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PROSPECTUS--MAY 1, 1999
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FLEXIBLE PREMIUM VARIABLE
LIFE INSURANCE POLICY
(INDIVIDUAL LIFE AND SURVIVORSHIP)
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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.
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TABLE OF CONTENTS
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<TABLE>
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PAGE
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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
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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.
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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.
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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.
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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.
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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.")
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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 ADJUSTED MORTALITY AND EXPENSE
PREMIUMS 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>
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(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 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.
(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.")
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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>
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(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.
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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.
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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.
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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
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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
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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.
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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.
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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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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>
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<PAGE> 18
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
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<PAGE> 19
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
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<PAGE> 20
(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> 21
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
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<PAGE> 22
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> 23
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.")
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<PAGE> 24
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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<PAGE> 25
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> 26
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
26
<PAGE> 27
- 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> 28
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.
28
<PAGE> 29
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
29
<PAGE> 30
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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<PAGE> 31
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> 32
<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> 33
<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> 34
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> 35
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> 36
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> 37
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> 38
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> 39
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> 40
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> 41
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> 42
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> 43
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> 44
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> 45
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> 46
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> 47
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> 48
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> 49
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> 50
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> 51
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> 52
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> 53
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> 54
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> 55
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> 56
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> 57
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> 58
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> 59
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> 60
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> 61
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
