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PROSPECTUS--MAY 1, 2000
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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 Flexible Premium Variable Life Insurance
Policies ("Policies") offered by Kemper Investors Life Insurance Company ("we"
or "KILICO"). 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.
You have 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 Omega Fund (formerly Evergreen VA Aggressive Growth Fund)
- Evergreen VA Small Cap Value 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
- - THE UNIVERSAL INSTITUTIONAL FUNDS, INC. (FORMERLY MORGAN STANLEY DEAN WITTER
UNIVERSAL FUNDS, INC.) ("UNIVERSAL INSTITUTIONAL FUNDS")
- Universal Institutional Funds High Yield Portfolio
- Universal Institutional Funds U.S. Real Estate Portfolio
- - FIDELITY VARIABLE INSURANCE PRODUCTS FUND ("VIP") (INITIAL CLASS)
- Fidelity VIP Money Market Portfolio
- Fidelity VIP Overseas Portfolio
- - FIDELITY VARIABLE INSURANCE PRODUCTS FUND II ("VIP II") (INITIAL CLASS)
- Fidelity VIP II Contrafund Portfolio(R)
- Fidelity 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.
You may choose from two Death Benefit options. You may also choose 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.
You may cancel the Policy and receive a refund during the Free-Look Period.
If you already own a flexible premium variable life insurance policy, it
may not be advantageous to buy additional insurance or to replace your policy
with the Policy described in this Prospectus.
THIS PROSPECTUS MUST BE ACCOMPANIED OR PRECEDED BY A CURRENT
PROSPECTUS FOR THE AVAILABLE UNDERLYING PORTFOLIOS. YOU SHOULD READ
AND RETAIN ALL PROSPECTUSES FOR FUTURE REFERENCE.
YOU CAN FIND THIS PROSPECTUS AND OTHER INFORMATION ABOUT THE SEPARATE
ACCOUNT REQUIRED TO BE FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION (SEC) AT THE SEC'S WEB SITE AT HTTP://WWW.SEC.GOV.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED
THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
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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<S> <C>
DEFINITIONS................................................. 3
SUMMARY..................................................... 5
KILICO AND THE SEPARATE ACCOUNT............................. 10
THE FUNDS................................................... 10
FIXED ACCOUNT OPTION........................................ 12
THE POLICY.................................................. 13
POLICY BENEFITS AND RIGHTS.................................. 15
CHARGES AND DEDUCTIONS...................................... 21
GENERAL PROVISIONS.......................................... 23
DOLLAR COST AVERAGING....................................... 25
SYSTEMATIC WITHDRAWAL PLAN.................................. 26
DISTRIBUTION OF POLICIES.................................... 26
FEDERAL TAX MATTERS......................................... 27
LEGAL CONSIDERATIONS........................................ 30
SAFEKEEPING OF THE SEPARATE ACCOUNT'S ASSETS................ 30
VOTING INTERESTS............................................ 30
STATE REGULATION OF KILICO.................................. 30
KILICO'S DIRECTORS AND OFFICERS............................. 31
LEGAL MATTERS............................................... 33
LEGAL PROCEEDINGS........................................... 33
EXPERTS..................................................... 33
REGISTRATION STATEMENT...................................... 33
FINANCIAL STATEMENTS........................................ 33
APPENDIX A--TABLE OF DEATH BENEFIT FACTORS.................. A-1
</TABLE>
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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 us.
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 you may cancel the Policy and receive a
refund. This time depends on the state where the Policy is issued; however, it
will be at least 10 days from the date you receive the Policy.
FUNDS--The underlying mutual funds in which the Subaccounts of the Separate
Account invest.
GENERAL ACCOUNT--The assets of KILICO other than those allocated to the
Separate Account or any other separate account.
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, if
the Policy is a Survivorship Policy, the younger 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 ("YOU", "YOUR", "YOURS")--The person designated on the application
who may exercise all rights and privileges under the Policy.
PLANNED PREMIUM--The scheduled premium you specify in the application.
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
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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 you have borrowed as a
loan. You 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 you and used to calculate the Death
Benefit. The Specified Amount is shown in the Policy Specifications.
SUBACCOUNT--A subdivision of the Separate Account.
SURRENDER VALUE--Cash Value 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 your
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.
You pay a premium for life insurance coverage on the Insured(s). Generally,
you may choose the amount and frequency of premium payments. The Policy provides
for a Surrender Value which is payable if the Policy is terminated during an
Insured's lifetime. The Death Benefit and Cash Value of the Policy may increase
or decrease to reflect investment experience.
Cash Value is not guaranteed. If the Surrender Value is insufficient to pay
Policy charges, the Policy will lapse unless an additional premium payment or
loan repayment is made. (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. If the Policy is treated as a modified endowment contract,
certain distributions will be included in your 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. You bear the entire
investment risk on amounts allocated to the Separate Account. We do not
guarantee Separate Account Value. (See "Policy Benefits and Rights--Cash
Value.")
You 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. You 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
you request 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
Cash Value multiplied by the appropriate factor specified in Appendix A. 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. You specify a
Planned Premium on the application. However, you are not required to make the
Planned Premiums and, subject to certain restrictions, may make premium payments
in any amount and at any frequency. The amount, frequency, and period of time
over which you pay premiums affects whether the Policy will be classified as a
modified endowment contract. The minimum monthly premium payment is $50. Other
minimums apply for other payment modes.
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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. You indicate 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, The Universal Institutional Funds, Inc. (formerly Morgan
Stanley Dean Witter Universal Funds, Inc.), Fidelity Variable Insurance Products
Fund, or Fidelity 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 your
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 your instructions in the application. (See "The
Policy--Policy Issue.")
TRANSFERS. You 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 Omega Fund (formerly Evergreen VA Aggressive Growth Fund)
- Evergreen VA Small Cap Value 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 The Universal Institutional Funds, Inc.
(formerly Morgan Stanley Dean Witter Universal Funds, Inc.) are currently
available for investment by the Separate Account:
- Universal Institutional Funds High Yield Portfolio
- Universal Institutional Funds U.S. Real Estate Portfolio
Initial Class Shares of the following Portfolios of the Fidelity Variable
Insurance Products Fund are currently available for investment by the Separate
Account:
- Fidelity VIP Money Market Portfolio
- Fidelity VIP Overseas Portfolio
Initial Class Shares of the following Portfolios of the Fidelity Variable
Insurance Products Fund II are currently available for investment by the
Separate Account:
- Fidelity VIP II Contrafund Portfolio
- Fidelity 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.")
You indirectly bear 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 you 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
You may examine a Policy and return it for a refund during the Free-Look
Period. The length of the Free-Look Period depends on the state where the Policy
is issued; however, it will be at least 10 days from the date you receive the
Policy. (See "Policy Benefits and Rights--Free-Look Period and Exchange
Rights.")
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 you understand the fees and
expenses that you bear, directly or indirectly. The first table describes the
Policy charges and deductions that you bear directly. The second table describes
the fees and expenses of the Portfolios. You 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)............. 0.00% 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 and local tax rate
from each premium payment. State and local premium tax rates generally range
from 0.00% to 5%, but may be higher. (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) For purposes of determining the appropriate Mortality and Expense Risk
Charge, 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. (See "Charges and
Deductions -- Mortality and Expense Risk Charge.")
(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, 1999)
<TABLE>
<CAPTION>
TOTAL
MANAGEMENT OTHER OPERATING
PORTFOLIO FEES EXPENSES EXPENSES
--------- ---------- -------- ---------
<S> <C> <C> <C>
Evergreen VA Fund(1)........................................ 0.79% 0.23% 1.02%
Evergreen VA Growth and Income Fund(1)...................... 0.80% 0.21% 1.01%
Evergreen VA Foundation Fund................................ 0.75% 0.20% 0.95%
Evergreen VA Global Leaders Fund(1)......................... 0.68% 0.33% 1.01%
Evergreen VA Strategic Income Fund.......................... 0.52% 0.32% 0.84%
Evergreen VA Omega Fund..................................... 0.52% 0.44% 0.96%
Evergreen VA Small Cap Value Fund(1)........................ 0.51% 0.50% 1.01%
Evergreen VA International Growth Fund(1)................... 0.00% 1.03% 1.03%
Evergreen VA Masters Fund(1)................................ 0.37% 0.63% 1.00%
Goldman Sachs International Equity Fund(2).................. 1.00% 0.35% 1.35%
Goldman Sachs Global Income Fund(2)......................... 0.90% 0.25% 1.15%
Universal Institutional Funds High Yield Portfolio(3)....... 0.19% 0.61% 0.80%
Universal Institutional Funds U.S. Real Estate
Portfolio(3).............................................. 0.00% 1.10% 1.10%
Fidelity VIP Money Market Portfolio......................... 0.18% 0.09% 0.27%
Fidelity VIP Overseas Portfolio(4).......................... 0.73% 0.14% 0.87%
Fidelity VIP II Contrafund Portfolio(4)..................... 0.58% 0.07% 0.65%
Fidelity VIP II Index 500 Portfolio(5)...................... 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 Management Fees, Other Expenses and
Total Operating Expenses for the period from January 1, 1999 to December 31,
1999, restated to reflect current fees, were as follows:
<TABLE>
<CAPTION>
TOTAL
MANAGEMENT OTHER OPERATING
FEES EXPENSES EXPENSES
---------- -------- ---------
<S> <C> <C> <C>
Evergreen VA Fund......................................... 0.87% 0.23% 1.10%
Evergreen VA Growth and Income Fund....................... 0.87% 0.21% 1.08%
Evergreen VA Global Leaders Fund.......................... 0.87% 0.33% 1.20%
Evergreen VA Small Cap Value Fund......................... 0.87% 0.50% 1.37%
Evergreen VA International Growth Fund.................... 0.66% 1.81% 2.47%
Evergreen VA Masters Fund................................. 0.87% 0.63% 1.50%
</TABLE>
(2) Each Goldman Sachs Portfolio is a series of Goldman Sachs Variable Insurance
Trust. Expenses are based on estimated expenses for fiscal year ending
December 31, 2000. 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 0.35% of the
Goldman Sachs International Equity Fund's average daily net assets and 0.25%
of the Goldman Sachs Global Income Fund's average daily net assets. Without
such reduction or limitation, "Other Expenses" and "Total Operating
Expenses" for the Goldman Sachs International Equity Fund and the Goldman
Sachs Global Income Fund would have been 0.77% and 1.77% and 1.78% and
2.68%, respectively, on an annualized basis. The reductions or limits may be
discontinued or modified by the investment adviser in its discretion at any
time.
(3) 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%, 0.61% and 1.11% for High Yield Portfolio, and 0.80%, 1.10% and
1.90% for U.S. Real Estate Portfolio.
(4) A portion of the brokerage commissions that certain Portfolios pay was used
to reduce expenses. In addition, certain Portfolios have entered into
arrangements with their custodian whereby credits realized as a result of
uninvested cash balances were used to reduce a portion of Portfolio
expenses. Without these reductions, Management Fees, Other Expenses and
Total Operating Expenses would have been 0.73%, 0.18% and 0.91%,
respectively, for the Fidelity VIP Overseas Portfolio and 0.58%, 0.09% and
0.67%, respectively, for the Fidelity VIP II Contrafund Portfolio.
(5) The investment adviser agreed to reimburse a portion of the Fidelity 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%, 0.10%, and 0.34%, respectively.
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<PAGE> 10
KILICO AND THE SEPARATE ACCOUNT
KEMPER INVESTORS LIFE INSURANCE COMPANY
We were organized under the laws of the State of Illinois in 1947 as a
stock life insurance company. Our offices are located at 1 Kemper Drive, Long
Grove, Illinois 60049. We offer life insurance and annuity products and are
admitted to do business in the District of Columbia and all states except New
York. We are a wholly-owned subsidiary of Kemper Corporation, a non-operating
holding company. KILICO and Kemper Corporation are wholly-owned subsidiaries of
Zurich Financial Services ("ZFS"). ZFS is owned by Zurich Allied A.G. and Allied
Zurich p.l.c., fifty-seven percent and forty-three percent, respectively.
SEPARATE ACCOUNT
KILICO Variable Separate Account-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, The Universal Institutional Funds, Inc.
(formerly Morgan Stanley Dean Witter Universal Funds, Inc.), Fidelity Variable
Insurance Products Fund, and Fidelity 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 long-term capital growth.
EVERGREEN VA GROWTH AND INCOME FUND: Seeks capital growth in the value of
its shares and current income.
EVERGREEN VA FOUNDATION FUND: Seeks, in order of priority, reasonable
income, conservation of capital and capital appreciation.
EVERGREEN VA GLOBAL LEADERS FUND: Seeks to provide investors with long-term
capital growth.
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<PAGE> 11
EVERGREEN VA STRATEGIC INCOME FUND: Seeks high current income from interest
on debt securities. Secondarily, the Fund considers potential for growth of
capital in selecting securities.
EVERGREEN VA OMEGA FUND (FORMERLY EVERGREEN VA AGGRESSIVE GROWTH
FUND): Seeks long-term capital growth.
EVERGREEN VA SMALL CAP VALUE FUND: Seeks current income and capital growth
in the value of its shares.
EVERGREEN VA INTERNATIONAL GROWTH FUND: Seeks long-term growth of capital
and, secondarily, modest income.
EVERGREEN VA MASTERS FUND: Seeks long-term capital growth.
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 Value Fund.
Evergreen Investment Management Company is the investment adviser to Evergreen
VA Omega Fund (formerly Evergreen VA Aggressive Growth Fund), Evergreen VA
Strategic Income Fund and Evergreen VA International Growth Fund. Pursuant to a
manager of managers strategy, Evergreen Investment Management is the investment
adviser to 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.
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.
GOLDMAN SACHS GLOBAL INCOME FUND: Seeks a high total return, emphasizing
current income, and, to a lesser extent, providing opportunities for capital
appreciation.
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.
THE UNIVERSAL INSTITUTIONAL FUNDS, INC. (FORMERLY MORGAN STANLEY DEAN WITTER
UNIVERSAL FUNDS, INC.)
The Portfolios of The Universal Institutional Funds, Inc. (formerly 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, commonly referred to as "junk bonds." The Portfolio may also
invest in investment grade fixed income securities (including U.S. Government
securities), corporate bonds and mortgage securities, and to a limited extent
foreign fixed income securities; and may use futures, swaps and other
derivatives.
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 Asset Management serves as investment adviser to
the U.S. Real Estate Portfolio.
FIDELITY VARIABLE INSURANCE PRODUCTS FUND
The Portfolios of the Fidelity Variable Insurance Products Fund in which
the Separate Account invests are summarized below:
FIDELITY VIP MONEY MARKET PORTFOLIO (INITIAL CLASS): Seeks as high a level
of current income as is consistent with the preservation of capital and
liquidity.
FIDELITY VIP OVERSEAS PORTFOLIO (INITIAL CLASS): Seeks long-term growth of
capital.
Fidelity Management & Research Company ("FMR") serves as the investment
adviser to the Fidelity VIP Money Market Portfolio and the Fidelity VIP Overseas
Portfolio. Fidelity Investments Money Management, Inc., a subsidiary of FMR,
chooses investments for the Fidelity VIP 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 the Fidelity VIP Overseas Portfolio.
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<PAGE> 12
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II
The Portfolios of the Fidelity Variable Insurance Products Fund II in which
the Separate Account invests are summarized below:
FIDELITY VIP II CONTRAFUND PORTFOLIO (INITIAL CLASS): Seeks long-term
capital appreciation.
FIDELITY VIP II INDEX 500 PORTFOLIO (INITIAL CLASS): 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 the Fidelity VIP II Contrafund
Portfolio and the Fidelity VIP II Index 500 Portfolio. FMR U.K., FMR Far East,
and FIIA(U.K.)L serve as sub-advisers to the Fidelity VIP II Contrafund
Portfolio. Bankers Trust Company, a wholly-owned subsidiary of Bankers Trust New
York Corporation, currently serves as the sub-adviser to the Fidelity VIP II
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 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
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<PAGE> 13
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 the
minimum 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 you,
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. You specify a Planned Premium payment on the application
that provides for the payment of level premiums over a specified period of time.
However, you are not required to pay Planned Premiums.
The total minimum premium is: (i) $250,000 for the first Policy Year or
(ii) $50,000 per year for the first five Policy Years. However, the following
minimums apply to Individual Policies issued in multi-life cases: single premium
$5,000; annual $600; semi-annual $300; quarterly $150; monthly $50; and
unscheduled $150. The maximum amount of premium that may be paid at any 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 you pay 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 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
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<PAGE> 14
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 you.
The minimum amount of any premium that may be allocated to a Subaccount is $50.
Cash Value may be allocated to a total of ten (10) Subaccounts at any given
time.
Separate Account Value will vary with the investment experience of the
chosen Subaccounts. You bear 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 your remaining interest in a Subaccount or
the Fixed Account, from which amounts are to be transferred, would be less than
$500 after the transfer. We may waive these minimums for reallocations under
established third party asset allocation programs. 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, you bear the risk of loss in the event of a
fraudulent telephone transfer.
If you authorize a third party to transact transfers on your behalf, we
will reallocate Cash Value pursuant to the authorized asset allocation program.
However, we do not offer or participate in any asset allocation program and we
take no responsibility for any third party asset allocation program. We may
suspend or cancel acceptance of a third party's instructions at any time and may
restrict the investment options available for transfer under third party
authorizations.
AUTOMATIC ASSET REALLOCATION. You may elect to have transfers made
automatically among the Subaccounts on an annual, semi-annual, quarterly, or
monthly basis so that Cash Value is reallocated to match the percentage
allocations in your predefined premium allocation elections. Transfers under
this program are not subject to the $500 minimum transfer limitations. 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:
- you request 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
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<PAGE> 15
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, you may voluntarily
repay a portion of Debt to avoid lapse. You may also combine premium payments
with Debt repayments. (See "Federal Tax Matters.")
The Death Benefit payable during the grace period will be the Death Benefit
in effect immediately prior to the grace period, less any Debt and any unpaid
monthly deductions.
REINSTATEMENT. If a Policy lapses because of insufficient 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);
(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. For Survivorship Policies, if the Policy has lapsed, one
of the Insureds dies, and the last surviving Insured reinstates, the Policy will
be re-issued as an Individual Policy.
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.
You make two elections in the application to determine the Death Benefit.
First, you choose one of two Death Benefit options--Option A or Option B.
Second, you choose 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, you can change the Death Benefit
option selected. So long as the Policy remains in force, the Death Benefit under
either option will never be less than the Specified Amount.
You choose the Specified Amount on the application. The Specified Amount is
stated in the Policy Specifications. The minimum Specified Amount 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 (but not below the
Specified Amount in effect at that time) 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.
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<PAGE> 16
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 and shown
in Appendix A to this Prospectus. The Death Benefit under Option B always varies
as Cash Value varies.
You also choose 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.
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.
You should consult a qualified tax adviser in making your 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>
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<PAGE> 17
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
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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>
SURVIVORSHIP POLICY--AGES MALE 75 AND FEMALE 70
<TABLE>
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CASH VALUE GUIDELINE
ACCUMULATION PREMIUM
TEST TEST
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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, you may change the Death Benefit option from
Option A to Option B, or from Option B to Option A. Changes in the Death Benefit
option may be made, in writing, once per Policy Year. The effective date of the
change is the next Monthly Processing Date after we accept the change.
A change in the Death Benefit from Option A to Option B reduces the
Specified Amount by the amount of the Policy's Cash Value. Therefore, the Death
Benefit payable under Option B at the time of the change equals the amount
payable under Option A immediately prior to the change. The change from Option A
to Option B 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 from
Option B to Option A affects the determination of the Death Benefit since Cash
Value is not added to the Specified Amount in
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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, you may increase or decrease the Specified
Amount, subject to our approval. A change in Specified Amount may only be made
once per Policy Year. The minimum change in Specified Amount is $25,000 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 your cost of insurance charge. Separate cost of insurance
rates apply to increases in Specified Amount. Conversely, a decrease in
Specified Amount may decrease the net amount at risk, thereby decreasing your
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 to the amount
of any increase in Specified Amount from its effective date.
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, and a 10% tax penalty may apply. (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 younger
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, and
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- Policy charges.
You 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, and
- Loan Account value.
Cash Value is determined on each Valuation Date. It is first calculated on
the Policy Date. On that date, the Cash Value equals the initial Net Premium,
minus the monthly deductions for the first Policy month. (See "Charges and
Deductions.")
On any Valuation Date, Separate Account Value in any Subaccount equals:
(1) Separate Account Value in the Subaccount at the end of the
preceding Valuation Period, times the Investment Experience Factor (defined
below) for the current Valuation Period; plus
(2) Any Net Premium received and allocated to the Subaccount during
the current Valuation
Period; plus
(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
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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."); and
(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, you 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 Value, the Policy
terminates 61 days after we send notice to you, 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 you direct
otherwise, the loan amount is deducted from the Subaccounts and the Fixed
Account in proportion to the values that each bears to the total of Separate
Account Value and Fixed Account Value at the end of the Valuation Period during
which the request is received.
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. You
must specify that the purpose of a payment is loan repayment; otherwise, a
payment is treated as premium. At the time of repayment, the Loan Account is
reduced by the repayment amount, adjusted for the difference between interest
charged and interest earned. The net repayment amount is allocated to the
Subaccounts and the Fixed Account, according to your 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 you. (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.")
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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), you may surrender the Policy for its Surrender Value. To
surrender the Policy, you must return the Policy to us, along with a written
request. Surrender Value equals Cash Value minus Debt.
PARTIAL WITHDRAWALS. After the first Policy Year, you 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, you may examine the Policy and return it for a
refund. The time period depends on where the Policy is issued; however, it will
be at least 10 days from the date you receive the Policy, or generally 30 days
(45 days in North Carolina) after you complete the application for insurance,
whichever is later. The amount of the refund also depends on where the Policy is
issued, but is generally the sum of the Cash Value in the Subaccounts and the
Fixed Account. To receive a refund you 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, you may exchange the Policy for a non-variable permanent fixed benefit
life insurance policy then currently offered by us or an affiliate. Evidence of
insurability is not required. The amount of the new policy may be, at your
election, either the initial Death Benefit or the same net amount at risk as the
Policy on the exchange date. All Debt must be repaid and the Policy must be
surrendered before the exchange is made. The new policy will have the same
Policy Date and issue age as the exchanged Policy.
CHARGES AND DEDUCTIONS
DEDUCTIONS FROM PREMIUMS
We deduct a state and local premium tax charge equal to the actual state
and local tax rate from each premium payment before Net Premium is allocated.
This charge reimburses us for paying state premium taxes. 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.)
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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 rate divided by 365. The effects of simple
compounding may cause charges to slightly exceed the effective annual rate.
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CUMULATIVE ADJUSTED MORTALITY AND EXPENSE
PREMIUMS PAID RISK CHARGE
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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 the appropriate Mortality and Expense Risk
Charge, 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, and
- other Owner servicing costs.
Separate Account administration expenses include:
- preparing annual reports and statements,
- maintaining Subaccount records, and
- 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, Benefit Finance Partners, LLC
("BFP") (formerly known as Life Insurance Solutions, L.L.C. ("LIS")) provides us
with certain services in connection with the Policy and Separate Account
management. BFP 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 BFP and its
affiliates for the development and implementation of administrative and
informational systems, product design, and the development of marketing
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materials for the Policy and other insurance and investment products. BFP and
its affiliates 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 BFP.
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.")
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
You, or Beneficiary at the death of the Insured (or last surviving Insured)
if no election by you is in effect, may elect to have the Death Benefit or
Surrender Value paid in a lump sum or have the amount applied to one of the
Settlement Options. Payments under these options will not be affected by the
investment experience of the Separate Account after proceeds are applied under a
Settlement Option. The payee elects monthly, quarterly, semi-annual or annual
payments. The option selected must result in a payment that at least equals our
required minimum in effect when the option is chosen. If at any time the
payments are less than the minimum 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.
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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.
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 you and KILICO. 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, your rights and the rights of the Beneficiary are subject to the
rights of the assignee of record. An assignment of coverage may have tax
consequences. (See "Federal Tax Matters.")
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<PAGE> 25
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 Owner. As Owner, you have the 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.
You designate 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 beneficiary class,
unless you request otherwise. 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, you 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 you sign
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 you, at your 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, and
- Policy charges.
We also send you confirmations and acknowledgments of various transactions, as
well as annual and semi-annual Fund reports.
WRITTEN NOTICES AND REQUESTS
Send written notices or requests to our home office 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 your address shown in the application unless
an address change is filed with us.
OPTIONAL INSURANCE BENEFITS
The following optional insurance benefits are available by rider at the
time of application:
- continuation of the Policy with an extended Maturity Date, and
- 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 will 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. You 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.
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<PAGE> 26
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,
- Cash Value attributable to the DCA Subaccount is insufficient to complete
the next transfer,
- we receive your written termination at least five (5) business days
before the next transfer date, or
- 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.
You 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, you 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 you to preauthorize
periodic withdrawals after the first Policy Year. You instruct us to withdraw
selected amounts from the Fixed Account or up to two (2) Subaccounts, on a
monthly, quarterly, semi-annual or annual basis. Your 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 us or from your
representative. We will give 30 days notice if we amend the SWP. The SWP may be
terminated at any time by you or us.
DISTRIBUTION OF POLICIES
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 National Association of Securities
Dealers, Inc. ("NASD"). The Policy is distributed through the principal
underwriter, BFP Securities, LLC (formerly LIS Securities) ("BFP Securities").
BFP Securities is a broker-dealer registered under the Securities Exchange Act
of 1934, as amended (the "1934 Act"), and is a member of the NASD. We are
affiliated with BFP and BFP Securities through Zurich's ownership. Pursuant to a
Distribution Agreement with us, BFP Securities may enter into Selling Group
Agreements with broker-dealers that are registered under the 1934 Act and
members of the NASD. BFP Securities is engaged in the distribution of other
variable life policies and annuities.
The Policy may be available for distribution through entities or persons
that provide separate trust or consultative estate and business planning
services on a fee basis. The fees, if any, are not a part of the Policy and we
are not responsible for payment of the fees.
While no direct sales charge is imposed, we may indirectly pay, through BFP
Securities, 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.
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<PAGE> 27
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, and
- 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 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 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 the courts.
This discussion does not address state or local tax consequences, nor
federal estate or gift tax consequences, associated with owning the Policy. IN
ADDITION, WE MAKE NO GUARANTEE REGARDING ANY TAX TREATMENT--FEDERAL, STATE OR
LOCAL--OF ANY POLICY OR OF ANY TRANSACTION INVOLVING A POLICY.
OUR TAX STATUS
We are taxed as a life insurance company and the operations of the Separate
Account are treated as part of our total operations. The operations of the
Separate Account do not materially affect our federal income tax liability
because we are allowed a deduction to the extent that net investment income of
the Separate Account is applied to increase Cash 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 and earnings thereon, increase the Death Benefit (which may result in
higher Policy charges), or take any other action we deem necessary to ensure the
Policy's compliance with the tax definition of life insurance. The Death Benefit
is generally excludable from the Beneficiary's gross income. Interest and other
income credited are not taxable unless certain withdrawals are made (or are
deemed to be made) from the Policy prior to the Insured's death, as discussed
below. This tax treatment will only apply, however, if (1) the investments of
the Separate Account are "adequately diversified", and (2) we, rather than you,
are considered the owner of the assets of the Separate Account.
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<PAGE> 28
DIVERSIFICATION REQUIREMENTS. The Code prescribes the manner in which the
Separate Account must be "adequately diversified." If the Separate Account fails
to comply with these diversification standards, the Policy will not be treated
as a life insurance contract, and you will be taxed on the income on the
contract (as defined in the tax law). We expect that the Separate Account,
through the Funds, will comply with the prescribed diversification requirements.
OWNERSHIP TREATMENT. In certain circumstances, variable life insurance
contract owners may be considered the owners of the assets of a segregated asset
account such as the Separate Account. Income and gains from the Separate Account
would then be includible in your gross income. The Internal Revenue Service
("IRS") has stated that a variable contract owner will be considered the owner
of the assets of a separate account if the owner possesses the ability to
exercise investment control over such assets. As of the date of this Prospectus,
no comprehensive guidance has been issued by the IRS clarifying the
circumstances when such investment control by a variable contract owner would
exist. As a result, your right to allocate Cash Values among the Subaccounts may
cause you to be considered the owner of the assets of the Separate Account.
We do not know what limits may be set forth in any guidance that the IRS
may issue, or whether any such limits will apply to existing Policies. We
therefore reserve the right to modify the Policy as necessary to attempt to
prevent Policy Owners from being considered the owners of the assets of the
Separate Account. However, there is no assurance that such efforts would be
successful.
The following discussion assumes that the Policy will be treated as a life
insurance contract for tax purposes.
TAX TREATMENT OF LIFE INSURANCE DEATH BENEFIT PROCEEDS. In general, the
Death Benefit is excludable from the beneficiary's gross income under the Code.
Certain transfers of the Policy, however, may result in a portion of the Death
Benefit being taxable. If the Death Benefit is paid under a Settlement Option,
generally payments will be prorated between the non-taxable Death Benefit and
taxable interest.
TAX DEFERRAL DURING ACCUMULATION PERIOD. Any increase in Cash Value is
generally not taxable to you unless amounts are received (or are deemed to be
received) from the Policy 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 your income. The "investment in the contract" generally is premium
payments minus non-taxable distributions. As described below, the tax treatment
of amounts distributed, including loans, while the Insured(s) are alive depends
upon whether your Policy is a "modified endowment contract" ("MEC"). The term
"modified endowment contract," or "MEC," is defined below.
POLICIES WHICH ARE NOT MECS
TAX TREATMENT OF WITHDRAWALS GENERALLY. If the Policy is not a MEC, the
amount of any withdrawal generally will be treated first as a non-taxable
recovery of premiums and then as taxable income. Thus, a withdrawal from a
non-MEC Policy generally is not taxable income unless the total withdrawals
exceed the investment in the contract.
DISTRIBUTIONS REQUIRED IN THE FIRST 15 POLICY YEARS. The Code limits the
amount of 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 Owner. As a result, the loan is not taxable
income to you 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, it is unclear whether the IRS would consider some or all of the loan
proceeds to be includible in income. Absent further guidance, we will treat all
loans as indebtedness. If a Policy lapses when a loan is outstanding, the amount
of the loan outstanding will be treated as a surrender in determining whether
any amounts are includible in the Owner's income.
Generally, interest paid on Policy Loans or other indebtedness related to
the Policy will not be tax deductible, except in the case of certain
indebtedness under a Policy covering a "key person." A tax adviser should be
consulted before taking any Policy Loan.
POLICIES WHICH ARE MECS
CHARACTERIZATION OF A POLICY AS A MEC. A Policy is a MEC if (1) the Policy
is received in exchange for a life insurance contract that was a MEC, or (2) the
Policy is issued on or after June 21, 1988 and premiums are paid
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<PAGE> 29
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.
Under Survivorship Policies, there are special considerations in applying
the 7-pay test. For example, a reduction in benefits at any time, such as may
occur upon a partial surrender, may cause the Policy to be a MEC. Also and more
generally, the manner of applying the 7-pay test is somewhat uncertain in the
case of contracts covering more than one Insured.
We monitor the Policies and attempt to notify Owners on a timely basis if a
Policy is in jeopardy of becoming a MEC. You may then request that We take
available steps to avoid treating the Policy as a MEC.
TAX TREATMENT OF WITHDRAWALS, LOANS, ASSIGNMENTS AND PLEDGES UNDER MECS. If
the Policy is a MEC, withdrawals are treated first as withdrawals of income and
then as a recovery of premiums. Thus, withdrawals are includible in income to
the extent that the Cash Value exceeds the investment in the contract. A Policy
loan is treated as a withdrawal for tax purposes.
If you assign or pledge Cash Value under a MEC (or agree to assign or
pledge any portion), such portion is a withdrawal for tax purposes. The
investment in the contract is increased by the amount includible in income with
respect to any assignment, pledge, or loan, though it is not affected by any
other aspect of the assignment, pledge, or loan (including its release or
repayment). Before assigning, pledging, or requesting a loan under a MEC, you
should consult a tax adviser.
PENALTY TAX. Generally, proceeds of a surrender or a withdrawal (or the
amount of any deemed withdrawal) from a MEC are subject to a penalty tax of 10%
of the portion of the proceeds that is includible in income, unless the
surrender or withdrawal is made (1) after you attain age 59 1/2 (2) because you
have become disabled (as defined in the Code), or (3) as substantially equal
periodic payments over your life or life expectancy (or the joint lives or life
expectancies of you and your beneficiary, within the meaning of the tax law.)
AGGREGATION OF POLICIES. All life insurance contracts which are treated as
MECs and which are purchased by the same person from us or our affiliates within
the same calendar year are aggregated and treated as one contract in determining
the tax on withdrawals (including deemed withdrawals). The effects of
aggregation are not always clear; however, it could affect the taxable amount of
a withdrawal (or a deemed withdrawal) and could subject the withdrawal to the
10% penalty tax.
CONSIDERATIONS APPLICABLE TO BOTH MECS AND NON-MECS
SURVIVORSHIP POLICIES. Although we believe that the Policy, when issued as
a Survivorship Policy, complies with 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. If you are considering the purchase of a
Survivorship Policy, you should consult a tax adviser.
LOSS OF INTEREST DEDUCTION WHERE POLICIES ARE HELD BY OR FOR THE BENEFIT OF
CORPORATIONS, TRUSTS, ETC. If an entity (such as a corporation or a trust, not
an individual) purchases a Policy or is the beneficiary of a Policy issued after
June 8, 1997, a portion of the interest on indebtedness unrelated to the Policy
may not be deductible by the entity. However, this rule does not apply to a
Policy owned by an entity engaged in a trade or business which covers the life
of only one individual who is (a) a 20 percent owner of the entity, or (b) an
officer, director, or employee of the trade or business, at the time first
covered by the Policy. This rule also does not apply to a Policy owned by an
entity engaged in a trade or business which covers the joint lives of the 20
percent owner of the entity and the owner's spouse at the time first covered by
the Policy. Entities that are considering purchasing the Policy, or that will be
Beneficiaries under a Policy, should consult a tax adviser.
TREATMENT OF MATURITY BENEFITS AND EXTENSION OF MATURITY DATE. At the
Maturity Date, the Surrender Value will be paid to you. This payment is taxable
in the same manner as a Policy Surrender. If you elect an extended Maturity Date
rider, the IRS could treat you 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 your
income at that time.
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,
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<PAGE> 30
inheritance and other tax consequences of ownership or receipt of Policy
proceeds depend on the circumstances of each Owner or Beneficiary. The exchange
of one life insurance contract for another life insurance contract generally is
not taxed (unless cash is distributed or a loan is reduced or forgiven). The
insured under the new contract must be the same as the insured under the old
contract. Thus, in the case of a Survivorship Policy, the other life insurance
contract involved in the exchange must also cover the same two Insureds.
FEDERAL INCOME TAX WITHHOLDING
We withhold and send to the federal government a part of the taxable
portion of withdrawals unless you notify us in writing at the time of withdrawal
that you are electing no withholding. You are always responsible for the payment
of any taxes and early distribution penalties that may be due on the amounts
received. You may also be required to pay penalties under the estimated tax
rules, if your withholding and estimated tax payments are insufficient to
satisfy your total tax liability.
LEGAL CONSIDERATIONS
On July 6, 1983, the Supreme Court held in ARIZONA GOVERNING COMMITTEE V.
NORRIS that certain annuity benefits provided by employers' retirement and
fringe benefit programs may not vary between men and women on the basis of sex.
The Policy 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.
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.
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<PAGE> 31
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>
Gale K. Caruso (42) President and Chief Executive Officer of Federal Kemper Life
President and Chief Executive Officer Assurance Company ("FKLA"), Fidelity Life Association
since June 1999. Director since July ("FLA"), Zurich Life Insurance Company of America ("ZLICA")
1999. and Zurich Direct, Incorporated ("ZD") since June 1999.
Director of FKLA, FLA and ZLICA since July 1999. Chairman,
President and Chief Executive Officer of Scudder Canada
Investor Services, Ltd. from 1995 to June 1999. Managing
Director of Scudder Kemper Investments, Inc. from July 1986
to June 1999.
Eliane C. Frye (52) Executive Vice President of FKLA and FLA since March 1995.
Executive Vice President since March Executive Vice President of ZLICA and ZD since March 1996.
1995. Director since May 1998. Director of FLA since December 1997. Director of FKLA and
ZLICA since May 1998. Director of ZD from March 1996 to
March 1997. Director of IBS and IBSIA since 1995. Senior
Vice President of KILICO, FKLA and FLA from 1993 to 1995.
Vice President of FKLA and FLA from 1988 to 1993.
Frederick L. Blackmon (48) Senior Vice President and Chief Financial Officer of FKLA
Senior Vice President and Chief since December 1995. Senior Vice President and Chief
Financial Officer since December Financial Officer of FLA since January 1996. Senior Vice
1995. President and Chief Financial Officer of ZLICA and ZD since
March 1996. Director of FLA since May 1998. Director of ZD
from March 1996 to March 1997. Treasurer and Chief Financial
Officer of Kemper since January 1996. Chief Financial
Officer of Alexander Hamilton Life Insurance Company from
April 1989 to November 1995.
Russell M. Bostick (43) Senior Vice President and Chief Information Officer of FKLA,
Senior Vice President and Chief FLA, ZLICA and ZD since March 1999. Vice President and Chief
Information Officer since March 1999. Information Officer of FKLA, FLA, KILICO, ZLICA and ZD from
April 1998 to March 1999. Chief Technology Officer of
Corporate Software & Technology from June 1997 to April
1998. Vice President, Information Technology Department of
CNA Insurance Companies from January 1995 to June 1997.
James C. Harkensee (41) Senior Vice President of FKLA and FLA since January 1996.
Senior Vice President since January Senior Vice President of ZLICA and ZD since 1995. Director
1996. of ZD from April 1993 to March 1997 and since March 1998.
Vice President of ZLICA from 1992 to 1995. Vice President of
ZD from 1994 to 1995.
James E. Hohmann (44) Senior Vice President of FKLA since December 1995. Chief
Senior Vice President since December Actuary of FKLA and KILICO from December 1995 to January
1995. Director since May 1998. 1999. Senior Vice President of FLA since January 1996. Chief
Actuary of FLA from January 1996 to January 1999. Senior
Vice President of ZLICA and ZD since March 1996. Chief
Actuary of ZLICA and ZD from March 1996 to January 1999.
Director of FLA since June 1997. Director of FKLA and ZLICA
since May 1998. Director of ZD from March 1996 to March
1997. Managing Principal (Partner) of Tillinghast-Towers
Perrin from January 1991 to December 1995.
</TABLE>
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<PAGE> 32
<TABLE>
<CAPTION>
NAME AND AGE
POSITION WITH KILICO
YEAR OF ELECTION OTHER BUSINESS EXPERIENCE DURING PAST 5 YEARS OR MORE
-------------------- -----------------------------------------------------
<S> <C>
Edward K. Loughridge (45) Senior Vice President and Corporate Development Officer of
Senior Vice President and Corporate FKLA and FLA since January 1996. Senior Vice President and
Development Officer since January Corporate Development Officer for ZLICA and ZD since March
1996. 1996. Senior Vice President of Human Resources of
Zurich-American Insurance Group from February 1992 to March
1996.
Debra P. Rezabek (44) Senior Vice President of FKLA and FLA since March 1996.
Senior Vice President since 1996. Corporate Secretary of FKLA and FLA since January 1996.
General Counsel since 1992. Corporate Director of FLA since May 1998. Vice President of KILICO,
Secretary since January 1996. FKLA and FLA since 1995. General Counsel and Director of
Government Affairs of FKLA and FLA since 1992 and of KILICO
since 1993. Senior Vice President, General Counsel and
Corporate Secretary of ZLICA and ZD since March 1996.
Director of ZD from March 1996 to March 1997. Secretary of
IBS and IBSIA since 1993. Director of IBS and IBSIA from
1993 to 1996. General Counsel and Assistant Secretary of
KILICO, FKLA and FLA from 1992 to 1996. Assistant Secretary
of Kemper since January 1996.
Edward L. Robbins (60) Senior Vice President and Chief Actuary of FKLA, FLA, ZLICA
Senior Vice President and Chief and ZD since March 1999. Senior Actuary of FKLA, FLA,
Actuary since March 1999. KILICO, ZLICA and ZD from July 1998 to March 1999. Principal
of KPMG Peat Marwick LLP from May 1984 to July 1998.
Kenneth M. Sapp (54) Senior Vice President of FKLA, FLA and ZLICA since January
Senior Vice President since January 1998. Senior Vice President of ZD since March 1998. Director
1998. of IBS since May 1998. Director of IBSIA since September
1998. Vice President--Aetna Life Brokerage of Aetna Life &
Annuity Company from February 1992 to January 1998.
George Vlaisavljevich (57) Senior Vice President of FKLA, FLA and ZLICA since October
Senior Vice President since October 1996. Senior Vice President of ZD since March 1997. Director
1996. of IBS and IBSIA since October 1996. Executive Vice
President of The Copeland Companies from April 1983 to
September 1996.
William H. Bolinder (56) Director of FKLA and FLA since January 1996. Director of
Chairman of the Board from January ZLICA and ZD since March 1995. Chairman of the Board of FKLA
1996 to June 1999 and since April and, FLA from January 1996 to June 1999 and since April
2000. Director since January 1996. 2000. Chairman of the Board of ZLICA and ZD from March 1995
to June 1999 and since April 2000. Chairman of the Board and
Director of Kemper since January 1996. Director of SKI since
January 1996. Vice Chairman of SKI from January 1996 to
1998. Member of the Group Executive Board of Zurich
Financial Services Group since 1998. Member of the Corporate
Executive Board of Zurich Insurance Group from October 1994
to 1998. Chairman of Zurich American Insurance Company since
1998. Chairman of the Board of American Guarantee and
Liability Insurance Company, Zurich American Insurance
Company of Illinois, American Zurich Insurance Company and
Steadfast Insurance Company since 1995. Chief Executive
Officer of American Guarantee and Liability Insurance
Company, Zurich American Insurance Company of Illinois and
American Zurich Insurance Company from 1986 to June 1995.
President of Zurich Holding Company of America ("ZHCA")
since 1995. Vice Chairman of ZHCA since 1996. Underwriter
for Zurich American Lloyds since 1986.
David A. Bowers (53) Director of FKLA and ZLICA since May 1997. Director of FLA
Director since May 1997. since June 1997. Executive Vice President, Corporate
Secretary and General Counsel of Zurich U.S. since August
1985. Vice President, General Counsel and Secretary of
Kemper since January 1996.
</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>
Gunther Gose (55) Director of FKLA, FLA and ZLICA since November 1998. Chief
Director since November 1998. Financial Officer and Member of the Group Executive Board of
Zurich Financial Services since October 1998. Member of the
Corporate Executive Board of Zurich Insurance Group from
April 1990 to October 1998.
</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.
EXPERTS
The consolidated balance sheets of KILICO as of December 31, 1999 and 1998
and the related consolidated statements of operations, comprehensive income,
stockholder's equity, and cash flows for the years ended December 31, 1999, 1998
and 1997 have been included herein and in the registration statement in reliance
upon the report of PricewaterhouseCoopers, LLP, independent accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
The statements of assets and liabilities and policy owners' equity of the
Separate Account as of December 31, 1999 and the related statements of
operations for the period then ended and the statements of changes in policy
owners' equity for the period then ended has been included herein in reliance
upon the report of PricewaterhouseCoopers LLP, independent accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
Actuarial matters included in this Prospectus have been examined by 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 or at the SEC's website at http://www.sec.gov.
FINANCIAL STATEMENTS
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.
33
<PAGE> 34
(This page intentionally left blank)
34
<PAGE> 35
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors of Kemper Investors Life Insurance Company and
Policy Owners of Kemper Investors Life Insurance Company's KILICO
Variable Separate Account-2
In our opinion, the accompanying statements of assets and liabilities and
policy owners' equity and the related statements of operations and changes in
policy owners' equity present fairly, in all material respects, the financial
position of the subaccounts of Kemper Investors Life Insurance Company's (the
"Company") KILICO Variable Separate Account-2, which includes the Evergreen VA
Subaccount, Evergreen VA Growth and Income Subaccount, Evergreen VA Foundation
Subaccount, Evergreen VA Global Leaders Subaccount, Evergreen VA Strategic
Income Subaccount, Evergreen VA Aggressive Growth Subaccount, Evergreen VA Small
Cap Value Subaccount, Evergreen VA International Growth Subaccount, Evergreen VA
Masters Subaccount (investment options within the Evergreen Variable Annuity
Trust), Goldman Sachs International Equity Subaccount, Goldman Sachs Global
Income Subaccount, (investment options within the Goldman Sachs Variable
Insurance Trust), High Yield Subaccount, U.S. Real Estate Subaccount (investment
options within the Morgan Stanley Dean Witter Universal Funds, Inc.), Fidelity
VIP Money Market Subaccount, Fidelity VIP Overseas Subaccount (investment
options within the Fidelity Variable Insurance Products Fund), Fidelity VIP II
Contrafund Subaccount and Fidelity VIP II Index 500 Subaccount (investment
options within the Fidelity Variable Insurance Products Fund II), thereof at
December 31, 1999, and the results of their operations for the period presented
and the changes in their policy owners' equity for the period April 1, 1999
(commencement of operations) to December 31, 1999, in conformity with accounting
principles generally accepted in the United States. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with auditing
standards generally accepted in the United States, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included direct confirmation of investments
owned at December 31, 1999 provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Chicago, Illinois
February 24, 2000
35
<PAGE> 36
KILICO VARIABLE SEPARATE ACCOUNT-2
STATEMENTS OF ASSETS AND LIABILITIES AND POLICY OWNERS' EQUITY
DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
EVERGREEN VARIABLE ANNUITY TRUST
----------------------------------------------------------------------------------------
EVERGREEN EVERGREEN EVERGREEN EVERGREEN EVERGREEN
VA EVERGREEN VA VA VA VA
EVERGREEN GROWTH AND VA GLOBAL STRATEGIC AGGRESSIVE SMALL CAP
VA INCOME FOUNDATION LEADERS INCOME GROWTH VALUE
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Investments in underlying portfolio
funds, at current value.......... $29 80 5 11 52 70 23
--- -- -- -- -- -- --
LIABILITIES AND POLICY OWNERS' EQUITY
Liabilities:
Mortality and expense risk
charges........................ -- -- -- -- -- -- --
Other payables................... -- -- -- -- -- -- --
--- -- -- -- -- -- --
Total liabilities........... -- -- -- -- -- -- --
--- -- -- -- -- -- --
Policy owners' equity.............. $29 80 5 11 52 70 23
=== == == == == == ==
ANALYSIS OF POLICY OWNERS' EQUITY
Excess of proceeds from units sold
over payments for units
redeemed......................... $27 75 5 9 53 55 23
Accumulated net investment income
(loss)........................... 1 1 -- -- (2) (3) --
Unrealized appreciation
(depreciation) of investments.... 1 4 -- 2 1 18 --
--- -- -- -- -- -- --
Policy owners' equity.............. $29 80 5 11 52 70 23
=== == == == == == ==
</TABLE>
- ---------------
See accompanying notes to financial statements.
36
<PAGE> 37
<TABLE>
<CAPTION>
MORGAN STANLEY DEAN WITTER
EVERGREEN VARIABLE ANNUITY TRUST GOLDMAN SACHS VARIABLE INSURANCE TRUST UNIVERSAL FUNDS, INC.
-------------------------------- --------------------------------------- --------------------------
EVERGREEN
VA EVERGREEN GOLDMAN SACHS
INTERNATIONAL VA INTERNATIONAL GOLDMAN SACHS U.S. REAL
GROWTH MASTERS EQUITY GLOBAL INCOME HIGH YIELD ESTATE
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------------- ------------- ------------------ ------------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
4 12 64 25 47 9
-- -- -- -- -- --
-- -- -- -- -- --
-- -- -- -- -- --
-- -- -- -- -- --
-- -- -- -- -- --
-- -- -- -- -- --
4 12 64 25 47 9
== == == == == ==
3 12 52 26 47 10
-- (1) 3 -- 2 --
1 1 9 (1) (2) (1)
-- -- -- -- -- --
4 12 64 25 47 9
== == == == == ==
</TABLE>
37
<PAGE> 38
KILICO VARIABLE SEPARATE ACCOUNT-2
STATEMENTS OF ASSETS AND LIABILITIES AND POLICY OWNERS' EQUITY (CONTINUED)
DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
FIDELITY VARIABLE INSURANCE FIDELITY VARIABLE INSURANCE
PRODUCTS FUND PRODUCTS FUND II
---------------------------- ----------------------------------
FIDELITY VIP
MONEY FIDELITY VIP FIDELITY VIP II FIDELITY VIP II
MARKET OVERSEAS CONTRAFUND INDEX 500
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
------------ ------------ --------------- ---------------
<S> <C> <C> <C> <C>
ASSETS
Investments in underlying portfolio funds, at current
value................................................ $ 75 19 139 510
---- -- --- ---
LIABILITIES AND POLICY OWNERS' EQUITY
Liabilities:
Mortality and expense risk charges................... -- -- -- 1
Other payables....................................... -- -- -- 1
---- -- --- ---
Total liabilities............................... -- -- -- 2
---- -- --- ---
Policy owners' equity.................................. $ 75 19 139 508
==== == === ===
ANALYSIS OF POLICY OWNERS' EQUITY
Excess of proceeds from units sold over payments for
units redeemed....................................... $ 94 15 126 478
Accumulated net investment loss........................ (19) (1) (5) (20)
Unrealized appreciation of investments................. -- 5 18 50
---- -- --- ---
Policy owners' equity.................................. $ 75 19 139 508
==== == === ===
</TABLE>
- ---------------
See accompanying notes to financial statements.
38
<PAGE> 39
KILICO VARIABLE SEPARATE ACCOUNT-2
STATEMENTS OF OPERATIONS
FOR THE PERIOD APRIL 1, 1999 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
EVERGREEN VARIABLE ANNUITY TRUST
----------------------------------------------------------------------------------------
EVERGREEN EVERGREEN EVERGREEN EVERGREEN EVERGREEN
VA EVERGREEN VA VA VA VA
EVERGREEN GROWTH AND VA GLOBAL STRATEGIC AGGRESSIVE SMALL CAP
VA INCOME FOUNDATION LEADERS INCOME GROWTH VALUE
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUE
Dividends and capital gains
distributions.................. $2 4 -- -- -- -- 1
EXPENSES
Mortality and expense risk and
other charges.................. 1 3 -- -- 2 3 1
-- -- -- -- -- -- --
Net investment income (loss)....... 1 1 -- -- (2) (3) --
-- -- -- -- -- -- --
NET UNREALIZED GAIN ON
INVESTMENTS
Change in unrealized appreciation
of investments................. 1 4 -- 2 1 18 --
-- -- -- -- -- -- --
Net unrealized gain on
investments...................... 1 4 -- 2 1 18 --
-- -- -- -- -- -- --
Net increase (decrease) in policy
owners' equity resulting from
operations....................... $2 5 -- 2 (1) 15 --
== == == == == == ==
</TABLE>
- ---------------
See accompanying notes to financial statements.
39
<PAGE> 40
KILICO VARIABLE SEPARATE ACCOUNT-2
STATEMENTS OF OPERATIONS (CONTINUED)
FOR THE PERIOD APRIL 1, 1999 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
MORGAN STANLEY
EVERGREEN VARIABLE GOLDMAN SACHS VARIABLE DEAN WITTER
ANNUITY TRUST INSURANCE TRUST UNIVERSAL FUNDS, INC.
-------------------------- ----------------------------- ------------------------
EVERGREEN
VA EVERGREEN GOLDMAN SACHS GOLDMAN SACHS
INTERNATIONAL VA INTERNATIONAL GLOBAL HIGH U.S.
GROWTH MASTERS EQUITY INCOME YIELD REAL ESTATE
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
------------- ---------- ------------- ------------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
REVENUE
Dividends and capital gains
distributions..................... $-- -- 5 1 3 1
EXPENSES
Mortality and expense risk and other
charges........................... -- 1 2 1 1 1
--- -- -- -- -- --
Net investment income (loss).......... -- (1) 3 -- 2 --
--- -- -- -- -- --
NET UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Change in unrealized appreciation
(depreciation) of investments..... 1 1 9 (1) (2) (1)
--- -- -- -- -- --
Net unrealized gain (loss) on
investments......................... 1 1 9 (1) (2) (1)
--- -- -- -- -- --
Net increase (decrease) in policy
owners' equity resulting from
operations.......................... $ 1 -- 12 (1) -- (1)
=== == == == == ==
</TABLE>
- ---------------
See accompanying notes to financial statements.
40
<PAGE> 41
<TABLE>
<CAPTION>
FIDELITY VARIABLE INSURANCE FIDELITY VARIABLE INSURANCE
PRODUCTS FUND PRODUCTS FUND II
------------------------------- -------------------------------------
FIDELITY VIP
MONEY FIDELITY VIP FIDELITY VIP II FIDELITY VIP II
MARKET OVERSEAS CONTRAFUND INDEX 500
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
------------ ------------ --------------- ---------------
<S> <C> <C> <C> <C>
3 -- -- --
22 1 5 20
--- -- -- ---
(19) (1) (5) (20)
--- -- -- ---
-- 5 18 50
--- -- -- ---
-- 5 18 50
--- -- -- ---
(19) 4 13 30
=== == == ===
</TABLE>
41
<PAGE> 42
KILICO VARIABLE SEPARATE ACCOUNT-2
STATEMENTS OF CHANGES IN POLICY OWNERS' EQUITY
FOR THE PERIOD APRIL 1, 1999 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
EVERGREEN VARIABLE ANNUITY TRUST
----------------------------------------------------------------------------------------
EVERGREEN EVERGREEN EVERGREEN EVERGREEN EVERGREEN
VA EVERGREEN VA VA VA VA
EVERGREEN GROWTH AND VA GLOBAL STRATEGIC AGGRESSIVE SMALL CAP
VA INCOME FOUNDATION LEADERS INCOME GROWTH VALUE
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATIONS
Net investment income.............. $ 1 1 -- -- (2) (3) --
Change in unrealized appreciation
(depreciation) of investments.... 1 4 -- 2 1 18 --
--- -- -- -- -- -- --
Net increase (decrease) in policy
owners' equity resulting from
operations..................... 2 5 -- 2 (1) 15 --
--- -- -- -- -- -- --
ACCOUNT UNIT TRANSACTIONS
Proceeds from units sold........... 22 48 4 8 45 46 19
Net transfers from affiliate and
subaccounts...................... 5 27 1 1 8 9 4
Payments for units redeemed........ -- -- -- -- -- -- --
--- -- -- -- -- -- --
Net increase in policy owners'
equity from account unit
transactions................... 27 75 5 9 53 55 23
--- -- -- -- -- -- --
Total increase in policy owners'
equity............................. 29 80 5 11 52 70 23
POLICY OWNERS' EQUITY
Beginning of period................ -- -- -- -- -- -- --
--- -- -- -- -- -- --
End of period...................... $29 80 5 11 52 70 23
=== == == == == == ==
</TABLE>
- ---------------
See accompanying notes to financial statements.
42
<PAGE> 43
<TABLE>
<CAPTION>
GOLDMAN SACHS VARIABLE MORGAN STANLEY DEAN WITTER
EVERGREEN VARIABLE ANNUITY TRUST INSURANCE TRUST UNIVERSAL FUNDS, INC.
-------------------------------- ----------------------------- ---------------------------
EVERGREEN
VA EVERGREEN GOLDMAN SACHS GOLDMAN SACHS
INTERNATIONAL VA INTERNATIONAL GLOBAL HIGH U.S.
GROWTH MASTERS EQUITY INCOME YIELD REAL ESTATE
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------------- ------------- ------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
-- (1) 3 -- 2 --
1 1 9 (1) (2) (1)
-- -- -- -- -- --
1 -- 12 (1) -- (1)
-- -- -- -- -- --
3 7 37 17 12 8
-- 5 15 9 35 2
-- -- -- -- -- --
-- -- -- -- -- --
3 12 52 26 47 10
-- -- -- -- -- --
4 12 64 25 47 9
-- -- -- -- -- --
-- -- -- -- -- --
4 12 64 25 47 9
== == == == == ==
</TABLE>
43
<PAGE> 44
KILICO VARIABLE SEPARATE ACCOUNT-2
STATEMENTS OF CHANGES IN POLICY OWNERS' EQUITY (CONTINUED)
FOR THE PERIOD APRIL 1, 1999 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
FIDELITY VARIABLE INSURANCE FIDELITY VARIABLE INSURANCE
PRODUCTS FUND PRODUCTS FUND II
---------------------------- ----------------------------------
FIDELITY VIP
MONEY FIDELITY VIP FIDELITY VIP II FIDELITY VIP II
MARKET OVERSEAS CONTRAFUND INDEX 500
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
------------ ------------ --------------- ---------------
<S> <C> <C> <C> <C>
OPERATIONS
Net investment income.................................. $ (19) (1) (5) (20)
Change in unrealized appreciation
of investments....................................... -- 5 18 50
----- -- --- ---
Net increase (decrease) in policy
owners' equity resulting from
operations......................................... (19) 4 13 30
----- -- --- ---
ACCOUNT UNIT TRANSACTIONS
Proceeds from units sold............................... 418 13 74 331
Net transfers (to) from affiliate and
subaccounts.......................................... (323) 2 52 147
Payments for units redeemed............................ (1) -- -- --
----- -- --- ---
Net increase in policy owners' equity from account
unit transactions.................................. 94 15 126 478
----- -- --- ---
Total increase in policy owners' equity.................. 75 19 139 508
POLICY OWNERS' EQUITY
Beginning of period.................................... -- -- -- --
----- -- --- ---
End of period.......................................... $ 75 19 139 508
===== == === ===
</TABLE>
- ---------------
See accompanying notes to financial statements.
44
<PAGE> 45
KILICO VARIABLE SEPARATE ACCOUNT-2
NOTES TO FINANCIAL STATEMENTS
(1) GENERAL INFORMATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
KILICO Variable Separate Account-2 (the "Separate Account") is a unit
investment trust registered under the Investment Company Act of 1940, as
amended, established by Kemper Investors Life Insurance Company ("KILICO").
KILICO is an indirect, wholly-owned subsidiary of Zurich Financial Services
("ZFS"). ZFS is owned by Zurich Allied AG and Allied Zurich p.l.c., fifty-seven
percent and forty-three percent, respectively. Zurich Allied AG is listed on the
Swiss Market Index (SMI). Allied Zurich p.l.c. is included in the FTSE-100 Share
Index in London.
The Separate Account is used to fund policies ("Policy") for the First
Foundation flexible premium variable life insurance policies. The Separate
Account commenced operations on April 1, 1999. The Separate Account is divided
into seventeen subaccount options which are available to policy owners, and each
subaccount invests exclusively in the shares of a corresponding portfolio in the
Evergreen Variable Annuity Trust, the Goldman Sachs Variable Insurance Trust,
the Morgan Stanley Dean Witter Universal Funds, Inc., the Fidelity Variable
Insurance Products Fund and the Fidelity Variable Insurance Products Fund II,
which are open-end diversified management companies.
ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that could affect the reported amounts of assets and
liabilities as well as the disclosure of contingent amounts at the date of the
financial statements. As a result, actual results reported as income and
expenses could differ from the estimates reported in the accompanying financial
statements.
SECURITY VALUATION
The investments are stated at current value which is based on the closing
bid price, net asset value, at December 31, 1999.
SECURITY TRANSACTIONS AND INVESTMENT INCOME
Security transactions are generally accounted for on the trade date (date
when KILICO accepts risks of providing insurance coverage to the insured).
Dividends and capital gains distributions are recorded as income on the
ex-dividend date. Realized gains and losses from security transactions are
generally reported on a first in, first out (FIFO) cost basis.
ACCUMULATION UNIT VALUATION
On each day the New York Stock Exchange (the "Exchange") is open for
trading, the accumulation unit value is determined as of the earlier of 3:00
p.m. (Central time) or the close of the Exchange by dividing the total value of
each subaccount's investments and other assets, less liabilities, by the number
of accumulation units outstanding in the respective subaccount.
FEDERAL INCOME TAXES
The operations of the Separate Account are included in the federal income
tax return of KILICO. Under existing federal income tax law, investment income
and realized capital gains and losses of the Separate Account increase
liabilities under the policy and are, therefore, not taxed. Thus the Separate
Account may realize net investment income and capital gains and losses without
federal income tax consequences.
45
<PAGE> 46
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF INVESTMENTS
Investments, at cost, at December 31, 1999, are as follows (in thousands,
differences are due to rounding):
<TABLE>
<CAPTION>
SHARES
OWNED COST
------ ------
<S> <C> <C>
EVERGREEN VARIABLE ANNUITY TRUST:
Evergreen VA Subaccount..................................... 2 $ 28
Evergreen VA Growth and Income Subaccount................... 5 76
Evergreen VA Foundation Subaccount.......................... 0 5
Evergreen VA Global Leaders Subaccount...................... 1 9
Evergreen VA Strategic Income Subaccount.................... 5 51
Evergreen VA Aggressive Growth Subaccount................... 4 52
Evergreen VA Small Cap Value Subaccount..................... 2 23
Evergreen VA International Growth Subaccount................ 0 3
Evergreen VA Masters Subaccount............................. 1 11
GOLDMAN SACHS VARIABLE INSURANCE TRUST:
Goldman Sachs International Equity Subaccount............... 4 55
Goldman Sachs Global Income Subaccount...................... 3 26
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.:
High Yield Subaccount....................................... 5 49
U.S. Real Estate Subaccount................................. 1 10
FIDELITY VARIABLE INSURANCE PRODUCTS FUND:
Fidelity VIP Money Market Subaccount........................ 7 75
Fidelity VIP Overseas Subaccount............................ 1 14
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II:
Fidelity VIP II Contrafund Subaccount....................... 5 121
Fidelity VIP II Index 500 Subaccount........................ 3 460
------
TOTAL INVESTMENTS AT COST.............................. $1,068
======
</TABLE>
A description of the underlying investments are summarized below.
EVERGREEN VARIABLE ANNUITY TRUST
EVERGREEN VA SUBACCOUNT: This subaccount invests in the Evergreen VA Fund
of the Evergreen Variable Annuity Trust. The Fund seeks to achieve capital
appreciation.
EVERGREEN VA GROWTH AND INCOME SUBACCOUNT: This subaccount invests in the
Evergreen VA Growth and Income Fund of the Evergreen Variable Annuity Trust. The
Fund seeks to achieve a return composed of capital appreciation in the value of
its shares and current income.
EVERGREEN VA FOUNDATION SUBACCOUNT: This subaccount invests in the
Evergreen VA Foundation Fund of the Evergreen Variable Annuity Trust. The Fund
seeks, in order of priority, reasonable income, conservation of capital and
capital appreciation.
EVERGREEN VA GLOBAL LEADERS SUBACCOUNT: This subaccount invests in the
Evergreen VA Global Leaders Fund of the Evergreen Variable Annuity Trust. The
Fund seeks to achieve capital appreciation.
EVERGREEN VA STRATEGIC INCOME SUBACCOUNT: This subaccount invests in the
Evergreen VA Strategic Income Fund of the Evergreen Variable Annuity Trust. The
Fund seeks high current income.
EVERGREEN VA AGGRESSIVE GROWTH SUBACCOUNT: This subaccount invests in the
Evergreen VA Aggressive Growth Fund of the Evergreen Variable Annuity Trust. The
Fund seeks long-term capital appreciation.
EVERGREEN VA SMALL CAP VALUE SUBACCOUNT: This subaccount invests in the
Evergreen VA Small Cap Value Fund of the Evergreen Variable Annuity Trust. The
Fund seeks to achieve a return consisting of current income and capital
appreciation in the value of its shares.
46
<PAGE> 47
EVERGREEN VA INTERNATIONAL GROWTH SUBACCOUNT: This subaccount invests in
the Evergreen VA International Growth Fund of the Evergreen Variable Annuity
Trust. The Fund seeks long-term growth of capital and, as a secondary objective,
seeks modest income.
EVERGREEN VA MASTERS SUBACCOUNT: This subaccount invests in the Evergreen
VA Masters Fund of the Evergreen Variable Annuity Trust. The Fund seeks
long-term capital appreciation.
GOLDMAN SACHS VARIABLE INSURANCE TRUST
GOLDMAN SACHS INTERNATIONAL EQUITY SUBACCOUNT: This subaccount invests in
the Goldman Sachs International Equity Fund of the Goldman Sachs Variable
Insurance Trust. The Fund seeks long-term capital appreciation.
GOLDMAN SACHS GLOBAL INCOME SUBACCOUNT: This subaccount invests in the
Goldman Sachs Global Income Fund of the Goldman Sachs Variable Insurance Trust.
The Fund seeks a high total return, emphasizing current income, and, to a lesser
extent, providing opportunities for capital appreciation.
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
HIGH YIELD SUBACCOUNT: This subaccount invests in the High Yield Portfolio
of the Morgan Stanley Dean Witter Universal Funds, Inc. The Portfolio seeks
above-average total return over a market cycle of three to five years.
U.S. REAL ESTATE SUBACCOUNT: This subaccount invests in the U.S. Real
Estate Portfolio of the Morgan Stanley Dean Witter Universal Funds, Inc. The
Portfolio seeks above-average current income and long-term capital appreciation.
FIDELITY VARIABLE INSURANCE PRODUCTS FUND
FIDELITY VIP MONEY MARKET SUBACCOUNT: This subaccount invests in the
Fidelity VIP Money Market Portfolio of the Fidelity Variable Insurance Products
Fund. The Portfolio seeks as high a level of current income as is consistent
with the preservation of capital and liquidity.
FIDELITY VIP OVERSEAS SUBACCOUNT: This subaccount invests in the Fidelity
VIP Overseas Portfolio of the Fidelity Variable Insurance Products Fund. The
Portfolio seeks long-term growth of capital.
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II
FIDELITY VIP II CONTRAFUND SUBACCOUNT: This subaccount invests in the
Fidelity VIP II Contrafund Portfolio of the Fidelity Variable Insurance Products
Fund II. The Portfolio seeks long-term capital appreciation.
FIDELITY VIP II INDEX 500 SUBACCOUNT: This subaccount invests in the
Fidelity VIP II Index 500 Portfolio of the Fidelity Variable Insurance Products
Fund II. The 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.
(3) TRANSACTIONS WITH AFFILIATES
KILICO provides a death benefit payment upon the death of the Policy Owner
under the terms of the death benefit option selected by the Policy Owner as
further described in the policy. KILICO assesses a monthly charge to the
subaccounts for the cost of providing this insurance protection to the Policy
Owner. These cost of insurance charges vary with the issue age, sex and rate
class of the Policy Owner, and are allocated among the subaccounts in the
proportion of each subaccount to the Separate Account value. Cost of insurance
charges totaled $30,850 for the period ended December 31, 1999. Additionally,
KILICO assesses a daily charge to the subaccounts for mortality and expense risk
assumed by KILICO at a rate not to exceed an effective annual rate of 0.90% of
the average net assets of the subaccounts.
Proceeds payable on the surrender of a Policy are reduced by the amount of
debt that may be outstanding.
A state and local premium tax charge is deducted from each premium payment,
these charges will range from 0.50% to 5% prior to the allocation of the net
premium. This charge is to reimburse KILICO for the payment of state premium
taxes. KILICO expects to pay an average state premium tax rate of approximately
2.18% but the actual premium tax attributable to a policy may be more or less.
Under Section 848 of the Internal Revenue Code (the "Code"), the receipt of
premium income by a life insurance company requires the deferral of a portion of
the acquisition cost over a maximum of a 120 month period. The effect of Section
848 for KILICO is an acceleration of income recognition over a deferral of the
associated deductions for tax purposes; this is referred to as deferred
acquisition cost or, the "DAC tax". As compensation for this accelerated
liability, a DAC tax charge
47
<PAGE> 48
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(3) TRANSACTIONS WITH AFFILIATES (CONTINUED)
of 1.00% of each premium dollar is deducted from the premium by KILICO before
investment of a Policy Owner's funds into the Separate Account.
Policy loans are also provided for under the terms of the Policy. The
minimum amount of the loan is $500 and is limited to 90% of the cash value less
debt. Interest is assessed against a policy loan under the terms of the Policy.
Policy loans are carried in KILICO's general account.
Pursuant to its administrative services agreements with KILICO, Life
Insurance Solutions ("LIS"), an affiliated Company, provides certain services to
KILICO in connection with policy management, certificate management and account
management.
Evergreen Asset Management Corp. is the investment manager for the
Evergreen VA Fund, the Evergreen VA Growth and Income Fund, the Evergreen VA
Foundation Fund, the Evergreen VA Global Leaders Fund and the Evergreen VA Small
Cap Value Fund of the Evergreen Variable Annuity Trust. Evergreen Investment
Management is the investment manager for the Evergreen VA Masters Fund of the
Evergreen Variable Annuity Trust. Evergreen Investment Management Company is the
investment manager for the Evergreen VA Strategic Income Fund, the Evergreen VA
Aggressive Growth Fund and the Evergreen VA International Growth Fund of the
Evergreen Variable Annuity Trust. Goldman Sachs Asset Management International
is the investment manager for the Goldman Sachs Variable Insurance Trust. Miller
Anderson & Sherrerd, LLP is the investment manager for the High Yield Portfolio
of the Morgan Stanley Dean Witter Universal Funds, Inc. Morgan Stanley Dean
Witter Investment Management Inc. is the investment manager for the U.S. Real
Estate Portfolio of the Morgan Stanley Dean Witter Universal Funds, Inc.
Fidelity Management & Research Company is the investment manager for the
Fidelity Variable Insurance Products Fund and the Fidelity Variable Insurance
Products Fund II. These entities are not affiliated with KILICO.
(4) NET TRANSFERS (TO) FROM AFFILIATE OR SUBACCOUNTS
Net transfers (to) from affiliate or subaccounts include transfers of all
or part of the Policy Owner's interest to or from another eligible subaccount or
to the general account of KILICO.
48
<PAGE> 49
(5) POLICY OWNERS' EQUITY
Policy Owners' equity at December 31, 1999, is as follows (in thousands,
except unit value; differences are due to rounding):
<TABLE>
<CAPTION>
NUMBER POLICY
OF UNIT OWNERS'
UNITS VALUE* EQUITY
------ ------- -------
<S> <C> <C> <C>
FIRST FOUNDATION POLICIES
EVERGREEN VARIABLE ANNUITY TRUST:
Evergreen VA Subaccount..................................... 3 $10.204 $ 29
Evergreen VA Growth and Income Subaccount................... 8 10.405 80
Evergreen VA Foundation Subaccount.......................... 0 10.244 5
Evergreen VA Global Leaders Subaccount...................... 1 11.580 11
Evergreen VA Strategic Income Subaccount.................... 5 10.026 52
Evergreen VA Aggressive Growth Subaccount................... 5 13.294 70
Evergreen VA Small Cap Value Subaccount..................... 2 10.243 23
Evergreen VA International Growth Subaccount................ 0 13.253 4
Evergreen VA Masters Subaccount............................. 1 11.993 12
GOLDMAN SACHS VARIABLE INSURANCE TRUST:
Goldman Sachs International Equity Subaccount............... 6 11.571 64
Goldman Sachs Global Income Subaccount...................... 3 9.560 25
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.:
High Yield Subaccount....................................... 5 9.390 47
U.S. Real Estate Subaccount................................. 1 8.650 9
FIDELITY VARIABLE INSURANCE PRODUCTS FUND:
Fidelity VIP Money Market Subaccount........................ 7 10.314 75
Fidelity VIP Overseas Subaccount............................ 1 13.152 19
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II:
Fidelity VIP II Contrafund Subaccount....................... 12 11.297 139
Fidelity VIP II Index 500 Subaccount........................ 47 10.859 508
------
TOTAL FIRST FOUNDATION POLICY OWNERS' EQUITY........... $1,172
======
</TABLE>
- ---------------
* Average
49
<PAGE> 50
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholder of
Kemper Investors Life Insurance Company:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, comprehensive income,
stockholder's equity and cash flows present fairly, in all material respects,
the financial position of Kemper Investors Life Insurance Company and
subsidiaries (the "Company") at December 31, 1999 and 1998, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States. In addition, in our opinion, the financial
statement schedules listed in the accompanying index present fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. These financial statements
and financial statement schedules are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements and financial statement schedules based on our audits. We conducted
our audits of these statements in accordance with auditing standards generally
accepted in the United States which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Chicago, Illinois
March 17, 2000
50
<PAGE> 51
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31
1999 1998
------------ -----------
<S> <C> <C>
ASSETS
Fixed maturities, available for sale, at fair value
(amortized cost: December 31, 1999, $3,397,188, December
31, 1998, $3,421,535)..................................... $ 3,276,017 $ 3,482,820
Trading account securities at fair value (amortized cost:
December 31, 1998, $99,095)............................... -- 101,781
Equity securities (cost: December 31, 1999, $65,235;
December 31, 1998, $66,776)............................... 61,592 66,854
Short-term investments...................................... 42,391 58,334
Joint venture mortgage loans................................ 67,242 65,806
Third-party mortgage loans.................................. 63,875 76,520
Other real estate-related investments....................... 20,506 22,049
Policy loans................................................ 261,788 271,540
Other invested assets....................................... 25,621 23,645
----------- -----------
Total investments................................. 3,819,032 4,169,349
Cash........................................................ 12,015 13,486
Accrued investment income................................... 127,219 124,213
Goodwill.................................................... 203,907 216,651
Value of business acquired.................................. 119,160 118,850
Deferred insurance acquisition costs........................ 159,667 91,543
Deferred income taxes....................................... 93,502 35,059
Reinsurance recoverable..................................... 309,696 344,837
Receivable on sales of securities........................... 3,500 3,500
Other assets and receivables................................ 29,950 23,029
Assets held in separate accounts............................ 9,778,068 7,099,204
----------- -----------
Total assets...................................... $14,655,716 $12,239,721
=========== ===========
LIABILITIES
Future policy benefits...................................... $ 3,718,833 $ 3,906,391
Other policyholder benefits and funds payable............... 457,328 318,369
Other accounts payable and liabilities...................... 71,482 61,898
Liabilities related to separate accounts.................... 9,778,068 7,099,204
----------- -----------
Total liabilities................................. 14,025,711 11,385,862
----------- -----------
Commitments and contingent liabilities
STOCKHOLDER'S EQUITY
Capital stock--$10 par value,
authorized 300,000 shares; outstanding 250,000 shares..... 2,500 2,500
Additional paid-in capital.................................. 804,347 804,347
Accumulated other comprehensive income (loss)............... (120,819) 32,975
Retained earnings (deficit)................................. (56,023) 14,037
----------- -----------
Total stockholder's equity........................ 630,005 853,859
----------- -----------
Total liabilities and stockholder's equity........ $14,655,716 $12,239,721
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
51
<PAGE> 52
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
REVENUE
Net investment income....................................... $264,640 $273,512 $296,195
Realized investment gains (losses).......................... (9,549) 51,868 10,546
Premium income.............................................. 21,990 22,346 22,239
Separate account fees and charges........................... 74,715 61,982 85,413
Other income................................................ 11,623 10,031 11,087
-------- -------- --------
Total revenue..................................... 363,419 419,739 425,480
-------- -------- --------
BENEFIT AND EXPENSES
Interest credited to policyholders.......................... 162,243 176,906 199,782
Claims incurred and other policyholder benefits............. 18,185 28,029 28,372
Taxes, licenses and fees.................................... 30,234 30,292 52,608
Commissions................................................. 67,555 39,046 32,602
Operating expenses.......................................... 45,989 44,575 36,837
Deferral of insurance acquisition costs..................... (69,814) (46,565) (38,177)
Amortization of insurance acquisition costs................. 5,524 12,082 3,204
Amortization of value of business acquired.................. 12,955 17,677 24,948
Amortization of goodwill.................................... 12,744 12,744 15,295
-------- -------- --------
Total benefits and expenses....................... 285,615 314,786 355,471
-------- -------- --------
Income before income tax expense............................ 77,804 104,953 70,009
Income tax expense.......................................... 32,864 39,804 31,292
-------- -------- --------
Net income........................................ $ 44,940 $ 65,149 $ 38,717
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
52
<PAGE> 53
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------
1999 1998 1997
--------- -------- --------
<S> <C> <C> <C>
NET INCOME.................................................. $ 44,940 $ 65,149 $ 38,717
--------- -------- --------
OTHER COMPREHENSIVE INCOME (LOSS), BEFORE TAX:
Unrealized holding gains (losses) on investments arising
during period:
Unrealized holding gains (losses) on investments.......... (180,267) 25,372 60,802
Adjustment to value of business acquired.................. 12,811 (9,332) (28,562)
Adjustment to deferred insurance acquisition costs........ 5,726 (2,862) (2,680)
--------- -------- --------
Total unrealized holding gains (losses) on
investments arising during period............... (161,730) 13,178 29,560
--------- -------- --------
Less reclassification adjustments for items included in
net income:
Adjustment for (gains) losses included in realized
investment gains (losses)............................ 16,651 6,794 (9,016)
Adjustment for amortization of premium on fixed
maturities included in net investment income......... (10,533) (17,064) (17,866)
Adjustment for (gains) losses included in amortization
of value of business acquired........................ (454) (7,378) (2,353)
Adjustment for (gains) losses included in amortization
of insurance acquisition costs....................... 1,892 (463) (355)
--------- -------- --------
Total reclassification adjustments for items
included in net income.......................... 7,556 (18,111) (29,590)
--------- -------- --------
Other comprehensive income (loss), before related income tax
expense (benefit)......................................... (169,286) 31,289 59,150
Related income tax expense (benefit)........................ (15,492) 10,952 (985)
--------- -------- --------
Other comprehensive income (loss), net of tax..... (153,794) 20,337 60,135
--------- -------- --------
Comprehensive income (loss)....................... $(108,854) $ 85,486 $ 98,852
========= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
53
<PAGE> 54
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(in thousands)
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------------
1999 1998 1997
--------- -------- --------
<S> <C> <C> <C>
CAPITAL STOCK, beginning and end of period.................. $ 2,500 $ 2,500 $ 2,500
--------- -------- --------
ADDITIONAL PAID-IN CAPITAL, beginning of period............. 804,347 806,538 761,538
Capital contributions from parent........................... -- 4,261 45,000
Adjustment to prior period capital contribution from
parent.................................................... -- (6,452) --
--------- -------- --------
End of period..................................... 804,347 804,347 806,538
--------- -------- --------
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS), beginning of
period.................................................... 32,975 12,637 (47,498)
Other comprehensive income (loss), net of tax............... (153,794) 20,338 60,135
--------- -------- --------
End of period..................................... (120,819) 32,975 12,637
--------- -------- --------
RETAINED EARNINGS, beginning of period...................... 14,037 43,888 34,421
Net income.................................................. 44,940 65,149 38,717
Dividends to parent......................................... (115,000) (95,000) (29,250)
--------- -------- --------
End of period..................................... (56,023) 14,037 43,888
--------- -------- --------
Total stockholder's equity........................ $ 630,005 $853,859 $865,563
========= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
54
<PAGE> 55
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------
1999 1998 1997
----------- ----------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................ $ 44,940 $ 65,149 $ 38,717
Reconcilement of net income to net cash provided:
Realized investment (gains) losses..................... 9,549 (51,868) (10,546)
Net change in trading account securities............... (51,239) (6,727) --
Interest credited and other charges.................... 158,557 173,958 198,206
Deferred insurance acquisition costs, net.............. (64,290) (34,483) (34,973)
Amortization of value of business acquired............. 12,955 17,677 24,948
Amortization of goodwill............................... 12,744 12,744 15,295
Amortization of discount and premium on investments.... 11,157 17,353 17,866
Deferred income taxes.................................. (42,952) (12,469) (99,370)
Net change in current federal income taxes............. (10,594) (73,162) 97,386
Benefits and premium taxes due related to separate
account bank-owned life insurance.................... 149,477 123,884 180,546
Other, net (11,901) (41,477) 17,168
----------- ----------- ---------
Net cash provided from operating activities....... 218,403 190,579 445,243
----------- ----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash from investments sold or matured:
Fixed maturities held to maturity...................... 335,735 491,699 229,208
Fixed maturities sold prior to maturity................ 1,269,290 882,596 633,872
Equity securities...................................... 11,379 107,598 --
Mortgage loans, policy loans and other invested
assets............................................... 75,389 180,316 131,866
Cost of investments purchased or loans originated:
Fixed maturities....................................... (1,455,496) (1,319,119) (606,028)
Equity securities...................................... (8,703) (83,303) --
Mortgage loans, policy loans and other invested
assets............................................... (43,665) (66,331) (76,350)
Short-term investments, net............................... 15,943 177,723 (164,361)
Net change in receivable and payable for securities
transactions........................................... -- (677) 29,746
Net change in other assets................................ (2,725) -- 244
----------- ----------- ---------
Net cash provided from investing activities....... 197,147 370,502 178,197
----------- ----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Policyholder account balances:
Deposits............................................... 383,874 180,124 145,687
Withdrawals............................................ (694,848) (649,400) (745,510)
Capital contributions from parent......................... -- 4,261 45,000
Dividends to parent....................................... (115,000) (95,000) (29,250)
Other..................................................... 8,953 (11,448) (18,275)
----------- ----------- ---------
Net cash used in financing activities............. (417,021) (571,463) (602,348)
----------- ----------- ---------
Net increase (decrease) in cash.............. (1,471) (10,382) 21,092
CASH, beginning of period................................... 13,486 23,868 2,776
----------- ----------- ---------
CASH, end of period......................................... $ 12,015 $ 13,486 $ 23,868
=========== =========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
55
<PAGE> 56
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Kemper Investors Life Insurance Company and subsidiaries (the "Company")
issues fixed and variable annuity products, variable life, term life and
interest-sensitive life insurance products marketed primarily through a network
of financial institutions, securities brokerage firms, insurance agents and
financial planners. The Company is licensed in the District of Columbia and all
states except New York. The Company is a wholly-owned subsidiary of Kemper
Corporation ("Kemper"). Kemper and the Company are wholly-owned subsidiaries of
Zurich Financial Services ("ZFS" or "Zurich"). ZFS is owned by Zurich Allied AG
and Allied Zurich p.l.c., fifty-seven percent and forty-three percent,
respectively. Zurich Allied AG is listed on the Swiss Market Index. Allied
Zurich p.l.c. is included in the FTSE-100 Share Index in London.
The financial statements include the accounts of the Company on a
consolidated basis. All significant intercompany balances and transactions have
been eliminated. Certain reclassifications have been made to the 1998 and 1997
consolidated financial statements in order for them to conform to the 1999
presentation. The accompanying consolidated financial statements of the Company
as of and for the years ended December 31, 1999, 1998 and 1997, have been
prepared in conformity with accounting principles generally accepted in the
United States.
ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that could affect the reported amounts of assets and
liabilities as well as the disclosure of contingent assets or liabilities at the
date of the financial statements. As a result, actual results reported as
revenue and expenses could differ from the estimates reported in the
accompanying financial statements. As further discussed in the accompanying
notes to the consolidated financial statements, significant estimates and
assumptions affect goodwill, deferred insurance acquisition costs, the value of
business acquired, provisions for real estate-related losses and reserves,
other-than-temporary declines in values for fixed maturities, the valuation
allowance for deferred income taxes and the calculation of fair value
disclosures for certain financial instruments.
GOODWILL
The Company reviews goodwill to determine if events or changes in
circumstances may have affected the recoverability of the outstanding goodwill
as of each reporting period. In the event that the Company determines that
goodwill is not recoverable, it would amortize such amounts as additional
goodwill expense in the accompanying financial statements. As of December 31,
1999, the Company believes that no such adjustment is necessary.
In December of 1997, the Company changed its amortization period from
twenty-five years to twenty years in order to conform to Zurich's accounting
practices and policies. As a result of the change in amortization periods, the
Company recorded an increase in goodwill amortization expense of $5.1 million
during 1997.
VALUE OF BUSINESS ACQUIRED
The value of business acquired reflects the estimated fair value of the
Company's life insurance business in force and represents the portion of the
cost to acquire the Company that is allocated to the value of the right to
receive future cash flows from insurance contracts existing at the date of
acquisition. Such value is the present value of the actuarially determined
projected cash flows for the acquired policies.
The value of the business acquired is amortized over the estimated contract
life of the business acquired in relation to the present value of estimated
gross profits using current assumptions based on an interest rate equal to
56
<PAGE> 57
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the liability or contract rate on the value of business acquired. The estimated
amortization and accretion of interest for the value of business acquired for
each of the years through December 31, 2004 are as follows:
<TABLE>
<CAPTION>
PROJECTED
(IN THOUSANDS) BEGINNING ACCRETION OF ENDING
YEAR ENDED DECEMBER 31 BALANCE AMORTIZATION INTEREST BALANCE
- ----------------------------------------------- --------- ------------ ------------ ---------
<S> <C> <C> <C> <C>
1997 (actual).................................. 168,692 (34,906) 9,958 143,744
1998 (actual).................................. 143,744 (26,807) 9,129 126,066
1999 (actual).................................. 126,066 (20,891) 7,936 113,111
2000........................................... 113,111 (23,418) 6,971 96,664
2001........................................... 96,664 (21,493) 5,890 81,061
2002........................................... 81,061 (17,805) 4,970 68,226
2003........................................... 68,226 (16,160) 4,185 56,251
2004........................................... 56,251 (14,625) 3,438 45,064
</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. This adjustment increased the value of business acquired by $6.0 million as
of December 31, 1999 and decreased the value of business acquired by $7.2
million as of December 31, 1998. Accumulated other comprehensive income
increased by approximately $3.9 million as of December 31, 1999 due to this
adjustment and decreased accumulated other comprehensive income by $4.7 million
as of December 31, 1998.
LIFE INSURANCE REVENUE AND EXPENSES
Revenue for annuities, variable life insurance and interest-sensitive life
insurance products consists of investment income, and policy charges such as
mortality, expense and surrender charges and expense loads for premium taxes on
certain contracts. Expenses consist of benefits and interest credited to
contracts, policy maintenance costs and amortization of deferred insurance
acquisition costs.
Premiums for term life policies are reported as earned when due. Profits
for such policies are recognized over the duration of the insurance policies by
matching benefits and expenses to premium income.
REINSURANCE
In the ordinary course of business, the Company enters into reinsurance
agreements to diversify risk and limit its overall financial exposure to certain
blocks of fixed-rate annuities and to individual death claims. The Company
generally cedes 100 percent of the related annuity liabilities under the terms
of the reinsurance agreements. Although these reinsurance agreements
contractually obligate the reinsurers to reimburse the Company, they do not
discharge the Company from its primary liabilities and obligations to
policyholders. As such, these amounts paid or deemed to have been paid are
recorded on the Company's consolidated balance sheet as reinsurance recoverables
and ceded future policy benefits.
DEFERRED INSURANCE ACQUISITION COSTS
The costs of acquiring new business, principally commission expense and
certain policy issuance and underwriting expenses, have been deferred to the
extent they are recoverable from estimated future gross profits on the related
contracts and policies. The deferred insurance acquisition costs for annuities,
separate account business and interest-sensitive life insurance products are
being amortized over the estimated contract life in relation to the present
value of estimated gross profits. Deferred insurance acquisition costs related
to such interest-sensitive products also reflect the estimated impact of
unrealized gains or losses on fixed maturities held as available for sale in the
investment portfolio, through a credit or charge to accumulated other
comprehensive
57
<PAGE> 58
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
FUTURE POLICY BENEFITS
Liabilities for future policy benefits related to annuities and
interest-sensitive life contracts reflect net premiums received plus interest
credited during the contract accumulation period and the present value of future
payments for contracts that have annuitized. Current interest rates credited
during the contract accumulation period range from 3.0 percent to 10.0 percent.
Future minimum guaranteed interest rates vary from 3.0 percent to 4.0 percent.
For contracts that have annuitized, interest rates used in determining the
present value of future payments range principally from 2.5 percent to 12.0
percent.
Liabilities for future term life policy benefits have been computed
principally by a net level premium method. Anticipated rates of mortality are
based on the 1975-1980 Select and Ultimate Table modified by Company experience,
including withdrawals. Estimated future investment yields are a level 7.1
percent.
GUARANTY FUND ASSESSMENTS
The Company is liable for guaranty fund assessments related to certain
unaffiliated insurance companies that have become insolvent during the years
1999 and prior. The Company's financial statements include provisions for all
known assessments that are expected to be levied against the Company as well as
an estimate of amounts (net of estimated future premium tax recoveries) that the
Company believes it will be assessed in the future for which the life insurance
industry has estimated the cost to cover losses to policyholders.
INVESTED ASSETS AND RELATED INCOME
Investments in fixed maturities and equity securities are carried at fair
value. Short-term investments are carried at cost, which approximates fair
value.
The amortized cost of fixed maturities is adjusted for amortization of
premiums and accretion of discounts to maturity, or in the case of
mortgage-backed and asset-backed securities, over the estimated life of the
security. Such amortization is included in net investment income. Amortization
of the discount or premium from mortgage-backed and asset-backed securities is
recognized using a level effective yield method which considers the estimated
timing and amount of prepayments of the underlying loans and is adjusted to
reflect differences which arise between the prepayments originally anticipated
and the actual prepayments received and currently anticipated. To the extent
that the estimated lives of such securities change as a result of changes in
prepayment rates, the adjustment is also included in net investment income. The
Company does not accrue interest income on fixed maturities deemed to be
impaired on an other-than-temporary basis, or on mortgage loans and other real
estate loans where the likelihood of collection of interest is doubtful.
Mortgage loans are carried at their unpaid balance, net of unamortized
discount and any applicable reserves or write-downs. Other real estate-related
investments, net of any applicable reserves and write-downs, include notes
receivable from real estate ventures and investments in real estate ventures,
adjusted for the equity in the operating income or loss of such ventures. Real
estate reserves are established when declines in collateral values, estimated in
light of current economic conditions, indicate a likelihood of loss.
Investments in policy loans and other invested assets, consisting primarily
of venture capital investments and a leveraged lease, are carried primarily at
cost.
Realized gains or losses on sales of investments, determined on the basis
of identifiable cost on the disposition of the respective investment,
recognition of other-than-temporary declines in value and changes in real
estate-related reserves and write-downs are included in revenue. Net unrealized
gains or losses on revaluation of investments are credited or charged to
accumulated other comprehensive income (loss). Such unrealized gains are
recorded net of deferred income tax expense, while unrealized losses are not tax
benefitted.
58
<PAGE> 59
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 separate account and retains varying
amounts of withdrawal charges to cover expenses in the event of early
withdrawals by contract holders. The assets and liabilities of the separate
accounts are carried at fair value.
INCOME TAX
The Company files a separate Federal income tax return. Deferred taxes are
provided on the temporary differences between the tax and financial statement
basis of assets and liabilities.
(2) CASH FLOW INFORMATION
The Company defines cash as cash in banks and money market accounts. The
Company paid federal income taxes of $83.8 million, $126.0 million and $29.0
million directly to the United States Treasury Department during 1999, 1998 and
1997, respectively.
(3) INVESTED ASSETS AND RELATED INCOME
The Company is carrying its fixed maturity investment portfolio at
estimated fair value as fixed maturities are considered available for sale. The
carrying value of fixed maturities compared with amortized cost, adjusted for
other-than-temporary declines in value, were as follows:
<TABLE>
<CAPTION>
ESTIMATED
UNREALIZED
CARRYING AMORTIZED -------------------
VALUE COST GAINS LOSSES
(in thousands) ---------- ---------- ------- ---------
<S> <C> <C> <C> <C>
DECEMBER 31, 1999
U.S. treasury securities and obligations of U.S.
government agencies and authorities................ $ 6,516 $ 6,631 $ -- $ (115)
Obligations of states and political subdivisions,
special revenue and nonguaranteed.................. 21,656 22,107 -- (451)
Debt securities issued by foreign governments........ 23,890 24,749 380 (1,239)
Corporate securities................................. 2,063,054 2,147,606 2,750 (87,302)
Mortgage and asset-backed securities................. 1,160,901 1,196,095 450 (35,644)
---------- ---------- ------- ---------
Total fixed maturities........................ $3,276,017 $3,397,188 $ 3,580 $(124,751)
========== ========== ======= =========
DECEMBER 31, 1998
U.S. treasury securities and obligations of U.S.
government agencies and authorities................ $ 7,951 $ 7,879 $ 81 $ (9)
Obligations of states and political subdivisions,
special revenue and nonguaranteed.................. 27,039 26,768 362 (91)
Debt securities issued by foreign governments........ 69,357 67,239 2,266 (148)
Corporate securities................................. 1,908,850 1,866,372 46,664 (4,186)
Mortgage and asset-backed securities................. 1,469,623 1,453,277 19,063 (2,717)
---------- ---------- ------- ---------
Total fixed maturities........................ $3,482,820 $3,421,535 $68,436 $ (7,151)
========== ========== ======= =========
</TABLE>
The carrying value and amortized cost of fixed maturity investments, by
contractual maturity at December 31, 1999, are shown below. Actual maturities
will differ from contractual maturities because borrowers may
59
<PAGE> 60
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) INVESTED ASSETS AND RELATED INCOME (CONTINUED)
have the right to call or prepay obligations with or without call or prepayment
penalties and because mortgage-backed and asset-backed securities provide for
periodic payments throughout their life.
<TABLE>
<CAPTION>
CARRYING AMORTIZED
VALUE COST
(in thousands) ---------- ----------
<S> <C> <C>
One year or less............................................ $ 49,221 $ 48,953
Over one year through five years............................ 747,086 765,064
Over five years through ten years........................... 1,022,850 1,073,468
Over ten years.............................................. 295,959 313,608
Securities not due at a single maturity date, primarily
mortgage and asset-backed securities(1)................... 1,160,901 1,196,095
---------- ----------
Total fixed maturities............................... $3,276,017 $3,397,188
========== ==========
</TABLE>
- ---------------
(1) Weighted average maturity of 4.9 years.
Proceeds from sales of investments in fixed maturities prior to maturity
were $1,269.3 million, $882.6 million and $633.9 million during 1999, 1998 and
1997, respectively. Gross gains of $7.9 million, $10.1 million and $3.1 million
and gross losses of $17.7 million, $8.0 million and $13.7 million were realized
on sales and write-downs of fixed maturities in 1999, 1998 and 1997,
respectively. Excluding agencies of the U.S. government, there were no
individual investments that exceeded ten percent of stockholder's equity at
December 31, 1999.
At December 31, 1999, securities carried at approximately $6.2 million were
on deposit with governmental agencies as required by law.
Upon default or indication of potential default by an issuer of fixed
maturity securities, the issue(s) of such issuer would be placed on nonaccrual
status and, since declines in fair value would no longer be considered by the
Company to be temporary, would be analyzed for possible write-down. Any such
issue would be written down to its net realizable value during the fiscal
quarter in which the impairment was determined to have become other than
temporary. Thereafter, each issue on nonaccrual status is regularly reviewed,
and additional write-downs may be taken in light of later developments.
The Company's computation of net realizable value involves judgments and
estimates, so such value should be used with care. Such value determination
considers such factors as the existence and value of any collateral security;
the capital structure of the issuer; the level of actual and expected market
interest rates; where the issue ranks in comparison with other debt of the
issuer; the economic and competitive environment of the issuer and its business;
the Company's view on the likelihood of success of any proposed issuer
restructuring plan; and the timing, type and amount of any restructured
securities that the Company anticipates it will receive.
The Company's $151.6 million real estate portfolio at December 31, 1999
consists of joint venture and third-party mortgage loans and other real
estate-related investments. At December 31, 1999 and 1998, total impaired real
estate-related loans were as follows:
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31
1999 1998
(in millions) ------------ ------------
<S> <C> <C>
Impaired loans without reserves--gross...................... $ 74.9 $ 83.9
Impaired loans with reserves--gross......................... 23.4 25.0
------ ------
Total gross impaired loans........................... 98.3 108.9
Reserves related to impaired loans.......................... (18.5) (18.5)
Write-downs related to impaired loans....................... (3.5) (3.5)
------ ------
Net impaired loans................................... $ 76.3 $ 86.9
====== ======
</TABLE>
Impaired loans without reserves include loans in which the deficit in
equity investments in real estate-related investments is considered in
determining reserves and write-downs. The Company had an average balance of
$100.0 million and $54.6 million in impaired loans for 1999 and 1998,
respectively. Cash payments received on impaired loans are generally applied to
reduce the outstanding loan balance.
60
<PAGE> 61
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) INVESTED ASSETS AND RELATED INCOME (CONTINUED)
At December 31, 1999 and 1998, loans on nonaccrual status, before reserves
and write-downs, amounted to $98.3 million and $37.4 million, respectively. The
Company's nonaccrual loans are generally included in impaired loans.
NET INVESTMENT INCOME
The sources of net investment income were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
(in thousands) -------- -------- --------
<S> <C> <C> <C>
Interest and dividends on fixed maturities.................. $231,176 $232,707 $250,170
Dividends on equity securities.............................. 4,618 2,143 2,123
Income from short-term investments.......................... 3,568 5,391 4,128
Income from mortgage loans.................................. 6,296 14,964 16,283
Income from policy loans.................................... 20,131 21,096 20,549
Income from other real estate-related investments........... 155 352 6,631
Income from other loans and investments..................... 2,033 2,223 2,045
-------- -------- --------
Total investment income.............................. $267,977 $278,876 $301,929
Investment expense.......................................... (3,337) (5,364) (5,734)
-------- -------- --------
Net investment income................................ $264,640 $273,512 $296,195
======== ======== ========
</TABLE>
NET REALIZED INVESTMENT GAINS (LOSSES)
Net realized investment gains (losses) for the years ended December 31, 1999,
1998 and 1997, were as follows:
<TABLE>
<CAPTION>
REALIZED GAINS (LOSSES)
-------------------------------------
1999 1998 1997
(in thousands) ------- -------- --------
<S> <C> <C> <C>
Real estate-related......................................... $ 4,201 $ 41,362 $ 19,758
Fixed maturities............................................ (9,755) 2,158 (10,656)
Trading account securities--gross gains..................... 491 3,254 --
Trading account securities--gross losses.................... (7,794) (417) --
Trading account securities--holding losses.................. -- (151) --
Equity securities........................................... 1,039 5,496 914
Other....................................................... 2,269 166 530
------- -------- --------
Realized investment gains (losses) before income tax
expense (benefit)...................................... $(9,549) $ 51,868 $ 10,546
Income tax expense (benefit)................................ (3,342) 18,154 3,691
------- -------- --------
Net realized investment gains (losses).................... $(6,207) $ 33,714 $ 6,855
======= ======== ========
</TABLE>
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
61
<PAGE> 62
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) INVESTED ASSETS AND RELATED INCOME (CONTINUED)
difference between fair value and cost. The change in net unrealized investment
gains (losses) by class of investment for the years ended December 31, 1999,
1998 and 1997 were as follows:
<TABLE>
<CAPTION>
CHANGE IN UNREALIZED GAINS (LOSSES)
-----------------------------------------
DECEMBER 31 DECEMBER 31 DECEMBER 31
1999 1998 1997
(in thousands) ------------ ------------ -----------
<S> <C> <C> <C>
Fixed maturities........................................ $(182,456) $36,717 $ 87,787
Equity and other securities............................. (3,929) (1,075) (103)
Adjustment to deferred insurance acquisition costs...... 3,834 (2,399) (2,325)
Adjustment to value of business acquired................ 13,265 (1,954) (26,209)
--------- ------- --------
Unrealized gain (loss) before income tax expense
(benefit).......................................... (169,286) 31,289 59,150
Income tax expense (benefit)............................ (15,492) 10,952 (985)
--------- ------- --------
Net unrealized gain (loss) on investments........ $(153,794) $20,337 $ 60,135
========= ======= ========
</TABLE>
(4) UNCONSOLIDATED INVESTEES
At December 31, 1999 and 1998 the Company, along with other Kemper
subsidiaries, directly held partnership interests in a number of real estate
joint ventures. The Company's direct and indirect real estate joint venture
investments are accounted for utilizing the equity method, with the Company
recording its share of the operating results of the respective partnerships. The
Company, as an equity owner, has the ability to fund, and historically has
elected to fund, operating requirements of certain of the joint ventures.
Consolidation accounting methods are not utilized as the Company, in most
instances, does not own more than 50 percent in the aggregate, and in any event,
major decisions of the partnership must be made jointly by all partners.
As of December 31, 1999 and 1998, the Company's net equity investment in
unconsolidated investees amounted to $0.9 million and $1.2 million,
respectively. The Company's share of net income related to such unconsolidated
investees amounted to $155 thousand, $241 thousand and $835 thousand in 1999,
1998 and 1997, respectively.
(5) CONCENTRATION OF CREDIT RISK
The Company generally strives to maintain a diversified invested asset
portfolio; however, certain concentrations of credit risk exist in mortgage and
asset-backed securities and real estate.
Approximately 20.0 percent of the Company's investment-grade fixed
maturities at December 31, 1999 were mortgage-backed securities, down from 28.0
percent at December 31, 1998, due to sales and paydowns during 1999. These
investments consist primarily of marketable mortgage pass-through securities
issued by the Government National Mortgage Association, the Federal National
Mortgage Association or the Federal Home Loan Mortgage Corporation and other
investment-grade securities collateralized by mortgage pass-through securities
issued by these entities. The Company has not made any investments in
interest-only or other similarly volatile tranches of mortgage-backed
securities. The Company's mortgage-backed investments are generally AAA credit
quality.
Approximately 16.8 percent and 15.4 percent of the Company's
investment-grade fixed maturities at December 31, 1999 and 1998, respectively,
consisted of corporate asset-backed securities. The majority of the Company's
investments in asset-backed securities were backed by home equity loans (24.0%),
commercial mortgage-backed securities (22.8%), manufactured housing loans
(12.5%), other commercial assets (11.3%) and collateralized loan and bond
obligations (10.6%).
The Company's real estate portfolio is distributed by geographic location
and property type. The geographic distribution of a majority of the real estate
portfolio as of December 31, 1999 was as follows: California (36.8%), Hawaii
(13.6%), Washington (10.9%) and Colorado (10.1%). The property type distribution
of a majority of the real estate portfolio as of December 31, 1999 was as
follows: hotels (36.3%), land (36.1%) and residential (13.5%).
62
<PAGE> 63
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) CONCENTRATION OF CREDIT RISK (CONTINUED)
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.
Slightly more than half of the Company's real estate mortgage loans are on
properties or projects where the Company, Kemper, or their affiliates have taken
ownership positions in joint ventures with a small number of partners.
At December 31, 1999, loans to and investments in joint ventures in which
Patrick M. Nesbitt or his affiliates ("Nesbitt"), a third-party real estate
developer, have ownership interests constituted approximately $63.9 million, or
42.2 percent, of the Company's real estate portfolio. The Nesbitt ventures
consist of nine hotel properties, one office building and one retail property.
At December 31, 1999, the Company did not have any Nesbitt-related
off-balance-sheet legal funding commitments outstanding.
At December 31, 1999, loans to a master limited partnership (the "MLP")
between subsidiaries of Kemper and subsidiaries of Lumbermens Mutual Casualty
Company ("Lumbermens"), a former affiliate, constituted approximately $55.4
million, or 36.5 percent, of the Company's real estate portfolio. Kemper's
interest in the MLP is 75.0 percent at December 31, 1999. Loans to the MLP were
placed on non-accrual status at the beginning of 1999 due to management's desire
not to increase book value of the MLP over net realizable value, as interest on
these loans has historically been added to principal. At December 31, 1999,
MLP-related commitments accounted for approximately $0.1 million of the
Company's off-balance-sheet legal commitments.
The remaining significant real estate-related investments amounted to $20.7
million at December 31, 1999 and consisted of various zoned and unzoned
residential and commercial lots located in Hawaii. Due to certain negative
zoning restriction developments in January 1997 and a continuing economic slump
in Hawaii, the Company has placed these real estate-related investments on
nonaccrual status as of December 31, 1996. The Company is currently pursuing the
zoning of all remaining unzoned properties, as well as pursuing steps to sell
all remaining zoned properties. However, due to the state of Hawaii's economy,
which has lagged behind the economic expansion of most of the rest of the United
States, the Company anticipates that it could be several additional years until
it completely disposes of all of its investments in Hawaii. At December 31,
1999, off-balance sheet legal commitments related to Hawaiian properties totaled
$4.0 million.
At December 31, 1999, the Company no longer had any outstanding loans or
investments in projects with the Prime Group, Inc. or its affiliates, as all
such investments have been sold. However, the Company continues to have Prime
Group-related commitments, which accounted for $25.7 million of the Company's
off-balance-sheet legal commitments at December 31, 1999.
(6) INCOME TAXES
Income tax expense (benefit) was as follows for the years ended December 31,
1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
(in thousands) -------- -------- --------
<S> <C> <C> <C>
Current................................................... $ 75,816 $ 52,273 $130,662
Deferred.................................................. (42,952) (12,469) (99,370)
-------- -------- --------
Total........................................... $ 32,864 $ 39,804 $ 31,292
======== ======== ========
</TABLE>
63
<PAGE> 64
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) INCOME TAXES (CONTINUED)
Additionally, the deferred income tax (benefit) expense related to items
included in other comprehensive income was as follows for the years ended
December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
(in thousands) -------- ------- -------
<S> <C> <C> <C>
Unrealized gains and losses on investments.................. $(21,477) $12,476 $ 9,002
Value of business acquired.................................. 4,643 (684) (9,173)
Deferred insurance acquisition costs........................ 1,342 (840) (814)
-------- ------- -------
Total............................................. $(15,492) $10,952 $ (985)
======== ======= =======
</TABLE>
The actual income tax expense for 1999, 1998 and 1997 differed from the
"expected" tax expense for those years as displayed below. "Expected" tax
expense was computed by applying the U.S. federal corporate tax rate of 35
percent in 1999, 1998, and 1997 to income before income tax expense.
<TABLE>
<CAPTION>
1999 1998 1997
(in thousands) ------- ------- -------
<S> <C> <C> <C>
Computed expected tax expense............................... $27,232 $36,734 $24,503
Difference between "expected" and actual tax expense:
State taxes............................................... 1,608 (434) 1,801
Amortization of goodwill.................................. 4,460 4,460 5,353
Dividend received deduction............................... -- (540) --
Foreign tax credit........................................ (306) (250) (278)
Other, net................................................ (130) (166) (87)
------- ------- -------
Total actual tax expense.......................... $32,864 $39,804 $31,292
======= ======= =======
</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 unrealized losses on investments to
a realizable amount. This amount is based on the evidence available and
management's judgment. Any reversals of the valuation allowance are contingent
upon the recognition of future capital gains in the Company's federal income tax
return or a change in circumstances which causes the recognition of the benefits
to become more likely than not. The change in the valuation allowance is related
solely to the change in the net deferred federal tax asset or liability from
unrealized gains or losses on investments.
The tax effects of temporary differences that give rise to significant portions
of the Company's net deferred federal tax assets or liabilities were as follows:
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31 DECEMBER 31
1999 1998 1997
(in thousands) ----------- ----------- -----------
<S> <C> <C> <C>
Deferred federal tax assets:
Deferred insurance acquisition costs ("DAC Tax")... $121,723 $ 86,332 $ 75,522
Unrealized losses on investments................... 43,758 -- --
Life policy reserves............................... 43,931 27,240 43,337
Unearned revenue................................... 59,349 42,598 37,243
Real estate-related................................ 7,103 13,944 13,400
</TABLE>
64
<PAGE> 65
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) INCOME TAXES (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31 DECEMBER 31
1999 1998 1997
(in thousands) ----------- ----------- -----------
<S> <C> <C> <C>
Other investment-related........................... 928 5,770 3,298
Other.............................................. 3,133 4,923 4,371
-------- -------- --------
Total deferred federal tax assets............... 279,925 180,807 177,171
Valuation allowance................................ (58,959) (15,201) (15,201)
-------- -------- --------
Total deferred federal tax assets after
valuation allowance........................... 220,966 165,606 161,970
-------- -------- --------
Deferred federal tax liabilities:
Value of business acquired......................... 55,884 41,598 48,469
Deferred insurance acquisition costs............... 41,706 32,040 20,811
Depreciation and amortization...................... 19,957 19,111 20,201
Other investment-related........................... 7,670 14,337 18,774
Unrealized gains on investments.................... -- 21,477 9,002
Other.............................................. 2,247 1,984 4,720
-------- -------- --------
Total deferred federal tax liabilities.......... 127,464 130,547 121,977
-------- -------- --------
Net deferred federal tax assets...................... $ 93,502 $ 35,059 $ 39,993
======== ======== ========
</TABLE>
The net deferred tax assets relate primarily to unearned revenue and the
DAC Tax associated with $1.6 billion and $1.5 billion of new and renewal sales
in 1999 and 1998, respectively, from a non-registered individual and group
variable bank-owned life insurance contract ("BOLI"). Management believes that
it is more likely than not that the results of future operations will generate
sufficient taxable income over the ten year amortization period of the unearned
revenue and DAC Tax to realize such deferred tax assets.
The tax returns through the year 1993 have been examined by the Internal
Revenue Service ("IRS"). Changes proposed are not material to the Company's
financial position. The tax returns for the years 1994 through 1996 are
currently under examination by the IRS.
(7) RELATED-PARTY TRANSACTIONS
The Company received capital contributions from Kemper of $4.3 million and
$45.0 million during 1998 and 1997, respectively. The Company paid cash
dividends of $115.0 million, $95.0 million and $29.3 million to Kemper during
1999, 1998 and 1997, respectively.
The Company has loans to joint ventures, consisting primarily of mortgage
loans on real estate, in which the Company and/or one of its affiliates has an
ownership interest. At December 31, 1999 and 1998, joint venture mortgage loans
totaled $67.2 million and $65.8 million, respectively, and during 1999, 1998 and
1997, the Company earned interest income on these joint venture loans of $0.6
million, $6.8 million and $7.5 million, respectively.
All of the Company's personnel are employees of Federal Kemper Life
Assurance Company ("FKLA"), an affiliated company. The Company is allocated
expenses for the utilization of FKLA employees and facilities, the investment
management services of Scudder Kemper Investments, Inc. ("SKI") an affiliated
company, and the information systems of Kemper Service Company ("KSvC"), an SKI
subsidiary, based on the Company's share of administrative, legal, marketing,
investment management, information systems and operation and support services.
During 1999 and 1998, expenses allocated to the Company from SKI amounted to $17
thousand and $43 thousand, respectively. During 1997, expenses allocated to the
Company from SKI and KSvC amounted to $114 thousand. The Company also paid to
SKI investment management fees of $1.8 million, $3.1 million and $3.5 million
during 1999, 1998 and 1997, respectively. In addition, expenses allocated to the
Company from FKLA during 1999, 1998 and 1997 amounted to $34.1 million, $35.5
million and $30.0 million, respectively. The Company also paid to Kemper real
estate subsidiaries fees of $1.0 million, $1.5 million and $2.2 million in 1999,
1998 and 1997, respectively, related to the management of the Company's real
estate portfolio.
65
<PAGE> 66
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(8) REINSURANCE
As of December 31, 1999 and 1998, the reinsurance recoverable related to
fixed-rate annuity liabilities ceded to an affiliate amounted to $309.7 million
and $344.8 million, respectively.
In 1996, the Company assumed, on a yearly renewable term basis, term life
insurance from FKLA. Premiums assumed during 1999 under the terms of the treaty
amounted to $21.3 million and the face amount which remained outstanding at
December 31, 1999 amounted to $10.4 billion.
Effective January 1, 1997, the Company ceded 90 percent of all new direct
life insurance premiums to outside reinsurers. Life reserves ceded to outside
reinsurers on the Company's direct business amounted to approximately $595
thousand and $413 thousand as of December 31, 1999 and 1998, respectively.
During December 1997, the Company entered into a funds withheld reinsurance
agreement with a Zurich affiliated company, Zurich Insurance Company, Bermuda
Branch ("ZICBB"), formerly ZC Life Reinsurance Limited. Under the terms of this
agreement, the Company ceded, on a yearly renewable term basis, 90 percent of
the net amount at risk (death benefit payable to the insured less the insured's
separate account cash surrender value) related to BOLI, which is held in the
Company's separate accounts. As consideration for this reinsurance coverage, the
Company cedes separate account fees (cost of insurance charges) to ZICBB and
retains a portion of such funds under the terms of the reinsurance agreement in
a funds withheld account which is included as a component of benefits and funds
payable in the accompanying consolidated balance sheets. During 1998, the
Company modified the reinsurance agreement to increase the reinsurance from
ninety percent to one hundred percent.
The following table contains amounts related to the BOLI funds withheld
reinsurance agreement (in millions):
BANK OWNED LIFE INSURANCE (BOLI)
(in millions)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Face amount in force........................................ $ 82,021 $ 66,186 $ 59,338
======== ======== ========
Net amount at risk ceded.................................... $(75,979) $(62,160) $(51,066)
======== ======== ========
Cost of insurance charges ceded............................. $ 166.4 $ 175.5 $ 24.3
======== ======== ========
Funds withheld account...................................... $ 263.4 $ 170.9 $ 23.4
======== ======== ========
</TABLE>
The Company has a funds withheld account ("FWA") supporting reserve credits
on reinsurance ceded on the BOLI product. Amendments to the reinsurance
contracts during 1998 changed the methodology used to determine increases to the
FWA. A substantial portion of the FWA was marked-to-market based predominantly
upon the total return of the Governmental Bond Division of the KILICO Variable
Series I Separate Account. During 1998, the Company recorded a $2.5 million
increase to the FWA related to this mark-to-market. In November 1998, to
properly match revenue and expenses, the Company had also placed assets
supporting the FWA in a segmented portion of its General Account. This portfolio
was classified as "trading" under Statement of Financial Accounting Standards
No. 115 ("FAS 115") at December 31, 1998 and through November 30, 1999. FAS 115
mandates that assets held in a trading account be valued at fair value, with
changes in fair value flowing through the income statement as realized capital
gains and losses. During 1998, the Company recorded a realized capital gain of
$2.8 million upon transfer of these assets from "available for sale" to the
trading portfolio as required by FAS 115. In addition, the Company recorded
realized capital losses of $7.3 million and $0.2 million related to the changes
in fair value of this portfolio during 1999 and 1998, respectively.
Due to a change in the reinsurance strategy related to the BOLI product,
effective December 1, 1999, the Company no longer marked-to-market a portion of
the FWA liability and therefore no longer designated the related portion of
assets as "trading". As a result, changes in fair value to the FWA and the
assets supporting the FWA no longer flow through the Company's operating
results.
66
<PAGE> 67
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
FKLA sponsors a health and welfare benefit plan that provides insurance
benefits covering substantially all eligible, active and retired employees of
FKLA and their covered dependents and beneficiaries. The Company is allocated a
portion of the costs of providing such benefits. The Company is self insured
with respect to medical benefits, and the plan is not funded except with respect
to certain disability-related medical claims. The medical plan provides for
medical insurance benefits at retirement, with eligibility based upon age and
the participant's number of years of participation attained at retirement. The
plan is contributory for pre-Medicare retirees, and will be contributory for all
retiree coverage for most current employees, with contributions generally
adjusted annually. Postretirement life insurance benefits are noncontributory
and are limited to $10,000 per participant.
The allocated accumulated postretirement benefit obligation accrued by the
Company amounted to $1.2 million and $2.0 million at December 31, 1999 and 1998,
respectively.
The discount rate used in determining the allocated postretirement benefit
obligation was 8.0 percent and 7.0 percent for 1999 and 1998, respectively. The
assumed health care trend rate used was based on projected experience for 1999,
7.2 percent for 2000, gradually declining to 5.6 percent by the year 2004 and
gradually declining thereafter.
A one percentage point increase in the assumed health care cost trend rate
for each year would increase the accumulated postretirement benefit obligation
as of December 31, 1999 and 1998 by $190 thousand and $312 thousand,
respectively.
(10) COMMITMENTS AND CONTINGENT LIABILITIES
The Company is involved in various legal actions for which it establishes
liabilities where appropriate. In the opinion of the Company's management, based
upon the advice of legal counsel, the resolution of such litigation is not
expected to have a material adverse effect on the consolidated financial
statements.
Although neither the Company nor its joint venture projects have been
identified as a "potentially responsible party" under Federal environmental
guidelines, inherent in the ownership of, or lending to, real estate projects is
the possibility that environmental pollution conditions may exist on or near or
relate to properties owned or previously owned on properties securing loans.
Where the Company has presently identified remediation costs, they have been
taken into account in determining the cash flows and resulting valuations of the
related real estate assets. Based on the Company's receipt and review of
environmental reports on most of the projects in which it is involved, the
Company believes its environmental exposure would be immaterial to its
consolidated results of operations. However, the Company may be required in the
future to take actions to remedy environmental exposures, and there can be no
assurance that material environmental exposures will not develop or be
identified in the future. The amount of future environmental costs is impossible
to estimate due to, among other factors, the unknown magnitude of possible
exposures, the unknown timing and extent of corrective actions that may be
required, the determination of the Company's liability in proportion to others
and the extent such costs may be covered by insurance or various environmental
indemnification agreements.
(11) FINANCIAL INSTRUMENTS--OFF-BALANCE-SHEET RISK
At December 31, 1999, the Company had future legal loan commitments and
stand-by financing agreements totaling $29.8 million to support the financing
needs of various real estate investments. To the extent these arrangements are
called upon, amounts loaned would be collateralized by assets of the joint
ventures, including first mortgage liens on the real estate. The Company's
criteria in making these arrangements are the same as for its mortgage loans and
other real estate investments. These commitments are included in the Company's
analysis of real estate-related reserves and write-downs. The fair values of
loan commitments and standby financing agreements are estimated in conjunction
with and using the same methodology as the fair value estimates of mortgage
loans and other real estate-related investments.
(12) FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates are made at specific points in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from offering
for sale at one time the Company's entire holdings of a particular financial
instrument. A
67
<PAGE> 68
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(12) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
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
68
<PAGE> 69
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(12) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
average crediting rate in 1999 and 1998 to be 4.78 percent and 4.75 percent,
respectively, while the assumed average market crediting rate was 5.0 percent in
both 1999 and 1998.
The carrying values and estimated fair values of the Company's financial
instruments at December 31, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
------------------------ ------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
(in thousands) ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Financial instruments recorded as assets:
Fixed maturities.............................. $3,276,017 $3,276,017 $3,482,820 $3,482,820
Trading account securities.................... -- -- 101,781 101,781
Cash and short-term investments............... 54,406 54,406 71,820 71,820
Mortgage loans and other real estate-related
assets..................................... 151,623 151,623 164,375 164,375
Policy loans.................................. 261,788 261,788 271,540 271,540
Equity securities............................. 61,592 61,592 66,854 66,854
Other invested assets......................... 25,620 26,226 23,645 27,620
Financial instruments recorded as liabilities:
Life policy benefits, excluding term life
reserves................................... 3,399,299 3,299,254 3,551,050 3,657,510
Funds withheld account........................ 263,428 263,428 170,920 170,920
</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 2000 is $59.1 million. The
Company paid cash dividends of $115.0 million, $95.0 million and $29.3 million
to Kemper during 1999, 1998 and 1997, respectively.
The Company's net income and capital and surplus as determined in accordance
with statutory accounting principles were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
(in thousands) -------- -------- --------
<S> <C> <C> <C>
Net income.................................................. $ 59,116 $ 64,871 $ 58,372
======== ======== ========
Statutory capital and surplus............................... $394,966 $455,213 $476,924
======== ======== ========
</TABLE>
In March 1998, the National Association of Insurance Commissioners approved
the codification of statutory accounting principles. Codification is effective
January 1, 2001. The Company has not quantified the impact that codification
will have on its statutory financial position or results of operations.
(14) UNAUDITED INTERIM FINANCIAL INFORMATION
The following table sets forth the Company's unaudited quarterly financial
information:
(in thousands)
<TABLE>
<CAPTION>
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 YEAR
QUARTER ENDED -------- -------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C>
1999 OPERATING SUMMARY
Revenues........................... $95,646 $ 86,164 $78,301 $103,308 $363,419
======= ======== ======= ======== ========
Net operating income, excluding
realized gains (losses)......... $11,222 $ 14,385 $11,568 $ 13,971 $ 51,147
Net realized investment gains
(losses)........................ (627) (1,286) (5,098) 805 (6,207)
------- -------- ------- -------- --------
Net income................. $10,595 $ 13,099 $ 6,470 $ 14,776 $ 44,940
======= ======== ======= ======== ========
</TABLE>
69
<PAGE> 70
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(14) UNAUDITED INTERIM FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 YEAR
QUARTER ENDED -------- -------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C>
1998 OPERATING SUMMARY
Revenues........................... $98,026 $110,003 $98,752 $112,958 $419,739
======= ======== ======= ======== ========
Net operating income, excluding
realized gains.................. $ 8,025 $ 5,700 $ 7,169 $ 10,541 $ 31,435
Net realized investment gains...... 1,205 10,187 5,818 16,504 33,714
------- -------- ------- -------- --------
Net income................. $ 9,230 $ 15,887 $12,987 $ 27,045 $ 65,149
======= ======== ======= ======== ========
1997 OPERATING SUMMARY
Revenues........................... $89,055 $ 99,293 $86,071 $151,061 $425,480
======= ======== ======= ======== ========
Net operating income, excluding
realized gains(losses).......... $ 9,590 $ 7,701 $ 6,075 $ 8,496 $ 31,862
Net realized investment gains
(losses)........................ 578 5,305 (1,971) 2,943 6,855
------- -------- ------- -------- --------
Net income................. $10,168 $ 13,006 $ 4,104 $ 11,439 $ 38,717
======= ======== ======= ======== ========
</TABLE>
(15) OPERATING SEGMENTS AND RELATED INFORMATION
In June 1997, the Financial Accounting Standards Board ("the FASB") issued
Statement of Financial Accounting Standards No. 131 ("FAS 131"), DISCLOSURES
ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. FAS 131 established
standards for how to report information about operating segments. It also
established standards for related disclosures about products and services,
geographic areas and major customers. The Company adopted FAS 131 as of December
31, 1998 and the impact of implementation did not affect the Company's
consolidated financial position, results of operations or cash flows. In the
initial year of adoption, FAS 131 requires comparative information for earlier
years to be restated, unless impracticable to do so.
The Company, FKLA, Zurich Life Insurance Company of America, ("ZLICA"), and
Fidelity Life Association ("FLA"), a Mutual Legal Reserve Company, owned by its
policyholders, operate under the trade name Zurich Kemper Life. For purposes of
this operating segment disclosure, Zurich Kemper Life will also include the
operations of Zurich Direct, Inc., an affiliated direct marketing life insurance
agency and excludes FLA, as it is owned by its policyholders.
Zurich Kemper Life is segregated by Strategic Business Unit ("SBU"). The
SBU concept employed by ZFS has each SBU concentrate on a specific customer
market. The SBU is the focal point of Zurich Kemper Life, because it is at the
SBU level that Zurich Kemper Life can clearly identify customer segments and
then work to understand and satisfy the needs of each customer. The
contributions of Zurich Kemper Life's SBUs to consolidated revenues, operating
results and certain balance sheet data pertaining thereto, are shown in the
following tables on the basis of accounting principles generally accepted in the
United States.
Zurich Kemper Life is segregated into the Life Brokerage, Financial,
Retirement Solutions Group ("RSG") and Direct SBUs. The SBUs are not managed at
the legal entity level, but rather at the Zurich Kemper Life level. Zurich
Kemper Life's SBUs cross legal entity lines, as certain similar products are
sold by more than one legal entity. The vast majority of the Company's business
is derived from the Financial and RSG SBUs.
Each SBU's revenue is derived from geographically dispersed areas as Zurich
Kemper Life is licensed in the District of Columbia and all states except New
York. During 1999, 1998 and 1997, Zurich Kemper Life did not derive net revenue
from one customer that exceeded 10 percent of the total revenue of Zurich Kemper
Life.
The principal products and markets of Zurich Kemper Life's SBUs are as
follows:
LIFE BROKERAGE: The Life Brokerage SBU develops low cost term and universal
life insurance, as well as fixed annuities, to market through independent
agencies and national marketing organizations.
FINANCIAL: The Financial SBU focuses on a wide range of products that
provide for the accumulation, distribution and transfer of wealth and primarily
includes variable and fixed annuities, variable universal life and bank-owned
life insurance. These products are distributed to consumers through financial
intermediaries such as
70
<PAGE> 71
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(15) OPERATING SEGMENTS AND RELATED INFORMATION (CONTINUED)
banks, brokerage firms and independent financial planners. Institutional
business includes BOLI and funding agreements (included in FKLA).
RSG: The RSG SBU has a sharp focus on its target customer. This SBU markets
variable annuities to K-12 schoolteachers, administrators, and healthcare
workers, along with college professors and certain employees of selected
non-profit organizations. This target market is eligible for what the IRS
designates as retirement-oriented savings or investment plans that qualify for
special tax treatment.
DIRECT: The Direct SBU is a direct marketer of basic, low-cost term life
insurance through various marketing media.
Summarized financial information for ZKL's SBU's are as follows:
As of and for the period ending December 31, 1999:
(in thousands)
<TABLE>
<CAPTION>
LIFE
BROKERAGE FINANCIAL RSG DIRECT TOTAL
INCOME STATEMENT ---------- ----------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C>
REVENUE
Premium income..................... $ 145,533 $ 410 $ -- $ 8,038 $ 153,981
Net investment income.............. 137,106 175,590 101,202 1,297 415,195
Realized investment gains
(losses)........................ 976 (6,980) (98) -- (6,102)
Fees and other income.............. 70,477 48,873 35,742 44,528 199,620
---------- ----------- ---------- -------- -----------
Total revenue.............. 354,092 217,893 136,846 53,863 762,694
---------- ----------- ---------- -------- -----------
BENEFITS AND EXPENSES
Policyholder benefits.............. 200,161 112,869 68,801 3,529 385,360
Intangible asset amortization...... 54,957 12,053 13,989 -- 80,999
Net deferral of insurance
acquisition costs............... (37,433) (43,664) (20,624) (41,412) (143,133)
Commissions and taxes, licenses and
fees............................ 21,881 66,702 26,700 17,411 132,694
Operating expenses................. 56,179 25,101 23,611 71,194 176,085
---------- ----------- ---------- -------- -----------
Total benefits and
expenses................. 295,745 173,061 112,477 50,722 632,005
---------- ----------- ---------- -------- -----------
Income before income tax expense..... 58,347 44,832 24,369 3,141 130,689
Income tax expense................... 25,707 19,235 10,966 1,114 57,022
---------- ----------- ---------- -------- -----------
Net income................. $ 32,640 $ 25,597 $ 13,403 $ 2,027 $ 73,667
========== =========== ========== ======== ===========
BALANCE SHEET
Total assets....................... $3,066,956 $10,311,850 $4,755,437 $144,189 $18,278,432
========== =========== ========== ======== ===========
</TABLE>
<TABLE>
<CAPTION>
NET
INCOME
REVENUE (LOSS) ASSETS
-------- ------- -------------
<S> <C> <C> <C>
Total revenue, net income and assets, respectively, from
above:.................................................... $762,694 $73,667 $18,278,432
-------- ------- -----------
Less:
Revenue, net income and assets of FKLA.................... 305,334 24,801 3,162,048
Revenue, net income and assets of ZLICA................... 49,460 8,528 456,283
Revenue, net loss and assets of Zurich Direct............. 44,481 (4,602) 4,385
-------- ------- -----------
Totals per the Company's consolidated financial
statements............................................. $363,419 $44,940 $14,655,716
======== ======= ===========
</TABLE>
71
<PAGE> 72
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(15) OPERATING SEGMENTS AND RELATED INFORMATION (CONTINUED)
As of and for the period ending December 31, 1998:
(in thousands)
<TABLE>
<CAPTION>
LIFE
BROKERAGE FINANCIAL RSG 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
INCOME
REVENUE (LOSS) ASSETS
-------- -------- -----------
<S> <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 of Zurich Direct........... 23,548 885 4,322
-------- -------- -----------
Totals per the Company's consolidated financial
statements........................................ $419,739 $ 65,149 $12,239,721
======== ======== ===========
</TABLE>
72
<PAGE> 73
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(15) OPERATING SEGMENTS AND RELATED INFORMATION (CONTINUED)
As of and for the period ending December 31, 1997:
(in thousands)
<TABLE>
<CAPTION>
LIFE
BROKERAGE FINANCIAL RSG 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..... 351,420 247,532 93,605 19,982 712,539
---------- ---------- ---------- ------- -----------
Income (loss) before income tax expense
(benefit)............................ 53,075 46,802 24,414 (7,221) 117,070
Income tax expense (benefit)........... 25,554 21,144 10,545 (2,528) 54,715
---------- ---------- ---------- ------- -----------
Net income (loss)............... $ 27,521 $ 25,658 $ 13,869 $(4,693) $ 62,355
========== ========== ========== ======= ===========
BALANCE SHEET
Total assets......................... $2,877,854 $7,416,791 $3,759,173 $41,669 $14,095,487
========== ========== ========== ======= ===========
</TABLE>
<TABLE>
<CAPTION>
NET
INCOME
REVENUE (LOSS) ASSETS
-------- ------- -----------
<S> <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>
(16) SUBSEQUENT EVENT
In February 2000, the Company announced that it had entered into an
agreement to purchase for $5.5 million the following related entities, all
privately held New York corporations:
- PMG Securities Corporation
- PMG Asset Management, Inc.
- PMG Life Agency, Inc., and
- PMG Marketing, Inc.
These companies were primarily purchased for their specialization in the
target market of the RSG SBU. The acquisition is expected to close at the end of
the first quarter 2000.
73
<PAGE> 74
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
