
VARIABLE INSURANCE PRODUCTS FUND II,
FIDELITY DISTRIBUTORS CORPORATION
and
KEMPER INVESTORS LIFE INSURANCE COMPANY
THIS SECOND AMENDMENT, made and entered into as of the 1st day of
August, 1998, is made a part of the PARTICIPATION AGREEMENT made and entered
into as of the 1st day of May, 1996, as previously amended by Amendment made and
entered into as of the 1st day of May, 1998 (hereinafter the "Agreement"), by
and among KEMPER INVESTORS LIFE INSURANCE COMPANY (hereinafter the "Company"),
an Illinois corporation, on its own behalf and on behalf of each segregated
asset account of the Company set forth on Schedule A hereto, as it may be
amended from time to time (each such account hereinafter referred to as the
"Account"), and the VARIABLE INSURANCE PRODUCTS FUND II, an unincorporated
business trust organized under the laws of the Commonwealth of Massachusetts
(hereinafter the "Fund") and FIDELITY DISTRIBUTORS CORPORATION (hereinafter the
"Underwriter"), a Massachusetts corporation.
WHEREAS, the Fund is registered as an open-end management investment
company under the Investment Company Act of 1940, as amended (hereinafter the
"1940 Act") and its shares are registered under the Securities Act of 1933, as
amended (hereinafter the "1933 Act"); and
WHEREAS, the beneficial interest in the Fund is divided into several
series of shares, each representing the interest in a particular managed
portfolio of securities and other assets, any one or more of which may be made
available under the Agreement (each such series hereinafter referred to as a
"Portfolio"); and
WHEREAS, the Company has registered certain variable life contracts
under the 1933 Act; and
WHEREAS, the Company has organized a segregated asset account,
established by resolution of the Board of Directors of the Company, to set aside
and invest assets attributable to the aforesaid variable life contracts, and has
registered such Account as a unit investment trust under the 1940 Act; and
<PAGE> 2
WHEREAS, to the extent permitted by applicable insurance laws aid
regulations, the Company intends to purchase shares in the Portfolios on behalf
of the Account to fund certain of the aforesaid variable life contracts and the
Underwriter is authorized to sell such shares to unit investment trusts such as
the Account at net asset value; and
WHEREAS, the Company, the Fund and the Underwriter desire hereby to
further amend the Agreement to effect such changes;
NOW, THEREFORE, in consideration of their mutual promises, the Company,
the Fund and the Underwriter hereby agree as follows:
1. Schedule A (As amended May 1, 1998) Separate Accounts and Associated
Contracts to the Agreement is hereby deleted in its entirety and replaced with
the attached new Schedule A (As amended August 1, 1998) Separate Accounts and
Associated Contracts.
2. Schedule C (As amended May 1, 1998) to the Agreement is hereby
deleted in its entirety and replaced with the attached new Schedule C (As
amended August 1, 1998).
3. Except as amended by this Second Amendment, all other provisions,
conditions and terms of the Agreement shall continue in full force and effect.
IN WITNESS WHEREOF, each of the parties hereto has caused this Second
Amendment to be executed in its name and on its behalf by its duly authorized
representative and its seal to be hereunder affixed hereto as of the date first
specified above.
KEMPER INVESTORS LIFE INSURANCE COMPANY
By: /s/ Otis R. Heldman, Jr.
----------------------------------------------
Otis R. Heldman, Jr., Marketing Officer
[Signatures Continued on Next Page]
2
<PAGE> 3
VARIABLE INSURANCE PRODUCTS FUND II
By: /s/ Robert C. Pozen
-------------------------------------------------
Robert C. Pozen, Senior Vice President
FIDELITY DISTRIBUTORS CORPORATION
By: /s/ Kevin J. Kelly
-------------------------------------------------
Kevin J. Kelly, Vice President
3
<PAGE> 4
Schedule A
(As amended August 1, 1998)
Separate Accounts and Associated Contracts
<TABLE>
<S> <C>
Name of Separate Account and Policy Form Numbers of Contracts Funded
Date Established by Board of Directors by Separate Account
KILICO Variable Annuity Separate Kemper Advantage III (Policy Form Series
Account (May 29, 1981) L- 1000)
KILICO Variable Separate Account Kemper Power V (Policy Form Series
(January 22, 1987) S-6003)
KILICO Variable Separate Account - 2 First Foundation VUL (Policy Form Series
(January 17, 1997) L-8161, L-8161CV, L-8162, L-8162CV)
</TABLE>
4
<PAGE> 5
SCHEDULE C
(As amended August 1, 1998)
Other investment companies currently available under variable annuities or
variable life insurance issued by the Company:
Kemper Advantage III
Investors Fund Series (formerly Kemper Investors Fund)
Kemper Money Market Portfolio
Kemper Total Return Portfolio
Kemper High Yield Portfolio
Kemper Growth Portfolio (formerly Equity Portfolio)
Kemper Government Securities Portfolio
Kemper International Portfolio
Kemper Small Cap Growth Portfolio (formerly Small Capitalization Equity
Portfolio)
Kemper Investment Grade Bond Portfolio
Kemper Small Cap Value Portfolio
Kemper Contrarian Value Portfolio (formerly Value Portfolio)
Kemper Horizon 5 Portfolio
Kemper Horizon 10+ Portfolio
Kemper Horizon 20 + Portfolio
Kemper Value & Growth Portfolio
Janus Aspen Series
Aggressive Growth Portfolio
Growth Portfolio
Worldwide Growth Portfolio
Balanced Portfolio
Short-Term Bond Portfolio
Lexington Natural Resources Trust
Lexington Emerging Markets Fund
Fidelity Insurance Products Fund
Equity-Income Portfolio
Growth Portfolio
5
<PAGE> 6
SCHEDULE C
(As amended August 1, 1998)
(Continued)
Kemper Power V
Investors Fund Series (formerly Kemper Investors Fund)
Kemper Money Market Portfolio
Kemper Total Return Portfolio
Kemper High Yield Portfolio
Kemper Growth Portfolio
Kemper Government Securities Portfolio
Kemper International Portfolio
Kemper Small Cap Growth Portfolio
American Skandia Trust
Lord Abbett Growth and Income Portfolio
JanCap Growth Portfolio
T. Rowe Price International Equity Portfolio
T. Rowe Price Asset Allocation Portfolio
Founders Capital Appreciation Portfolio
INVESCO Equity Income Portfolio
PIMCO Total Return Bond Portfolio
PIMCO Limited Maturity Bond Portfolio
Neuberger & Berman Mid-Cap Growth Portfolio
Fidelity Variable Insurance Products Fund
Equity-Income Portfolio
High Income Portfolio
Fidelity Variable Insurance Products Fund III
Growth Opportunities Portfolio
Scudder Variable Life Investment Fund
International (B-Shares) Portfolio
Growth and Income (B-Shares) Portfolio
6
<PAGE> 7
SCHEDULE C
(As amended August 1, 1998)
(Continued)
First Foundation VUL
Evergreen Variable Annuity Trust
Evergreen VA Fund
Evergreen VA Growth and Income Fund
Evergreen VA Foundation Fund
Evergreen VA Global Leaders Fund
Evergreen VA Strategic Income Fund
Evergreen VA Aggressive Growth Fund
Evergreen VA Small Cap Equity Income Fund
Evergreen VA International Growth Fund
Goldman Sachs Variable Insurance Trust
Goldman Sachs International Equity Fund
Goldman Sachs Global Income Fund
Morgan Stanley Universal Funds, Inc.
Morgan Stanley High Yield Portfolio
Morgan Stanley U.S. Real Estate Portfolio
Fidelity Variable Insurance Products Fund
Money Market Portfolio
Overseas Portfolio
7
<PAGE> 1
EXHIBIT (8)(f)
ADMINISTRATIVE SERVICES AGREEMENT
Administrative Services Agreement, dated as of October 1, 1998, by and between
Kemper Investors Life Insurance Company, an Illinois insurance company (together
with its successors and permitted assigns, the "Company") and Life Insurance
Solutions, L.L.C., a Delaware limited liability company (together with its
successors and permitted assigns, the "Administrator").
WHEREAS, the Company is the issuer of the life insurance and annuity products
identified on Schedules A, B, and C to the Agreement (the "Policy or Policies")
as such Schedules may be amended from time to time; and
WHEREAS, the Company and the Administrator desire to enter into this Agreement
whereby the Administrator agrees to perform administrative services in
connection with the Policy, as specified herein.
NOW, THEREFORE, in consideration of these premises, the parties hereto mutually
agree as follows:
SECTION 1 - RESPONSIBILITY
The Company hereby appoints and designates the Administrator to be the
administrator of the Policies.
The Administrator hereby agrees to assume responsibility for the performance of
"administrative services," as hereinafter described.
SECTION 2 - ADMINISTRATIVE SERVICES
The term "administrative services" as used in this Agreement shall mean the
performance by the Administrator of the following functions:
1. Billing - The Administrator shall prepare all premium statements and
distribute them to each owner of a Policy ("policyholder").
2. Reports - The Administrator shall furnish to the Company premium reports,
including information as to covered employees, additions to and
terminations of coverage, total gross premium billed, full and partial
surrenders, loans, as well as any other information about the Policy or the
policyholder the Company may reasonably request, including, but not limited
to, the timely provision of information necessary to permit the Company to
determine the payments required to be made pursuant to paragraph 8 of
Section 3 hereof. The Administrator shall furnish to the Company all
information and reports necessary to enable compliance with Internal
Revenue Code Section 7702 and Section 7702A and with any other tax
reporting obligations the Company might have relating to the Policies. The
<PAGE> 2
Company shall have the sole and exclusive right to interpret the Internal
Revenue Code and determine its tax and other liabilities and
responsibilities thereunder.
3. Policyholder Communications and Other Services - The Administrator shall
prepare statements for policyholders showing account values and other
transactions, including surrenders. Such statements shall be furnished
annually to each policyholder or more often as such policyholder may
reasonably request. The Administrator shall perform such other services
customarily associated with insurance policy administration, including but
not limited to processing changes in the amount of insurance, and
communication with the policyholder.
4. Office and Supplies - The Administrator shall maintain, at its own expense,
an office and the Company will provide the necessary supplies of forms for
the administration of the Policy.
5. Reports - Any forms or reports developed by the Administrator for the
administration of the Policy for distribution to policyholders must be
approved by the Company prior to use.
6. Reserve Calculations - The Administrator shall perform all calculations of
reserves in connection with the Policy and shall furnish reserve
information to the Company at such times requested by the Company and in
such format agreed to by the Company and the Administrator.
7. Loans and Surrenders - The Administrator shall process all requests for
loans and full and partial surrenders under the Policy.
8. Additional Services - The Administrator shall also provide those services,
with respect to a Policy, described in Schedule E to the Agreement as such
Schedule may be amended from time to time by the parties.
The Company agrees to provide the Administrator with such information and
materials as the Administrator may reasonably request in connection with the
performance of the Administrator's performance of its obligations hereunder.
SECTION 3 - GENERAL PROVISIONS
1. Standard of Care - The Administrator agrees to perform, in a timely manner
consistent with reasonable industry practice, faithfully and in accordance
with applicable law, the duties as set forth herein. The Administrator
represents that it meets all applicable requirements to enter into this
agreement including any required state licenses and agrees to take such
action as may be required under any applicable law to perform its
obligations under this agreement. In performing the services set forth
herein, the Administrator shall direct its efforts towards advancing the
business and interests of the Company to the best of its ability. The
Administrator may delegate any or all of the obligations that the
<PAGE> 3
Administrator is required to perform hereunder; provided, that the
Administrator remains obligated to perform such services; and provided,
further, that the Administrator has received the prior written consent of
the Company (which consent shall not be unreasonably withheld or delayed).
2. Indemnification - The Administrator agrees to indemnify the Company and
hold the Company harmless from any and all losses, damages, and expenses,
including reasonable legal fees and expenses, which the Company may incur
as a result of or arising out of any acts or omissions, whether dishonest,
fraudulent, criminal or negligent, of the Administrator or its employees,
or any party with which the Administrator may contract for the performance
of services hereunder, acting alone or in collusion with others.
The Company agrees to indemnify the Administrator and hold the
Administrator harmless from any and all losses, damages, and expenses,
including reasonable legal fees and expenses, which the Administrator may
incur as a result of or arising out of any acts or omissions, whether
dishonest, fraudulent, criminal or negligent, of the Company or its
employees, acting alone or in collusion with others.
The Administrator shall maintain in effect an errors and omissions
liability policy in the amount of no less than $1,000,000 per occurrence,
$3,000,000 annual aggregate limit, providing for indemnification of the
Company to cover any loss arising as a result of any real or alleged
dishonest, fraudulent or negligent conduct on the part of the
Administrator's officers, agents or employees in any aspect of the
performance of the Administrator's services under this Agreement. The
Administrator shall cause the issuer of said policy to name the Company as
a loss payee under such policy and to deliver to the Company evidence of
the existence of such policy. The Administrator shall also cause the issuer
to give 30 days' written notice prior to the cancellation of or any
material change in the policy.
3. Termination - This Agreement shall become effective as of the date it has
been duly executed by all parties and shall continue in effect until
terminated pursuant to paragraph a or b below.
a. This Agreement may be terminated by the Company or the Administrator
by giving written notice to the other at least ninety days prior to
the termination date, provided that, in the event of a termination by
the Administrator pursuant to this sentence, the Company shall have
the right in its sole discretion to extend the term of this Agreement
for up to an additional 270 days (i.e., so that this Agreement would
not be terminated on less than 360 days prior written notice by the
Administrator).
b. Notwithstanding any other provision herein to the contrary, this
Agreement may be terminated immediately by the Company for any of the
following reasons:
<PAGE> 4
i. The Administrator fails to perform any of its obligations under
Section 2 of this Agreement which failure to perform shall continue
without cure for not less than 30 days following the Administrator's
receipt of written notice from the Company of the Administrator's
failure to perform; or
ii. The occurrence of an event described in Section 14 of this
Agreement.
Notwithstanding any other provision herein to the contrary, this
Agreement may be terminated by the Administrator if the Company fails
to make a payment required to be made by this Agreement to the
Administrator and such failure has not been cured within 30 days after
notice (specifying that it is a notice of termination being given
pursuant to this Section 3b) has been sent by the Administrator to the
Company, provided that with respect to this paragraph of Section 3b,
written notice is given in the manner provided in Section 20 below,
and, additionally concurrent telephone confirmation of such notice is
given personally directly to any of Debra Rezabek, Frank Julian or
James Hohmann.
c. Upon termination of this Agreement for any reason, the Administrator
agrees that for a period of five years from the date of termination,
neither it nor any of its affiliates will (i) take any action designed
or calculated to result in the transfer or exchange of Policies or
(ii) provide administrative services or otherwise use or offer its
systems for use in administering policies issued by an insurance
company other than the Company where the cash values of such policies
are the result of transfers or exchanges from a Series I Private
Placement Variable Life Insurance Policy issued by the Company and
listed on Schedule A that (x) is administered under this Agreement and
(y) has total premiums that are expected to be paid over a five-year
pay-in period for such Policy equal to or greater than $250,000,000.
4. Independent Contractor - The execution of this Agreement does not serve to
indicate any relationship of employer and employee between the Company and
the Administrator, and it is understood that the Administrator is an
independent contractor.
5. Delivery to Policyholder - Any policies, certificates, booklets,
termination notices or other written communications delivered by the
Company to the Administrator for delivery to the policyholder, shall be
delivered by the Administrator, at the Company's expense, promptly after
receipt of instructions from the Company to do so.
6. Legal or Administrative Proceedings - If any notice of the commencement of
any legal proceeding involving any policyholder is received by the
Administrator, or if it receives any communication from any Insurance
Department or other administrative agency or any other person identifying a
complaint by a policyholder or calling a hearing involving any Company
insuring practice, the Administrator shall immediately thereafter forward
any correspondence or necessary files to the Company's Home Office for
handling by the Company.
<PAGE> 5
7. Records - The Administrator shall hold and possess, as the property of the
Company, all papers, books, files, correspondence, and records of all kinds
which at any time shall come into its possession or under its control
relating to transactions by or for the Company. Such records will be
maintained during the duration of this Agreement and six years thereafter.
Upon termination of this Agreement or upon prior request, the Administrator
shall surrender this property to the Company or its designee provided the
Company is the underwriter on such date. If this Agreement is terminated
because the Company is replaced as the underwriter with respect to all
Policies, then all such property (except that relating to the payment of
claims which shall remain the property of the Company) shall inure to the
new underwriter at no charge by the Company; however, the Company will have
access to such property to the extent needed to fulfill its contractual
obligations and any other legal obligations which may arise.
Notwithstanding the foregoing, the Administrator shall have the right to
retain copies of all papers, books, files, correspondence and records of
all kinds relating to this Agreement upon termination of this Agreement for
any reason.
8. Compensation - The Company will pay the Administrator the fees set out in
Schedule D. The Company and the Administrator may by mutual consent add,
delete, or change the fees shown in Schedule D from time to time. The
provisions contained in this Agreement shall survive termination of this
Agreement.
9. Policy Amendment - The Administrator shall have no authority to alter or
amend the Policy, nor to modify, waive or extend any of its provisions.
10. Advertising, Etc. - It is expressly agreed that the Administrator shall
have no authority to prepare or distribute any advertising, promotional or
descriptive material relating to the Policy without first obtaining the
Company's written approval of same. The Administrator shall not use the
Company name, trademarks, logo or the name of the affiliated company in any
way or manner not specifically authorized in writing by the Company.
11. Furnishing Information: Audit, Etc.
a. Administrator shall furnish the Company with all reasonably requested
information regarding any and all matters or transactions or
activities pertaining to the Policy. The Administrator shall furnish
such information, including information requested for financial
reporting purposes, at such times requested by the Company, and in a
format mutually agreed upon. The Company shall have the right to
inspect any documents, books and records of the Administrator
pertaining to the Policy or any activities of the Administrator in
connection therewith. Any right on the part of the Company to have
access to the offices of the Administrator or to inspect, audit or
photocopy any of the Administrator's documents, books or records shall
be
<PAGE> 6
subject to reasonable advance notice, shall be conducted during the
Administrator's normal business hours in a manner which will not
unreasonably interfere with the Administrator's conduct of its
business and shall be conducted at the sole expense of the Company.
b. The Administrator shall provide access and cooperation to duly
authorized representatives of the Company and Insurance Department
representatives (and representatives of other regulatory authorities),
for the purpose of conducting examinations or audits of its books and
accounts necessary to comply with applicable law, and the
Administrator shall make full disclosure, without reservation of any
kind, necessary to enable the Company to determine fully whether the
Administrator is faithfully performing its obligations under this
Agreement. Any right on the part of the Company to have access to the
offices of the Administrator or to inspect, audit or photocopy any of
the Administrator's books or records shall be subject to reasonable
advance notice, shall be conducted during the Administrator's normal
business hours in a manner which will not unreasonably interfere with
the Administrator's conduct of its business and shall be conducted at
the sole expense of the Company.
c. The Company shall have the right to conduct the periodic audits
referred to in paragraphs 11(a) and 11(b) above at the Company's
office or at the office of the Administrator. If the Company chooses
to conduct an audit at its own offices, the Administrator shall
immediately ship copies of all records required to be provided under
paragraphs 11(a) or 11(b) above to the designated Company office at
the sole expense of the Company. Any right on the part of the Company
to conduct periodic audits at the offices of the Administrator shall
be subject to reasonable advance notice, shall be conducted during the
Administrator's normal business hours in a manner which will not
unreasonably interfere with the Administrator's conduct of its
business and shall be conducted at the sole expense of the Company.
12. Assignment - The Administrator shall not assign any of its administrative
functions, duties, or responsibilities without the prior written approval
of the Company or to an affiliate of the Administrator. The Company shall
have the right to refuse approval for any reason whatsoever at its sole
discretion. Notwithstanding the foregoing, the Administrator may delegate
any or all of the obligations that the Administrator is required to perform
hereunder; provided that the Administrator remains obligated to perform
such services; ; and provided, further, that the Administrator has received
the prior written consent of the Company (which consent shall not be
unreasonably withheld or delayed). The Company may not assign this
Agreement or any of its rights or obligations hereunder without the prior
written consent of the Administrator.
13. No Other Agreements - The Administrator shall have no authority to make any
agreement binding upon the Company, except as otherwise provided in this
Agreement, with respect to the Policy or premiums payable thereon unless
previously agreed upon in advance and in writing between the Administrator
and the Company.
<PAGE> 7
14. Insolvency, Etc. - In the event the Administrator shall become insolvent,
make a general assignment for the benefit of creditors, or if any
proceeding of any nature under the Federal Bankruptcy Act, as amended, or
under any state insolvency statute, be commenced by or against the
Administrator (or one of its joint ventures) or if a receiver be appointed
therefore, and such proceeding remains in effect and unstayed for a period
of not less than 90 days, the Administrator shall immediately notify the
Company pursuant to Section 20 hereof, and upon the request of the Company:
a. cease and desist all administrative services provided for herein;
b. promptly relinquish and turn over to the Company all records as may be
requested by the Company; and,
c. provide to the Company whatever additional information or assistance
may be requested by the Company.
15. Arbitration: Submission to Jurisdiction - Any dispute arising out of or
relating to this Agreement or the breach, termination or validity hereof
shall be settled by arbitration before one arbitrator in Chicago, Illinois
in accordance with the commercial arbitration rules then in effect of the
American Arbitration Association. The parties hereby consent and submit to
the personal jurisdiction of any federal court sitting in Chicago, Illinois
and of any Illinois State court of competent jurisdiction sitting in
Chicago, Illinois in any suit, action or proceeding in connection with
arbitration arising out of or relating to this Agreement. The award entered
by the arbitrator shall be final and binding on all parties to arbitration.
Each party shall bear its respective arbitration expenses and each shall
pay its pro rata portion based on the number of parties participating in
such arbitration of the arbitrator's charges and expenses. The arbitrator
shall not award punitive, exemplary or consequential damages.
Notwithstanding the foregoing, this agreement to arbitrate shall not bar
any party hereto from seeking temporary or provisional remedies in any
court having jurisdiction thereof.
16. Headings - The headings and captions in this Agreement are inserted for
convenience only and shall not be considered in the construction of any
provisions.
17. Entire Contract - This Agreement, and any related confidentiality
agreements, constitutes the entire contract between the parties hereto with
respect to the subject matter hereof. Any amendment or modification of this
Agreement, including any Schedule hereto, will not be effective unless made
in writing and signed by the parties hereto.
18. Governing Law - This Agreement shall be construed and enforced according to
the laws of the State of Illinois.
19. Miscellaneous - This Agreement shall be binding upon the Company and the
Administrator, and inure to the benefit of the parties hereto and their
respective successors
<PAGE> 8
and permitted assigns. This Agreement may be executed simultaneously in two
or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument. No failure or
delay in exercising any right, power or privilege hereunder will operate as
a waiver thereof, nor will any single or partial exercise thereof preclude
any other further exercise thereof or the exercise of any right, power or
privilege hereunder.
20. Notices - All notices and other communications hereunder shall be in
writing and shall be sent by registered or certified mail, return receipt
requested, posted prepaid, by hand delivery or by telecopier, as follows:
If to Company: Kemper Investors Life Insurance Company
1 Kemper Drive
Long Grove, IL 60049
Attention: General Counsel
Telecopier No: 847.969.3529
If to Administrator: Life Insurance Solutions, L.L.C.
One Chase Manhattan Plaza
New York, NY 10005
Attention: Michael Hartnett
Telecopier No.: 212.859.2671
or to such other person or address as any party shall specify by like
notice to each of the other parties. All such notices and communications
shall be deemed to have been duly given or made (i) when delivered by hand,
(ii) when mailed, five business days after being deposited in the mail,
postage prepaid and (iii) when telecopied, receipt acknowledged.
21. Limitations on Authority - Except as directed by the Company, the
Administrator is not authorized to and shall not establish or adjust the
level of any discretionary deductions such as cost of insurance charges or
the build-up of amounts such as claim stabilization reserve levels.
IN WITNESS WHEREOF, this Agreement has been duly executed by an authorized
representative of each of the parties hereto, on the dates indicated below.
LIFE INSURANCE SOLUTIONS, LLC KEMPER INVESTORS LIFE
INSURANCE COMPANY
By: /s/ Michael J. Hartnett By: /s/ James E. Hohmann
------------------------------ -------------------------------
Name: Michael J. Hartnett Name: James E. Hohmann
Title: Chief Operating Officer Title: Sr. Vice President
Date: 11/30/98 Date: 11/24/98
------------------------- --------------------------
<PAGE> 9
SCHEDULE E
ADMINISTRATIVE SERVICES
SERVICES
Loading all appropriate parameters to establish the Policies in the
Administrator's environment.
Implementation of the premium collection process as directed by the Company in
writing.
Implementation of accounting as directed by the Company in writing, including
the establishment of a chart of accounts as submitted by the Company, Company
specific accounting procedures and necessary reports and data files.
Implementation and development of appropriate and mutually agreed upon
management reporting.
Development and documentation of mutually agreed upon Company specific
administrative procedures and service levels.
Collections of Premiums. All premiums shall be deposited into a Company owned
and controlled lockbox or wire transferred to the Company's designated account.
Any premiums that are received directly by the Administrator shall be deposited
into such lockbox or wire transferred to the Company's designated account on a
daily basis. The deposit information and accompanying data respecting such
lockbox shall be delivered by the bank to the Administrator. Upon receipt of
this data, the Administrator shall balance the collections to the bank deposit
record and enter such data into the administrative system as credited to the
policyholder's policy.
Lapse Notices. The administrator shall be responsible for generating and mailing
lapse warnings and notices for applicable life insurance policies.
Policyholder Services. In accordance with Company procedures, the Administrator
shall answer routine policyholder and agent questions to support the client
service "800" number. Additionally, the Administrator shall respond to written
inquiries regarding particular policies.
Requests for address changes, beneficiary changes, title changes, assignments
and policy changes shall be processed by the Administrator using Company forms
and letters to confirm completion of requests.
Requests for policy disbursements, death benefit claims, medical waiver claims
and accelerated death benefit claims, shall be processed and forwarded to the
Company by the Administrator. These include cancellations and free-look
surrenders.
<PAGE> 10
Requests for fund transfers shall be processed by the Administrator. This
includes, but is not limited to adhoc requests as well as regularly scheduled
transfers such as dollar-cost-averaging, Automatic Portfolio Rebalancing and
End-of-Free-look period transfers.
New Business Issue. The Administrator shall be responsible for entering the
applicable information into the administration system, including the correct
mortality and expense charges applicable to a policy, and assembling and
forwarding the policies. For any Policies designated by the Company, the
Administrator shall be responsible for preparing and printing policies but shall
not use or modify the policy forms without prior Company approval.
Delivery receipts. The Administrator shall send one (1) follow up letter and
then send to the Company's Home Office for disposition if the receipt is not
obtained.
Underwriting Requirements. Follow-up for outstanding underwriting requirements
is the responsibility of the Administrator. All case requirements must be
received by the Company within 75 days of pre-application submission, otherwise
the case will be closed.
Reinsurance Administration. The Administrator shall be responsible for
maintaining adequate records and providing reports as may be required under
reinsurance agreements related to the Policies and requested by the Company. The
Company shall advise the Administrator of the reinsurance administration
requirements for which the Administrator shall be responsible.
Record Keeping. The Administrator shall maintain a complete policy file on
record, either in the form of a paper file or microfiche. The Administrator
shall provide Company with copies of each policy file on paper on a mutually
agreed upon schedule. All originals are to be forwarded to Company on a mutually
agreed upon schedule.
All production cycles, which include accounting reports, quarterly and annual
statements, and confirmation statements shall be maintained by the
Administrator.
Accounting. Administrator's basic account support for the Company includes:
- Setting up one (1) chart of accounts, as submitted by the Company;
- Balancing the daily cycles for completeness and accuracy;
- Receiving NAVs from each fund company or investment manager;
- Preparing and transmitting trade purchase and redemption reports
and daily activity reports to each fund company and investment
manager for the Company; and
- Preparing/posting M&E daily from the trade system.
<PAGE> 11
Report Production: The Administrator shall produce the following periodic
reports daily with respect to the prior period's activities:
Purchase/Redemption. This daily report displays amounts or units to be
traded by each fund company. This report must be received by the
Company by 8:30 A.M. CST to trade at previous day closing NAV.
Distribution Report. This daily report displays all payment
transactions. This report needs to be received by 12:00 Noon CST.
Accounting Report. This daily transactional report produces the
accounting for that cycle.
Telephone Report. This quarterly report shows information about calls
received on the client service 800#. It includes but is not limited to
the number of calls received, queue times, abandon rate and call times.
New Business. This monthly report lists policies awaiting initial
premium. In addition to the company, policy number and policy effective
date, the expected premium is also reported. Expected premium is the
schedule billed premium, not necessarily the balance of the initial
premium not yet received.
Paid New Business. This monthly report lists policies that changed from
pending initial premium to active status during the reporting period.
Sales Activity by Product/Plan/LOB. This monthly report details the
sales activity by product, plan and line of business.
Reserves. This monthly report generates a reserve extract file and
report containing detailed reserve calculations on all products.
Premium and Premium Tax Report by State.
Death Report. This monthly report displays information on all death
claims.
Monthly Reinsurance Report and Extract.
<PAGE> 1
EXHIBIT 7.
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors of
Kemper Investors Life Insurance Company and
Contract Owners of KILICO Flexible Premium Variable Life Insurance Policy
(Individual Life and Survivorship)-KILICO Variable Separate Account-2
We consent to the inclusion in this registration statement on Form S-6 (File
No. 333-35159) of our report dated March 12, 1999, 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 29, 1999
<PAGE> 1
EXHIBIT 8.
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Kemper Investors Life Insurance Company
We consent to the use of our report included herein on the consolidated
financial statements and financial statement schedules of Kemper Investors Life
Insurance Company and to the reference to our firm under the heading "Experts"
in the prospectus.
KPMG LLP
Chicago, Illinois
April 29, 1999
