KEMPER INVESTORS LIFE INSURANCE CO, POS AM, 1995-04-14

KEMPER INVESTORS LIFE INSURANCE CO
POS AM, 1995-04-14

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 14, 1995

REGISTRATION NO. 33-46881

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM S-1

AMENDMENT NO. 4

REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

KEMPER INVESTORS LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)

<TABLE>
<S> <C>
Illinois 36-3050975
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

1 Kemper Drive
Long Grove, Illinois 60049
(708) 320-4500 6312
---------------------------------------------------- ------------------------
(Address, including zip code, and telephone number, (Primary Standard Industrial
including area code, of registrant's principal executive Classification Code Number)
offices)

</TABLE>

Debra P. Rezabek, Esq.
Kemper Investors Life Insurance Company
1 Kemper Drive
Long Grove, Illinois 60049
(708) 320-3098
--------------------------------------------------
(Name, address, including zip code, and telephone number,
including area code, of agent for service)

Copies to:

Frank Julian, Esq.
Kemper Investors Life Insurance Company
KLIC Legal T-1
1 Kemper Drive
Long Grove, Illinois 60049

Joan E. Boros, Esq.

Katten Muchin & Zavis

1025 Thomas Jefferson Street, N.W.
Washington, D.C. 20007

------------------

Approximate date of commencement of proposed sale to the public: as soon as
practicable after this Amendment becomes effective.

If any of the Securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. /X/
------------------

Pursuant to Rule 429 under the Securities Act of 1933, the prospectus contained
herein also relates to Registration Statements No. 33-33547 and No. 33-43462.
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<PAGE> 2

KEMPER INVESTORS LIFE INSURANCE COMPANY

CROSS REFERENCE SHEET

PURSUANT TO REGULATION S-K, ITEM 501(B)

<TABLE>
<CAPTION>
FORM
S-1
ITEM
NO. FORM S-1 CAPTION CAPTION IN PROSPECTUS
--- -------------------------------------------------- -------------------------------------
<S> <C> <C> <C>
1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus.................... Facing Page and Outside Front Cover
Page of Prospectus.

2. Inside Front and Outside Back Cover Pages of
Prospectus........................................ Table of Contents.

3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges......................... Summary; Not Applicable as to Ratio
of Earnings to Fixed Charges.

4. Use of Proceeds................................... KILICO, The MVA Option, The Separate
Account and The Fund--The MVA Option;
Description of Business--
Investments.

5. Determination of Offering Price................... Not Applicable.

6. Dilution.......................................... Not Applicable.

7. Selling of Security Holders....................... Not Applicable.

8. Plan of Distribution.............................. Distribution of Contracts and
Certificates.

9. Description of Securities to be Registered........ Summary; The Certificates; The
Accumulation Period; Certificate
Charges and Expenses.

10. Interests of Named Experts and Counsel............ Experts; Legal Matters.

11. Information with Respect to the Registrant........ Federal Income Taxes; Description of
Business; Management's Discussion and
Analysis; Legal Proceedings;
Financial Statements.

12. Disclosure of Commission Position of
Indemnification For Securities Act Liabilities.... Part II, Item 17.
</TABLE>
<PAGE> 3

PROSPECTUS--MAY 1, 1995

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INDIVIDUAL AND GROUP VARIABLE AND MARKET VALUE

ADJUSTED DEFERRED ANNUITY CONTRACTS
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KEMPER PASSPORT

ISSUED BY
KEMPER INVESTORS LIFE INSURANCE COMPANY
HOME OFFICE: 1 KEMPER DRIVE, LONG GROVE, ILLINOIS 60049 (708) 320-4500

The types of Individual and Group Variable and Market Value Adjusted Deferred
Annuity Contracts ("Contract" or "Contracts") offered by this Prospectus are
issued by Kemper Investors Life Insurance Company ("KILICO") and are designed to
provide annuity benefits under retirement plans which may or may not qualify for
the Federal tax advantages available under Section 401, 403, 408 or 457 of the
Internal Revenue Code of 1986, as amended. Depending upon particular state
requirements, participation in a group contract will be accounted for by the
issuance of a certificate and participation in an individual contract will be
accounted for by the issuance of an individual annuity contract. The certificate
and individual annuity contract and values thereunder are hereafter both
referred to in terms of the "Certificate."

Purchase payments for the Certificates may be allocated to one or more of the
investment options under which Certificate values accumulate on either a
variable basis or fixed basis subject to a market value adjustment. These
options consist of the eight Subaccounts of the Separate Account and the Market
Value Adjustment Option ("MVA Option"). The Subaccounts invest in the portfolios
of the Kemper Investors Fund (the "Fund") which is managed by Kemper Financial
Services, Inc. The Fund currently consists of the following Portfolios: Money
Market, Total Return, High Yield, Equity, Government Securities, International
and Small Capitalization Equity ("Small Cap"). Subaccounts and Portfolios may be
added in the future. Certificate values allocated to any of the Subaccounts will
vary to reflect the investment performance of the corresponding Portfolio. The
accompanying Prospectus for the Fund describes the investment objectives and the
attendant risks of the Portfolios of the Fund. Certificate values allocated to
one or more Guarantee Periods of the MVA Option will accumulate on a fixed
basis.

This Prospectus is designed to provide you with certain essential information
that you should know before investing. A Statement of Additional Information
dated May 1, 1995 has been filed with the Securities and Exchange Commission and
is incorporated herein by reference. A Statement of Additional Information is
available upon request from Kemper Investors Life Insurance Company by writing
or calling the address or telephone number listed above. A table of contents for
the Statement of Additional Information is on page 47 of this Prospectus.

THIS PROSPECTUS IS VALID ONLY IF ACCOMPANIED OR PRECEDED BY A CURRENT PROSPECTUS
FOR THE KEMPER INVESTORS FUND. ALL PROSPECTUSES SHOULD BE READ AND RETAINED FOR
FUTURE REFERENCE.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE> 4

TABLE OF CONTENTS
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<TABLE>
<CAPTION>
PAGE
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<S> <C>
DEFINITIONS................................................................................. 1
SUMMARY..................................................................................... 2
SUMMARY OF EXPENSES......................................................................... 4
KILICO, THE MVA OPTION, THE SEPARATE ACCOUNT AND THE FUND................................... 6
THE CERTIFICATES............................................................................ 9
THE ACCUMULATION PERIOD..................................................................... 10
CERTIFICATE CHARGES AND EXPENSES............................................................ 16
THE ANNUITY PERIOD.......................................................................... 18
FEDERAL INCOME TAXES........................................................................ 21
DISTRIBUTION OF CONTRACTS AND CERTIFICATES.................................................. 24
VOTING RIGHTS............................................................................... 24
REPORTS TO OWNERS AND INQUIRIES............................................................. 25
DOLLAR COST AVERAGING....................................................................... 25
SYSTEMATIC WITHDRAWAL PLAN.................................................................. 25
EXPERTS..................................................................................... 26
LEGAL MATTERS............................................................................... 26
SPECIAL CONSIDERATIONS...................................................................... 26
AVAILABLE INFORMATION....................................................................... 26
BUSINESS.................................................................................... 27
PROPERTIES.................................................................................. 30
LEGAL PROCEEDINGS........................................................................... 30
MANAGEMENT'S DISCUSSION AND ANALYSIS........................................................ 31
KILICO MANAGEMENT........................................................................... 42
EXECUTIVE COMPENSATION...................................................................... 44
TABLE OF CONTENTS--STATEMENT OF ADDITIONAL INFORMATION...................................... 47
FINANCIAL STATEMENTS........................................................................ 47
</TABLE>

<PAGE> 5

DEFINITIONS

The following terms as used in this Prospectus have the indicated meanings:

Accumulated Guarantee Period Value--The sum of an Owner's Guarantee Period
Values.

Accumulation Period--The period between the Date of Issue of a Certificate
and the Annuity Date.

Accumulation Unit--A unit of measurement used to determine the value of
each Subaccount during the Accumulation Period.

Allocation Option--The eight Subaccounts and the MVA Option available under
the Certificate for allocation of Purchase Payments, or transfers of
Certificate Value during the Accumulation Period.

Annuitant--The person designated to receive or who is actually receiving
annuity payments and upon the continuation of whose life annuity payments
involving life contingencies depend.

Annuity Date--The date on which annuity payments are to commence.

Annuity Option--One of several forms in which annuity payments can be made.

Annuity Period--The period starting on the Annuity Date.

Annuity Unit--A unit of measurement used to determine the amount of
Variable Annuity payments.

Beneficiary--The person designated to receive any benefits under a
Certificate upon the death of the Annuitant or the Owner prior to the
Annuity Period.

Certificate--An individual certificate of participation issued by KILICO to
each Owner in a group as evidence of his or her rights and benefits under
the Contract or an individual contract issued by KILICO to an Owner.

Certificate Value--The sum of the values of the Owner's Accumulated
Guarantee Period Value and Separate Account Value during the Accumulation
Period.

Certificate Year--Period between anniversaries of the Date of Issue of a
Certificate.

Contract--The Variable and Market Value Adjusted Deferred Annuity Contracts
offered on an individual or group basis by this Prospectus.

Date of Issue--The date on which the first Certificate Year commences.

Fixed Annuity--An annuity under which the amount of each annuity payment
does not vary with the investment experience of a Subaccount and is
guaranteed by KILICO.

Fund--The Kemper Investors Fund, an open-end management investment company
consisting of seven portfolios in which the Separate Account invests.

General Account--All the assets of KILICO other than those allocated to any
legally segregated Separate Account.

Guaranteed Interest Rate--The rate of interest established by KILICO for a
given Guarantee Period.

Guarantee Period--A period of time during which an amount is to be credited
with a Guaranteed Interest Rate. Guarantee Period options may have
durations of from one (1) to ten (10) years, as elected by the Owner.

Guarantee Period Value--The Guarantee Period Value is the sum of the
Owner's: (1) Purchase Payment allocated or amount transferred to a
Guarantee Period; plus (2) interest credited; minus (3) withdrawals,
previously assessed Withdrawal Charges and transfers; and (4) as adjusted
for any applicable Market Value Adjustment previously made.

KFS--Kemper Financial Services, Inc., whose Home Office is at 120 South
LaSalle Street, Chicago, Illinois 60603.

KILICO--Kemper Investors Life Insurance Company, whose Home Office is at 1
Kemper Drive, Long Grove, Illinois 60049.

Market Adjusted Value--A Guarantee Period Value adjusted by the market
value adjustment formula on any date prior to the end of a Guarantee
Period.

Market Value Adjustment--An adjustment of values under a Guarantee Period
in accordance with the market value adjustment formula prior to the end of
that Guarantee Period. The adjustment reflects the change in the value of
the Guarantee Period Value due to changes in interest rates since the date
the Guarantee Period commenced. The adjustment is computed using the market
value adjustment formula stated in the Certificate.

1
<PAGE> 6

Non-Qualified Plan Certificate--A Certificate issued in connection with a
retirement plan which does not receive favorable tax treatment under
Section 401, 403, 408 or 457 of the Internal Revenue Code.

Owner--The person designated in the Certificate as having the privileges of
ownership defined in the Certificate.

Purchase Payments--Amounts paid to KILICO by or on behalf of the Owner.

Qualified Plan Certificate--A Certificate issued in connection with a
retirement plan which receives favorable tax treatment under Section 401,
403, 408 or 457 of the Internal Revenue Code.

Separate Account--A unit investment trust registered with the Securities
and Exchange Commission under the Investment Company Act of 1940 known as
the KILICO Variable Annuity Separate Account.

Separate Account Value--The sum of the Owner's Subaccount values.

Subaccounts--The eight subdivisions of the Separate Account, the assets of
which consist solely of shares of the corresponding portfolio of the Fund.

Subaccount Value--The value of the Owner's interest in each Subaccount.

Valuation Date--Each day when the New York Stock Exchange is open for
trading, as well as each day otherwise required.

Valuation Period--The interval of time between two consecutive Valuation
Dates.

Variable Annuity--An annuity with payments varying in amount in accordance
with the investment experience of the Subaccount(s) in which the Owner's
Certificate has an interest.

Withdrawal Charge--The "contingent deferred sales charge" assessed against
certain withdrawals of Certificate Value in the first six Certificate Years
after a Purchase Payment is made or against certain annuitizations of
Certificate Value in the first six Certificate Years after a Purchase
Payment is made.

SUMMARY

The following summary should be read in conjunction with the detailed
information appearing elsewhere in this Prospectus. Any significant variations
from the information appearing in the Prospectus which may be required due to
differing state law requirements are contained in supplements to this Prospectus
or in amendments to the Certificates, as appropriate.

The Certificates described in the Prospectus provide a way to invest on a
tax-deferred basis and to receive annuity benefits in accordance with the
annuity option selected and the retirement plan under which the Certificate has
been purchased. The Prospectus offers Certificates designed for use in
connection with both Non-Qualified Plans and Qualified Plans. KILICO makes
several underlying investment options, including eight Subaccounts and up to ten
durations of Guarantee Periods, available for the Owner to pursue his or her
investment objectives.

The minimum initial Purchase Payment for each Certificate is $5,000. Subsequent
Purchase Payments of at least $5,000 each will be accepted at any time while the
Certificate is in force. In addition, subsequent Purchase Payments of at least
$2,000 will be accepted if the Contract is issued as an Individual Retirement
Annuity. (See "The Accumulation Period" page 10.)

KILICO provides for variable accumulations and benefits under the Certificate by
crediting purchase payments to one or more Subaccounts of the Separate Account
as selected by the Owner. The Subaccounts invest in one of the seven
corresponding Portfolios (the "Portfolios") of the Kemper Investors Fund (the
"Fund"), a series mutual fund which is managed by Kemper Financial Services,
Inc. The Money Market Portfolio invests in U.S. dollar denominated money market
instruments that mature in twelve months or less. The Total Return Portfolio
invests in a combination of debt securities and common stocks. The High Yield
Portfolio invests in fixed income securities, including lower rated and unrated
securities which may entail relatively greater risk of loss of income or
principal but may offer a current yield or yield to maturity which is higher.
Lower rated and non-rated securities, which are sometimes referred to by the
popular press as "junk bonds," have widely varying characteristics and quality.
The Equity Portfolio invests primarily in common stock or securities convertible
into or exchangeable for common stocks. The Government Securities Portfolio
invests primarily in direct obligations of the U.S. Treasury or obligations
issued or guaranteed by agencies and instrumentalities of the United States. The
International Portfolio invests primarily in common stocks of established
non-United States companies believed to have potential for capital growth. The
Small Cap Portfolio invests primarily in the equity securities of smaller
companies, i.e., those having a market capitalization of $1 billion or less at
the time of investment. (See "The Fund," page 7.) The Certificate Value
allocated to the Separate Account will vary with the investment performance of
the Portfolios selected by the Owner.

2
<PAGE> 7

KILICO also provides for fixed accumulations under the Certificates in the MVA
Option. The MVA Option is only available during the Accumulation Period. An
Owner may allocate amounts to one or more Guarantee Periods available under the
MVA Option with durations of from one to ten years. KILICO may, in its
discretion, offer additional Guarantee Periods or, limit for new Certificates
the number of Guarantee Period options available to no less than three (3).
KILICO will credit interest daily at a rate declared by KILICO in its sole
discretion to amounts allocated to the MVA Option and guarantees these amounts
at various interest rates ("Guaranteed Interest Rates") for the duration of the
Guarantee Period selected by the Owner, subject to any applicable withdrawal
charge, Market Value Adjustment or records maintenance charge. KILICO may not
change a Guaranteed Interest Rate for the duration of the Guarantee Period;
however, Guaranteed Interest Rates for subsequent Guarantee Periods will be
determined at the sole discretion of KILICO. At the end of any Owner's Guarantee
Period, a subsequent Guarantee Period automatically renews for the same duration
as the terminating Guarantee Period unless the Owner elects another Guarantee
Period during the designated period before and after the end of the Guarantee
Period. The interests under the Certificate relating to the MVA Option are
registered under the Securities Act of 1933 but are not registered under the
Investment Company Act of 1940. (See "The MVA Option," page 6.)

Transfers between and among Subaccounts and Guarantee Periods during the
Accumulation Period are permitted subject to certain limitations. A transfer
from a Guarantee Period is subject to a Market Value Adjustment unless effected
within 15 days before or 15 days after the existing Guarantee Period ends.
Transfers between the Subaccounts are permitted during the Annuity Period after
the first year of annuitization subject to certain limitations. (See "Transfer
During Accumulation Period" and "Transfer During Annuity Period," pages 13 and
19.)

An Owner may withdraw up to 10% of the Certificate Value in any Certificate Year
without assessment of a Withdrawal Charge. If the Owner withdraws an amount in
excess of 10% of the Certificate Value in any Certificate Year, the amount
withdrawn in excess of 10% is subject to a contingent deferred sales charge
("Withdrawal Charge").

The Withdrawal Charge is assessed on withdrawals attributable to Purchase
Payments and all related accumulations during the first six Certificate Years
after the Purchase Payments are made. The Withdrawal Charge starts at 6% in the
Certificate Year in which the Purchase Payment is made (the first "Contribution
Year") and remains at 6% in the second Contribution Year; reduces to 5% in the
third and fourth Contribution Years; reduces to 4% in the fifth and sixth
Contribution Years and reduces to 0% thereafter. However, in no event shall the
aggregate Withdrawal Charges assessed against a Certificate exceed 9% of the
aggregate Purchase Payments made under the Certificate. Please note that adverse
tax consequences may occur with respect to certain withdrawals. (See "Tax
Treatment of Withdrawals and Assignments" page 22.)

A Market Value Adjustment also applies to any withdrawal (except during the
"free look" period), transfer, purchase of an annuity option and to death
benefit payments made more than 15 days before or 15 days after the end of a
Guarantee Period in the MVA Option. The Market Value Adjustment is applied to
the amount being withdrawn before deduction of any applicable Withdrawal
Charges. (See "The Certificates," page 9.)

KILICO deducts a charge for mortality and expense risks and administrative costs
at an annual rate of 1.25% of the daily net assets of the Separate Account. At
the end of each Certificate Year, on surrender of a Certificate, and on
surrender upon annuitization, KILICO deducts a records maintenance charge
("Record Maintenance Charge") of $30 from the Owner's account. The Records
Maintenance Charge will not be deducted during the Annuity Period. KILICO also
deducts state premium taxes from the Owner's account when paid by KILICO or upon
annuitization. (See "Certificate Charges and Expenses," page 16.) In addition,
KFS makes a charge against the assets of each of the Portfolios for providing
investment advisory services. (See "The Fund," page 7 and the Fund prospectus.)

The Certificates may be purchased in connection with retirement plans which
qualify either under Section 401 or 403(b) of the Internal Revenue Code of 1986,
as amended (the "Code") or as individual retirement account plans established
under Section 408 of the Code. The Certificates are also available in connection
with state and municipal deferred compensation plans and other entities
qualified under Section 457 of the Code and under other deferred compensation
arrangements, and are also offered under other retirement plans which may not
qualify for similar tax advantages. (See "Qualified Plans," page 22.)

An Owner has the right within the "free look" period (generally ten days,
subject to state variation) after receiving the Certificate to cancel the
Certificate by delivering or mailing it to KILICO. Upon receipt by KILICO, the
Certificate will be cancelled and a refund will be made. The amount of the
refund will depend on the state in which the Certificate is issued; however, it
will be an amount at least equal to the Separate Account Value plus amounts
allocated to the Guarantee Periods which will not be subject to the Market Value
Adjustment. (See "The Certificates," page 9.)

3
<PAGE> 8

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SUMMARY OF EXPENSES
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CERTIFICATE OWNER TRANSACTION EXPENSES

<TABLE>
<S> <C>
Sales Load Imposed on Purchases (as a percentage of purchase payments)......................................... None
Contingent Deferred Sales Load (as a percentage of amount surrendered)*
Certificate Year of Withdrawal
First year...................................... 6%
Second year..................................... 6%
Third year...................................... 5%
Fourth year..................................... 5%
Fifth year...................................... 4%
Sixth year...................................... 4%
Seventh year and following...................... 0%
Surrender Fees (in addition to Withdrawal Charge)**............................................................ None
Exchange Fee................................................................................................... None
ANNUAL CONTRACT FEE (Records Maintenance Charge)***............................................................ $30
</TABLE>

<TABLE>
<CAPTION>
SEPARATE ACCOUNT ANNUAL EXPENSES FUND ANNUAL EXPENSES
(as percentage of average daily account value) (as percentage of each Portfolio's average net assets)

MONEY TOTAL GOVERNMENT
MARKET RETURN HIGH YIELD EQUITY SECURITIES
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
--------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Mortality and Expense Risk... 1.10% Management Fees.......... .50% .55% .60% .60% .55%
Administration............... .15 Other Expenses........... .03 .06 .05 .06 .09
Account Fees and --- --- --- --- ---
Expenses............... 0% Total Portfolio
Total Separate Account Annual Expenses......... .53% .61% .65% .66% .63%
Annual Expenses........ 1.25% === === === === ===

FUND ANNUAL EXPENSES
(as percentage of each Portfolio's average net assets)
INTERNATIONAL SMALL CAP
PORTFOLIO PORTFOLIO
------------- ---------
<S> <C> <C>
Management Fees.......... .75% .65%
Other Expenses........... .18 .60
--- ---
Total Portfolio
Annual Expenses......... .93% 1.25%
=== ====
</TABLE>

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EXAMPLE
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<TABLE>
<CAPTION>
1 3 5 10
SUBACCOUNT YEAR YEARS YEARS YEARS
---- ----- ----- -----
<S> <C> <C> <C> <C> <C>
If you surrender your contract at the end of the Money Market #1+ 81 113 147 217
applicable time period: Total Return 81 115 151 226
You would pay the following expenses on a $1,000 High Yield 82 117 153 230
investment, assuming 5% annual return on assets: Equity 82 117 153 231
Government Securities 82 116 152 228
International 85 125 167 259
Small Cap 88 134 -- --

If you do not surrender your contract: Money Market #1+ 19 58 100 217
You would pay the following expenses Total Return 19 61 104 226
on a $1,000 investment, assuming High Yield 20 62 107 230
5% annual return on assets: Equity 20 62 107 231
Government Securities 20 61 106 228
International 23 71 121 259
Small Cap 26 81 -- --
</TABLE>

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The purpose of the preceding table is to assist Owners in understanding the
various costs and expenses that a Owner in a Subaccount will bear directly or
indirectly. The table reflects expenses of both the Separate Account and the
Fund but not the MVA Option. See "Certificate Charges and Expenses" and "The MVA
Option" for more information regarding the various costs and expenses. THE
EXAMPLE SHOULD NOT BE CONSIDERED TO BE A REPRESENTATION OF PAST OR FUTURE
EXPENSES AND DOES NOT INCLUDE THE DEDUCTION OF STATE PREMIUM TAXES, WHICH MAY BE
ASSESSED BEFORE OR UPON ANNUITIZATION. ACTUAL EXPENSES MAY BE GREATER OR LESS
THAN THOSE SHOWN. The example assumes a 5% annual rate of return pursuant to
requirements of the Securities and Exchange Commission. This hypothetical rate
of return is not intended to be representative of past or future performance of
any Subaccount. The Records Maintenance Charge is a single charge, it is not a
separate charge for each Subaccount. In addition, the effect of the Records
Maintenance Charge has been reflected by applying the percentage derived by
dividing the total amounts of annual Records Maintenance Charge collected by the
total net assets of all the Subaccounts in the Separate Account.

* A Certificate Owner may withdraw up to 10% of the Separate Account Value
plus Market Adjusted Value in any Certificate Year without assessment of
any charge. Under certain circumstances the contingent deferred sales load
may be reduced or waived, including when certain annuity options are
selected.

** Surrenders and other withdrawals from the MVA Option are subject to a
Market Value Adjustment unless made within 15 days before or 15 days after
the end of a Guarantee Period. The Market Value Adjustment may increase
or reduce the Guarantee Period Value.

*** Under certain circumstances the annual Records Maintenance Charge may be
reduced or waived.

+ Money Market Subaccount #2 is not shown because it is available only for
dollar cost averaging that will deplete an Owner's Subaccount Value
entirely at least by the end of the third Certificate Year.

4
<PAGE> 9

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CONDENSED FINANCIAL INFORMATION
- --------------------------------------------------------------------------------

The following condensed financial information is derived from the financial
statements of the Separate Account. The data should be read in conjunction
with the financial statements, related notes and other financial information
included in the Statement of Additional Information.

Selected data for accumulation units outstanding as of the year ended December
31, 1994:

<TABLE>
<CAPTION>
ACCUMULATION UNIT VALUE AT BEGINNING OF PERIOD* 1994 1993 1992
------ ------ ------
<S> <C> <C> <C>
Money Market Subaccount #1..................................... 1.037 1.021 1.000
Money Market Subaccount #2..................................... 1.063 1.034 1.000
Total Return Subaccount........................................ 1.109 1.002 1.000
High Yield Subaccount.......................................... 1.354 1.143 1.000
Equity Subaccount.............................................. 1.153 1.018 1.000
Government Securities Subaccount............................... 1.104 1.050 1.000
International Subaccount....................................... 1.287 .981 1.000
</TABLE>

<TABLE>
<CAPTION>
ACCUMULATION UNIT VALUE AT END OF PERIOD 1994 1993 1992
------ ------ ------
<S> <C> <C> <C>
Money Market Subaccount #1..................................... 1.065 1.037 1.021
Money Market Subaccount #2..................................... 1.105 1.063 1.034
Total Return Subaccount........................................ .991 1.109 1.002
High Yield Subaccount.......................................... 1.308 1.354 1.143
Equity Subaccount.............................................. 1.093 1.153 1.018
Government Securities Subaccount............................... 1.061 1.104 1.050
International Subaccount....................................... 1.225 1.287 .981
Small Cap Subaccount**......................................... 1.031
</TABLE>

<TABLE>
<CAPTION>
NUMBER OF ACCUMULATION UNITS OUTSTANDING AT END OF PERIOD
(000'S OMITTED) 1994 1993 1992
------ ------ ------
<S> <C> <C> <C>
Money Market Subaccount #1..................................... 14,423 5,757 3,037
Money Market Subaccount #2..................................... 3,333 3,033 6,561
Total Return Subaccount........................................ 68,207 51,444 27,355
High Yield Subaccount.......................................... 28,545 22,109 6,519
Equity Subaccount.............................................. 55,308 37,678 19,693
Government Securities Subaccount............................... 24,760 28,414 16,647
International Subaccount....................................... 21,035 12,503 4,699
Small Cap Subaccount**......................................... 2,637
</TABLE>

- --------------------------------------------------------------------------------

* Commencement of Offering on January 6, 1992.

** Commencement of Offering on May 2, 1994 at initial accumulation unit value of
1.000.

5
<PAGE> 10

KILICO, THE MVA OPTION, THE SEPARATE ACCOUNT AND THE FUND

KEMPER INVESTORS LIFE INSURANCE COMPANY

Kemper Investors Life Insurance Company ("KILICO"), 1 Kemper Drive, Long Grove,
Illinois 60049, was organized in 1947 and is a stock life insurance company
organized under the laws of the State of Illinois. KILICO offers annuity and
life insurance products and is admitted to do business in the District of
Columbia and all states except New York. KILICO is a wholly owned subsidiary of
Kemper Financial Companies, Inc. ("KFC"), a nonoperating holding company. KFC is
a subsidiary of Kemper Corporation ("Kemper"), another public financial services
holding company.

THE MVA OPTION

An Owner may allocate amounts in the MVA Option to one or more Guarantee Periods
with durations of one (1) to ten (10) years during the Accumulation Period.
KILICO may, at its discretion, offer additional Guarantee Periods or limit, for
new Certificates, the number of durations of Guarantee Periods available to no
less than three (3).

The amounts allocated to the MVA Option under the Certificates are invested in
accordance with the standards applicable to KILICO's general account. State
insurance laws concerning the nature and quality of investments regulate
KILICO's investments for its general account. Within specified limits and
subject to certain standards, these laws generally permit investment in federal,
state and municipal obligations, preferred and common stocks, corporate bonds,
real estate mortgages, real estate and certain other investments. (See
"Management's Discussion and Analysis--INVESTMENTS" and "FINANCIAL STATEMENTS"
for information on KILICO's investments.) Assets of KILICO's general account are
managed by Kemper Financial Services, Inc. ("KFS" or the "Adviser"), a wholly
owned subsidiary of KFC and an affiliate of KILICO.

KILICO intends to consider the return available on the instruments in which it
intends to invest the proceeds from the Certificates when it establishes
Guaranteed Interest Rates. Such return is only one of many factors considered in
establishing the Guaranteed Interest Rates. (See "The Accumulation Period--D.
Establishment of Guaranteed Interest Rates.")

KILICO's investment strategy is generally to invest in debt instruments that it
uses to match its liabilities with regard to a Guarantee Period. This is done,
in KILICO's sole discretion, by investing in any type of instrument that is
authorized under applicable state law. KILICO expects to invest a substantial
portion of the Purchase Payments received in debt instruments as follows: (1)
securities issued by the United States Government or its agencies or
instrumentalities, which issues may or may not be guaranteed by the United
States Government; (2) debt securities which have an investment grade, at the
time of purchase, within the four (4) highest grades assigned by Moody's
Investors Services, Inc. ("Moody's") (Aaa, Aa, A or Baa), Standard & Poor's
Corporation ("Standard & Poor's") (AAA, AA, A or BBB), or any other nationally
recognized rating service; and (3) other debt instruments including, but not
limited to, issues of or guaranteed by banks or bank holding companies and
corporations, which obligations, although not rated by Moody's or Standard &
Poor's, are deemed by KILICO's management to have an investment quality
comparable to securities which may be purchased as stated above. In addition,
KILICO may engage in options and futures transactions on fixed income
securities.

KILICO's invested assets portfolio at December 31, 1994 included approximately
72.3 percent in U.S. Treasuries, investment grade corporate, foreign and
municipal bonds, and commercial paper, 2.8 percent in below investment grade
(high risk) bonds, 18.4 percent in mortgage loans and other real estate-related
investments and 6.5 percent in all other investments. (See "Management's
Discussion and Analysis--INVESTMENTS.")

KILICO is not obligated to invest the amounts allocated to the MVA Option
according to any particular strategy, except as may be required by applicable
state insurance laws. (See "Management's Discussion and Analysis--INVESTMENTS.")

THE SEPARATE ACCOUNT

KILICO originally established the KILICO Variable Annuity Separate Account (the
"Separate Account") on May 29, 1981 pursuant to Illinois law as the KILICO Money
Market Separate Account, registered with the Securities and Exchange Commission
("Commission") as an open-end, diversified management investment company under
the Investment Company Act of 1940 ("1940 Act"). On November 2, 1989, contract
owners approved a Reorganization under which the Separate Account was
restructured as a multi-subaccount unit investment trust registered with

6
<PAGE> 11

the Commission under the 1940 Act. Such registration does not involve
supervision by the Commission of the management, investment practices or
policies of the Separate Account or KILICO.

The Separate Account is administered and accounted for as part of the general
business of KILICO, but the income and capital gains or capital losses, whether
or not realized, for assets allocated to the Separate Account are credited to or
charged against the assets held in the Separate Account, without regard to any
other income, capital gains or capital losses of any other separate account or
arising out of any other business which KILICO may conduct. The benefits
provided under the Contracts and Certificates are obligations of KILICO. The
assets of the Separate Account are not chargeable with liabilities arising out
of the business conducted by any other separate account or out of any other
business KILICO may conduct.

The Separate Account holds assets that are segregated from all of KILICO's other
assets. The Separate Account is used to support the variable annuity contracts
described herein during both the Accumulation Period and Annuity Period and
certain other variable annuity contracts. The obligations to Owners and
beneficiaries arising under the Contracts and Certificates are general corporate
obligations of KILICO.

The Separate Account is currently divided into eight Subaccounts. Each
Subaccount invests exclusively in shares of one of the corresponding Portfolios
of the Fund. Additional Subaccounts may be added in the future.

The Separate Account will purchase and redeem shares from the Fund at net asset
value. KILICO will redeem Fund shares as necessary to provide benefits, to
deduct charges under the Certificates and to transfer assets from one Subaccount
to another as requested by Owners. All dividends and capital gains distributions
received by the Separate Account from a Portfolio of the Fund will be reinvested
in such Portfolio at net asset value and retained as assets of the corresponding
Subaccount.

The Separate Account's financial statements appear in the Statement of
Additional Information.

THE FUND

The Separate Account invests in shares of the Kemper Investors Fund, a series
type mutual fund registered with the Commission as an open-end, diversified
management investment company. Registration of the Fund does not involve
supervision of its management, investment practices or policies by the
Commission. The Fund is designed to provide an investment vehicle for variable
annuity contracts and variable life insurance. Shares of the Fund are sold only
to insurance company separate accounts. In addition to selling shares to
variable annuity and variable life separate accounts of KILICO and its
affiliates (currently, the Separate Account and KILICO Variable Separate
Account), shares of the Fund 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 and variable annuity separate accounts of companies
unaffiliated with KILICO, or for both variable life insurance separate accounts
and variable annuity separate accounts, to invest simultaneously in the Fund.
Currently, neither KILICO nor the Fund foresees any such disadvantages to either
variable life insurance or variable annuity owners. Management of the Fund has
an obligation to monitor events to identify material conflicts between such
owners and determine what action, if any, should be taken. In addition, if
KILICO believes that the Fund's response to any of those events or conflicts
insufficiently protects the Owners, it will take appropriate action on its own.

The Fund currently consists of the following Portfolios: Money Market, Total
Return, High Yield, Equity, Government Securities, International and Small Cap.
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
investment performance of one Portfolio has no effect on the investment
performance of any other Portfolio.

The investment objectives and policies of the Fund's Portfolios are summarized
below:

Money Market Portfolio: This Portfolio seeks to provide maximum current income
to the extent consistent with stability of principal. It will maintain a dollar
weighted average portfolio maturity of 90 days or less. This Portfolio pursues
its objective of maximum income and stability of principal by investing in money
market securities such as U.S. Treasury obligations, commercial paper, and
certificates of deposit and bankers' acceptances of domestic and foreign banks,
including foreign branches of domestic banks, and will enter into repurchase
agreements.

Total Return Portfolio: This Portfolio seeks a high total return, a combination
of income and capital appreciation, by investing in a combination of debt
securities and common stocks. The Portfolio's investments will normally consist
of fixed-income and equity securities. Fixed-income securities will include
bonds and other debt securities and

7
<PAGE> 12

preferred stocks, some of which may have a call on common stocks through
attached warrants or a conversion privilege. Equity investments normally will
consist of common stocks and securities convertible into or exchangeable for
common stocks, however the Portfolio may also make private placement investments
(which are normally restricted securities).

High Yield Portfolio: This Portfolio seeks to provide a high level of current
income by investing in fixed-income securities. It invests in U.S. Government,
corporate, and other notes and bonds paying high current income.

Equity Portfolio: This Portfolio seeks maximum appreciation of capital through
diversification of investment securities having potential for capital
appreciation. Current income will not be a significant factor. This Portfolio's
investments normally will consist of common stocks and securities convertible
into or exchangeable for common stocks; however, it may also make private
placement investments (which are normally restricted securities).

Government Securities Portfolio: This Portfolio seeks high current return
consistent with preservation of capital from a portfolio composed primarily of
U.S. Government securities. The Portfolio will also invest in fixed-income
securities other than U.S. Government securities, and will engage in options and
financial futures transactions. The Portfolio may purchase or sell portfolio
securities on a when-issued or delayed delivery basis. The Portfolio's current
return is sought from interest income and net short-term gains on securities and
options and futures transactions.

International Portfolio: This Portfolio seeks a total return, a combination of
capital growth and income, principally through an internationally diversified
portfolio of equity securities. While this Portfolio invests principally in
equity securities of non-United States issuers, this Portfolio may also invest
in convertible and debt securities of non-United States issuers and foreign
currencies.

Small Cap Portfolio: This Portfolio seeks maximum appreciation of capital. At
least 65% of its total assets normally will be invested in the equity securities
of smaller companies, i.e., those having a market capitalization of $1 billion
or less at the time of investment. Current income will not be a significant
factor. This Portfolio's investments normally will consist primarily of common
stocks and securities convertible into or exchangeable for common stocks and to
a limited degree in preferred stocks and debt securities.

There is no assurance that any of the Portfolios of the Fund will achieve its
stated objective. More detailed information, including a description of risks
involved in investing in each of the Portfolios, may be found in the prospectus
for the Fund, which must accompany or precede this Prospectus, and the Fund's
Statement of Additional Information available upon request from Kemper Investors
Life Insurance Company, 1 Kemper Drive, Long Grove, Illinois 60049 or Kemper
Financial Services, Inc., 120 South LaSalle Street, Chicago, Illinois 60603.
Read the prospectus carefully before investing.

KFS is the investment adviser to the Fund and manages its daily investments and
business affairs, subject to the policies established by the trustees of the
Fund. For its advisory services to the Portfolios, the Adviser receives
compensation monthly at annual rates equal to .50 of 1%, .55 of 1%, .60 of 1%,
.60 of 1%, .55 of 1%, .75 of 1% and .65 of 1% of the average daily net asset
values of the Money Market Portfolio, the Total Return Portfolio, the High Yield
Portfolio, the Equity Portfolio, the Government Securities Portfolio, the
International Portfolio and the Small Cap Portfolio, respectively.

CHANGE OF INVESTMENTS

KILICO reserves the right, subject to applicable law, to make additions to,
deletions from, or substitutions for the shares held by the Separate Account or
that the Separate Account may purchase. KILICO reserves the right to eliminate
the shares of any of the portfolios of the Fund and to substitute shares of
another portfolio of the Fund or of another investment company, if the shares of
a portfolio are no longer available for investment, or if in its judgment
further investment in any portfolio becomes inappropriate in view of the
purposes of the Separate Account. KILICO will not substitute any shares
attributable to an Owner's interest in a Subaccount of the Separate Account
without notice to the Owner and prior approval of the Commission, to the extent
required by the 1940 Act or other applicable law. 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.

KILICO also reserves the right to establish additional subaccounts of the
Separate Account, each of which would invest in a new portfolio of the Fund, or
in shares of another investment company, with a specified investment objective.
New subaccounts may be established when, in the sole discretion of KILICO,
marketing needs or investment conditions warrant, and any new subaccounts may be
made available to existing Owners as determined by KILICO. KILICO may also
eliminate or combine one or more subaccounts, transfer assets, or it may
substitute

8
<PAGE> 13

one subaccount for another subaccount, if, in its sole discretion, marketing,
tax, or investment conditions warrant. KILICO will notify all Owners of any such
changes.

If deemed by KILICO to be in the best interests of persons having voting rights
under the Certificate, 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 other KILICO separate
accounts. To the extent permitted by law, KILICO may also transfer the assets of
the Separate Account associated with the Certificate to another separate
account, or to the General Account.

PERFORMANCE INFORMATION

From time to time, the Separate Account may advertise several types of
performance information for the Subaccounts. All Subaccounts may advertise
"average annual total return" and "total return," except "average annual total
return" is not shown for Money Market Subaccount #1 and Money Market Subaccount
#2 (collectively, the "Money Market Subaccounts"). The High Yield Subaccount and
the Government Securities Subaccount may also advertise "yield." The Money
Market Subaccounts may each advertise "yield" and "effective yield." Each of
these figures is based upon historical earnings and is not necessarily
representative of the future performance of a Subaccount. Average annual total
return and total return calculations measure the net income of a Subaccount plus
the effect of any realized or unrealized appreciation or depreciation of the
underlying investments in the Subaccount for the period in question. Average
annual total return will be quoted for periods of at least one year, five years
if applicable, and the life of the Subaccount, ending with the most recent
calendar quarter. Average annual total return figures are annualized and,
therefore, represent the average annual percentage change in the value of an
investment in a Subaccount over the applicable period. Total return figures are
not annualized and represent the actual percentage change over the applicable
period. Yield is a measure of the net dividend and interest income earned over a
specific one month or 30-day period (seven-day period for each of the Money
Market Subaccounts) expressed as a percentage of the value of the Subaccounts'
Accumulation Units. Yield is an annualized figure, which means that it is
assumed that the Subaccount generates the same level of net income over a one
year period which is compounded on a semi-annual basis. The effective yield for
each of the Money Market Subaccounts is calculated similarly but includes the
effect of assumed compounding calculated under rules prescribed by the
Securities and Exchange Commission. The Money Market Subaccounts effective
yields will be slightly higher than their yields due to this compounding effect.
The Subaccounts' units are sold at Accumulation Unit value. The Subaccounts'
performance figures and Accumulation Unit values will fluctuate. Units of the
Subaccount are redeemable by an investor at Accumulation Unit value, which may
be more or less than original cost. The performance figures include the
deduction of all expenses and fees, including a prorated portion of the Records
Maintenance Charge. Redemptions within the first six years after purchase may be
subject to a Withdrawal Charge that ranges from 6% the first year to 0% after
six years; however, the aggregate Withdrawal Charge will not exceed 9.0% of
aggregate Purchase Payments under the Certificate. Yield, effective yield and
total return figures do not include the effect of any Withdrawal Charge that may
be imposed upon the redemption of units, and thus may be higher than if such
charges were deducted. Average annual total return figures include the effect of
the applicable Withdrawal Charge that may be imposed at the end of the period in
question. Additional information concerning a Subaccount's performance appears
in the Statement of Additional Information. The Subaccounts may provide
comparative information with regard to the Dow Jones Industrial Average, the
Standard & Poor's 500 Stock Index, the Consumer Price Index, the CDA Certificate
of Deposit Index, the Lehman Brothers Government and Corporate Bond Index, the
Salomon Brothers High Grade Corporate Bond Index and the Merrill Lynch
Government/Corporate Master Index, the CDA Mutual Fund--International Index, and
the Morgan Stanley Capital International Europe, Australia, Far East Index, and
may provide Lipper Analytical Services, Inc., the VARDS Report and Morningstar,
Inc. performance analysis rankings. From time to time, the Separate Account may
quote information from publications such as Morningstar, Inc., The Wall Street
Journal, Money Magazine, Forbes, Barron's, Fortune, The Chicago Tribune, USA
Today, Institutional Investor, Registered Representative, VARDS and Investment
Advisor.

THE CERTIFICATES

The Prospectus offers Certificates for use in connection with both Qualified
Plans and Non-Qualified Plans. The minimum initial Purchase Payment for a
Certificate is $5,000. Subsequent Purchase Payments of at least $5,000 will be
accepted at any time while the Certificate is in force. In addition, subsequent
Purchase Payments of at least $2,000 will be accepted if the Contract is issued
as an Individual Retirement Annuity. The prior approval of KILICO is required
before it will accept a Purchase Payment in excess of $1,000,000. The maximum
amount of Purchase Payments may also be limited by the provisions of the
retirement plan pursuant to which the Certificate has been purchased.

9
<PAGE> 14

KILICO may at any time amend the Contract and Certificate in accordance with
changes in the law, including applicable tax laws, regulations or rulings, and
for other purposes.

An Owner is allowed a "free look" period (generally ten days, subject to state
variation) after receiving the Certificate, to review it and decide whether or
not to keep it. If the Owner decides to return the Certificate, it may be
cancelled by delivering or mailing it to KILICO. Upon receipt by KILICO, the
Certificate will be cancelled and a refund will be made. The amount of the
refund will depend on the state in which the Certificate is issued; however, it
will generally be an amount at least equal to the Separate Account Value plus
amounts allocated to the Guarantee Periods on the date of receipt by KILICO,
without any deduction for withdrawal charges or Records Maintenance Charges. In
some states applicable law requires that the amount of the Purchase Payment be
returned.

During the Accumulation Period, the Owner may assign the Certificate or change a
Beneficiary at any time by filing such assignment or change with KILICO's home
office at 1 Kemper Drive, Long Grove, Illinois 60049. No assignment or
Beneficiary change shall be binding on KILICO until received by KILICO. KILICO
assumes no responsibility for the validity of such assignment or Beneficiary
change. An assignment may subject the Owner to immediate tax liability. (See
"Tax Treatment of Withdrawals, Loans and Assignments.")

Amounts payable during the Annuity Period may not be assigned or encumbered and,
to the extent permitted by law, are not subject to levy, attachment or other
judicial process for the payment of the payee's debts or obligations.

The original Beneficiary may be named in the application for the Certificate. If
a Beneficiary is not named, or if no named Beneficiary survives the Annuitant,
the Beneficiary shall be the Owner's estate upon the death of the Owner, or the
Annuitant's estate upon the death of the Annuitant who is not the Owner.

Assignment of interest in the Certificate or change of Beneficiary designation
under a Qualified Plan Certificate may be prohibited by the provisions of the
applicable plan.

THE ACCUMULATION PERIOD

A. APPLICATION OF PURCHASE PAYMENTS.

An eligible member of a group or an individual to which a Certificate has been
issued may participate by submitting to KILICO for approval a completed
enrollment application form along with the required initial Purchase Payment.
KILICO issues a Certificate upon acceptance of the application and receipt of
the Purchase Payment. Purchase Payments are confirmed to an Owner in writing.
Purchase Payments are allocated to the Subaccount(s) or Guarantee Period(s) as
selected by the Owner, subject to a minimum of $1,000 in each Subaccount and
Guarantee Period.

KILICO will issue a Certificate without having previously received a signed
application from the applicant in the following circumstances. A dealer may
inform KILICO of an applicant's answers to the questions in the application by
submitting an unsigned application and cause the initial Purchase Payment to be
paid to KILICO. If the information is in good order, KILICO will issue the
Certificate with a copy of the completed application. The Certificate will be
delivered to the owner with a letter requesting the Owner to sign and return to
KILICO a copy of the application in confirmation of the correctness of the
information on the application.

The amount of each Purchase Payment credited to a Subaccount will be based on
the next computed value of an Accumulation Unit following receipt of payment in
proper form by KILICO. The value of an Accumulation Unit is determined when the
net asset values of the Portfolios of the Fund are calculated, which is
generally at 3:00 p.m. Chicago time (11:00 a.m. and 3:00 p.m. Chicago time for
the Money Market Portfolio) on each day that the New York Stock Exchange is open
for trading. Purchase Payments allocated to a Guarantee Period will begin
earning interest one day after receipt in proper form. However, with respect to
initial Purchase Payments allocated to either Subaccount(s) or Guarantee
Period(s), the amount will be credited only after an affirmative determination
by KILICO to issue the Certificate, but no later than the second day following
receipt of the Purchase Payment. Wired funds received before 3:00 p.m. (CST)
will be credited that day. Wired funds received after 3:00 p.m. (CST) will be
credited the next business day. After the initial purchase, the number of
Accumulation Units credited is determined by dividing the Purchase Payment
amount allocated to a Subaccount by the Accumulation Unit value which is next
computed following receipt by KILICO of any Purchase Payment in good funds.
Purchase Payments will not be received except on those days when the New York
Stock Exchange is open for trading.

The number of Accumulation Units will not change because of a subsequent change
in value. The dollar value of an Accumulation Unit will vary to reflect the
investment experience of the Subaccount and the assessment of charges against
the Subaccount other than the Records Maintenance Charge. The number of
Accumulation Units and the amount of Guarantee Period Value will be reduced upon
assessment of the Records Maintenance Charge.

10
<PAGE> 15

If KILICO has not been provided with information sufficient to establish a
Certificate or to properly credit such Purchase Payment, it will promptly
request that the necessary information be furnished. If the requested
information is not furnished within five (5) business days of initial receipt of
the Purchase Payment, or if KILICO determines that it cannot otherwise issue the
Certificate within the five (5) day period, the Purchase Payment will be
returned to the Owner.

B. ACCUMULATION UNIT VALUE.

Each Subaccount has an Accumulation Unit value. When Purchase Payments or other
amounts are allocated to a Subaccount, a number of 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.

The Accumulation Unit value for each subsequent valuation period is the
investment experience factor for that period multiplied by the Accumulation Unit
value for the immediately preceding period. Each valuation period has a single
Accumulation Unit value which is applied to each day in the period.

Each Subaccount has its own investment experience factor. The investment
experience of the Separate Account is calculated by applying the investment
experience factor to the Accumulation Unit value in each Subaccount during a
valuation period.

The investment experience factor of a Subaccount for a Valuation Period is
determined by dividing (1) by (2) and subtracting (3) from the result, where:

(1) is the net result of:

a. the net asset value per share of the investment held in the
Subaccount determined at the end of the current valuation period; plus

b. the per share amount of any dividend or capital gain distributions
made by the investments held in the Subaccount, if the "ex-dividend"
date occurs during the current valuation period; plus or minus

c. a charge or credit for any taxes reserved for the current valuation
period which KILICO determines to have resulted from the investment
operations of the Subaccount;

(2) is the net asset value per share of the investment held in the
Subaccount, determined at the end of the last prior valuation period;

(3) is the factor representing the mortality and expense risk and
administrative cost charge stated in the Certificate for the number of days
in the valuation period.

C. GUARANTEE PERIODS OF THE MVA OPTION.

An Owner may select, on the application form, one or more Guarantee Periods with
durations of one (1) to ten (10) years. Any subsequently permitted Purchase
Payments are allocated to Guarantee Periods as selected by the Owner. The
Guarantee Period, for each Purchase Payment or portion thereof, selected by the
Owner determines the Guaranteed Interest Rate. KILICO pays interest at the
Guaranteed Interest Rates in effect at the time the Purchase Payment is
received. The Guaranteed Interest Rate applies for the entire duration of the
Guarantee Period for that Purchase Payment remaining in the Guarantee Period.
Interest is credited daily at a rate equivalent to the effective annual rate.

11
<PAGE> 16

Set forth below is an illustration of how KILICO will credit interest during a
Guarantee Period. For the purpose of this example, certain assumptions were made
as indicated.

EXAMPLE OF GUARANTEED INTEREST RATE ACCUMULATION

Purchase Payment: $40,000
Guarantee Period: 5 Years
Guaranteed Interest Rate:
4.0% Effective Annual Rate

<TABLE>
<CAPTION>
INTEREST
CREDITED CUMULATIVE
DURING INTEREST
YEAR YEAR CREDITED
----------------------------------------------- --------- ---------
<S> <C> <C>
1 ............................................. $1,600.00 $1,600.00
2 ............................................. 1,664.00 3,264.00
3 ............................................. 1,730.56 4,994.56
4 ............................................. 1,799.78 6,794.34
5 ............................................. 1,871.77 8,666.11
</TABLE>

Accumulated Value at the end of 5 years is:

$40,000 + $8,666.11 = $48,666.11

NOTE: THIS EXAMPLE ASSUMES NO WITHDRAWALS OF ANY AMOUNT DURING THE ENTIRE
FIVE-YEAR PERIOD. A MARKET VALUE ADJUSTMENT AND A WITHDRAWAL CHARGE APPLY TO ANY
INTERIM WITHDRAWAL OR TRANSFER (SEE, "WITHDRAWAL DURING ACCUMULATION PERIOD" AND
"TRANSFER DURING ACCUMULATION PERIOD.") THE HYPOTHETICAL INTEREST RATES ARE
ILLUSTRATIVE ONLY AND ARE NOT INTENDED TO PREDICT FUTURE INTEREST RATES TO BE
GUARANTEED UNDER THE CERTIFICATE. ACTUAL INTEREST RATES GUARANTEED FOR ANY GIVEN
TIME MAY BE MORE OR LESS THAN THOSE SHOWN.

At the end of any Guarantee Period, a subsequent Guarantee Period begins. KILICO
provides written notification of the beginning of a subsequent Guarantee Period.
The subsequent Guarantee Period automatically renews for the same duration as
the terminating Guarantee Period unless the Owner elects another Guarantee
Period within 15 days before or 15 days after the end of the terminating
Guarantee Period. The Owner may choose a different Guarantee Period by
preauthorized telephone instructions or written notification to KILICO within 15
days before or 15 days after the beginning of the subsequent Guarantee Period
(or such longer period as stated in KILICO's notification). An Owner should not
select a subsequent Guarantee Period that would extend beyond the Annuity Date
then in effect for that Certificate as the Guarantee Period Amount available for
annuitization in such Guarantee Period would be subject to a Market Value
Adjustment and any applicable Withdrawal Charge. (See "Market Value Adjustment"
below.)

The amount reinvested at the beginning of any subsequent Guarantee Period is
equal to the Guarantee Period Value in the Guarantee Period just ended. The
Guaranteed Interest Rate in effect when the subsequent Guarantee Period begins
applies for the entire duration of the subsequent Guarantee Period.

An Owner may call 1-800-621-5001 or write to KILICO, 1 Kemper Drive, Long Grove,
Illinois 60049 for the subsequent Guaranteed Interest Rates.

D. ESTABLISHMENT OF GUARANTEED INTEREST RATES.

KILICO declares the Guaranteed Interest Rates for each of the ten durations of
Guarantee Periods from time to time as market conditions dictate, but once
established, rates will be guaranteed for the duration of the respective
Guarantee Periods. KILICO advises an Owner of the Guaranteed Interest Rate for a
chosen Guarantee Period at the time a Purchase Payment is received, a transfer
is effectuated or a Guarantee Period renews. Any portion of an Owner's
Accumulated Guarantee Period Value withdrawn from the MVA Option will be subject
to any applicable Withdrawal Charge and Records Maintenance Charge and may be
subject to a Market Value Adjustment. (See "Market Value Adjustment" below.)

KILICO has no specific formula for establishing the Guaranteed Interest Rates
for the Guarantee Periods. The determination may be influenced by, but not
necessarily correspond to, interest rates generally available on the types of
investments acquired with the Purchase Payments received under the Certificates.
(See "The MVA Option".) KILICO, in determining Guaranteed Interest Rates, may
also consider, among other factors, the duration of a Guarantee Period,
regulatory and tax requirements, sales commissions and administrative expenses
borne by KILICO, and general economic trends.

12
<PAGE> 17

KILICO'S MANAGEMENT MAKES THE FINAL DETERMINATION OF THE GUARANTEED INTEREST
RATES TO BE DECLARED. KILICO CANNOT PREDICT OR GUARANTEE THE LEVEL OF FUTURE
GUARANTEED INTEREST RATES.

E. CERTIFICATE VALUE.

Separate Account Value on any Valuation Date can be determined by multiplying
the total number of Accumulation Units credited to the Contract for a Subaccount
by the value of an Accumulation Unit for that Subaccount on that Valuation Date,
then adding the values of the Owner's interest in each Subaccount in which the
Certificate is participating. That amount, when added to the Owner's Accumulated
Guarantee Period Value in the MVA Option, equals the Certificate Value.

F. TRANSFER DURING ACCUMULATION PERIOD.

During the Accumulation Period, an Owner may transfer all or part of Certificate
Value to one or more Subaccounts or Guarantee Periods subject to the following
provisions: (i) an Owner is limited to allocating Certificate Value to a maximum
of eight allocation options (all Guarantee Periods are considered one allocation
option) including 40 Guarantee Periods under the MVA Option; (ii) no transfer
can be made until the initial Purchase Payment has been in a Subaccount or
Guarantee Period for fifteen days; (iii) once all or part of the Owner's
Certificate Value has been transferred to or from a Subaccount or Guarantee
Period another transfer may not be made within the next fifteen day period; (iv)
the amount being transferred must be at least $1,000, unless the total
Certificate Value attributable to a Subaccount or Guarantee Period is being
transferred; and (v) the Certificate Value remaining in a Subaccount or
Guarantee Period must be at least $1,000. In addition, transfers of all or a
portion of Guarantee Period Value will be subject to the Market Value Adjustment
described below unless the transfer is effective within 15 days before or 15
days after the end of the applicable Guarantee Period. Because a transfer before
the end of a Guarantee Period is subject to a Market Value Adjustment, the
amount actually transferred from the Guarantee Period may be more or less than
the requested specific dollar amount.

KILICO will make transfers pursuant to proper written or telephone instructions
which specify in detail the requested changes. Before telephone transfer
instructions will be honored by KILICO, a telephone transfer authorization must
be completed by the Owner. A transfer request generally is effective on the day
the request is received by KILICO. Transfers involving a Subaccount will be
based upon the Accumulation Unit values next determined following receipt of
valid, complete transfer instructions by KILICO. Under current law, there is no
tax liability to the Owner upon transfer. The transfer privilege may be
suspended, modified or terminated at any time (subject to state requirements).
KILICO disclaims all liability for acting in good faith in following
instructions which are given in accordance with procedures established by
KILICO, including requests for personal identifying information, that are
designed to limit unauthorized use of the privilege. Therefore, a Certificate
Owner would bear the risk of loss in the event of a fraudulent telephone
transfer.

G. WITHDRAWAL DURING ACCUMULATION PERIOD.

The Owner may redeem all or a portion of the Certificate Value less the Record
Maintenance Charge and previous withdrawals, plus or minus any applicable Market
Value Adjustment, and less any contingent deferred sales charge ("Withdrawal
Charge"). Owners should be aware that such withdrawals may, under certain
circumstances, be subject to adverse tax consequences under the Internal Revenue
Code. (See "Tax Treatment of Withdrawals and Assignments.") A withdrawal of the
entire Certificate Value is called a surrender.

ALL WITHDRAWALS OF ANY GUARANTEE PERIOD VALUE, EXCEPT THOSE EFFECTED DURING THE
"FREE LOOK" PERIOD AND THOSE EFFECTED WITHIN 15 DAYS BEFORE OR 15 DAYS AFTER THE
END OF THE APPLICABLE GUARANTEE PERIOD, WILL BE SUBJECT TO THE MARKET VALUE
ADJUSTMENT.

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<PAGE> 18

sixth Contribution Years and reduces to 0% thereafter. However, in no event
shall the aggregate Withdrawal Charges assessed against a Certificate exceed 9%
of the aggregate Purchase Payments made under the Certificate. Please note that
adverse tax consequences may occur with respect to certain withdrawals. (See
"Tax Treatment of Withdrawals and Assignments.")

In the case of a Certificate invested other than solely in one Subaccount or
Guarantee Period, an Owner requesting a partial withdrawal must specify what
portion of the Certificate Value is to be redeemed. If an Owner does not specify
what portion of the Certificate Value is to be redeemed, KILICO will redeem
Certificate Value from all Subaccounts and Guarantee Periods in which the Owner
has an interest. The number of Accumulation Units redeemed from each Subaccount
and the amount redeemed from each Guarantee Period will be in approximately the
proportion which the Owner's interest in each Subaccount and in each Guarantee
Period bears to the total Certificate Value.

The Owner may request a partial withdrawal subject to the following conditions:

(1) The amount requested must be at least $1,000 (before application of the
Market Value Adjustment) or the Owner's entire interest in the Subaccount
or Guarantee Period from which the withdrawal is requested.

(2) The Owner's remaining interest in the Subaccount or Guarantee Period
from which the withdrawal is requested, if not zero, must be at least
$1,000 after the withdrawal is completed and the minimum Certificate Value
must be $2,500.

(3) A Purchase Payment must be made more than 30 days before a partial
withdrawal of such Purchase Payment is permitted except for purchases made
by wire which may be withdrawn immediately.

KILICO, upon request, will inform the Owner of the amounts that would be payable
in the event of a full surrender or partial withdrawal.

Election to withdraw shall be made in writing to KILICO at its home office at 1
Kemper Drive, Long Grove, Illinois 60049. Withdrawal requests will not be
received except on KILICO business days which are those days when the New York
Stock Exchange is open for trading. A withdrawal attributable to the Subaccounts
is determined on the basis of the Accumulation Unit values next computed
following receipt of the request in proper order. The withdrawal will be paid
within seven (7) days after the date a proper written request is received by
KILICO at its home office provided, however, that KILICO may suspend the right
of withdrawal or delay payment of amounts withdrawn from the Subaccounts more
than seven (7) days (a) during any period when the New York Stock Exchange is
closed (other than customary weekend and holiday closings), (b) when trading in
the markets a Portfolio of the Fund normally utilizes is restricted or an
emergency exists as determined by the Securities and Exchange Commission, so
that disposal of the Subaccounts investments or determination of its
Accumulation Unit value is not reasonably practicable, or (c) for such other
periods as the Securities and Exchange Commission by order may permit for the
protection of Owners. For withdrawal requests from the MVA Option, KILICO may
defer any payment for the period permitted by the law of the appropriate state
of jurisdiction, but in no event for more than six (6) months after the written
request is received by KILICO. During the period of deferral, interest at the
current Guaranteed Interest Rate for the same Guarantee Period as declared by
KILICO will continue to be credited.

H. MARKET VALUE ADJUSTMENT.

Any withdrawal, transfer or any annuitization of Guarantee Period Value other
than if effected during the "free look" period or within 15 days before or 15
days after a Guarantee Period terminates, may be adjusted up or down by the
application of a Market Value Adjustment. The Market Value Adjustment is applied
to the amount being withdrawn before deduction of any applicable Withdrawal
Charge. The Market Value Adjustment will also apply to the death benefit payable
upon the death of the Owner or the Annuitant. (See "Death Benefit".)

The Market Value Adjustment reflects the relationship between (a) the currently
established interest rate ("Current Interest Rate") for a Guarantee Period equal
to the remaining length of the Guarantee Period, rounded to the next higher
number of complete years, and (b) the Guaranteed Interest Rate applicable to the
amount being withdrawn. Generally, if the Guaranteed Interest Rate is the same
or lower than the applicable Current Interest Rate, then the application of the
Market Value Adjustment results in a reduced Market Adjusted Value and hence a
lower payment upon withdrawal. Thus, it is possible that the amount available on
withdrawal could be less than the original Purchase Payment or the original
amount allocated to a Guarantee Period if interest rates increase. Conversely,
if the Guaranteed Interest Rate is higher than the applicable Current Interest
Rate, the application of the Market Value Adjustment results in an increased
Market Adjusted Value and, hence, a higher payment upon withdrawal.

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<PAGE> 19

The Market Value Adjustment (MVA) is determined by the application of the
following formula:

(1 + I) t/365
MVA = GPV X [ [ ----------------- ] -1 ]
(1 + J + .005)

Where I is the Guaranteed Interest Rate being credited to the Guarantee
Period Value (GPV) subject to the Market Value Adjustment,

J is the Current Interest Rate declared by KILICO, as of the effective date
of the application of the Market Value Adjustment, for current allocations
to a Guarantee Period the length of which is equal to the balance of the
Guarantee Period for the Guarantee Period Value subject to the Market Value
Adjustment, rounded to the next higher number of complete years, and

t is the number of days remaining in the Guarantee Period.

The .005 Market Value Adjustment factor can be changed in the future, at the
discretion of KILICO on newly issued Certificates.

For an illustration showing an upward and a downward adjustment, see Appendix A.

I. DEATH BENEFIT.

A death benefit shall be paid prior to the annuity date in the event of: (1) the
death of the Owner who is also the Annuitant; (2) the death of either the
Annuitant or the Owner when the Annuitant is not the Owner; (3) the death of a
joint Owner; or (4) the death of the surviving joint Annuitant when joint
Annuitants are named and they are not the Owners.

If there is a joint Owner (permitted only under a Non-Qualified Plan
Certificate), the Owner's death will occasion payment of the death benefit
unless the joint Owner is the Owner's spouse, and the spouse has been named
beneficiary. In that case, the surviving spouse becomes the new Owner.

If a death benefit becomes payable by reason of the death of an Owner, it must
be fully paid out within five (5) years of the Owner's death, unless it is
payable to the named beneficiary over his or her life or life expectancy,
beginning no more than one (1) year after the Owner's death. The death benefit
proceeds applied to the annuity must be $4,000 or more. If a death benefit
becomes payable by reason of the death of an Owner, and the beneficiary is the
Owner's surviving spouse, the surviving spouse may become the new Owner under
the Certificate.

If the death benefit becomes payable by reason of the death of the Annuitant or
joint Annuitant, it will be paid in the manner selected by the named
beneficiary, including a lump sum withdrawal or Annuity Option, provided, in the
case of an annuity option, that the death benefit proceeds are $4,000 or more.

The death benefit payable under the Certificate depends upon issue age of the
Owner except in the case of a Certificate issued where the Owner differs from
the Annuitant, the death benefit issue age will be based on the age of the Owner
or Annuitant, whichever is older.

For a Certificate issued to an Owner prior to attaining age 66, the death
benefit payable during the first six Certificate Years will be Market Adjusted
Value plus Separate Account Value as of the date KILICO receives due proof of
death and return of the Certificate, or the sum of all Purchase Payments (minus
withdrawals and withdrawal charges) accumulated at 5% annually per Certificate
Year, whichever is greater. The death benefit payable at the end of the sixth
Certificate Year is the greater of Market Adjusted Value plus Separate Account
Value as of the date KILICO receives due proof of death and return of the
Certificate, or the sum of all Purchase Payments (minus withdrawals and
withdrawal charges) accumulated at 5% annually per Certificate Year ("Minimum
Death Benefit Value"). From the seventh Certificate Year to the twelfth
Certificate Year, the death benefit payable during the Accumulation Period is
the Market Adjusted Value plus Separate Account Value as of the date KILICO
receives due proof of death and return of the Certificate, or Minimum Death
Benefit Value at the end of year six plus subsequent Purchase Payments minus
withdrawals and withdrawal charges, whichever is greater. Every six years after
the end of the twelfth Certificate Year the Minimum Death Benefit Value plus
subsequent Purchase Payments minus withdrawals and withdrawal charges is
compared to Market Adjusted Value plus Separate Account Value and whichever is
greater determines the new Current Minimum Death Benefit Value for the next six
Certificate Years.

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<PAGE> 20

For a Certificate issued to an Owner age 66 and over, the death benefit payable
during the Accumulation Period for the first six Certificate Years is Market
Adjusted Value plus Separate Account Value, or the sum of all Purchase Payments
(minus withdrawals and withdrawal charges), whichever is greater. At the end of
the sixth Certificate Year, the Minimum Death Benefit Payable will be set for
the remainder of the Accumulation Period at the greater of Market Adjusted Value
plus Separate Account Value, or the sum of all Purchase Payments (minus
withdrawals and withdrawal charges). For the remainder of the Accumulation
Period, the beneficiary will receive the greater of Market Adjusted Value plus
Separate Account Value or the Minimum Death Benefit Value plus subsequent
Purchase Payments minus withdrawals and withdrawal charges.

The death benefit is payable upon the receipt by KILICO at its Home Office of
due proof of death and return of the Certificate, election of the method of
payment, and sufficient information about the beneficiary to make payment. The
beneficiary may receive a lump sum benefit, defer receipt of the benefit for up
to five (5) years or select an available Annuity Option if the proceeds are
$4,000 or more.

CERTIFICATE CHARGES AND EXPENSES

Charges and deductions under the Certificates are made against the Separate
Account for KILICO's assumption of mortality and expense risk and administrative
expenses. In addition, a deduction is made from the Owner's account for a
Records Maintenance Charge of $30 at the end of each Certificate Year, on
surrender of a Certificate and on surrender upon annuitization. Investment
management fees and other expenses of the Fund are indirectly borne by the
Owner. These fees and other expenses are described in the Fund's Prospectus and
Statement of Additional Information. KILICO will deduct state premium taxes from
Certificate Value when paid by KILICO. Additionally, where applicable, a
Withdrawal Charge may be assessed by KILICO in the event of early withdrawal or
early annuitization.

A. CHARGES AGAINST THE SEPARATE ACCOUNT.

During both the Accumulation Period and the Annuity Period, KILICO assesses that
portion of each Subaccount representing Certificate Value with a daily asset
charge for mortality and expense risks and administrative costs, which amounts
to an aggregate of one and one-quarter percent (1.25%) per annum (consisting of
approximately .80% for mortality risks, approximately .30% for expense risks and
approximately .15% for administrative costs). The administrative charge is
intended to cover the average anticipated administrative expenses to be incurred
over the period the Certificates are in force. With an administrative charge
based on a percentage of assets, however, there is not necessarily a direct
relationship between the amount of the charge and the administrative costs of a
particular account. Additionally, KILICO deducts an annual Records Maintenance
Charge of $30 for each Certificate as described below. The Records Maintenance
Charge is not assessed during the Annuity Period.

These charges may be decreased by KILICO without notice. The Records Maintenance
Charge and the daily asset charge for mortality and expense risks are guaranteed
not to increase. The daily asset charge for administrative costs may be
increased provided that the increase will apply only to Certificates issued
after the effective date of such increase. If the daily asset charge for
mortality and expense risks is insufficient to cover the risks, any loss or
deficiency will fall on KILICO. Conversely, if the charges prove more than
sufficient, the gain will accrue to KILICO, creating a profit which would be
available for any proper corporate purpose including, among other things,
payment of distribution expenses.

1. MORTALITY RISK.

Variable Annuity payments reflect the investment performance of each Subaccount
but are not affected by changes in actual mortality experience or by actual
expenses incurred by KILICO.

The mortality risk assumed by KILICO arises from two contractual obligations.
First, in case of the death of the Owner or of the Annuitant prior to the
Annuity Date, KILICO will return to the Beneficiary the guaranteed and
increasing death benefit described above. The second contractual obligation
assumed by KILICO is to continue to make annuity payments to each Annuitant for
the entire life of the Annuitant under Annuity Options involving life
contingencies.

The latter assures each Annuitant that neither the Annuitant's own longevity nor
an improvement in life expectancy generally will have an adverse effect on the
annuity payments received under a Certificate and relieves the Annuitant from
the risk of outliving the amounts accumulated for retirement.

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<PAGE> 21

2. EXPENSE RISK.

KILICO also assumes the risk that all actual expenses involved in administering
the Certificates including Certificate maintenance costs, administrative costs,
data processing costs and costs of other services may exceed the amount
recovered from the Records Maintenance Charge or the amount recovered from the
administrative cost portion of the daily asset charge.

3. ADMINISTRATIVE COSTS.

The daily asset charge for administrative costs is imposed to reimburse KILICO
for the expenses it incurs for administering the Certificates, which include,
among other things, responding to Owner inquiries, recordkeeping, processing
changes in Purchase Payment allocations, regulatory compliance reports and
providing reports to Owners.

B. RECORDS MAINTENANCE CHARGE.

KILICO will assess a Records Maintenance Charge of $30 during the Accumulation
Period against each Owner's account at the end of each Certificate Year, on
surrender of a Certificate and on surrender upon annuitization. This charge is
to reimburse KILICO for expenses incurred in establishing and maintaining the
records relating to an Owner's account. This charge has been set at a level not
greater than its costs. The imposition of the Records Maintenance Charge will
constitute a reduction in Separate Account Value or in Guarantee Period Value.
Under certain circumstances, the Records Maintenance Charge may be waived or
reduced by KILICO to reflect differences in costs or services, provided that it
does unfairly discriminate against any person.

At any time the Records Maintenance Charge is assessed, an equal portion of the
applicable charge will be assessed against each Subaccount in which the
Certificate is participating and a number of Accumulation Units sufficient to
equal the proper portion of the charge will be redeemed from each Subaccount to
meet the assessment. If the Owner has no Certificate Value allocated to the
Separate Account, the Records Maintenance Charge is deducted from the Guarantee
Period closest to maturity and shortest in original duration.

C. WITHDRAWAL CHARGE.

No sales charge is deducted from any Purchase Payment. However, a contingent
deferred sales charge ("Withdrawal Charge") may be assessed on withdrawals
attributable to Purchase Payments and all related accumulations during the first
six Certificate Years after the Purchase Payments are made. The Withdrawal
Charge will be used to cover expenses relating to the sale of the Certificates,
including commissions paid to sales personnel, the costs of preparation of sales
literature and other promotional costs and other acquisition expenses. During
the first six Certificate Years after a Purchase Payment is made, a Withdrawal
Charge applies even if the withdrawal occurs at the end of a Guarantee Period.

The Withdrawal Charge is computed as a percentage of the total amount withdrawn,
after application of any Market Value Adjustment. When a partial withdrawal is
requested, the recipient will receive a check in the amount requested. To the
extent that any Withdrawal Charge is applicable, the Certificate Value will be
reduced by the amount of the Withdrawal Charge in addition to the actual dollar
amount sent to the Owner. In no event shall the aggregate Withdrawal Charges
assessed against a Certificate exceed 9% of the aggregate Purchase Payments made
under the Certificate. (For additional details, see "Withdrawal During
Accumulation Period.") Withdrawals may be subject to certain adverse tax
consequences. (See "Tax Treatment of Withdrawals and Assignments.")

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<PAGE> 22

The Withdrawal Charges are intended to compensate KILICO for expenses in
connection with distribution of the Certificates. Under current assumptions
KILICO anticipates Withdrawal Charges will not fully cover distribution
expenses. To the extent that distribution expenses are not recovered from
Withdrawal Charges, those expenses may be recovered from KILICO's general
assets. Those assets may include proceeds from the mortality and expense charge
described above.

The Withdrawal Charge will also apply upon annuitization to Purchase Payments
made within six Certificate Years of annuitization and all related accumulations
unless the Owner elects an annuity which provides either an income benefit
period of five years or more, or a benefit under which payment is contingent
upon the life of the payee.

The Withdrawal Charge may be reduced or eliminated to particular classes of
Owners, but only to the extent KILICO applies such variations in Withdrawal
Charges uniformly to the class and informs existing and prospective Owners of
such variations. Units of a Subaccount sold to officers, directors and employees
of KILICO and the Fund, the Fund's investment adviser, and principal underwriter
or certain affiliated companies, or to any trust, pension, profit-sharing or
other benefit plan for such persons may be withdrawn without any Withdrawal
Charge.

D. FUND INVESTMENT MANAGEMENT FEE AND OTHER EXPENSES.

The net asset value of each of the Portfolios of the Fund reflects investment
management fees and certain general operating expenses already deducted from the
assets of the Portfolios. These fees and expenses are indirectly borne by the
Owners. Investment management fees are described on page 8. Further detail about
fees and expenses of the Portfolios is provided in the attached prospectus for
the Fund and in the Fund's Statement of Additional Information.

E. STATE PREMIUM TAXES.

Certain state and local governments impose a premium tax ranging from 0% to 3.5%
on the amount of Purchase Payments. KILICO will deduct state premium taxes from
the Certificate Value when paid by KILICO. Where applicable, the dollar amount
of state premium taxes previously paid or payable upon annuitization by KILICO
will be charged against the Certificate Value if not previously assessed, when
and if the Certificate is annuitized. See "Appendix B--State Premium Tax Chart"
in the Statement of Additional Information.

THE ANNUITY PERIOD

Certificates may be annuitized under one of several Annuity Options, which are
available either on a fixed or variable basis. Annuity payments will begin on
the Annuity Date under the Annuity Option selected by the Owner.

1. ANNUITY PAYMENTS.

Annuity payments will be determined on the basis of (i) the annuity table
specified in the Certificate, (ii) the Annuity Option selected, and (iii) the
investment performance of the Subaccount selected. The Annuitant receives the
value of a fixed number of Annuity Units each month. The value of an Annuity
Unit will reflect the investment performance of the Subaccounts selected, and
the amount of each annuity payment will vary accordingly. Upon annuitization, a
Withdrawal Charge will apply to Purchase Payments made within six Certificate
Years of annuitization and all related accumulations. If the Owner elects an
annuity which provides either an income benefit period of five years or more, or
a benefit under which payment is contingent upon the life of the payee(s), any
applicable Withdrawal Charges will be waived.

2. ANNUITY OPTIONS.

The Owner may elect to have annuity payments made under any one of the Annuity
Options specified in the Certificate and described below. However, all available
options are not described below. For example, additional options are available
under contracts issued prior to June 1, 1993 and other options may be made
available by KILICO. The Owner may decide at any time (subject to the provisions
of any applicable retirement plan) to commence annuity payments. A change of
Annuity Option is permitted if made before the date annuity payments are to
commence. For a Non-Qualified Plan Certificate, if no other Annuity Option is
elected, monthly annuity payments will be made in accordance with Option 3 below
with a ten (10) year period certain. For a Qualified Plan Certificate, if no
other Annuity Option is elected, monthly annuity payments will be made in the
form of a qualified joint and survivor annuity with a monthly income at
two-thirds of the full amount payable during the lifetime of the surviving
payee. Generally, annuity payments will be made in monthly installments.
However, if the net proceeds available to apply under an Annuity Option are less
than $4,000, KILICO shall have the right to pay the annuity in one lump sum. In
addition, if the first payment provided would be less than $50, KILICO shall
have the right to change the frequency of payments to quarterly, semiannual or
annual intervals resulting in an initial payment of at least $50.

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<PAGE> 23

The amount of periodic annuity payments will depend upon (a) the type of annuity
option selected; (b) the age of the payee; and (c) the investment experience of
the Subaccounts selected. For example, if the annuity option selected is income
for a specified period, the shorter the period selected the fewer payments will
be made and those payments will have a higher value. If the annuity option
selected is life income, it is likely the payments will be in a smaller amount
than income for a short specified period. If an individual selects the life
income with installments guaranteed option, the payments will probably be in a
smaller amount than for the life income option. If an individual selects the
joint and survivor annuity option, the payments will be smaller than those
measured by an individual life income option. The age of the payee will also
influence the amount of periodic annuity payments because the older the payee,
the shorter the life expectancy and the larger the payments. Finally, if the
Owner participates in a Subaccount with higher investment performance, it is
likely the Owner will receive a higher periodic payment.

For Non-Qualified Plan Certificates, if the Owner dies before the Annuity Date,
Annuity Options which may be elected are limited. The Annuity Options available
are (a) Option 2 or (b) Option 1 or 3 for a period no longer than the life
expectancy of the Beneficiary (but not less than 5 years from the Owner's
death). If the Beneficiary is not an individual, the entire interest must be
distributed within 5 years of the Owner's death. The Death Benefit distribution
must begin no later than one year from the Owner's death or such later date as
prescribed by federal regulation.

Option 1--Income for Specified Period.

An annuity payable monthly for a selected number of years ranging from five to
thirty. Upon payee's death, if the Beneficiary is a natural person, KILICO will
automatically continue payments for the remainder of the certain period to the
Beneficiary. If the Beneficiary is either an estate or trust, KILICO will pay a
commuted value of the remaining payments. Variable Annuity payments under Option
1 reflect the payment of the mortality and expense risk charge, even though
there is no life contingency risk associated with Option 1. Payees under Option
1 by written notice to KILICO may cancel all or part of the remaining variable
annuity payments due and receive that part of the remaining value of the
Certificate less any applicable Withdrawal Charge.

Option 2--Life Income.

An annuity payable monthly during the lifetime of the payee, terminating with
the last monthly payment due prior to the death of the payee. 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.

An annuity payable monthly during the lifetime of the payee with the provision
that if, at the death of the payee, payments have been made for less than five,
ten, fifteen or twenty years as elected, and the Beneficiary is a natural
person, KILICO will automatically continue payments for the remainder of the
elected period to the Beneficiary. If the Beneficiary is either an estate or
trust, KILICO will pay a commuted value of the remaining payments.

Option 4--Joint and Survivor Annuity.

An annuity payable monthly while both payees are living. Upon the death of
either payee, the monthly income payable will continue during the lifetime of
the surviving payee at the percentage of such full amount chosen at the time of
election of this Option. Annuity payments terminate automatically and
immediately upon the death of the surviving payee without regard to the number
or total amount of payments received.

3. ALLOCATION OF ANNUITY.

The Owner may elect to have payments made on a fixed or variable basis, or a
combination of both. An Owner should exercise the transfer privilege during the
Accumulation Period for the purposes of such allocation. Any Guarantee Period
Value will be annuitized on a fixed basis. Any Separate Account Value will be
annuitized on a variable basis. Transfers during the Annuity Period are
permitted subject to stated limitations. The MVA Option is not available during
the Annuity Period.

4. TRANSFER DURING ANNUITY PERIOD.

During the Annuity Period, the payee may transfer the value of the payee's
Certificate interest in a Subaccount(s) to another Subaccount or to the General
Account by written request to KILICO subject to the following limitations:

a. No transfer to a Subaccount may be made during the first year of the
Annuity Period; subsequent transfers are limited to one per year during the
Annuity Period.

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<PAGE> 24

b. A Certificate's entire interest in a Subaccount must be transferred.

c. A transfer to a Subaccount, if notice to KILICO is received more than
seven (7) days prior to any annuity payment date, shall be effective during
the Valuation Period next succeeding the date such notice is received. If
received fewer than seven (7) days before any annuity payment date, the
transfer shall be effective during the Valuation Period next succeeding
that annuity payment date.

d. A transfer to the General Account may be made effective only on an
anniversary of the first Annuity Date and upon not less than thirty (30)
days prior written notice to KILICO.

The Annuity Unit value of a Subaccount shall be determined as of the end of the
Valuation Period next preceding the effective date of the transfer. The transfer
privilege may be suspended, modified or terminated at any time (subject to state
requirements). Payees should consider the appropriateness of each Subaccount's
investment objectives and risks as an investment during the annuity period.

5. ANNUITY UNIT VALUE.

The value of an Annuity Unit is determined independently for each of the
Subaccounts.

For each Subaccount, the Annuity Unit value for any Valuation Period is
determined by multiplying the Annuity Unit value for the immediately preceding
Valuation Period by the net investment factor for the Valuation Period for which
the Annuity Unit value is being calculated, and multiplying the result by an
interest factor which offsets the effect of the assumed investment earnings rate
of 4% per annum which is assumed in the annuity tables contained in the
Certificate.

The net investment factor for each Subaccount for any Valuation Period is
determined by dividing (1) by (2) and subtracting (3) from the result where:

(1) is the net result of:

a. the net asset value per share of the investment held in the
Subaccount determined at the end of the current valuation period; plus

c. a charge or credit for any taxes reserved for the current valuation
period which KILICO determines to have resulted from the investment
operations of the Subaccount;

(2) is the net asset value per share of the investment held in the
Subaccount, determined at the end of the last prior valuation period;

(3) is the factor representing the mortality and expense risk and
administrative cost charge stated in the Certificate for the number of days
in the valuation period.

6. FIRST PERIODIC PAYMENT.

At the time annuity payments begin, the value of the Owner's Certificate
interest is determined by multiplying the applicable Accumulation Unit values at
the end of the Valuation Period immediately preceding the date the first annuity
payment is due by the respective number of Accumulation Units credited to the
Owner's Certificate interest as of the end of such Valuation Period, less the
dollar amount of premium taxes not previously deducted, if applicable, and less
the amount of the Withdrawal Charge, if applicable.

There shall be no Withdrawal Charge assessed so long as annuity payments provide
for payments under Annuity Options 2, 3 or 4 or payments under Annuity Option 1
are scheduled to continue for at least five years.

The first annuity payment is determined by multiplying the benefit per $1,000 of
value shown in the applicable annuity table by the number of thousands of
dollars of Certificate Value less deduction for premium taxes and Withdrawal
Charge, if applicable.

A 4% assumed investment rate is built into the annuity tables contained in the
Certificates. If the actual net investment rate exceeds 4%, payments will
increase at a rate equal to the amount of such excess. Conversely, if the actual
rate is less than 4%, annuity payments will decrease.

7. SUBSEQUENT PERIODIC PAYMENTS.

The amount of the second and subsequent annuity payments is determined by
multiplying the number of Annuity Units by the Annuity Unit value as of the
Valuation Period next preceding the date on which each annuity payment

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<PAGE> 25

is due. The dollar amount of the first annuity payment as determined above is
divided by the Annuity Unit value as of the Annuity Date to establish the number
of Annuity Units representing each annuity payment. The number of Annuity Units
determined for the first annuity payment remains constant for the second and
subsequent monthly payments.

8. FIXED ANNUITY PAYMENTS.

The amount of each payment under a Fixed Annuity will be determined from tables
prepared by KILICO. Such tables show the monthly payment for each $1,000 of
Certificate Value net of any applicable premium tax allocated to provide a Fixed
Annuity. Fixed Annuity payments will not change regardless of investment,
mortality or expense experience.

9. DEATH BENEFIT.

If the payee dies after the Annuity Date, the death proceeds, if any, will
depend upon the form of annuity payment in effect at the time of death. (See
"Annuity Options.")

FEDERAL INCOME TAXES

The ultimate effect of Federal income taxes on Certificate Value, on annuity
payments and on the economic benefit to the Owner, Annuitant or Beneficiary
depends on KILICO's tax status, the type of retirement plan for which the
Certificate is purchased and upon the tax status of the individual concerned.
Each individual Owner should consult a competent tax advisor.

A. KILICO'S TAX STATUS.

KILICO is taxed as a life insurance company under the current Internal Revenue
Code. The operations of the Separate Account are taxed as part of the total
operations of KILICO. However, the determination of tax charges and credits to
the Separate Account will be independent of the tax actually paid by KILICO.

Under current interpretations of existing Federal income tax law, investment
income of the Separate Account, to the extent that it is applied to increase an
individual Owner's equity, is not taxed. Thus, a Subaccount may realize net
investment income and dividends, and the Subaccount may receive and reinvest
them, all without Federal income tax consequences for the Separate Account.

B. AMOUNTS RECEIVED AS AN ANNUITY.

A fixed portion of each annuity payment is excludable from gross income as a
return of investment in the Certificate and the balance is taxed as ordinary
income. For payments made on a fixed basis, the excludable amount and the
includible amount generally will stay the same for each payment. For payments
made on a variable basis, the excludable amount generally will stay the same,
but the includible amount may vary for each payment. In addition, for payments
made on a variable basis, the excludable amount may be recalculated if any
payment is less than the excludable amount.

The excludable amount of each Annuity Unit is determined by dividing the
investment in the Certificate as of the Annuity Date by the number of Annuity
Units to be received under the payment option chosen.

For a Non-Qualified Plan Certificate, the investment in the Certificate is equal
to the Purchase Payments minus any withdrawals thereof. For a Qualified Plan
Certificate, the investment in the Certificate is equal to the employee's
non-deductible contributions, minus any prior distributions thereof.

The excludable amount of any payment may not exceed the unrecovered investment
in the Certificate immediately before such payment. The amount of the
unrecovered investment is allowed as a deduction on the final return of a
deceased Annuitant where annuity payments cease before the investment in the
Certificate has been fully recovered.

C. NON-QUALIFIED PLAN CERTIFICATES.

1. DIVERSIFICATION REQUIREMENTS.

While Section 72 of the Code governs the taxation of annuities in general,
Section 817(h) of the Code provides that nonqualified annuity contracts will not
be treated as annuities unless the underlying investments are "adequately
diversified" in accordance with regulations prescribed by the Secretary of the
Treasury. Such regulations require,

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<PAGE> 26

among other things, that a mutual fund underlying an annuity contract, such as
those underlying the Certificates, may invest no more than 55% of the value of
its assets in one investment; 70% in two investments; 80% in three investments;
and 90% in four investments. If the above diversification requirements are not
met by each and every Portfolio, the Certificate could lose its overall tax
status as an annuity, resulting in current taxation of the excess of cash value
over the "investment in the Certificate" (as defined above) to the Owner. KILICO
has reviewed the diversification regulations and believes that the Portfolios
are in compliance with these regulations and that there is no threat to the
current favorable tax status of the Certificates. Furthermore, KILICO intends to
make whatever changes may be necessary and appropriate in the future in order to
maintain the continued favorable tax treatment.

In connection with the earlier issuance of temporary regulations relating to
diversification requirements, the Treasury Department announced that such
regulations do not provide guidance concerning the extent to which owners may
direct their investments to particular Subaccounts. Moreover any additional rule
may apply to pension plan contracts. It is possible that when such guidance is
available, the Contract and Certificates may need to be modified to comply with
such guidance. Accordingly, KILICO reserves the right to modify the Contract and
Certificates as necessary to prevent the Owner from being considered the owner
of the assets of the Subaccount. Because the guidance has not been published,
there can be no assurance as to content or even whether application will be
prospective only.

2. TAX TREATMENT OF WITHDRAWALS AND ASSIGNMENTS.

Withdrawals from Non-Qualified Plan Certificates will generally be allocable
first to ordinary income, then to investment in the Certificate. For
Certificates acquired in exchange for an annuity contract to which the Owner
made contributions before August 14, 1982, withdrawals will be allocable first
to investment in the annuity contract made prior to August 14, 1982, then to
ordinary income then to any other investment in the annuity contract or
Certificate.

If the Owner transfers a Non-Qualified Plan Certificate by gift, the Owner must
include in gross income the excess of the Certificate Value over the investment
in the Certificate as of the date of transfer.

Non-Qualified Plan Certificates or annuity contracts issued by KILICO (or an
affiliate) during a calendar year are to be aggregated and considered a single
contract for purposes of determining the amount of any withdrawal, or assigned
or pledged cash value includible in the Owner's gross income. This rule does not
apply to a Certificate or annuity contract where the Annuity Date is within one
year after the Certificate or annuity contract is issued.

3. 10-PERCENT PENALTY TAX ON PREMATURE DISTRIBUTIONS.

A 10% penalty is imposed on the taxable portion of any distribution to a
participant in a qualified pension or profit sharing plan, tax sheltered annuity
or individual retirement annuity ("IRA"), or under a Non-Qualified Plan
Certificate, prior to age 59 1/2, death or disability of the participant or
Non-Qualified Plan Owner.

The 10% penalty does not apply to any distribution which is part of a series of
substantially equal periodic payments (not less frequently than annually) made
for the life or life expectancy of the qualified plan participant or Non-
Qualified Plan Owner, provided that there is no change in such payments before
the later of (i) the close of the 5-year period beginning on the date of the
first payment, or (ii) age 59 1/2, death or disability of such participant or
Owner. Further, the 10% penalty does not apply to any distribution from a
qualified pension or profit sharing plan or tax sheltered annuity on account of
retirement after age 55, or to any distribution from a Non-Qualified Plan
Certificate: (i) attributable to investment in the Certificate before August 14,
1982, or (ii) where the Annuity Date is within one year after the Certificate is
issued.

D. QUALIFIED PLANS.

The Certificates offered by this Prospectus are designed to be suitable for use
under Qualified Plans. Such contracts are commonly referred to as "Qualified
Plan Certificates." KILICO, in its sole discretion, reserves the right to waive
certain minimums with respect to large group contracts. Taxation of participants
in such Qualified Plans varies with the type of plan and the terms and
conditions of the specific plan.

Qualified Plan Owners, Annuitants and Beneficiaries are cautioned that benefits
under a Qualified Plan may be subject to the terms and conditions of the plan
regardless of the terms and conditions of the Certificates issued pursuant to
the plan. Following are general descriptions of the types of Qualified Plans and
of the use of the Certificates in connection therewith. Purchasers intending to
use the Certificates in connection with Qualified Plans should seek competent
tax advice.

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(a) Pension and Profit-Sharing Plans.

Sections 401(a) of the Internal Revenue Code ("Code") permits employers to
establish qualified retirement plans for employees. Taxation of plan
participants depends on the specific plan. Such plans are limited by law as
to maximum permissible contributions, distribution dates,
non-forfeitability of interests and tax rates applicable to distributions.
In order to establish such a plan, a plan document is adopted and
implemented by the employer. Such retirement plans may permit the purchase
of the Certificates in order to provide benefits under the plans.

(b) Tax-Sheltered Annuities.

Section 403(b) of the Code permits public school employees and employees of
certain types of charitable, educational and scientific organizations
specified in Section 501(c)(3) of the Code to purchase annuity contracts
and, subject to certain limitations, exclude the amount of purchase
payments from gross income for tax purposes. These annuity contracts are
commonly referred to as "tax-sheltered annuities."

The Certificates offered by this Prospectus are designed to exclude
periodic contributions to tax-sheltered annuities under salary reduction
agreements but to accept lump-sum contributions and rollovers that meet the
$5,000 minimum Purchase Payment requirement. To the extent attributable to
salary reduction contributions to your tax-sheltered annuity contract (or
to transfers of such amounts from other contracts), contributions made or
earnings credited after December 31, 1988 may not be withdrawn until
separation from service, attainment of age 59 1/2, death or disability.
Salary reduction contributions after December 31, 1988 may also be
withdrawn in the case of hardship within the meaning of section 403(b)(11)
of the Code. Under your employer's tax-sheltered annuity plan, you may be
allowed to transfer your Certificate Value to other types of options, such
as other fixed or variable annuity contracts or Section 403(b)(7) custodial
accounts.

Distributions from Pension and Profit Sharing Plans and Tax-Sheltered
Annuities which are eligible to be rolled over to an IRA or another
employer's retirement plan are generally subject to 20% withholding, unless
the participant exercises the right to a "direct rollover." A "direct
rollover" may be accomplished when the sponsor of a participant's existing
pension or profit sharing plan or tax-sheltered annuity makes a
distribution payable to the sponsor of the new IRA or new employer plan for
the participant's benefit.

If the participant does not exercise the right to a "direct rollover," in
general, 20% will be withheld from the distribution and credited against
the participant's income taxes incurred in the taxable year of the
distribution. Other rules may apply, therefore, KILICO suggests that
participants consult their tax advisors before making a decision.

(d) Individual Retirement Annuities.

Section 408(b) of the Code permits eligible individuals to make deductible
contributions to an individual retirement program known as an "Individual
Retirement Annuity" ("IRA"). Generally, the maximum contribution is $2,000
for an individual and $2,250 for an individual and spouse eligible for a
spousal IRA. In addition, certain distributions from qualified pension and
profit sharing plans, tax-sheltered annuities and other IRA's may be placed
on a tax-deferred basis into an IRA. When issued in connection with an IRA,
the Certificate will be amended to conform to the requirements under such
plans. Purchasers have the right to revoke an IRA Certificate within seven
(7) days of the receipt of the IRA disclosure statement which is attached
to the application used for IRA Certificates. The IRA disclosure statement
also provides more information on contribution limits. A purchaser can
revoke the IRA Certificate within seven (7) days of the date the
application was signed by notifying KILICO.

PLEASE NOTE THAT AN IRA DISCLOSURE STATEMENT IS INCLUDED IN THIS PROSPECTUS
AS AN APPENDIX.

(e) Deferred Compensation Plans.

Section 457 of the Code allows a State defined to also include a political
subdivision of a State, and an agency or instrumentality of a State or a
political subdivision of a State, and any other tax exempt organization to
establish a deferred compensation plan ("Section 457 Plan") for the benefit
of its employees. Certificates issued under such a plan are owned by the
employer.

An employee electing to participate in a Section 457 Plan should understand
that all rights and benefits are governed strictly by the terms of the
plan. The employer is legal owner of any Certificates issued under the
plan. The employee is, in fact, a general creditor of the employer under
the terms of the plan. The employer, as

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<PAGE> 28

owner of the Certificates, also retains all voting and redemption rights
which may accrue through the Certificates issued under the plan.

The participating employee should look to the terms of the plan for any
charges in regard to participating in such plan other than those disclosed
in this Prospectus. Section 457 of the Code places limitations on
contributions to such plans. A participant must look to the terms of the
plan for an explanation of this limitation.

E. OTHER CONSIDERATIONS.

Because of the complexity of the law and its application to a specific
individual, tax advice may be needed by a person contemplating purchase of a
Certificate or the exercise of elections under a Certificate. The above comments
concerning the Federal income tax consequences are not exhaustive, and special
rules are provided with respect to situations not discussed in this Prospectus.

The preceding description is based upon KILICO's understanding of current
Federal income tax law. KILICO cannot assess the probability that changes in tax
laws, particularly affecting annuities, will be made.

The preceding comments do not take into account state income or other tax
considerations which may be involved in the purchase of a Certificate or the
exercise of elections under the Certificate. For complete information on such
Federal and state tax considerations, a qualified tax adviser should be
consulted.

Legislation has been considered which would prohibit insurers from using
sex-distinct factors in determining annuity benefit payments. If "unisex"
requirements are adopted, KILICO may be required to utilize annuity tables which
do not differentiate the amount of annuity benefits on the basis of sex. This
might result in a change providing for either an increase in the initial amount
of monthly benefits applied for females or a decrease in such amount for males
or a combination of both. KILICO is using "unisex" annuity tables on Qualified
Plan Certificates.

DISTRIBUTION OF CONTRACTS AND CERTIFICATES

The Contracts and Certificates are sold by licensed insurance agents, where the
Contracts and Certificates may be lawfully sold, who are registered
representatives of broker-dealers which are registered under the Securities
Exchange Act of 1934 and are members of the National Association of Securities
Dealers, Inc. KILICO generally pays a maximum commission of 6% on sales based on
Purchase Payments. KILICO reserves the right to pay additional commissions based
on the value in an Owner's account. In addition to commissions, KILICO may, from
time to time, pay or allow additional promotional incentives, in the form of
cash or other compensation, to broker-dealers that sell the Contracts and
Certificates. In some instances, such other incentives may be offered only to
certain licensed broker-dealers that sell or are expected to sell during
specified time periods certain minimum amounts of the Contracts and Certificates
or other contracts issued by KILICO. The Contracts and Certificates are
distributed through the principal underwriter for the Separate Account, which is
Investors Brokerage Services, Inc. ("IBS"), a wholly owned subsidiary of KILICO.

VOTING RIGHTS

Proxy materials in connection with any shareholder meeting of the Fund will be
delivered to each Owner or Annuitant with Subaccount interests invested in the
Fund as of the record date for voting at such meeting. Such proxy materials will
include an appropriate form which may be used to give voting instructions.
KILICO will vote Fund shares held in each Subaccount in accordance with
instructions received from persons having a Subaccount interest in such Fund
shares. Fund shares as to which no timely voting instructions are received will
be voted by KILICO in proportion to the voting instructions received from all
persons in a timely manner. KILICO will also vote any Fund shares attributed to
amounts it has accumulated in the Subaccounts in the same proportion that Owners
vote. As a trust, the Fund is not required and does not intend to hold annual
shareholders' meetings. It will, however, hold special meetings as required or
deemed desirable for such purposes as electing trustees, changing fundamental
policies or approving an investment advisory agreement.

Owners and Annuitants of all Certificates participating in each Subaccount shall
have voting rights with respect to the Portfolio invested in by that Subaccount,
based upon each Owner's proportionate interest in that Subaccount as measured by
units. The person having such voting rights will be the Owner before surrender,
the Annuity Date or the death of the Annuitant, and thereafter, the payee
entitled to receive Variable Annuity payments under the Certificate. During the
Annuity Period, voting rights attributable to a Certificate will generally
decrease as Annuity Units attributable to an Annuitant decrease.

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<PAGE> 29

REPORTS TO OWNERS AND INQUIRIES

Immediately after each Certificate anniversary, Owners will be sent statements
for their own Certificate showing the number and value of Accumulation Units
credited to each Subaccount and the Guarantee Period Value for each Guarantee
Period. It will also show the interest rate(s) that KILICO is crediting upon
amounts then held in each Guarantee Period. In addition, Owners transferring
amounts among the Subaccounts and Guarantee Periods or making additional
payments will receive written confirmation of such transactions. Upon request,
any Owner will be sent a current statement in a form similar to that of the
annual statement described above. Each Owner will also be sent an annual and a
semi-annual report for the Fund and a list of the securities held in each
Portfolio of the Fund, as required by the 1940 Act. In addition, KILICO will
calculate for an Owner, the portion of a total amount that must be invested in a
selected Guarantee Period so that the portion grows to equal the original total
amount at the expiration of the Guarantee Period.

An Owner may direct inquiries to the individual who sold him or her the
Certificate or may call 1-800-621-5001 or write to Kemper Investors Life
Insurance Company, Customer Service, 1 Kemper Drive, Long Grove, Illinois 60049.

DOLLAR COST AVERAGING

KILICO offers two different dollar cost averaging programs whereby an Owner may
predesignate a portion of Subaccount Value under a Certificate to be
automatically transferred on a monthly basis to one or more of the other
Subaccounts during the Accumulation Period. The first dollar cost averaging
program is available only for initial Purchase Payments and an Owner must enroll
in the program at the time the Certificate is issued. An Owner may allocate all
or a portion of the initial Purchase Payment to Money Market Subaccount #2,
which is the only Subaccount with no deduction for the 1.25% daily asset-based
charge for mortality and expense risks and administrative costs. The Owner must
transfer all of the Subaccount Value out of Money Market Subaccount #2 to one or
more of the other Subaccounts within three years from the initial Purchase
Payment. If an Owner terminates dollar cost averaging or does not deplete all
Certificate Value in Money Market Subaccount #2 within three years, KILICO will
automatically transfer any remaining Subaccount Value in Money Market Subaccount
#2 to Money Market Subaccount #1.

The other dollar cost averaging program is available for Purchase Payments and
for Certificate Value transferred into Money Market Subaccount #1 or Government
Securities Subaccount. An Owner may predesignate a portion of Subaccount Value
to be automatically transferred on a monthly basis to one or more of the other
Subaccounts. An Owner may enroll in this program at the time the Contract is
issued or anytime thereafter by properly completing the Dollar Cost Averaging
enrollment form and returning it to KILICO at its home office at least five (5)
business days prior to the second Tuesday of a month which is the date that all
dollar cost averaging transfers will be made ("Transfer Date").

Under each program, transfers will be made in the amounts designated by the
Owner and must be at least $500 per Subaccount. The total Certificate Value in
the applicable Subaccount at the time Dollar Cost Averaging is elected must be
at least equal to the amount designated to be transferred on each Transfer Date
multiplied by the duration selected. Dollar Cost Averaging will cease
automatically if the Certificate Value does not equal or exceed the amount
designated to be transferred on each Transfer Date and the remaining amount will
be transferred.

Dollar Cost Averaging will terminate when (i) the number of designated monthly
transfers has been completed, (ii) the value of the Accumulation Units
attributable to the applicable Subaccount is insufficient to complete the next
transfer, (iii) the Owner requests termination in writing and such writing is
received by KILICO at its home office at least two (2) business days prior to
the next Transfer Date in order to cancel the transfer scheduled to take effect
on such date, or (iv) the Certificate is surrendered or annuitized.

An Owner may initiate, reinstate or change Dollar Cost Averaging from Money
Market Subaccount #1 or Government Securities Subaccount or change existing
Dollar Cost Averaging terms for Money Market Subaccount #2 by properly
completing the new enrollment form and returning it to KILICO at its home office
at least five (5) business days prior to the next Transfer Date such transfer is
to be made.

When utilizing Dollar Cost Averaging an Owner must be invested in Money Market
Subaccount #1, Money Market Subaccount #2, or Government Securities Subaccount
and may be invested in any other Subaccounts at any given time. Election of
Dollar Cost Averaging is not available during the Annuity Period.

SYSTEMATIC WITHDRAWAL PLAN

KILICO administers a Systematic Withdrawal Plan ("SWP") which allows certain
Owners to pre-authorize periodic withdrawals during the accumulation period.
Owners entering into a SWP agreement instruct KILICO to withdraw

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<PAGE> 30

selected amounts from any of the Subaccounts or Guarantee Periods on a monthly,
quarterly, semi-annual or annual basis. Currently the SWP is available to Owners
who request a minimum $100 periodic payment. A MARKET VALUE ADJUSTMENT WILL
APPLY TO ANY WITHDRAWALS UNDER THE SWP FROM A GUARANTEE PERIOD UNLESS EFFECTED
WITHIN 15 DAYS BEFORE OR 15 DAYS AFTER THE GUARANTEE PERIOD ENDS. IF THE AMOUNTS
DISTRIBUTED UNDER THE SWP EXCEED THE AMOUNT FREE OF SURRENDER CHARGE (CURRENTLY
10% OF CERTIFICATE VALUE) THEN THE SURRENDER CHARGE WILL BE APPLIED ON ANY
AMOUNTS EXCEEDING THE 10% FREE WITHDRAWAL. WITHDRAWALS TAKEN UNDER THE SWP MAY
BE SUBJECT TO THE 10% FEDERAL TAX PENALTY ON EARLY WITHDRAWALS AND TO INCOME
TAXES AND MAY BE SUBJECT TO 20% WITHHOLDING. SEE "FEDERAL INCOME TAXES." Owners
interested in SWP may obtain an application from their representative or
KILICO's home office. The right is reserved to amend the SWP on thirty days'
notice. The SWP may be terminated at any time by the Owner or KILICO.

EXPERTS

The consolidated financial statements of KILICO as of December 31, 1994 and
1993, and for each of the years in the three-year period ended December 31, 1994
have been included herein in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing. As discussed
in the notes to KILICO's consolidated financial statements, effective January 1,
1994, KILICO changed its method of accounting for investment securities to adopt
the provisions of the Financial Accounting Standards Board's Statement of
Financial Accounting Standards ("SFAS") 115, Accounting for Certain Investments
in Debt and Equity Securities. Also, as discussed in the notes effective January
1, 1993, KILICO changed its method of accounting for impairment of loans
receivable to adopt the provisions of SFAS 114, Accounting by Creditors for
Impairment of a Loan, and changed its method of accounting for income taxes to
adopt the provisions of SFAS 109, Accounting for Income Taxes. Further, as
discussed in the notes, KILICO adopted the provisions of SFAS 106, Employers'
Accounting for Postretirement Benefits Other than Pensions in 1992.

LEGAL MATTERS

Legal matters with respect to the organization of KILICO, its authority to issue
annuity contracts and the validity of the Contract, have been passed upon by
Debra P. Rezabek, General Counsel and Director of Government Affairs for KILICO.
Katten Muchin & Zavis, Washington, D.C., has advised KILICO on certain legal
matters concerning federal securities laws applicable to the issue and sale of
the Certificates.

SPECIAL CONSIDERATIONS

KILICO reserves the right to amend the Contract and Certificates to meet the
requirements of any applicable federal or state laws or regulations. KILICO will
notify the Owner in writing of any such amendments.

An Owner's rights under a Certificate may be assigned as provided by applicable
law. An assignment will not be binding upon KILICO until it receives a written
copy of the assignment. The Owner is solely responsible for the validity or
effect of any assignment. The Owner, therefore, should consult a qualified tax
advisor regarding the tax consequences, as an assignment may be a taxable event.

AVAILABLE INFORMATION

KILICO is subject to the informational requirements of the Securities Exchange
Act of 1934 and in accordance therewith files reports and other information with
the Securities and Exchange Commission (the "Commission"). Such reports and
other information can be inspected and copied at the public reference facilities
of the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. and 500
West Madison, Suite 1400, Northwestern Atrium Center, Chicago, Illinois. Copies
of such materials also can be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates.

KILICO has filed registration statements (the "Registration Statements") with
the Commission under the Securities Act of 1933 relating to the Contracts and
Certificates offered by this Prospectus. This Prospectus has been filed as a
part of the Registration Statements and does not contain all of the information
set forth in the Registration Statements, and reference is hereby made to such
Registration Statements for further information relating to KILICO and the
Contracts and Certificates. The Registration Statements may be inspected and
copied, and copies can be obtained at prescribed rates in the manner set forth
in the preceding paragraph.

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BUSINESS

NARRATIVE DESCRIPTION OF BUSINESS

KILICO offers both individual fixed-rate (general account) and individual and
group variable (separate account) annuity contracts, as well as individual
universal life and variable life insurance products through various distribution
channels. KILICO's broad product selection is designed for diverse economic
environments. KILICO structures its products to offer investment-oriented
products, guaranteed returns or a combination of both to help policyholders meet
multiple insurance and financial objectives. Financial institutions,
nonaffiliated and affiliated securities brokerage firms, insurance agents and
financial planners are important distribution channels for KILICO's products. In
1994, INVEST Financial Corporation ("INVEST") and Kemper Securities, Inc.
("KSI"), two KFC subsidiaries, accounted for approximately 36 percent and 20
percent, respectively, of KILICO's first-year sales, compared with 41 percent
and 12 percent, respectively, in 1993. KILICO's sales mainly consist of premiums
received on certain long duration annuity contracts. See the table captioned
"Sales" under "Management's Discussion and Analysis of Financial Condition and
Results of Operations."

Annuities accounted for approximately 99 percent of KILICO's sales in recent
years. KILICO's annuities generally have disappearing surrender charges that are
a specified percentage of policy values and decline as the policy ages. General
account annuity and interest-sensitive life policies are guaranteed to
accumulate at specified interest rates but allow for periodic crediting rate
changes.

In the last four years, in part reflecting the low interest rate environment
through early 1994, and to reduce its exposure to investment risk, KILICO has
placed more emphasis on marketing its separate account products. Unlike the
fixed-rate annuity business where KILICO manages spread revenue, variable
annuities pose minimal investment risk for KILICO and increase administrative
fee revenue. KILICO's separate account assets totaled $1.50 billion at December
31, 1994 and 1993, and $1.14 billion at December 31, 1992. KILICO's sales of its
separate account annuities were $250.7 million in 1994, $263.7 million in 1993,
$275.9 million in 1992 and $113.9 million in 1991. In 1992, KILICO introduced
Kemper PASSPORT. In 1994, KILICO changed Kemper PASSPORT from a single premium
annuity to one with a flexible premium structure and also added a small
capitalization equity subaccount as another investment portfolio choice for
purchasers of Kemper PASSPORT and certain other variable annuity products.
Separate account annuities represented 53.8 percent of KILICO's total sales in
1994, compared with 51.7 percent in 1993, 38.5 percent in 1992 and 16.8 percent
in 1991.

Declines in interest rates in recent years and strategic reductions in crediting
rates lowered general account annuity sales for KILICO in each of the last four
years. KILICO sales also were hurt by fixed-rate annuity buyers' focus on
investment risk. In the second half of 1994, KILICO began raising crediting
rates on certain general account products, reflecting both competitive
conditions and a rising interest rate environment. General account annuities
represented 46.0 percent of KILICO's total sales in 1994, compared with 47.9
percent in 1993, 60.8 percent in 1992 and 82.0 percent in 1991.

KILICO's sales of interest-sensitive life products decreased again in 1994, to
$0.8 million, from $2.0 million in 1993, $5.0 million in 1992 and $8.0 million
in 1991, for the same reasons its sales of general account annuities declined.
Overall, sales of interest-sensitive life products represented less than 1
percent of KILICO's total sales in each of the last four years.

CORPORATE CONTROL EVENTS

In the first quarter of 1994, Kemper received and rejected an unsolicited offer
by General Electric Capital Corporation ("GECC") to acquire all outstanding
shares of Kemper common stock for $55 per share. In May 1994, GECC increased its
offer to $60 per share, subject to certain conditions including a full due
diligence review, and the board of directors of Kemper directed that all
appropriate steps be taken to maximize stockholder value. Kemper put itself up
for sale, and a due diligence process began that resulted in Conseco, Inc.'s
cash and stock bid of $67 per share on June 23, 1994. Within hours of Conseco's
announcement, GECC withdrew completely from the process. Kemper and Conseco
signed a merger agreement on June 26, 1994. On November 20, Kemper and Conseco
announced that the merger agreement was terminated by mutual consent since it
became clear that the proposed merger could not be completed. The Kemper board
then again directed that all appropriate steps be taken to maximize stockholder
value. On April 11, 1995, Kemper and an investor group comprised of Zurich
Insurance Company ("Zurich") and Insurance Partners, L.P. and Insurance Partners
Offshore (Bermuda), L.P. ("Insurance Partners") announced that they reached an
agreement in principle pursuant to which Kemper, including KILICO, would be
acquired in a merger transaction. Following the transaction, Zurich, or an
affiliate, would be the majority owner of Kemper, including KILICO. A definitive
agreement is expected in early May, subject to the completion of

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<PAGE> 32

the investor group's due diligence. Consummation of the transaction is subject
to, among other things, stockholder and regulatory approvals. The transaction is
expected to close early in the fourth quarter of 1995.

Distractions caused by uncertainties with respect to Kemper's and KILICO's
ownership have had an impact on 1994 performance. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."

STRATEGIC INITIATIVES OF THE EARLY 1990'S

During 1992 and 1993, in order to streamline management, control costs and
improve profitability, the management, operations and strategic directions of
KILICO were integrated with those of another Kemper subsidiary, Federal Kemper
Life Assurance Company ("FKLA"). A common chairman and chief executive officer
for both companies was named in early 1992. Headquartered in Long Grove,
Illinois, FKLA markets term and interest-sensitive life insurance as well as
certain annuity products through brokerage general agents and other independent
distributors. The integration encompassed virtually all aspects of operations,
distribution channels and product development and was designed to promote
increased efficiencies and productivity and to expand both companies'
distribution capabilities. As described below, KILICO has emphasized different
products and distribution methods.

Since late 1991, KILICO intensified its management of real estate-related
investments due to adverse markets and recorded real estate-related reserves,
write-downs and operating losses totaling in excess of $333 million. KILICO
successfully implemented strategies to reduce both its joint venture operating
losses and the level of its real estate-related investments. These strategies
included sales, refinancings and restructurings. Also, effective January 1,
1993, subsidiaries of Kemper and Lumbermens Mutual Casualty Company
("Lumbermens") formed a master limited partnership to hold the equity real
estate interests each of the two organizations separately held previously in
joint ventures with Kemper's largest (now former) joint venture partner, which
master limited partnership in early 1994 acquired the former partner's equity
interests.

During 1992, 1993 and 1994, KILICO also sold for cash $642.5 million of certain
real estate-related investments to affiliated non-life real estate subsidiaries
of KFC. In addition, during 1991, 1992, 1993 and 1994, KILICO received $342.5
million in capital contributions from KFC (which, in turn, borrowed most of the
funds from Kemper). Focusing on its variable annuity products, KILICO also ceded
approximately $900 million of fixed-rate annuity liabilities in reinsurance
transactions effected in 1991 and 1992. Further addressing the quality of its
investment portfolio, KILICO reduced its holdings of below investment-grade
securities (excluding real estate-related investments) from 20.0 percent of its
total invested assets and cash at year-end 1990 to 2.8 percent at year-end 1994.

NAIC RATIOS

The National Association of Insurance Commissioners ("NAIC") annually calculates
certain statutory financial ratios for most insurance companies in the United
States. These calculations are known as the Insurance Regulatory Information
System ("IRIS") ratios. There presently are twelve IRIS ratios. The primary
purpose of the ratios is to provide an "early warning" of any negative
developments. The NAIC reports the ratios to state regulators who may then
contact the companies if three or more ratios fall outside the NAIC's "usual
ranges".

Based on statutory financial data as of December 31, 1994, KILICO had only one
ratio outside the usual ranges. KILICO's change in reserving ratio on
interest-sensitive life products reflected its strategic reductions of general
account business. Other than certain states requesting quarterly financial
reporting and/or explanations of the underlying causes for certain ratios, no
state regulators have taken any action due to KILICO's IRIS ratios for 1994 or
earlier years.

GUARANTY ASSOCIATION ASSESSMENTS

From time to time, mandatory assessments are levied on KILICO by life and health
guaranty associations of most states in which KILICO is licensed to cover losses
to policyholders of insolvent or rehabilitated insurance companies. These
associations levy assessments (up to prescribed limits) on all member insurers
in a particular state in order to pay claims on the basis of the proportionate
share of premiums written by member insurers in the lines of business in which
the insolvent or rehabilitated insurer engaged. These assessments may be
deferred or forgiven in certain states if they would threaten an insurer's
financial strength, and, in some states, these assessments can be partially
recovered through a reduction in future premium taxes.

In the early 1990s, there were a number of failures of life insurance companies.
KILICO's financial statements include provisions for all known assessments that
will be levied against KILICO by various state guaranty associations as well as
an estimate of amounts (net of estimated future premium tax recoveries) that
KILICO believes will be assessed in the future for failures which have occurred
to date and for which the life insurance industry has estimated the cost to
cover losses to policyholders. Assessments levied against KILICO and charged to
expense in 1993 and 1992 amounted to $5.8 million and $10.0 million,
respectively. Such amounts relate to accrued guaranty

28
<PAGE> 33

fund assessments of $4.0 million and $8.9 million at December 31, 1994 and 1993,
respectively. No additional assessments were charged to expense during 1994 as
KILICO believes it has established adequate accruals for all known insolvencies
where an estimate of the cost to cover losses to policyholders was available at
December 31, 1994.

RISK-BASED CAPITAL

Since the early 1990s, reflecting a recessionary environment and the
insolvencies of a few large life insurance companies, both state and federal
legislators have increased scrutiny of the existing insurance regulatory
framework. While various initiatives, such as a new model investment law, are
being considered for future implementation by the NAIC, it is not presently
possible to predict the future impact of potential regulatory changes on KILICO.

Under asset adequacy and risk-based capital rules adopted in 1993 in Illinois
(the domiciliary state of KILICO), state regulators may mandate remedial action
for inadequately reserved or inadequately capitalized companies. The new asset
adequacy rules are designed to assure that reserves and assets are adequate to
cover liabilities under a variety of economic scenarios. The focus of the new
capital rules is a risk-based formula that applies prescribed factors to various
risk elements in an insurer's business and investments to develop a minimum
capital requirement designed to be proportional to the amount of risk assumed by
the insurer. KILICO has capital levels substantially exceeding any which would
mandate action under the risk-based capital rules and is in compliance with
applicable asset adequacy rules.

RESERVES AND REINSURANCE

The following table provides a breakdown of KILICO's reserves for future policy
benefits by product type at December 31, 1994, 1993 and 1992 (in millions):

<TABLE>
<CAPTION>
1994 1993 1992
------ ------ ------
<S> <C> <C> <C>
General account annuities.......................................... $4,010 $4,180 $4,172
Interest-sensitive life insurance.................................. 833 860 869
Ceded future policy benefits....................................... 643 746 --
------ ------ ------
Total.................................................... $5,486 $5,786 $5,041
====== ====== ======
</TABLE>

Ceded future policy benefits shown above reflect coinsurance (indemnity
reinsurance) transactions in which KILICO reinsured liabilities of approximately
$516 million in 1992 and $416 million in 1991 with Fidelity Life Association
("FLA"), an affiliated mutual insurance company. FLA shares management,
operations and employees with FKLA and KILICO pursuant to an administrative and
management services agreement. FLA produces whole life policies not produced by
FKLA or KILICO as well as other policies similar to certain FKLA policies. At
December 31, 1994, KILICO's reinsurance recoverable from FLA related to these
coinsurance transactions totaled approximately $642.8 million. KILICO remains
primarily liable to its policyholders for this amount. Utilizing FKLA's
employees, KILICO is the servicing company for this coinsured business and is
reimbursed by FLA for the related servicing expenses. Excluding this
coinsurance, KILICO, because it is primarily an annuity company, reinsures only
a very limited portion of its business. KILICO has immaterial exposure to
mortality losses. See the note captioned "Reinsurance" of the Notes to
Consolidated Financial Statements.

COMPETITION

KILICO is in a highly competitive business and competes with a large number of
other stock and mutual life insurance companies, many of which are larger
financially, although none is truly dominant in the industry. KILICO, with its
emphasis on annuity products, also competes for savings dollars with asset
manager, securities brokerage and investment advisory firms as well as financial
institutions that manage assets, produce financial products or market other
types of investment products.

KILICO's principal methods of competition continue to be innovative products,
often designed for selected distribution channels and economic conditions, as
well as appropriate product pricing, careful underwriting, expense control and
the quality of services provided to policyholders and agents. Certain of
KILICO's financial strength ratings and claims-paying/performance ratings,
however, were lower in 1993 and 1994 than in earlier years and were under review
in 1994 and to date in 1995 due to uncertainty with respect to Kemper's and
KILICO's ownership. These ratings impacted sales efforts in certain markets.

To address its competition, KILICO has adopted certain business strategies.
These include systematic reductions of investment risk and strengthening of
KILICO's capital position; continued focus on existing and new variable annuity
products; distribution through diversified channels, with an emphasis on
INVEST's financial institution

29
<PAGE> 34

clients and KSI's retail base; and ongoing efforts to continue as a low-cost
provider of insurance products and high-quality services to agents and
policyholders through the use of technology.

EMPLOYEES

At December 31, 1994, KILICO utilized the services of approximately 340
employees of FKLA which are also shared with FLA.

REGULATION

KILICO is generally subject to regulation and supervision by the insurance
departments of Illinois and other jurisdictions in which KILICO is licensed to
do business. These departments enforce laws and regulations designed to assure
that insurance companies maintain adequate capital and surplus, manage
investments according to prescribed character, standards and limitations and
comply with a variety of operational standards. The departments also make
periodic examinations of individual companies and review annual and other
reports on the financial condition of each company operating within their
respective jurisdictions. Regulations, which often vary from state to state,
cover most aspects of the life insurance business, including market practices,
forms of policies and accounting and financial reporting procedures.

Insurance holding company laws enacted in many states grant additional powers to
state insurance commissioners to regulate acquisition of and by domestic
insurance companies, to require periodic disclosure of relevant information and
to regulate certain transactions with related companies. These laws also impose
prior approval requirements for certain transactions with affiliates and
generally regulate dividend distributions by an insurance subsidiary to its
holding company parent.

In addition, variable life insurance and annuities offered by KILICO, and the
related separate accounts, are subject to regulation by the Securities and
Exchange Commission (the "SEC").

KILICO believes it is in compliance in all material respects with all applicable
regulations.

INVESTMENTS

Changing marketplace dynamics affected the life insurance industry in recent
years. To accommodate customers' increased preference for safety over higher
yields, KILICO has systematically reduced its investment risk and strengthened
its capital position. In 1994, KILICO's total net investment income increased
for the first time since 1990. Investments are an integral part of KILICO's
business.

KILICO's cash flow is carefully monitored and its investment program is
regularly and systematically planned to provide funds to meet all obligations
and to maximize investment return. Portfolio management is handled by an
affiliated company, Kemper Financial Services, Inc. ("KFS"), and its
subsidiaries, with investment policy directed by KILICO's board of directors.
KILICO's investment strategies take into account the nature of each annuity and
life insurance product, the respective crediting rates and the estimated future
policy benefit maturities. See "INVESTMENTS" under "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

PROPERTIES

KILICO primarily shares the office space leased by FKLA from Lumbermens, 78,000
sq. ft. in Long Grove, Illinois. KILICO also has utilized 43,000 sq. ft. of
office space presently leased by KFS in Chicago, although virtually all of this
space is expected to be eliminated in 1997 in connection with a new lease
executed by KFS.

LEGAL PROCEEDINGS

In 1992 the Staff of the SEC commenced an investigation into certain of Kemper's
real estate-related accounting practices and related disclosures. KILICO's
accounting and disclosure practices are consistent with those of Kemper. Kemper
fully cooperated throughout the Staff's investigation which has now concluded.
Kemper and the Staff have had settlement discussions respecting this matter, and
KILICO anticipates that this matter will be resolved with respect to Kemper in
1995 with the filing of an administrative proceeding.

KILICO has been named as defendant in certain lawsuits incidental to its
insurance business. KILICO's management, based on the advice of legal counsel,
believes that the resolution of these various lawsuits will not result in any
material adverse effect on KILICO's consolidated financial position.

30
<PAGE> 35

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

During 1994, Kemper faced both an unsolicited suitor and an unsuccessful merger
agreement. The resulting distractions and uncertainties negatively impacted
KILICO's operations. The Kemper board of directors has directed its management
to take all appropriate actions to maximize value for stockholders. On April 11,
1995, Kemper, Zurich and Insurance Partners, announced that they have reached an
agreement in principle, pursuant to which Kemper, including KILICO, would be
acquired in a merger transaction. See "Business--Corporate Control Events."

RESULTS OF OPERATIONS

KILICO recorded net income of $26.4 million for 1994, compared with net income
of $14.0 million in 1993 and a net loss of $51.9 million in 1992. The
improvement in 1994 was primarily the result of increases in spread income, an
increase in fees and other income and a decrease in commissions, taxes, licenses
and fees. These improvements were partially offset by higher realized investment
losses in 1994, compared with 1993. The improvement in 1993 net income, compared
with 1992, was primarily the result of lower realized investment losses,
increases in spread income and reductions in operating expenses. The net loss in
1992 also reflected an increased level of amortization of insurance acquisition
costs.

The following table reflects the major components of realized investment results
included in net income (loss). (See "INVESTMENTS" below, and the note captioned
"Invested Assets and Related Income" of the Notes to Consolidated Financial
Statements.)

REALIZED INVESTMENT RESULTS, AFTER TAX
(in millions)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------
1994 1993 1992
------ ------ ------
<S> <C> <C> <C>
Real estate-related losses........ $(27.1) $(51.7) $(66.0)
Fixed maturity write-downs........ -- (12.3) (19.8)
Other gains (losses), net......... (8.4) 44.3 23.6
------ ------ ------
Total................... $(35.5) $(19.7) $(62.2)
====== ====== ======
</TABLE>

Real estate-related losses decreased, reflecting a lower level of reserves and
write-downs on real estate-related investments. Fixed maturity write-downs
decreased due to the increased quality of KILICO's fixed maturity portfolio.
Other realized investment losses for 1994, and other realized investment gains
for 1993 and 1992 relate primarily to the sale of fixed maturity investments.
The fixed maturity losses generated in 1994 arose primarily from the sale of
$330.7 million of fixed maturity investments, consisting of lower yielding
investment-grade corporate securities and collateralized mortgage obligations,
related to a repositioning of KILICO's fixed maturity investment portfolio in
September 1994. The $306.9 million of proceeds from the repositioning, together
with $275.0 million of cash and short-term investments, were reinvested into
higher yielding U.S. government and agency guaranteed mortgage pass-through
securities issued by the Government National Mortgage Association and the
Federal National Mortgage Association. (See "INVESTMENTS" below.)

Operating earnings (net income excluding realized investment results) totaled
$61.9 million in 1994, compared with $33.7 million and $10.3 million in 1993 and
1992, respectively. Operating earnings improved in 1994 and 1993, compared with
1992, primarily due to increased spread income. Continuing a strategy
implemented during 1992, KILICO improved spread income by reducing crediting
rates on certain existing blocks of its fixed annuity and interest-sensitive
life insurance products in 1993 and through most of 1994. Such reductions in
crediting rates occurred as overall interest rates declined. Operating earnings
improved as crediting rates declined at a faster rate than KILICO's investment
income. Beginning in late 1994, as a result of rising interest rates and other
competitive market factors, KILICO increased crediting rates on these products.
Although KILICO continues to manage spread revenue, further increases in
crediting rates could adversely impact future operating earnings but could also
help to improve sales and the overall persistency of such products.

Investment income was positively impacted in 1994 and 1993, compared with 1992,
from the benefits of capital contributions to KILICO and reductions in the level
of nonperforming real estate-related investments, primarily from the sales of
certain real estate-related investments to affiliated non-life realty companies.
These sales totaled $154.0 million in 1994, $343.7 million in 1993 and $144.8
million in 1992 and resulted in no realized gain or loss to KILICO. Investment
income in 1994 also benefitted from rising investment yields on new money, the

31
<PAGE> 36

above-mentioned repositioning of KILICO's investment portfolio and a $5.0
million pre-tax adjustment related to the amortization of the discount or
premium on mortgage-backed securities. Investment income for 1994, 1993 and 1992
has been impacted by a shift over the last few years to higher-quality, lower
yielding investments and foregone income on nonperforming investments.
Investment income in 1993, compared with 1992, was also reduced by a 1992
reinsurance transaction which transferred $515.7 million of policyholder
liabilities and the related invested assets. (See the note captioned
"Reinsurance" of the Notes to Consolidated Financial Statements.)

SALES
(in millions)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
1994 1993 1992
------ ------ ------
<S> <C> <C> <C>
Annuities:
General account..................... $214.2 $244.2 $435.6
Separate account.................... 250.8 263.7 275.9
------ ------ ------
Total annuities........... 465.0 507.9 711.5
Interest-sensitive life insurance..... .8 2.0 5.0
------ ------ ------
Total sales............ $465.8 $509.9 $716.5
====== ====== ======
</TABLE>

The decreases over the last three years in general account (fixed annuity) sales
and interest-sensitive life insurance sales reflected KILICO's continuing
strategy to direct its sales efforts toward separate account (variable annuity)
products, which increase administrative fees earned and pose minimal investment
risk for KILICO as policyholders invest in one or more of several underlying
investment funds. Despite this strategy, separate account sales declined in 1994
and 1993, compared with 1992, due to competitive conditions in certain
distribution channels, in part reflecting KILICO's financial strength and
performance ratings as well as the underlying investment fund performance
reflecting the economic environment of rising interest rates and overall poor
stock and bond market conditions.

Included in fees and other income are administrative fees received from KILICO's
separate account products of $20.8 million in 1994, compared with $18.1 million
and $14.3 million in 1993 and 1992, respectively. Administrative fee revenue
increased in each of the last three years due to growth in average separate
account assets. Other income also included surrender charge revenue of $7.4
million in 1994, compared with $6.3 million and $6.2 million in 1993 and 1992,
respectively. The higher level of surrender charge revenue reflected an increase
in policyholder withdrawals, primarily as a result of the planned reductions in
crediting rates on fixed annuities and rising interest rates. KILICO's crediting
rate increases in 1994 were designed to reduce the level of future withdrawals.
Other income in 1992 also included a $12.0 million ceding commission resulting
from the earlier described reinsurance transaction.

Commissions, taxes, licenses and fees were lower in 1994, compared with 1993 and
1992, primarily reflecting lower annuity sales and reduced guaranty fund
assessments. Expenses for such assessments totaled $0.0, $5.8 million and $10.0
million in 1994, 1993 and 1992, respectively. (See "Guaranty association
assessments" above.)

The higher level of deferral of policy acquisition costs in 1994, compared with
1993, reflected an increase in the amount of imputed interest capitalized due to
improvements in projected future revenue streams primarily as a result of the
decline in the level of nonperforming real estate-related investments. The
amortization of policy acquisition costs was favorably impacted during 1994 due
to the repositioning of KILICO's investment portfolio. The repositioning
favorably impacted the amortization of policy acquisition costs because it
resulted in current realized investment losses as well as an increase in
projected future net investment income, which together are expected to increase
KILICO's projected future estimated gross profits in later years. Excluding the
effects of the repositioning, the amortization of policy acquisition costs
increased in 1994, compared with 1993 and 1992, primarily as a result of
improved net income during 1994. The amortization in 1992 included approximately
$22.5 million of additional amortization as a result of the previously mentioned
reinsurance transaction.

Operating expenses in 1994, compared with 1993, increased only slightly, as a
result of expense control and the integration of the two life insurance
subsidiaries' operations and management beginning in 1992. Primarily as a result
of the integration of the two life companies, operating expenses in 1993
declined by approximately 37 percent, compared with the 1992 level.

32
<PAGE> 37

Since year-end 1990, KILICO has taken many steps to improve its earnings,
financial strength and competitive marketing position. These steps included
adjustments in crediting rates, reductions of operating expenses, reductions of
below investment-grade securities, a strategy not to embark on new real estate
projects, additional provisions for real estate-related losses, sales of $642.5
million of certain real estate-related investments to affiliated non-life realty
companies through December 31, 1994, third-party sales and refinancings of
certain mortgage and other real estate loans, approximately $900 million in
annuity reinsurance transactions with an affiliated mutual life insurance
company, a parental guarantee of indebtedness, and capital contributions of
$342.5 million through December 31, 1994. KILICO's statutory surplus ratio
improved to 10.2 percent at December 31, 1994, from 8.2 percent at December 31,
1993, 6.6 percent at December 31, 1992, 6.5 percent at December 31, 1991 and 4.0
percent at year-end 1990.

INVESTMENTS

KILICO's principal investment strategy is to maintain a balanced,
well-diversified portfolio supporting the insurance contracts written. KILICO
makes shifts in its investment portfolio depending on, among other factors, the
interest rate environment, liability durations and changes in market and
business conditions.

INVESTED ASSETS AND CASH
(in millions)

<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------------
1994 1993
---------------- ----------------
<S> <C> <C> <C> <C>
Cash and short-term investments.............................. $ 227 4.6% $ 410 7.6%
Fixed maturities:
Investment-grade:
NAIC(1) Class 1......................................... 2,569 52.2 2,307 42.9
NAIC(1) Class 2......................................... 760 15.5 983 18.3
Performing below investment-grade(2)....................... 135 2.8 151 2.8
Equity securities............................................ 15 .3 68 1.3
Joint venture mortgage loans(3).............................. 351 7.1 731 13.6
Third-party mortgage loans(3)................................ 319 6.5 132 2.4
Other real estate-related investments........................ 237 4.8 291 5.4
Policy loans................................................. 278 5.7 264 4.9
Other........................................................ 26 .5 44 .8
------ ----- ------ -----
Total(4)........................................... $4,917 100.0% $5,381 100.0%
====== ===== ====== =====
</TABLE>

- ---------------
(1) National Association of Insurance Commissioners ("NAIC").
-- Class 1 = A- and above
-- Class 2 = BBB- through BBB+
(2) Excludes $49.9 million, or 1.0 percent, and $106.0 million, or 2.0 percent,
at December 31, 1994 and 1993, respectively, of bonds carried in other real
estate-related investments.
(3) A joint venture mortgage loan is recharacterized in the current period as a
third-party mortgage loan when KILICO and its affiliates have disposed of
their related equity interest in that venture.

(4) See the note captioned "Financial Instruments--Off-Balance-Sheet Risk" of
the Notes to Consolidated Financial Statements.

FIXED MATURITIES

KILICO is carrying its fixed maturity investment portfolio, which it considers
available for sale, at estimated market value, with the aggregate unrealized
appreciation or depreciation being recorded as a separate component of
stockholder's equity, net of any applicable income tax effect. The aggregate
unrealized depreciation was $243.6 million at December 31, 1994, compared with
unrealized appreciation of $70.2 million, net of tax, at December 31, 1993.
KILICO has not recorded a deferred tax benefit for the aggregate unrealized
depreciation on investments. Market values are sensitive to movements in
interest rates and other economic developments and can be expected to fluctuate,
at times significantly, from period to period.

During each of the last three years, KILICO repositioned its fixed maturity
investments and increased the relative and absolute levels of investment-grade
fixed maturities and cash and short-term investments held. At December 31, 1994,
investment-grade fixed maturities and cash and short-term investments accounted
for 72.3 percent of

33
<PAGE> 38

KILICO's invested assets and cash, compared with 68.8 percent at December 31,
1993. Approximately 70 percent of KILICO's NAIC Class 1 bonds were rated AAA or
equivalent at year-end 1994, up from 61 percent at year-end 1993.

Approximately 49.2 percent of KILICO's investment-grade fixed maturities at
December 31, 1994 were mortgage-backed securities. 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. KILICO has not made any material investments in
interest-only or other similarly volatile tranches of mortgage-backed
securities. KILICO's mortgage-backed investments are generally of AAA credit
quality, and the markets for KILICO's investments in mortgage-backed securities
have been and are expected to remain liquid.

Future investment income from mortgage-backed securities may be affected by the
timing of principal payments and the yields on reinvestment alternatives
available at the time of such payments. Due to the fact that KILICO's
investments in mortgage-backed securities predominately date from recent years,
the current rise in interest rates is not expected to cause any material
unanticipated extension of the average maturities of these investments. With the
exception of KILICO's September 1994 purchases of such investments, most of
these investments were purchased by KILICO at discounts. Prepayment activity on
such securities is not expected to result in any material losses to KILICO
because such prepayment would generally accelerate the reporting of the
discounts as investment income. Many of KILICO's September 1994 purchases were
at a premium. Prepayments resulting from a decline in interest rates would
accelerate the amortization of premiums on such purchases which would result in
reductions of investment income related to such securities. At December 31,
1994, KILICO had unamortized discounts and premiums of $20.4 million and $14.8
million, respectively, related to mortgage-backed securities. Given the credit
quality, liquidity and anticipated payment characteristics of KILICO's
investments in mortgage-backed securities, KILICO believes that the associated
risk can be managed without material adverse consequences on its consolidated
financial statements.

Below investment-grade securities holdings (NAIC classes 3 through 6),
representing securities of 12 issuers at December 31, 1994 totaled less than
three percent of cash and invested assets at year-end 1994 and 1993. See the
note captioned "Invested Assets and Related Income" of the Notes to Consolidated
Financial Statements. Below investment-grade securities are generally unsecured
and often subordinated to other creditors of the issuers. These issuers may have
relatively higher levels of indebtedness and be more sensitive to adverse
economic conditions than investment-grade issuers. Over the last four years,
KILICO significantly reduced its exposure to below investment-grade securities.
This strategy takes into account the more conservative nature of today's
consumer and the resulting demand for higher-quality investments in the life
insurance and annuity marketplace. KILICO's below investment-grade holdings
decreased through sales, maturities, restructurings, market value adjustments
and write-downs.

REAL ESTATE-RELATED INVESTMENTS

The $907 million real estate portfolio held by KILICO constituted 18.4 percent
of cash and invested assets at December 31, 1994, compared with $1.15 billion,
or 21.4 percent, at December 31, 1993. The real estate portfolio consists of
joint venture and third-party mortgage loans and other real estate-related
investments. The majority of KILICO's real estate loans are on properties or
projects where KILICO, Kemper, Lumbermens or their respective affiliates have
taken ownership positions in joint ventures with a small number of partners.
(See the notes captioned "Unconsolidated Investees" and "Concentration of Credit
Risk" of the Notes to Consolidated Financial Statements.)

34
<PAGE> 39

SUMMARY OF GROSS AND NET REAL ESTATE INVESTMENTS
(in millions)

<TABLE>
<CAPTION>
DECEMBER 31
----------------
1994 1993
------ ------
<S> <C> <C>
Investments before reserves, write-downs and net
joint venture operating losses:
Joint venture mortgage loans....................... $ 358 $ 766
Third-party mortgage loans......................... 353 200
Other real estate-related investments.............. 350 354
------ ------
Subtotal...................................... 1,061 1,320
Reserves........................................... (43) (61)
Write-downs........................................ (97) (88)
Cumulative net operating losses of joint ventures
owned........................................... (14) (17)
------ ------
Net real estate investments.......................... $ 907 $1,154
====== ======
</TABLE>

As reflected in the "Real estate portfolio" table below, KILICO has continued to
fund both existing projects and legal commitments. The future legal commitments
were $376.1 million at December 31, 1994. This amount represented a net decrease
of $118.8 million since year-end 1993, largely due to fundings in 1994. As of
December 31, 1994, KILICO expects to fund approximately $96.5 million of these
commitments, along with providing capital to existing projects. The disparity
between total legal commitments and the amount expected to be funded relates
principally to standby financing arrangements that provide credit enhancements
to certain tax-exempt bonds, which KILICO does not presently expect to fund. The
total legal commitments, along with estimated working capital requirements, are
considered in KILICO's evaluation of reserves and write-downs. (See the note
captioned "Financial Instruments--Off-Balance-Sheet Risk" of the Notes to
Consolidated Financial Statements.)

Generally, at the inception of a real estate loan, KILICO anticipated that it
would roll over the loan and reset the interest rate at least one time in the
future, although KILICO is not legally committed to do so. As a result of the
continued weakness in real estate markets and fairly restrictive lending
practices by other lenders in this environment, KILICO expects that all or most
loans maturing in 1995 will be rolled over, restructured or foreclosed.

Excluding the $57.3 million of real estate owned and $45.4 million in KILICO's
net equity investments in joint ventures, KILICO's real estate loans (including
real estate-related bonds) totaled $804.6 million at December 31, 1994, after
reserves and write-downs. Of this amount, $595.9 million are on accrual status
with a weighted average interest rate of approximately 7.9 percent. Of these
accrual loans, 53.6 percent have terms requiring current periodic payments of
their full contractual interest, 32.5 percent require only partial payments or
payments to the extent of cash flow of the borrowers, and 13.9 percent defer all
interest to maturity.

At December 31, 1994, the equity investments in real estate consisted of $36.6
million of loans to Spanish projects (see page 37), $0.3 million of unsecured
loans to joint ventures treated as equity investments, $17.7 million in KILICO's
net equity investments in joint ventures and $9.2 million of reserves. The
equity investments include KILICO's share of periodic operating results. KILICO,
as an equity owner or affiliate thereof, has the ability to fund, and
historically has elected to fund, operating requirements of certain joint
ventures.

KILICO's real estate owned included $54.2 million of deeds in lieu of
foreclosure and $3.1 million of certain purchased properties at December 31,
1994. Real estate owned was net of $67.5 million of write-downs at December 31,
1994.

35
<PAGE> 40

REAL ESTATE PORTFOLIO
(in millions)

<TABLE>
<CAPTION>
MORTGAGE LOANS OTHER REAL ESTATE-RELATED INVESTMENTS
----------------- -------------------------------------------------
JOINT THIRD- OTHER REAL ESTATE EQUITY
VENTURE PARTY BONDS(4) LOANS(5) OWNED INVESTMENTS TOTAL
------- ------ -------- -------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1993...................... $ 730.8 $132.2 $ 106.0 $ 58.7 $ 55.1 $ 71.7 $1,154.5(1)
Additions (deductions):
Fundings.................... 27.3 29.3 23.5 59.5 17.3 58.7 215.6
Interest added to
principal................. 1.5 .8 -- -- -- -- 2.3
Sales/paydowns/distributions... (88.8) (15.9) (26.5) (19.0) (25.2) (18.7) (194.1)
REIT(2)..................... (59.2) -- (15.8) (5.0) -- (2.4) (82.4)
Maturities.................. (10.6) -- (2.1) (44.0) -- -- (56.7)
Rollovers at maturity:
Principal................. 10.6 -- 2.1 44.0 -- -- 56.7
Interest.................. 1.7 -- -- 1.4 -- -- 3.1
Sold to KFC Portfolio
Corporation............... (21.0) (17.9) (35.1) (19.6) -- (52.3) (145.9)
Operating loss.............. -- -- -- -- -- (1.4) (1.4)
Transfers to real estate
owned..................... (16.1) (16.8) -- (1.9) 34.8 -- --
Realized investments gain
(loss)(3)................. 2.6 (16.9) (3.4) (8.3) (6.7) (9.0) (41.7)
Net transfers from joint
venture to third-party
mortgages................. (198.3) 198.3 -- -- -- -- --
Other transactions, net..... (29.1) 25.6 1.2 18.8 (18.0) (1.2) (2.7)
------- ------ -------- -------- ----------- ----------- --------
Balance, December 31,
1994...................... $ 351.4 $318.7 $ 49.9 $ 84.6 $ 57.3 $ 45.4 $ 907.3(6)
======= ====== ======= ======= ======== ========= ========
</TABLE>

- ---------------
(1) Net of $149.4 million reserve and write-downs. Excludes $47.3 million of
real estate-related accrued interest.

(2) Reflects the 1994 formation of Prime Retail, Inc., a retail properties real
estate investment trust ("REIT") affiliated with the Prime Group, Inc. See
"Real estate concentrations" below.

(3) See the note captioned "Invested Assets and Related Income" of the Notes to
Consolidated Financial Statements.

(4) KILICO's real estate-related bonds, all of which are presently rated below
investment-grade, are generally unsecured and were issued to KILICO by real
estate finance or development companies generally to provide financing for
Kemper's or KILICO's joint ventures for such purposes as land acquisition,
construction/development, refinancing debt, interest and other operating
expenses.

(5) The other real estate loans are notes receivable evidencing financing,
primarily to joint ventures, for purposes similar to those funded by real
estate-related bonds.

(6) Net of $139.6 million reserve and write-downs. Excludes $29.8 million of
real estate-related accrued interest.

As reflected in the preceding table, cash received from
sales/paydowns/distributions and REIT transactions in 1994 exceeded KILICO's
cash fundings in 1994 by $60.9 million. Cash received from
sales/paydowns/distributions and refinancings in 1993 exceeded KILICO's cash
fundings in 1993 by $136.0 million.

36
<PAGE> 41

REAL ESTATE CONCENTRATIONS

KILICO's real estate portfolio is distributed by geographic location and
property type, as shown in the following two tables:

GEOGRAPHIC DISTRIBUTION AS OF DECEMBER 31, 1994

<TABLE>
<S> <C>
California...................... 26.9%
Illinois........................ 26.2
Texas........................... 11.2
Ohio............................ 6.3
Spain........................... 4.0
Colorado........................ 3.8
Oregon.......................... 3.0
Indiana......................... 2.7
Washington...................... 2.7
Hawaii.......................... 2.5
Virginia........................ 2.5
Florida......................... 2.1
Other(1)........................ 6.1
-----
Total................. 100.0%
=====
</TABLE>

- ---------------
(1) No other single location exceeded 2.0 percent.

DISTRIBUTION BY PROPERTY TYPE AS OF DECEMBER 31, 1994

<TABLE>
<S> <C>
Office.......................... 21.5%
Land............................ 20.4
Industrial...................... 14.7
Retail.......................... 13.9
Hotel........................... 11.7
Apartment....................... 5.0
Residential..................... 4.7
Mixed use....................... 2.1
Other........................... 6.0
-----
Total................. 100.0%
=====
</TABLE>

Real estate markets have been depressed in recent periods in areas where most of
KILICO's real estate portfolio is located. Approximately one-half of KILICO's
real estate holdings are in California and Illinois. Southern California shows
signs of improvement, although real estate market conditions there have
continued to be worse than in many other areas of the country. Northern
California and Illinois currently reflect some stabilization and improvement.

At December 31, 1994, KILICO's real estate portfolio also included $36.6 million
of loans carried as equity investments in real estate related to land for office
and retail development and residential projects located in Barcelona, Spain.
Such equity investments in Spain totaled $31.9 million at December 31, 1993,
after accounting for fundings of $151.3 million during 1993. The Spanish
projects accounted for $29.4 million of net fundings during 1994 and represented
approximately 4.0 percent of KILICO's real estate portfolio at December 31,
1994. These investments, which began in the late 1980s, accounted for $14.1
million of the December 31, 1994 off-balance-sheet commitments, of which KILICO
expects to fund $7.1 million. Also during 1994, loans to the Spanish projects
totaling $24.7 million were sold at book value to an affiliated real estate
subsidiary of KFC.

Undeveloped land, including the Spanish projects, represented approximately 20.4
percent of KILICO's real estate portfolio at December 31, 1994. To maximize the
value of certain land and other projects, additional development is proceeding
or is planned. Such development of existing projects may continue to require
substantial funding, either from KILICO 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 KILICO. The
values of development projects are dependent on a number of factors, including
Kemper's and KILICO's plans with respect thereto, obtaining necessary 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 KILICO's plans with
respect to such projects may not change substantially.

At December 31, 1994, KILICO's loans to and investments in projects with the
Prime Group, Inc. or its affiliates, based in Chicago, represented approximately
$238.0 million, or 26.2 percent, of KILICO's real estate portfolio (including
the previously mentioned Spanish projects, which are Prime Group-related). (See
the note captioned "Unconsolidated Investees" of the Notes to Consolidated
Financial Statements.) This amount reflected $125.2 million in fundings during
1994 and $208.4 million during 1993. KILICO also received cash, from Prime
Group-related sales/paydowns/distributions and REIT transactions, totaling
$135.3 million in 1994 and $39.7 million in 1993. Prime Group-related
commitments accounted for $203.2 million of the off-balance-sheet legal
commitments at December 31, 1994, of which KILICO expects to fund $33.0 million.

Effective January 1, 1993, Kemper and its subsidiaries, including KILICO, formed
a master limited partnership (the "MLP") with Lumbermens and its subsidiaries.
The assets of the MLP consist of the equity interests each partner or

37
<PAGE> 42

its subsidiaries previously owned in projects with Peter B. Bedford or his
affiliates ("Bedford"), a California-based real estate developer. As MLP
partners, Kemper and Lumbermens have participated in funding certain cash needs
of the MLP projects. During 1994, KILICO provided $57.3 million of fundings to
the MLP projects, compared with fundings of $54.1 million in 1993. KILICO also
received cash from MLP-related sales/paydowns/distributions and refinancings of
$102.2 million in 1994 and $130.3 million in 1993. At December 31, 1994, these
projects in the MLP accounted for $56.6 million of KILICO's off-balance-sheet
legal commitments, of which KILICO expects to fund $48.7 million. Kemper's
affected equity interests in real estate are held almost entirely by the real
estate subsidiaries of Kemper and KFC. Of KILICO's real estate portfolio at
December 31, 1994, approximately $254.3 million, or 28.0 percent, represented
loans to and investments in MLP-owned joint ventures.

Pursuant to agreements entered into in January 1994, Bedford transferred to the
MLP and FLA all of Bedford's ownership interests in ventures in which Bedford,
Kemper, Lumbermens and their respective subsidiaries previously shared ownership
interests. Bedford was released from certain recourse liabilities owed to the
MLP, the ventures, Lumbermens, Kemper and certain of their respective
subsidiaries. Because Kemper's reserve methodology does not take any credit for
such recourse and because Kemper in 1993 had already been recording an aggregate
50 percent of the operating results of the related ventures, this transaction,
which simplified the management of Kemper's portfolio, did not have any material
adverse impact on Kemper's or KILICO's results of operations or financial
condition.

PROVISIONS FOR REAL ESTATE-RELATED LOSSES

KILICO monitors its real estate portfolio and identifies changes in the relevant
real estate marketplaces, the economy and each borrower's circumstances. KILICO
establishes its provisions for real estate-related losses (both reserves and
write-downs) on the basis of its valuations of the related real estate,
estimated in light of current economic conditions taking into consideration the
effects of recourse to, and subordination of loans held by, affiliated non-life
realty companies and calculated in conformity with SFAS 114. (See the discussion
of SFAS 114 in the note captioned "Summary of Significant Accounting Policies"
of the Notes to Consolidated Financial Statements.) KILICO evaluates its real
estate-related assets (including accrued interest) by estimating the
probabilities of loss utilizing various projections that include several factors
relating to the borrower, property, term of the loan, tenant composition, rental
rates, other supply and demand factors and overall economic conditions. Because
KILICO's real estate review process includes estimates, there can be no
assurance that current estimates will prove accurate over time due to changing
economic conditions and other factors.

KILICO's real estate reserve was allocated as follows:

REAL ESTATE RESERVE
(in millions)

<TABLE>
<CAPTION>
JOINT VENTURE THIRD-PARTY OTHER REAL
MORTGAGE MORTGAGE ESTATE-RELATED
LOANS LOANS INVESTMENTS TOTAL
------------- ----------- -------------- ------
<S> <C> <C> <C> <C>
Balance at 12/31/92..... $ 64.4 $ 5.0 $ 23.4 $ 92.8
1993 change in
reserve............... (29.3) (5.0) 2.6 (31.7)
------------- ----------- ------- ------
Balance at 12/31/93..... 35.1 -- 26.0 61.1
1994 change in
reserve............... (28.0) 10.4 (.5) (18.1)
------------- ----------- ------- ------
Balance at 12/31/94..... $ 7.1 $10.4 $ 25.5 $ 43.0
============ ========== ============ ======
</TABLE>

In addition to the reserve, KILICO's provision for real estate-related losses
(on assets held at the respective period end) included cumulative write-downs
(both by KILICO and including KILICO's share of write-downs by joint ventures)
totaling $96.6 million at December 31, 1994 and $88.3 million at December 31,
1993. The 1994 decrease in reserves was primarily due to write-downs which
increased in 1994 as reserves for general real estate risks were allocated to
certain specific loans and equity investments in real estate, particularly with
respect to investments in land (including the Spanish projects). In 1993,
KILICO's real estate reserve and write-downs reflected declining valuations in
KILICO's real estate portfolio, offset in part by the positive effects of
recourse to, and subordination of loans held by, affiliated non-life realty
companies. The declining valuations in 1993 reflected KILICO's view, based on
economic data then available, that there will be slower than previously
anticipated economic growth in the future and therefore slower absorption of
real estate, particularly undeveloped land. Due to KILICO's assessment for
slower economic growth, its plans with respect to certain projects were changed
to reflect deferrals of their commencement or completion.

38
<PAGE> 43

REAL ESTATE OUTLOOK

KILICO's real estate experience could continue to be adversely affected by
overbuilding and weak economic conditions in certain real estate markets and by
fairly restrictive lending practices by banks and other lenders. Stagnant or
worsening economic conditions in the areas in which KILICO has made loans, or
additional adverse information becoming known to KILICO through its regular
reviews or otherwise, could result in higher levels of problem loans or
potential problem loans, reductions in the value of real estate collateral and
adjustments to the real estate reserve. KILICO's net income and stockholder's
equity could be materially reduced in future periods if real estate market
conditions remain stagnant or worsen in areas where KILICO's portfolio is
located.

Current conditions in the real estate markets have been adversely affecting the
financial resources of certain of KILICO's joint venture partners. Every
partner, however, remains active in the control of its respective joint
ventures. In evaluating a partner's ability to meet its financial commitments,
KILICO considers the amount of all applicable debt and the value of all
properties within that portion of KILICO's portfolio consisting of loans to and
investments in joint ventures with such partner.

The following table is a summary of KILICO's troubled real estate-related
investments:

TROUBLED REAL ESTATE-RELATED INVESTMENTS
(BEFORE RESERVES AND WRITE-DOWNS, EXCEPT FOR REAL ESTATE OWNED)
(in millions)

<TABLE>
<CAPTION>
DECEMBER 31
---------------------
1994 1993
------ ------
<S> <C> <C>
Potential problem loans(1)...................... $ 57.9 $ 20.2
Past due loans(2)............................... -- 2.8
Nonaccrual loans(3)............................. 274.6 563.6
Restructured loans (currently performing)(4).... 50.5 56.7
Real estate owned(5)............................ 57.3 55.1
------ ------
Total(6)(7)........................... $440.3 $698.4
====== ======
</TABLE>

- ---------------
(1) These are real estate-related investments where KILICO, based on known
information, has serious doubts about the borrowers' abilities to comply
with present repayment terms and which KILICO anticipates may go into
nonaccrual, past due or restructured status.
(2) Interest more than 90 days past due but not on nonaccrual status.
(3) KILICO does not accrue interest on real estate-related investments when it
judges that the likelihood of collection of interest is doubtful. The 1994
decrease in nonaccrual loans primarily reflected sales and foreclosures as
well as write-offs of certain fully reserved loans.
(4) KILICO defines a "restructuring" of debt as an event whereby KILICO, for
economic or legal reasons related to the debtor's financial difficulties,
grants a concession to the debtor it would not otherwise consider. Such
concessions either stem from an agreement between KILICO and the debtor or
are imposed by law or a court. By this definition, restructured loans do not
include any loan that, upon the expiration of its term, both repays its
principal and pays interest then due from the proceeds of a new loan that
KILICO, at its option, may extend (roll over).
(5) Real estate owned is carried at fair value and includes deeds in lieu of
foreclosure and certain purchased property. Cumulative write-downs to fair
value were $67.5 million and $20.6 million at December 31, 1994 and 1993,
respectively.
(6) Total reserves and cumulative write-downs on properties owned at December
31, 1994 (excluding fair value adjustments to real estate owned) were 16.4
percent of total troubled real estate-related investments and 7.4 percent of
KILICO's total real estate portfolio before reserves and write-downs.
(7) Equity investments in real estate are not defined as part of, and therefore
are not taken into account in calculating, total troubled real estate.
KILICO's equity investments also involve real estate risks. See "Real estate
concentrations" above.

Based on the level of troubled real estate-related investments KILICO
experienced in 1994 and 1993, KILICO anticipates additional foreclosures and
deeds in lieu of foreclosure in 1995 and beyond. Any consolidation accounting
resulting from foreclosures would add the related ventures' assets and senior
third-party liabilities to KILICO's balance sheet and eliminate KILICO's loans
to such ventures.

Due to the adverse real estate environment affecting KILICO's portfolio in
recent years, KILICO has continued to devote significant attention to its real
estate portfolio, enhancing monitoring of the portfolio and formulating

39
<PAGE> 44

specific action plans addressing nonperforming and potential problem credits.
Since 1991, KILICO has intensified its attention to evaluating the asset
quality, cash flow and prospects associated with each of its projects. KILICO
continues to analyze various potential transactions designed to reduce both its
joint venture operating losses and the amount of its real estate-related
investments. Specific types of transactions under consideration (and previously
utilized) include loan sales, property sales, mortgage refinancings and real
estate investment trusts. However, there can be no assurance that such efforts
will result in continued improvements in the performance of KILICO's real estate
portfolio.

NET INVESTMENT INCOME

KILICO's pre-tax net investment income totaled $353.1 million in 1994, compared
with $339.3 million in 1993 and $404.8 million in 1992. Included in pre-tax net
investment income is KILICO's share of the operating losses from equity
investments in real estate. KILICO's share of real estate operating losses
(excluding write-downs) totaled $1.4 million, $8.6 million and $10.0 million in
1994, 1993 and 1992, respectively. The pre-tax operating results consist of
rental and other income less depreciation, interest and other expenses. Such
operating results exclude interest expense on loans by KILICO which are on
nonaccrual status.

KILICO's total foregone investment income before tax on both nonperforming fixed
maturity investments and nonaccrual real estate-related investments was as
follows:

FOREGONE INVESTMENT INCOME
(dollars in millions)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------
1994 1993 1992
----- ----- -----
<S> <C> <C> <C>
Fixed maturities............................ $ -- $ 8.6 $23.3
Real estate-related investments............. 28.4 32.2 17.0
----- ----- -----
Total................................ $28.4 $40.8 $40.3
===== ===== =====
Basis points................................ 55 78 78
===== ===== =====
</TABLE>

Foregone investment income from the nonaccrual of real estate-related
investments is net of KILICO's share of interest expense on these loans excluded
from KILICO's share of joint venture operating results. Based on the level of
nonaccrual real estate-related investments at December 31, 1994, KILICO
estimates foregone investment income in 1995 will decrease slightly compared
with the 1994 level. Any nonperforming securities, and either worsening or
stagnant real estate conditions, would increase the expected adverse effect on
KILICO's future investment income and realized investment results.

Future net investment income, results of operations and cash flow will reflect
KILICO's current levels of investments in investment-grade securities, real
estate fundings treated as equity investments, nonaccrual real estate loans and
joint venture operating losses. KILICO expects, however, that any adverse
effects should be offset to some extent by certain advantages that it expects to
realize over time from its other investment strategies, its product mix and its
continuing cost-control measures. Other mitigating factors include marketing
advantages that could result from KILICO having lower levels of investment risk
and earnings improvements from KILICO's ability to adjust crediting rates on
annuities and interest-sensitive life products over time.

REALIZED INVESTMENT RESULTS

Reflected in net income are after-tax realized investment losses of $35.5
million, $19.7 million and $62.2 million for 1994, 1993 and 1992, respectively.
(See the note captioned "Invested Assets and Related Income" of the Notes to
Consolidated Financial Statements.) Real estate-related losses declined in 1994
because certain real estate markets began to stabilize and because of the
subordinated nature of loans purchased from KILICO and held by affiliated realty
companies. The 1994 realized investment losses on bonds were primarily generated
by KILICO's third-quarter repositioning of its fixed maturity portfolio, which
resulted in an after-tax loss of approximately $16.5 million. The $306.9 million
of proceeds from the repositioning, along with $275.0 million of cash and
short-term investments, were reinvested primarily in higher yielding U.S.
government guaranteed mortgage pass-through

40
<PAGE> 45

securities. Fixed maturity write-downs were insignificant in 1994 due to the
increased quality of KILICO's fixed maturity portfolio.

Unrealized gains and losses on fixed maturity investments are not reflected in
KILICO's net income. These changes in unrealized value are included within a
separate component of stockholder's equity, net of any applicable income taxes.
If and to the extent a fixed maturity investment suffers an other-than-temporary
decline in value, however, such security is written down to net realizable
value, and the write-down adversely impacts net income.

KILICO regularly monitors its investment portfolio and as part of this process
reviews its assets for possible impairments of carrying value. Because the
review process includes estimates, there can be no assurance that current
estimates will prove accurate over time due to changing economic conditions and
other factors.

A valuation allowance was established upon adoption of SFAS 109 (and is
evaluated as of each reported period end) to reduce the deferred tax asset for
investment losses to the amount that, based upon available evidence, is in
management's judgment more likely than not to be realized. (See the note
captioned "Income Taxes" of the Notes to Consolidated Financial Statements.)

INTEREST RATES

Interest rate fluctuations affect KILICO. The 1993 interest rate environment was
characterized by very low short-term rates and a steeply sloped yield curve
while 1994 saw rapidly rising short-term interest rates which resulted in a much
flatter yield curve as the Federal Reserve Board raised rates five times during
the year.

When maturing or sold investments are reinvested at lower yields in a low
interest rate environment, KILICO can adjust its crediting rates on fixed
annuities and other interest-bearing liabilities. However, competitive
conditions and contractual commitments do not always permit the reduction in
crediting rates to fully or immediately reflect reductions in investment yield,
which can result in narrower spreads.

The lower interest rate environment contributed both to a reduction in KILICO's
net investment income in 1993 and 1992, and as interest rates rose during 1994,
to both realized and unrealized fixed maturity investment losses in 1994. Also,
lower renewal crediting rates on annuities, compared with higher new money
crediting rates, have influenced certain clients to seek alternative products.
KILICO mitigates this risk somewhat by charging decreasing surrender fees when
annuity holders withdraw funds prior to maturity on certain annuity products.
Approximately one-half of KILICO's fixed annuity liabilities as of December 31,
1994, however, were no longer subject to significant surrender fees.

As interest rates rose during 1994, KILICO's capital resources were adversely
impacted by unrealized loss positions in its fixed maturity investments. KILICO
believes, however, that this decline in value should be offset by a decrease in
the present value of KILICO's policy liabilities and that its sales of
fixed-rate annuity products could increase in a rising interest rate
environment.

LIQUIDITY AND CAPITAL RESOURCES

KILICO carefully monitors cash and short-term investments to maintain adequate
balances for timely payment of claims, expenses, taxes and customers' account
balances. In addition, regulatory authorities establish minimum liquidity and
capital standards. The major ongoing sources of KILICO's liquidity are deposits
for fixed annuities and interest-sensitive life contracts, investment income,
other operating revenue and cash provided from maturing or sold investments.
(See "INVESTMENTS" above.)

Policyholder deposits decreased to $215.0 million during 1994 from $246.2
million during 1993, and policyholder withdrawals increased to $652.5 million
during 1994 from $516.3 million during 1993, primarily due to planned reductions
in crediting rates on general account annuities as well as increased
competition. KILICO's late 1994 increases in crediting rates are designed to
produce new policyholder deposits and to reduce future withdrawals.

STOCKHOLDER'S EQUITY

Stockholder's equity totaled $434.0 million at December 31, 1994, compared with
$654.6 million and $488.7 million at December 31, 1993 and 1992, respectively.
The 1994 and 1993 changes in stockholder's equity were due primarily to capital
contributions of $82.5 million and $90.0 million in 1994 and 1993, respectively,
an increase in unrealized depreciation of investments of $329.5 million in 1994
and unrealized appreciation of $53.2 million in 1993, and net income of $26.4
million and $14.0 million in 1994 and 1993, respectively.

41
<PAGE> 46

KILICO MANAGEMENT

The following are the principal officers and directors of KILICO:

John H. Fitzpatrick (38)..... Senior Vice President Executive Vice President since May,
and Chief Financial 1993 and Chief Financial Officer
Officer 1994 and since May 1990 of Kemper Corporation;
Director 1992 prior thereto, Senior Vice President
until May 1993 from May 1990; prior
thereto, Vice President of Kemper
Corporation; also Executive Vice
President and Chief Financial Officer
of Kemper Financial Companies, Inc.
since January 1994.

James R. Boris (50).......... Director 1993 Executive Vice President of Kemper
Corporation from January 1994.
Director of Federal Kemper Life
Assurance Company since January 1993.
Executive Vice President of Kemper
Financial Companies, Inc. since March
1990. Chairman of the Board and Chief
Executive Officer of both Kemper
Securities Holdings, Inc. and Kemper
Securities, Inc. since August 1990.
Chairman of the Board and Chief
Executive Officer of INVEST Financial
Corporation from May 1989 to July
1991.

David B. Mathis (57)......... Director 1990 Chairman of the Board and Chief
Executive Officer of Kemper
Corporation from February 1992; prior
thereto, President from May 1990 to
September 1992, Chief Operating
Officer from May 1990 to February
1992; prior thereto, Executive Vice
President from May 1989 of Kemper
Corporation. Chairman of the Board
and Chief Executive Officer of Kemper
Reinsurance Company until March 1990;
Vice President of Lumbermens until
May 1989.
</TABLE>

42
<PAGE> 47

<TABLE>
<CAPTION>
POSITION WITH KILICO OTHER BUSINESS EXPERIENCE DURING
NAME AND AGE YEAR OF ELECTION PAST 5 YEARS OR MORE
----------------------------- -------------------------- -------------------------------------
<S> <C> <C>
Stephen B. Timbers (50)...... Director 1989 President and Chief Operating Officer
of Kemper Corporation since September
1992; prior thereto, Chief Investment
Officer until May 1993 from May 1991;
also Chairman, Chief Executive
Officer and Chief Investment Officer
of Kemper Financial Services, Inc.
from February 1995; prior thereto,
Chief Investment Officer until May
1993 from May 1990; prior thereto,
Executive Vice President and Chief
Investment Officer.
Debra P. Rezabek (39)........ Vice President 1995 and Vice President since 1995, General
General Counsel, Director Counsel, Director of Government
of Government Affairs and Affairs since 1992, Assistant General
Assistant Secretary 1992 Counsel 1988- 1992, Federal Kemper
Life Assurance Company and Fidelity
Life Association.
Jerome J. Cwiok (47)......... Executive Vice President Senior Vice President of KILICO 1993-
1995 1995; Executive Vice President since
1995, Senior Vice President
1993-1995, Vice President 1993,
Federal Kemper Life Assurance Company
and Fidelity Life Association.
Executive Vice President from 1986-
1993 of Academy Insurance Group, At-
lanta, Georgia.
Eliane C. Frye (46).......... Executive Vice President Senior Vice President of KILICO 1992-
1995 1995; Executive Vice President since
1995, Senior Vice President
1993-1995, Vice President 1988-1993,
Federal Kemper Life Assurance Company
and Fidelity Life Association.
</TABLE>

43
<PAGE> 48

EXECUTIVE COMPENSATION

The compensation, for the last three completed fiscal years, of the Chief
Executive Officer and the most highly compensated executive officers other than
the Chief Executive Officer with compensation in excess of $100,000 is
summarized in the tables below. The executive officers listed may also serve as
officers of one or more affiliated companies of KILICO. Allocations have been
made, where applicable, as to each individual's time devoted to duties as an
executive officer of KILICO.

TABLE I
SUMMARY COMPENSATION TABLE

<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
--------------------------------------------------------------
(A) (B) (C) (D) (E) (F) (G)
OTHER RESTRICTED
ANNUAL STOCK OPTIONS/ ALL OTHER
NAME AND COMPENSATION AWARD(S) SARS COMPENSATION
PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) ($)(2) ($)(3) (#)(4) ($)(5)
- ------------------------------------------------------------------------------------------------------------------------
John B. Scott................... 1994
Chairman of the Board and 1993 153,600 129,600 11,492 80,730 6,720 21,204
Chief Executive Officer(1) 1992 77,915 26,250 5,347 70,875 2,625 12,233
1993
1992
1991
1993
1992
1991
1993
1992
1991
</TABLE>

- ---------------

(1) Also served in same positions for Federal Kemper Life Assurance Company
("FKLA") an affiliate of KILICO and Fidelity Life Association ("FLA"), a
mutual insurance company under common management with Kemper and its
affiliates. An allocation as to time devoted to duties as executive officer
of KILICO has been made. All Compensation items reflect the allocation.
Restricted Stock Award and Options received for years prior to 1992 related
to service for FKLA.

(2) The amounts disclosed in this column include:

(a) Amounts paid as non-preferential dividend equivalents on shares of
restricted stock.

(b) The cash value of shares of Kemper common stock when awarded under the
Kemper Corporation Anniversary Award Plan. Employees are awarded shares on
an increasing scale beginning with their 10th year of employment and every
5 years thereafter, with a pro rata award at retirement.

(d) Relocation expense reimbursements.

(3) The values shown are based on the closing price for Kemper's common stock on
the date any restricted stock was awarded applied to the number of award
shares. A five-year restriction period on transfers or other dispositions
applies to all awards of restricted stock made to date. If a participant
terminates service prior to the end of the five-year restriction period for
reasons other than death, permanent disability or normal retirement, the
shares and all associated rights are forfeited and returned to Kemper.
Participants may settle their tax obligations on the vesting of restricted
shares by utilizing a portion of the award shares.

As of December 31, 1994, Mr. Scott held a total of shares of
restricted stock, with an aggregate value (based on the closing price for
Kemper's common stock as of the date each award was granted) of $ .
Dividend equivalents, calculated based on the amount of the per share
dividend declared and paid on Kemper's

44
<PAGE> 49

outstanding common stock, will be paid as additional compensation income to the
named individuals throughout the applicable five-year vesting period when
dividends are paid to Kemper's stockholders.

Any remaining restriction period will terminate upon a "change of control" of
Kemper or a sale of a subsidiary employer of the participant, if such
participant ceases to be an employee of Kemper or one of its subsidiaries as a
result of such event and provided such shares were awarded at least six months
prior to the change of control event. If these "change of control" provisions
were presently triggered, each of the named executive officers would vest in
all of the shares described in the preceding paragraph.

(4) Options were granted under Kemper stock option plans maintained for selected
officers and employees of Kemper and its subsidiaries.

(5) This column includes the amounts of employer contributions and forfeitures
which vested to the named persons' accounts under profit sharing plans or
under supplemental plans maintained to provide benefits in excess of
applicable ERISA limitations.

TABLE II

OPTION/SAR GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE AT
ASSUMED
ANNUAL RATES
OF STOCK PRICE
APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM(4)
- ----------------------------------------------------------------------------------------------------------------------------------
(A) (B) (C) (D) (E) (F) (G)
% OF TOTAL
OPTIONS/
SARS
OPTIONS/ GRANTED TO
SARS EMPLOYEES EXERCISE OR
GRANTED IN FISCAL BASE PRICE EXPIRATION
NAME (#)(1) YEAR(2) ($/SH)(3) DATE 5% ($) 10% ($)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
John B. Scott....................................
</TABLE>

- ---------------

(1) The options described above first become exercisable for 25% of the
underlying shares on or after , one year after the date of
grant, and for the total number of underlying shares on or after
.

(2) Based on shares, the total number of shares granted under options in
1994 for all eligible employees of KILICO, Kemper Corporation and eligible
affiliates. This total includes shares granted under options on
to employees of Kemper Securities, Inc. and subsidiary
employee holders of Kemper Financial Companies, Inc. Debentures under
special incentive owned programs.

(3) The option exercise price assigned was the last sale price for Kemper
Corporation common stock on the date of the grant.

(4) The assumed annual rates of stock price appreciation are prescribed in the
registration rules and should not be construed to forecast any future
appreciation in the market price for Kemper's common stock.

(5) These options contain a "reload" feature which entitles an optionee who,
within the first eight years after the date the option was granted, pays all
or any portion of the exercise price of an option with shares of Kemper's
common stock to receive a new non-qualified stock option to purchase a
number of shares equal to the number of shares of common stock tendered in
payment. The new option will have an exercise price equal to the fair market
value of the common stock on the date of such exercise by payment in shares,
and is only exercisable as long as the optionee continues to hold the shares
issued on exercise of the initial option. The new option would vest in
installments identical to those first applying to the option exercised. In
no event, however, can any new option granted under the "reload" feature be
exercised beyond the ten-year term of the initial option exercised.

(6) The options disclosed in the table, if not fully exercisable, become fully
exercisable upon a "change of control" of Kemper or a sale of a subsidiary
employer of the optionee, if such change of control or sale occurs at least
one year from the date the option was granted and provided the optionee
ceases to be an employee of Kemper or one of its subsidiaries as a result of
such event.

45
<PAGE> 50

TABLE III
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES

<TABLE>
<CAPTION>
(A) (B) (C) (D) (E)
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS/SARS AT IN-THE-MONEY OPTIONS/
FY-END (#) SARS AT FY-END ($)(1)
SHARES ACQUIRED ON
NAME EXERCISE (#) VALUE REALIZED ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
John B. Scott(2)............ -- --
-- --
-- --
-- --
</TABLE>

- ---------------

(1) Based on a value per share as of December 31, 1994 over the exercise price,
if less.

(2) Includes options granted related to service for FKLA.

TABLE IV
PENSION PLAN TABLE

The following table shows the estimated annual pension benefits payable to a
covered participant at normal retirement age under the final pay formula
contained in the Kemper Corporation Retirement Plan, a qualified defined benefit
plan, including any pension amounts which would be provided under the
non-qualified supplemental retirement plan due to benefit limitations imposed by
ERISA. The Retirement Plan includes an alternative career average benefit
formula based on compensation earned during all years of plan participation
(1.85 percent of the participant's first $10,000 of eligible compensation for
each plan year and 2.40 percent of eligible compensation above $10,000), but it
is estimated that the Retirement Plan's final pay formula will produce the
greater benefit to the persons identified in the SUMMARY COMPENSATION TABLE who
participate in the Retirement Plan.

<TABLE>
<CAPTION>
FIVE-YEAR YEARS OF PLAN PARTICIPATION
AVERAGE ------------------------------------------------------------
COMPENSATION 20 25 30 35 40
- ------------ -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
$ 200,000 $ 38,220 $ 47,775 $ 57,330 $ 66,885 $ 76,440
250,000 48,220 60,275 72,330 84,385 96,440
300,000 58,220 72,775 87,330 101,885 116,440
350,000 68,220 85,275 102,330 119,385 136,440
400,000 78,220 97,775 117,330 136,885 156,440
450,000 88,220 110,275 132,330 154,385 176,440
500,000 98,220 122,775 147,330 171,885 236,440
600,000 118,220 147,775 177,330 206,885 236,440
700,000 138,220 172,775 207,330 241,885 276,440
800,000 158,220 197,775 237,330 276,885 316,440
900,000 178,220 222,775 267,330 311,885 356,440
1,000,000 198,220 247,775 297,330 346,885 396,440
</TABLE>

A participant's remuneration covered by the Retirement Plan's final pay formula
is his or her average annual salary plus bonus as reported in the SUMMARY
COMPENSATION TABLE (plus the value of any award received under the Company's
Anniversary Stock Award Program) for the 50 months preceding a participant's
retirement or, in the case of a participant who has participated in the plan for
less than 60 months, the period of his or her participation. The estimated
credited years of plan participation at normal retirement age for Messrs. Scott,
and and , respectively are 32 years,
and . Actual years of participation are
respectively 15 years, .

Benefits shown are computed as a straight life single annuity beginning at age
65, and are not subject to reduction for social security or other offset
amounts.

46
<PAGE> 51

COMPENSATION OF DIRECTORS

All of the directors of KILICO are also officers of KILICO and/or an affiliated
company of KILICO and do not receive additional compensation as director.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The board of directors of KILICO does not establish a separate compensation
committee. Instead, the compensation committee of the board of directors of
Kemper Corporation establishes compensation for many of the employees of Kemper
subsidiaries including those individuals who serve on the board of directors of
KILICO. The members of the committee are Raymond F. Farley, George D. Kennedy
and John T. Chain Jr., all being outside directors on the board of directors of
Kemper Corporation.

TABLE OF CONTENTS--STATEMENT OF ADDITIONAL INFORMATION

The Statement of Additional Information, Table of Contents is: Services to the
Separate Account; Performance Information of Subaccounts; State Regulation;
Experts; Financial Statements; Independent Auditors' Report, Financial
Statements of the Separate Account. The Statement of Additional Information
should be read in conjunction with this Prospectus.

FINANCIAL STATEMENTS

The financial statements of KILICO that are included in this Prospectus should
be considered primarily as bearing on the ability of KILICO to meet its
obligations under the Certificates. The Certificates are not entitled to
participate in earnings, dividends or surplus of KILICO.

47
<PAGE> 52

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

The Board of Directors
Kemper Investors Life Insurance Company:

We have audited the consolidated balance sheet of Kemper Investors Life
Insurance Company and subsidiaries as of December 31, 1994 and 1993, and the
related consolidated statements of operations, stockholder's equity and cash
flows for each of the years in the three-year period ended December 31, 1994.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Kemper Investors
Life Insurance Company and subsidiaries at December 31, 1994 and 1993, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1994, in conformity with generally accepted
accounting principles.

As discussed in the notes to the consolidated financial statements, effective
January 1, 1994, the Company changed its method of accounting for investment
securities to adopt the provisions of the Financial Accounting Standards Board's
Statement of Financial Accounting Standards ("SFAS") 115, Accounting for Certain
Investments in Debt and Equity Securities. Also, as discussed in the notes,
effective January 1, 1993, the Company changed its method of accounting for
impairment of loans receivable to adopt the provisions of SFAS 114, Accounting
by Creditors for Impairment of a Loan, and changed its method of accounting for
income taxes to adopt the provisions of SFAS 109, Accounting for Income Taxes.
Further, as discussed in the notes, the Company adopted the provisions of SFAS
106, Employers' Accounting for Postretirement Benefits Other than Pensions in
1992.

KPMG PEAT MARWICK LLP
Chicago, Illinois
March 3, 1995

48
<PAGE> 53

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET
(in thousands, except share data)

<TABLE>
<CAPTION>
DECEMBER 31
---------------------------
1994 1993
---------- ----------
<S> <C> <C>
ASSETS
Fixed maturities, available for sale, at market (cost: 1994,
$3,707,356;
1993, $3,333,202)................................................. $3,463,732 $3,441,224
Equity securities, at market (cost: 1994, $14,947; 1993, $35,170)... 14,767 67,700
Short-term investments.............................................. 204,164 402,463
Joint venture mortgage loans........................................ 351,359 730,753
Third-party mortgage loans.......................................... 318,682 132,162
Other real estate-related investments............................... 237,242 291,489
Policy loans........................................................ 277,743 264,112
Other invested assets............................................... 25,760 43,267
---------- ----------
Total investments......................................... 4,893,449 5,373,170
Cash................................................................ 23,189 7,487
Accrued investment income........................................... 125,543 132,834
Deferred insurance acquisition costs................................ 310,465 288,097
Fixed assets, at cost less accumulated depreciation................. 3,735 6,413
Receivable for securities sold...................................... -- 26,631
Reinsurance recoverable............................................. 642,801 745,554
Other assets and receivables........................................ 29,914 34,058
Assets held in separate accounts.................................... 1,507,984 1,499,471
---------- ----------
Total assets.............................................. $7,537,080 $8,113,715
========== ==========
LIABILITIES
Future policy benefits.............................................. $4,843,690 $5,040,002
Ceded future policy benefits........................................ 642,801 745,554
Payable for securities purchased.................................... 574 43,758
Other accounts payable and liabilities.............................. 66,687 66,298
Deferred income taxes............................................... 41,364 64,045
Liabilities related to separate accounts............................ 1,507,984 1,499,471
---------- ----------
Total liabilities......................................... 7,103,100 7,459,128
---------- ----------
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.......................................... 491,994 409,423
Unrealized gain (loss) on investments............................... (236,443) 93,096
Retained earnings................................................... 175,929 149,568
---------- ----------
Total stockholder's equity................................ 433,980 654,587
---------- ----------
Total liabilities and stockholder's equity................ $7,537,080 $8,113,715
========== ==========
</TABLE>

See accompanying notes to consolidated financial statements.

49
<PAGE> 54

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
REVENUE
Net investment income...................................... $ 353,084 $ 339,274 $ 404,758
Realized investment losses................................. (54,557) (27,584) (83,502)
Fees and other income...................................... 31,950 25,687 32,360
--------- --------- ---------
Total revenue.................................... 330,477 337,377 353,616
--------- --------- ---------
BENEFITS AND EXPENSES
Benefits and interest credited to policyholders............ 248,494 275,689 348,555
Commissions, taxes, licenses and fees...................... 26,910 33,875 49,309
Operating expenses......................................... 25,324 24,383 38,617
Deferral of insurance acquisition costs.................... (31,852) (31,781) (46,649)
Amortization of insurance acquisition costs................ 20,809 12,376 29,119
--------- --------- ---------
Total benefits and expenses...................... 289,685 314,542 418,951
--------- --------- ---------
Income (loss) before income tax expense (benefit) and
cumulative effect of changes in accounting principles.... 40,792 22,835 (65,335)
Income tax expense (benefit)............................... 14,431 11,142 (13,730)
--------- --------- ---------
Income (loss) before cumulative effect of changes
in accounting principles....................... 26,361 11,693 (51,605)
Cumulative effect of changes in accounting principles, net
of tax................................................... -- 2,350 (281)
--------- --------- ---------
Net income (loss)................................ $ 26,361 $ 14,043 $ (51,886)
======== ======== ========
</TABLE>

See accompanying notes to consolidated financial statements.

50
<PAGE> 55

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
(in thousands)

<TABLE>
<CAPTION>
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
CAPITAL STOCK, beginning and end of year................. $ 2,500 $ 2,500 $ 2,500
--------- --------- ---------

ADDITIONAL PAID-IN CAPITAL, beginning of year............ 409,423 310,237 280,237
Capital contributions from Parent........................ 82,500 90,000 30,000
Transfer of limited partnership interest to Parent....... 71 9,186 --
--------- --------- ---------
End of year.................................... 491,994 409,423 310,237
--------- --------- ---------

UNREALIZED GAIN (LOSS) ON INVESTMENTS, beginning of
year................................................... 93,096 39,872 (830)
Unrealized gain (loss) on revaluation of investments,
net.................................................... (329,539) 53,224 40,702
--------- --------- ---------
End of year.................................... (236,443) 93,096 39,872
--------- --------- ---------

RETAINED EARNINGS, beginning of year..................... 149,568 136,055 187,941
Net income (loss)........................................ 26,361 14,043 (51,886)
Dividend of limited partnership interest to Parent....... -- (530) --
--------- --------- ---------
End of year.................................... 175,929 149,568 136,055
--------- --------- ---------
Total stockholder's equity..................... $ 433,980 $ 654,587 $ 488,664
======== ======== ========
</TABLE>

See accompanying notes to consolidated financial statements.

51
<PAGE> 56

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------------
1994 1993 1992
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)................................. $ 26,361 $ 14,043 $ (51,886)
Reconcilement of net income (loss) to net cash
provided:
Realized investment losses..................... 54,557 27,584 83,502
Interest credited and other charges............ 242,591 269,766 343,788
Deferred insurance acquisition costs........... (11,043) (19,405) (17,529)
Amortization of discount and premium on
investments.................................. (1,383) (203) (4,699)
Deferred income taxes.......................... 20,809 14,596 16,599
Other, net..................................... (13,352) 30,148 (33,740)
----------- ----------- -----------
Net cash provided from operating
activities.............................. 318,540 336,529 336,035
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash from investments sold or matured:
Fixed maturities held to maturity.............. 144,717 187,949 96,588
Fixed maturities sold prior to maturity........ 910,913 1,652,119 2,939,784
Mortgage loans, policy loans and other invested
assets....................................... 536,668 881,505 557,237
Cost of investments purchased or loans originated:
Fixed maturities............................... (1,447,393) (2,322,085) (3,456,016)
Mortgage loans, policy loans and other invested
assets....................................... (281,059) (443,445) (326,899)
Short-term investments, net....................... 198,299 (214,999) 474,280
Net change in receivable and payable for
securities transactions........................ (16,553) 39,078 (70,088)
Net reductions in fixed assets.................... 2,678 8,062 2,667
----------- ----------- -----------
Net cash provided by (used in) investing
activities.............................. 48,270 (211,816) 217,553
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Policyholder account balances:
Deposits....................................... 215,034 246,219 440,576
Withdrawals.................................... (652,513) (516,340) (498,287)
Capital contributions from Parent................. 82,500 90,000 30,000
Reinsured life reserves........................... -- -- (515,684)
Other............................................. 3,871 16,776 7,934
----------- ----------- -----------
Net cash used in financing activities..... (351,108) (163,345) (535,461)
----------- ----------- -----------
Net increase (decrease) in cash...... 15,702 (38,632) 18,127
CASH, beginning of period........................... 7,487 46,119 27,992
----------- ----------- -----------
CASH, end of period................................. $ 23,189 $ 7,487 $ 46,119
=========== =========== ===========
</TABLE>

See accompanying notes to consolidated financial statements.

52
<PAGE> 57

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 and interest-sensitive life insurance
products marketed primarily through a network of financial institutions,
nonaffiliated and affiliated securities brokerage firms, insurance agents and
financial planners. The Company is a wholly-owned subsidiary of Kemper Financial
Companies, Inc. ("KFC"), which in turn is a holding company formed by Kemper
Corporation ("Kemper"), the Company's ultimate parent.

The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles. The statements include the accounts of
the Company on a consolidated basis. All significant intercompany balances and
transactions have been eliminated.

Life insurance revenue and expenses

Revenue for annuities and interest-sensitive life products consists of
investment income, and policy charges such as mortality, expense and surrender
charges. Expenses consist of benefits and interest credited to contracts, policy
maintenance costs and amortization of deferred insurance acquisition costs. Also
reflected in fees and other income are ceding commissions received as a result
of certain reinsurance transactions entered into by the Company during 1992.
(See the note captioned "Reinsurance" on page 64.)

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 products are being amortized over
the estimated contract life in relation to the present value of estimated gross
profits. Beginning in 1994, deferred insurance acquisition costs 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
stockholder's equity, net of income tax.

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 4 percent to 8.75 percent.
Future minimum guaranteed interest rates vary from 4 percent to 8.75 percent for
periods ranging from a portion of 1995 up to a portion of 1999 and are generally
3 percent to 4.5 percent thereafter. For contracts that have annuitized,
interest rates that are used in determining the present value of future payments
range principally from 3 percent to 11.25 percent.

Invested assets and related income

Investments in fixed maturities (bonds and redeemable preferred stocks) are
carried at market value at December 31, 1994 and 1993, as they are currently
considered available for sale. Short-term investments are carried at cost, which
approximates market value. Equity securities of nonrelated companies are
generally carried at market value using the closing prices as of the balance
sheet date derived from either a major securities exchange or the National
Association of Securities Dealers Automated Quotations system.

Mortgage loans are carried at their unpaid balance net of unamortized discount
and any applicable reserve. Other real estate-related investments net of any
applicable reserve and write-downs include certain bonds issued by real estate
finance or development companies; notes receivable from real estate ventures;
investments in real estate ventures carried at cost, adjusted for the equity in
the operating income or loss of such ventures; and real estate owned carried
primarily at fair value.

The Company evaluates its real estate-related assets (including accrued
interest) by estimating the probabilities of loss utilizing various projections
that include several factors relating to the borrower, property, term of the
loan,

53
<PAGE> 58

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

tenant composition, rental rates, other supply and demand factors and overall
economic conditions. Real estate reserves are established when declines in
collateral values, estimated in light of current economic conditions and
calculated in conformity with Statement of Financial Accounting Standards
("SFAS") 114, indicate a likelihood of loss. Generally, the reserve is based
upon the excess of the loan amount over the estimated future cash flows from the
loan discounted at the loan's contractual rate of interest taking into
consideration the effects of recourse to, and subordination of loans held by,
affiliated non-life realty companies. Changes in the Company's real estate
reserves and write-downs are included in revenue as realized investment gain or
loss. (See "Real estate-related investments" on page 10.)

The Company adopted SFAS 114, Accounting by Creditors for Impairment of a Loan,
in the fourth quarter of 1993. SFAS 114 defines "impaired loans" as loans in
which it is probable that a creditor will be unable to collect all amounts due
according to the contractual terms of the loan agreement. In the fourth quarter
of 1994, the Company adopted SFAS 118, Accounting by Creditors for Impairment of
a Loan--Income Recognition and Disclosures. SFAS 118 amends SFAS 114, providing
clarification of income recognition issues and requiring additional disclosures
relating to impaired loans. The adoption of SFAS 118 had no effect on the
Company's financial position or results of operations at or for the year ended
December 31, 1994.

At December 31, 1994 and 1993, total impaired loans amounted to $75.9 million
and $179.4 million, respectively. Impaired loans with reserves were $67.6
million and $91.9 million with corresponding reserves of $18.8 million and $38.5
million at December 31, 1994 and 1993, respectively. In determining reserves
relative to impaired loans, the Company also considered the deficit in equity
investments in real estate of $2.0 million and $35.0 million at December 31,
1994 and 1993, respectively. (See the real estate reserve table on page 34.)

The Company had an average balance of $93.9 million and $158.0 million in
impaired loans for 1994 and 1993, respectively. Cash payments received on
impaired loans are generally applied to reduce the outstanding loan balance. At
December 31, 1994 and 1993, loans on nonaccrual status amounted to $274.6
million and $563.6 million, respectively. Impaired loans are generally included
in the Company's nonaccrual loans. The additional amount of nonaccrual loans in
excess of impaired loans represents the Company's consideration of market risks
associated with the real estate loan portfolio.

Upon adoption of SFAS 114, the Company determined that its previous disclosures
relating to impaired loans and recorded real estate reserves were adequate. As
such, restating prior quarters' operating results for the impact of SFAS 114 was
not considered necessary.

Policy loans are carried at their unpaid balance. Other invested assets consist
primarily of venture capital and a leveraged lease and are carried 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. Unrealized gains or losses on
revaluation of investments are credited or charged to stockholder's equity net
of deferred income tax.

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
securities, over the estimated life of the security. Such amortization is
included in net interest income. Amortization of the discount or premium from
mortgage-backed securities is recognized using a level effective yield method
which considers the estimated timing and amount of prepayments of the underlying
mortgage 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 mortgage-backed
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, real estate-related bonds and other real estate
loans where the likelihood of collection of interest is doubtful.

54
<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 market value.

Income tax

The operations of the Company are included in the consolidated federal income
tax return of Kemper. Income taxes receivable or payable are determined on a
separate return basis, and payments are received from or remitted to Kemper
pursuant to a tax allocation arrangement between Kemper and its subsidiaries,
including the Company. The Company generally receives a tax benefit for losses
to the extent such losses can be utilized in Kemper's consolidated tax return.

Upon adoption of SFAS 109, Accounting for Income Taxes, effective January 1,
1993, deferred taxes are provided on the temporary differences between the tax
and financial statement basis of assets and liabilities. Deferred income tax
previously was provided on the tax effects of timing differences between
financial statement and taxable income.

Fixed assets

Fixed assets, consisting primarily of electronic data processing equipment, are
recorded at cost and are depreciated over the useful lives of the assets on a
straight-line method. At December 31, 1994 and 1993, the accumulated
depreciation on fixed assets was $20.8 million and $21.6 million, respectively.

Other

Certain reclassifications have been made in the consolidated financial
statements for the years 1993 and 1992 to conform to 1994 reporting.

(2) CASH FLOW INFORMATION

The Company defines cash as cash in banks and money market accounts. Federal
income tax paid to (refunded by) Kemper under the tax allocation arrangement for
the years ended December 31, 1994, 1993 and 1992 amounted to $(10.7) million,
$4.2 million and $7.8 million, respectively.

Not reflected in the statement of cash flows are rollovers of mortgage loans,
other loans and investments totaling $57 million, $146 million and $229 million
in 1994, 1993 and 1992, respectively.

Reflected in the statement of cash flows is the 1992 sale of $515.7 million of
reinsured life reserves for which the Company delivered an investment portfolio
that included $151.4 million of mortgage loans, $294.8 million of fixed
maturities and $69.5 million of other investments.

The Company also transferred its equity ownership interests in two limited
partnerships during 1994 and 1993. (See the note captioned "Related-Party
Transactions" on page 63.)

55
<PAGE> 60

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(3) INVESTED ASSETS AND RELATED INCOME

Fixed maturities are considered available for sale, depending upon certain
economic and business conditions. The Company is carrying its fixed maturity
investment portfolio at estimated market value, with the aggregate unrealized
appreciation or depreciation being recorded as a separate component of
stockholder's equity net of any applicable income tax effect. The carrying value
(estimated market value) of fixed maturities compared with amortized cost,
adjusted for other-than-temporary declines in value, at December 31, 1994 and
1993, was as follows:

<TABLE>
<CAPTION>
ESTIMATED UNREALIZED
CARRYING AMORTIZED ---------------------
(in thousands) VALUE COST GAINS LOSSES
---------- ---------- -------- ---------
<S> <C> <C> <C> <C>
1994
U.S. treasury securities and obligations of U.S.
government agencies and authorities.............. $ 10,682 $ 10,998 $ 24 $ (340)
Obligations of states and political subdivisions,
special revenue and nonguaranteed................ 25,021 25,691 -- (670)
Debt securities issued by foreign governments...... 109,624 120,950 50 (11,376)
Corporate securities............................... 1,679,428 1,805,933 7,027 (133,532)
Mortgage-backed securities......................... 1,638,977 1,743,784 -- (104,807)
---------- ---------- -------- ---------
Total fixed maturities...................... $3,463,732 $3,707,356 $ 7,101 $(250,725)
========== ========== ======== =========

1993
U.S. treasury securities and obligations of U.S.
government agencies and authorities.............. $ 11,686 $ 11,464 $ 240 $ (18)
Obligations of states and political subdivisions,
special revenue and nonguaranteed................ 16,434 15,232 1,202 --
Debt securities issued by foreign governments...... 114,275 112,825 2,782 (1,332)
Corporate securities............................... 2,025,888 1,948,268 89,445 (11,825)
Mortgage-backed securities......................... 1,272,941 1,245,413 34,268 (6,740)
---------- ---------- -------- ---------
Total fixed maturities...................... $3,441,224 $3,333,202 $127,937 $ (19,915)
========== ========== ======== =========
</TABLE>

Upon default or indication of potential default by an issuer of fixed maturity
securities, the Company-owned issue(s) of such issuer would be placed on
nonaccrual status and, since declines in market 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,
determined in the manner described in the following paragraph, during the fiscal
quarter in which the impairment was determined to have become other than
temporary, unless such net realizable value exceeded the Company's carrying
value for such issue. 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 $907 million real estate portfolio consists of joint venture and
third-party mortgage loans and other real estate-related investments. (See "Real
estate-related investments" on page 10.) At December 31, 1994, the Company had
$216.2 million of mortgage loans and other real estate-related investments (net
of reserves and write-downs) that were non-income producing for the preceding 12
months.

At December 31, 1994, securities carried at approximately $5.3 million were on
deposit with governmental agencies as required by law.

56
<PAGE> 61

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(3) INVESTED ASSETS AND RELATED INCOME (CONTINUED)
Proceeds from sales of investments in fixed maturities prior to maturity were
$910.9 million, $1.7 billion and $2.9 billion during 1994, 1993 and 1992,
respectively. Gross gains of $6.0 million, $80.4 million and $69.5 million and
gross losses of $55.9 million, $37.8 million and $101.7 million were realized on
sales of fixed maturities in 1994, 1993 and 1992, respectively. Gross unrealized
gains and losses on equity securities at December 31, 1994 amounted to $469
thousand and $649 thousand, respectively.

The following table sets forth the maturity aging schedule of fixed maturity
investments at December 31, 1994:

<TABLE>
<CAPTION>
CARRYING AMORTIZED
(in thousands) VALUE COST VALUE
---------- ----------
<S> <C> <C>
One year or less........................................................ $ 1,135 $ 1,135
Over one year through five.............................................. 346,841 357,697
Over five years through ten............................................. 1,011,526 1,088,547
Over ten years.......................................................... 465,253 516,193
Securities not due at a single maturity date(1)......................... 1,638,977 1,743,784
---------- ----------
Total fixed maturities........................................... $3,463,732 $3,707,356
========== ==========
</TABLE>

- ---------------
(1) Weighted average maturity of 7 years.

The sources of net investment income were as follows:

<TABLE>
<CAPTION>
(in thousands) 1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Interest and dividends on fixed maturities.................. $274,231 $221,144 $210,047
Dividends on equity securities.............................. 1,751 3,084 2,061
Income from short-term investments.......................... 10,668 12,155 18,249
Income from mortgage loans.................................. 41,713 82,028 149,816
Income from policy loans.................................... 18,517 16,826 17,052
Income from other real estate-related investments........... 21,239 11,755 17,915
Income from other loans and investments..................... 3,533 8,008 2,580
-------- -------- --------
Total investment income.............................. 371,652 355,000 417,720
Investment expense.......................................... (18,568) (15,726) (12,962)
-------- -------- --------
Net investment income................................ $353,084 $339,274 $404,758
======== ======== ========
</TABLE>

57
<PAGE> 62

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(3) INVESTED ASSETS AND RELATED INCOME (CONTINUED)
Unrealized gains (losses) are computed below as follows: fixed maturities--the
difference between market and amortized cost, adjusted for other-than-temporary
declines in value; equity securities and other--the difference between market
value and cost. The realized and change in unrealized investment gains (losses)
by class of investment for the years ended December 31, 1994, 1993 and 1992 were
as follows:

<TABLE>
<CAPTION>
REALIZED GAINS (LOSSES)
------------------------------------------
(in thousands) 1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Real estate-related.................................... $(41,720) $(79,652) $(94,995)
Fixed maturities....................................... (49,857) 36,234 11,150
Equity securities...................................... 28,243 17,086 109
Other.................................................. 8,777 (1,252) 234
-------- -------- --------
Realized investment losses before income tax
benefit........................................... (54,557) (27,584) (83,502)
Income tax benefit..................................... (19,095) (7,917) (21,256)
-------- -------- --------
Net realized investment losses....................... $(35,462) $(19,667) $(62,246)
======== ======== ========
</TABLE>

<TABLE>
<CAPTION>
CHANGE IN UNREALIZED GAINS (LOSSES)
------------------------------------------
(in thousands) 1994 1993 1992
--------- ------- --------
<S> <C> <C> <C>
Fixed maturities...................................... $(351,646) $60,258 $ 88,820
Equity securities..................................... (32,710) 19,882 14,882
Adjustment to deferred insurance acquisition costs.... 11,325 -- --
--------- ------- --------
Unrealized gain (loss) before income tax............ (373,031) 80,140 103,702
Income tax expense (benefit).......................... (43,492) 26,916 20,968
--------- ------- --------
Net unrealized gain (loss) on investments...... $(329,539) $53,224 $ 82,734
========= ======= ========
</TABLE>

(4) UNCONSOLIDATED INVESTEES

At December 31, 1994, KILICO, along with other Kemper subsidiaries, directly
held partnership interests in a number of real estate joint ventures. Also,
KILICO and Lumbermens Mutual Casualty Company ("Lumbermens") and certain
subsidiaries of Kemper and Lumbermens are partners in a master limited
partnership (the "MLP") formed, effective January 1, 1993, to hold the equity
interests each partner's organization separately held previously in joint
ventures with Peter B. Bedford or his affiliates ("Bedford"), and in January
1994, the MLP acquired substantially all of Bedford's interests in such joint
ventures. Kemper and Lumbermens each own 50 percent of the MLP.

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.

58
<PAGE> 63

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(4) UNCONSOLIDATED INVESTEES (CONTINUED)

Selected financial information, as of December 31, 1994 and 1993, is presented
below separately for the MLP, ventures with the Prime Group, Inc. or its
affiliates ("Prime"), and other real estate-related partnerships. (See the note
captioned "Concentration of Credit Risk" on page 30.) Such real estate-related
information for 1994 and 1993 was based on unaudited financial information
received by the Company from the respective entities.

SELECTED FINANCIAL INFORMATION
(in thousands)

<TABLE>
<CAPTION>
REAL ESTATE-RELATED
-------------------------------------------------------
PRIME-RELATED
-------------------------
MLP DOMESTIC SPANISH OTHER
VENTURES PARTNERSHIPS PROJECTS PARTNERSHIPS
---------- ------------ --------- ------------
<S> <C> <C> <C> <C>
1994
Revenue............................................ $ 104,827 $ 14,966 $ 22,095 $ 52,295
Expenses........................................... 192,492 18,881 45,256 49,011
---------- -------- --------- --------
Operating income (loss)............................ (87,665) (3,915) (23,161) 3,284
Asset writedowns(1)................................ (23,536) (621) (102,031) (17,037)
---------- -------- --------- --------
Net loss........................................... $ (111,201) $ (4,536) $(125,192) $(13,753)
========== ======== ========= ========
The Company's share of operating loss(1)........... $ (121) $ (1,140) $ -- $ (145)
========== ======== ========= ========
The Company's share of net loss(1)................. $ (156) $ (1,244) $ -- $ (4,915)
========== ======== ========= ========
Properties at cost, net of depreciation............ $ 879,352 $ 55,804 $ 338,923 $ 38,075
========== ======== ========= ========
Total assets....................................... $1,049,019 $ 77,751 $ 373,637 $153,785
========== ======== ========= ========
Mortgages, notes payable and related accrued
interest payable to:
The Company...................................... $ 207,909 $ 31,767 $ 36,606 $ 7,436
Kemper subsidiaries other than the Company....... 417,967 2,713 394,764 2,411
Lumbermens....................................... 181,325 -- 92,592 26,734
Fidelity Life Association........................ 46,036 -- -- --
Other third parties.............................. 411,795 42,048 98,076 51,303
Total liabilities.................................. $1,354,624 $ 82,770 $ 660,557 $110,334
========== ======== ========= ========
The Company's net equity investment(1)............. $ 1,953 $ (585) $ 36,624 $ 7,415
========== ======== ========= ========
</TABLE>

- ---------------
(1) Excluded from the Company's share of operating and net losses and related
net equity investment in real estate-related entities is interest expense
related to loans by the Company which are on nonaccrual status and write-
downs taken directly by the Company. Included in the Company's share of
current year results are immaterial prior year audit adjustments by the
respective entities.

Included in the immediately preceding and immediately following tables are real
estate loans to partnerships or corporations in which the Company and other
Kemper subsidiaries hold equity interests. At December 31, 1994, the Company had
other joint venture-related loans totaling $16.0 million before reserves, not
included in the table above, to partnerships in which the Company has options to
acquire equity interests or has made loans with additional interest features.
These joint venture-related loans totaled $38.5 million at December 31, 1993.
Also at December 31, 1994, the Company had joint venture-related loans totaling
$37.5 million before reserves, not included in the table above, to partnerships
in which Lumbermens and Fidelity Life Association, an affiliated mutual
insurance company ("FLA"), had equity interests. These joint venture-related
loans totaled $68.1 million before reserves at December 31, 1993. (See the note
captioned "Financial Instruments--Off-Balance-Sheet Risk" on page 66.)

59
<PAGE> 64

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(4) UNCONSOLIDATED INVESTEES (CONTINUED)

SELECTED FINANCIAL INFORMATION
(in thousands)

<TABLE>
<CAPTION>
REAL ESTATE-RELATED
---------------------------------------------------
PRIME-RELATED
-----------------------
MLP DOMESTIC SPANISH OTHER
VENTURES PARTNERSHIPS PROJECTS PARTNERSHIPS
---------- ------------ -------- ------------
<S> <C> <C> <C> <C>
1993
Revenue................................................ $ 101,694 $ 50,636 $ 36,607 $ 60,701
Expenses............................................... 226,282 65,824 76,449 66,978
---------- -------- -------- --------
Operating loss......................................... (124,588) (15,188) (39,842) (6,277)
Asset writedowns(1).................................... (107,135) -- (39,274) --
---------- -------- -------- --------
Net loss............................................... $ (231,723) $(15,188) $(79,116) $ (6,277)
========== ======== ======== ========
The Company's share of operating loss(1)............... $ (172) $ (7,548) $ -- $ (852)
========== ======== ======== ========
The Company's share of net loss(1)..................... $ (409) $ (7,548) $ -- $ (852)
========== ======== ======== ========
Properties at cost, net of depreciation................ $1,161,025 $278,635 $253,321 $ 46,184
========== ======== ======== ========
Total assets........................................... $1,426,638 $375,738 $292,825 $225,019
========== ======== ======== ========
Mortgages, notes payable and related accrued
interest payable to:
The Company.......................................... $ 298,447 $ 48,303 $ 31,871 $ 5,287
Kemper subsidiaries other than the Company........... 490,031 56,602 305,335 5,430
Lumbermens........................................... 245,890 17,262 51,423 30,226
Fidelity Life Association............................ 65,691 -- -- --
Other third parties.................................. 752,239 199,765 88,558 56,622
Total liabilities...................................... $1,895,260 $390,888 $539,728 $153,334
========== ======== ======== ========
The Company's net equity investment(1)................. $ 18,548 $ 7,626 $ 31,871 $ 15,524
========== ======== ======== ========
</TABLE>

(5) CONCENTRATION OF CREDIT RISK

The Company generally strives to maintain a diversified invested asset
portfolio; however, certain concentrations of credit risk exist, including
mortgage-backed securities and real estate. These concentrations are discussed
in "INVESTMENTS" on page 33.

The Company had $246.3 million (5.0 percent of invested assets and cash), $240.5
million (4.9 percent of invested assets and cash) and $102.8 million (2.1
percent of invested assets and cash) of mortgage loans and other real estate

60
<PAGE> 65

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(5) CONCENTRATION OF CREDIT RISK (CONTINUED)
investments in California, Illinois and Texas, respectively, at December 31,
1994. The majority of the Illinois and Texas loans and other investments are
Prime-related. The majority of the California loans and other investments are
MLP-related. (See the note captioned "Unconsolidated Investees.")

The Company had $184.9 million (3.8 percent of invested assets and cash) of
below investment-grade securities (including real estate-related bonds) totaling
$49.9 million, or 1.0 percent of invested assets and cash) at December 31, 1994.

At December 31, 1994, the Company held only one investment which exceeded 10
percent of stockholder's equity. This investment, amounting to $47.6 million, is
a joint venture mortgage loan to Lisle Park Plaza.

The following table shows the amounts of the Company's real estate portfolio at
December 31, 1994 which consisted of loans to or investments in joint ventures
with the MLP and Prime:

<TABLE>
<CAPTION>
(in millions) MLP PRIME
------ ------
<S> <C> <C>
Mortgage loans................................................................. $161.6 $150.3
Real estate-related bonds...................................................... 2.9 36.2
Other real estate loans........................................................ 54.5 29.7
Real estate owned.............................................................. 98.3 --
Equity investments............................................................. 7.4 42.9
Reserves....................................................................... (8.9) (21.0)
Write-downs.................................................................... (61.5) (.1)
------ ------
Total........................................................................ $254.3 $238.0
====== ======
</TABLE>

(6) INCOME TAXES

Income tax expense (benefit) was as follows for the years ended December 31,
1994, 1993 and 1992:

<TABLE>
<CAPTION>
(in thousands) 1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Current..................................................... $ (6,898) $ (5,773) $ (9,457)
Deferred.................................................... 21,329 16,915 (4,273)
-------- -------- --------
Total............................................. $ 14,431 $ 11,142 $(13,730)
======= ======= ========
</TABLE>

The actual income tax expense (benefit) for 1994, 1993 and 1992 differed from
the "expected" tax expense (benefit) for those years as displayed below.
"Expected" tax expense (benefit) was computed by applying the U.S. federal
corporate tax rate of 35 percent in 1994 and 1993 and 34 percent for 1992 to
income (loss) before income tax expense (benefit) and cumulative effect of
changes in accounting principles.

<TABLE>
<CAPTION>
(in thousands) 1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Computed expected tax expense (benefit)..................... $ 14,277 $ 7,992 $(22,214)
Difference between "expected" and actual tax expense
(benefit):
State taxes............................................... 645 332 777
Foreign tax credit........................................ (155) 358 (611)
Change in tax rate........................................ -- 1,441 --
Change in valuation allowance............................. -- 701 --
Unutilized capital losses................................. -- -- 8,286
Other, net................................................ (336) 318 32
-------- -------- --------
Total actual tax expense (benefit)................ $ 14,431 $ 11,142 $(13,730)
======= ======= ========
</TABLE>

The Company adopted SFAS 109, Accounting for Income Taxes, as of January 1,
1993. SFAS 109 established new principles for calculating and reporting the
effects of income taxes in financial statements. SFAS 109 replaced the

61
<PAGE> 66

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(6) INCOME TAXES (CONTINUED)
income statement orientation inherent in APB Opinion 11 with a balance sheet
approach. Under the new approach, deferred tax assets and liabilities are
generally determined based on the difference between the financial statement and
tax bases of assets and liabilities using enacted tax rates in effect for the
year in which the differences are expected to reverse. Under SFAS 109, the
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. SFAS 109
allows recognition of deferred tax assets if future realization of the tax
benefit is more likely than not, with a valuation allowance for the portion that
is not likely to be realized.

The implementation of SFAS 109 resulted in a one-time increase to earnings of
$2.4 million in the first quarter of 1993. Prior years' financial statements
have not been restated to apply the provisions of SFAS 109.

Upon adoption of SFAS 109, a valuation allowance was established to reduce the
deferred federal tax asset related to real estate and other investments to the
amount that, based upon available evidence, is, in management's judgment, more
likely than not to be realized. Any reversals of the valuation allowance are
contingent upon the recognition of future capital gains in Kemper's federal
income tax return or a change in circumstances which causes the recognition of
the benefits to become more likely than not. During 1994, the valuation
allowance was increased by $85.3 million. This increase in the valuation
allowance is solely attributable to the decrease in the net deferred federal tax
liability from unrealized losses on investments.

The tax effects of temporary differences that give rise to significant portions
of the Company's net deferred federal tax liability were as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
(in thousands) 1994 1993
--------- --------
<S> <C> <C>
Deferred federal tax assets:
Unrealized losses on investments...................................... $ 85,331 $ --
Life policy reserves.................................................. 51,519 60,446
Real estate-related................................................... 39,360 45,851
Other investment-related.............................................. 7,435 12,498
Other................................................................. 6,415 5,804
--------- --------
Total deferred federal tax assets.................................. 190,060 124,599
Valuation allowance................................................... (100,532) (15,201)
--------- --------
Total deferred federal tax assets after valuation allowance........ 89,528 109,398
--------- --------
Deferred federal tax liabilities:
Deferred insurance acquisition costs.................................. 108,663 100,834
Unrealized gains on investments....................................... -- 49,193
Depreciation and amortization......................................... 18,878 21,367
Other................................................................. 3,351 2,049
--------- --------
Total deferred federal tax liabilities............................. 130,892 173,443
--------- --------
Net deferred federal tax liabilities.................................... $ (41,364) $(64,045)
========= ========
</TABLE>

The valuation allowance of $100.5 million is subject to future adjustments based
on, among other items, Kemper's estimates of future operating earnings and
capital gains.

Pursuant to the deferred method under APB Opinion 11, deferred income taxes were
recognized for income and expense items that were reported in different years
for financial reporting purposes and income tax purposes using the tax rate
applicable for the year of the calculation. Under the deferred method, deferred
taxes were not adjusted for subsequent changes in tax rates.

62
<PAGE> 67

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(6) INCOME TAXES (CONTINUED)
The sources of deferred tax expense (benefit) and their tax effect were as
follows:

<TABLE>
<CAPTION>
(in thousands) 1992
--------
<S> <C>
Deferred insurance acquisition costs.................................................. $ 6,172
Future policy benefit reserves tax adjustment......................................... 5,692
Timing differences in recognition of accrued liabilities for GAAP and tax purposes.... (397)
Tax versus GAAP separate account gain................................................. (3,277)
Tax versus GAAP capital losses........................................................ 4,350
GAAP versus tax investment income on bonds............................................ (4,380)
Joint venture partnership income adjustments.......................................... 1,491
Leasing transactions.................................................................. 2,567
Change in real estate reserve......................................................... (21,305)
Tax capitalization of policy acquisition costs........................................ 555
Tax versus GAAP depreciation.......................................................... 490
Unutilized capital losses............................................................. 8,286
Other, net............................................................................ (4,517)
--------
Total....................................................................... $ (4,273)
========
</TABLE>

The tax returns through the year 1986 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 1987 through 1990 are currently under
examination by the IRS.

(7) RELATED-PARTY TRANSACTIONS

The Company received cash capital contributions from KFC of $82.5 million, $90.0
million and $30.0 million during 1994, 1993 and 1992, respectively.

In 1994 and 1993, the Company transferred the majority of its deficit equity
ownership interest in two limited partnerships to KFC resulting in an increase
of the Company's additional paid-in capital of $71 thousand and $9.2 million,
respectively. The Company also paid a non-cash dividend of $530 thousand to KFC
in December 1993, which represented the positive equity ownership interests of
the majority of one of its limited partnerships. Net losses associated with the
Company's ownership interests in these limited partnerships amounted to $1.4
million, $5.4 million and $3.9 million in 1994, 1993 and 1992, respectively, and
are included in the Company's consolidated statement of operations.

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, 1994 and 1993, joint venture mortgage loans
totaled $351 million and $731 million, respectively, and during 1994, 1993 and
1992, the Company earned interest income on these joint venture loans of $22.0
million, $63.1 million and $116.3 million, respectively.

As of January 1, 1993, all of the Company's personnel are employees of Federal
Kemper Life Assurance Company ("FKLA"), an affiliated company. Prior to January
1, 1993, the majority of the Company's personnel were employees of another
affiliated company, Kemper Financial Services, Inc. ("KFS"). The Company is
allocated expenses for the utilization of KFS and FKLA employees and facilities
and the information systems of Kemper Service Company ("KSvC") based on the
Company's share of administrative, legal, marketing, investment management,
information systems and operation and support services. During 1994, 1993 and
1992, expenses allocated to the Company from KFS and KSvC amounted to $6.5
million, $3.1 million and $28.2 million, respectively. The Company also paid to
KFS investment management fees of $6.0 million, $6.7 million and $5.9 million
during 1994, 1993 and 1992, respectively. The Company paid Kemper Sales Company
$7.1 million in 1992 for services relating to the distribution of the Company's
products. In addition, expenses allocated to the

63
<PAGE> 68

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(7) RELATED-PARTY TRANSACTIONS (CONTINUED)
Company from FKLA during 1994, 1993 and 1992 amounted to $11.1 million, $13.1
million and $1.1 million, respectively.

During 1994, 1993 and 1992, the Company sold certain mortgages and real
estate-related investments, net of reserves, amounting to approximately $154.0
million, $343.7 million and $144.8 million respectively, to KFC Portfolio Corp.,
an affiliated non-life realty company, in exchange for cash. No gain or loss was
recognized on the sales.

(8) REINSURANCE

In the ordinary course of business, the Company enters into reinsurance
agreements to diversify risk and limit its overall financial exposure to certain
blocks of fixed-rate annuities. 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.

In 1992 and 1991, the Company entered into 100 percent indemnity reinsurance
agreements ceding $515.7 million and $416.3 million, respectively, of its
fixed-rate annuity liabilities to FLA. FLA is a mutual insurance company that
shares common management with the Company and FKLA and certain common board
members with the Company and Kemper. The 1992 reinsurance agreement resulted in
the sale to FLA of approximately $500 million of certain assets, including $151
million of mortgage loans, while the 1992 agreement was all cash. As of December
31, 1994, the reinsurance recoverable related to the fixed-rate annuity
liabilities ceded to FLA amounted to approximately $643 million.

(9) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS

The Company and FKLA sponsor a welfare plan that provides medical and life
insurance benefits to their retired and active employees and the Company is
allocated a portion of the costs of providing such benefits. The Company is self
insured with respect to medical benefits, and the plan is not funded except with
respect to certain disability-related medical claims. The medical plan provides
for medical insurance benefits at retirement, with eligibility based upon age
and the participant's number of years of participation attained at retirement.
The plan is contributory for pre-Medicare retirees, and will be contributory for
all retiree coverage for most current employees, with contributions generally
adjusted annually. Postretirement life insurance benefits are noncontributory
and are limited to $10,000 per participant.

The discount rate used in determining the allocated postretirement benefit
obligation was 8 percent and 7 percent for 1994 and 1993, respectively. The
assumed health care trend rate used was based on projected experience for 1994
and 1995, 10 percent in 1996, gradually declining to 6 percent by the year 1999
and remaining at that level thereafter.

64
<PAGE> 69

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(9) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (CONTINUED)
The status of the plan as of December 31, 1994 and 1993, was as follows:

Accumulated postretirement benefit obligation:

<TABLE>
<CAPTION>
(in thousands) 1994 1993
---- ----
<S> <C> <C>
Retirees.......................................................................... $206 $171
Fully eligible active plan participants........................................... 58 90
Other active plan participants.................................................... 101 159
Unrecognized gain from actuarial experience....................................... 314 223
---- ----
Accrued liability....................................................... $679 $643
===== =====
Components of the net periodic postretirement benefit cost:
</TABLE>

<TABLE>
<CAPTION>
(in thousands) 1994 1993
---- ----
<S> <C> <C>
Service cost-benefits attributed to service during the period..................... $ 31 $ 84
Interest cost on accumulated postretirement benefit obligations................... 43 41
Amortization of unrecognized actuarial gain....................................... (35) --
---- ----
Total................................................................... $ 39 $125
===== =====
</TABLE>

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, 1994 and 1993 by $48 thousand and $69 thousand, respectively, and
the net postretirement health care interest and service costs for the years
ended December 31, 1994 and 1993 by $14 thousand and $19 thousand, respectively.

During 1994, the Company adopted certain severance-related policies to provide
benefits, generally limited in time, to former or inactive employees after
employment but before retirement. The effect of adopting these policies was
immaterial.

(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 none of the Company or 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.

See the note captioned "Financial Instruments--Off-Balance-Sheet Risk" below for
the discussion regarding the Company's loan commitments and standby financing
agreements.

The Company is liable for guaranty fund assessments related to certain
unaffiliated insurance companies that have become insolvent during the years
1994 and prior. The Company's financial statements include provisions for all
known assessments that will 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

65
<PAGE> 70

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(10) COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)

insurance industry has estimated the cost to cover losses to policyholders. (See
"Guaranty association assessments" on page 28.) The Company is also contingently
liable for any future guaranty fund assessments related to insolvencies of
unaffiliated insurance companies, for which the life insurance industry has been
unable to estimate the cost to cover losses to policyholders. No specific amount
can be reasonably estimated for such insolvencies as of December 31, 1994.

(11) FINANCIAL INSTRUMENTS--OFF BALANCE-SHEET RISK

At December 31, 1994, the Company had loan commitments and stand-by financing
agreements totaling $376.1 million to support the financing needs of various
real estate investments. To the extent these arrangements are called upon,
amounts loaned would be secured 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. The Company presently expects to fund approximately $96.5 million
of these arrangements. 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) DERIVATIVE FINANCIAL INSTRUMENTS

The Company is party to derivative financial instruments in the normal course of
business for other than trading purposes to hedge exposures in foreign currency
fluctuations related to certain foreign fixed maturity securities held by the
Company. The following table summarizes various information regarding these
derivative financial instruments as of December 31, 1994 and 1993:

<TABLE>
<CAPTION>
WEIGHTED
WEIGHTED AVERAGE
AVERAGE REPRICING
(in thousands) NOTIONAL CARRYING ESTIMATED YEARS TO FREQUENCY
1994 AMOUNT VALUE FAIR VALUE EXPIRATION (DAYS)
- ----------------------------------------------------------------- -------- -------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Non-trading foreign exchange forward options..................... $ 34,541 $ 18 $ 18 .25 30
</TABLE>

<TABLE>
<CAPTION>
1993
- -----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-trading foreign exchange forward options..................... 69,241 2,194 2,194 .22 30
</TABLE>

The Company's hedges relating to foreign currency exposure are implemented using
forward contracts on foreign currencies. These are generally short duration
contracts with U.S. money-center banks. The Company records realized and
unrealized gains and losses on such investments in net income on a current
basis. The amounts of gain (loss) included in net income during 1994, 1993 and
1992 totaled $6.4 million, $(2.8) million and $(2.4) million, respectively.

(13) FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair value disclosures are required under SFAS 107. Such fair value estimates
are made at specific points in time, based on relevant market information and
information about the financial instrument. These estimates do not reflect any
premium or discount that could result from offering for sale at one time the
Company's entire holdings of a particular financial instrument. A significant
portion of the Company's financial instruments are carried at fair value. (See
the note captioned "Invested Assets and Related Income" on page 56.) 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

66
<PAGE> 71

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(13) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
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: Fair values for fixed maturity securities carried at market
value were determined by using market quotations, or independent pricing
services that use prices provided by market makers or estimates of market 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, Kemper Financial Services, Inc.

Equity securities: Fair values for equity securities were based upon quoted
market prices.

Cash and short-term investments: The carrying amounts reported in the
consolidated balance sheet for these instruments approximate fair values.

Mortgage loans and other real estate-related investments: Fair values for
mortgage loans and other real estate-related investments were estimated on a
project-by-project basis. Generally, the projected cash flows of the collateral
are discounted using a discount rate of 10 to 12 percent. The resulting
collateral estimates were then used to determine the value of the Company's real
estate-related investments. The estimate of fair value should be used with care
given the inherent difficulty of 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 sheet for these instruments approximate fair values. The fair values of
policy loans were estimated by discounting the expected future cash flows using
an interest rate charged on policy loans for similar policies currently being
issued.

Life policy benefits: Fair values of the life policy benefits regarding
investment contracts (primarily deferred annuities) and universal life contracts
were estimated by discounting gross benefit payments, net of contractual
premiums, using the average crediting rate currently being offered in the
marketplace for similar contracts with maturities consistent with those
remaining for the contracts being valued. The Company had projected its future
average crediting rate in 1994 and 1993 to be 5.5 percent and 5.0 percent,
respectively, while the assumed average market crediting rate was 6.5 percent in
1994 and 5.25 percent in 1993.

The carrying values and estimated fair values of the Company's financial
instruments at December 31, 1994 and 1993 were as follows:

<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------------------------------
1994 1993
------------------------ ------------------------
CARRYING FAIR CARRYING FAIR
(in thousands) VALUE VALUE VALUE VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Financial instruments recorded as assets:
Fixed maturities(1).......................... $3,463,732 $3,463,732 $3,441,224 $3,441,224
Equity securities............................ 14,767 14,767 67,700 67,700
Cash and short-term investments.............. 227,353 227,353 409,950 409,950
Mortgage loans and other real estate-related
assets.................................... 907,283 804,867 1,154,404 1,010,038
Policy loans................................. 277,743 277,743 264,112 264,112
Other invested assets........................ 25,760 25,760 43,267 43,267
Financial instruments recorded as liabilities:
Life policy benefits......................... 4,843,690 4,709,561 5,040,002 5,120,000
</TABLE>

- ---------------
(1) Includes $18 and $2,200 carrying value and fair value for 1994 and 1993,
respectively, of derivative securities used to hedge the foreign currency
exposure on certain specific foreign fixed maturity investments.

67
<PAGE> 72

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(14) 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, if such dividend, together with other
distributions during the twelve preceding months would exceed the greater of ten
percent of statutory surplus as regards policyholders as of the preceding
December 31, or statutory net income for the preceding calendar year, then such
proposed dividend must be reported to the Director of Insurance at least 30 days
prior to the proposed payment date and may be paid only if not disapproved.
Illinois insurance laws also permit payment of dividends only out of earned
surplus, exclusive of most unrealized capital gains. The maximum amount of
dividends which can be paid by the Company in 1995 is currently $0. The Company
paid no cash dividends in 1994, 1993 or 1992.

The Company's net income (loss) and stockholder's equity as determined in
accordance with statutory accounting principles are as follows:

<TABLE>
<CAPTION>
(in thousands) 1994 1993 1992
-------- -------- ---------
<S> <C> <C> <C>
Net income (loss)............................................. $ 44,491 $(36,178) $(141,975)
======== ======== =========
Statutory surplus............................................. $416,243 $329,430 $ 251,283
======== ======== =========
</TABLE>

68
<PAGE> 73

APPENDIX A

ILLUSTRATION OF A MARKET VALUE ADJUSTMENT

<TABLE>
<S> <C>
Purchase Payment: $40,000
Guarantee Period: 5 Years
Guaranteed Interest Rate: 5% Annual Effective Rate
</TABLE>

The following examples illustrate how the Market Value Adjustment and the
Withdrawal Charge may affect the values of a Certificate upon a withdrawal. The
5% assumed Guaranteed Interest Rate is the rate required to be used in the
"Summary of Expenses." In these examples, the withdrawal occurs one year after
the Date of Issue. The Market Value Adjustment operates in a similar manner for
transfers. No Withdrawal Charge applies to transfers.

The Guarantee Period Value for this $40,000 Purchase Payment is $51,051.26 at
the end of the five-year Guarantee Period. After one year, when the withdrawals
occur in these examples, the Guarantee Period Value is $42,000.00. It is also
assumed, for the purposes of these examples, that no prior partial withdrawals
or transfers have occurred.

The Market Value Adjustment will be based on the rate KILICO is then crediting
(at the time of the withdrawal) on new Certificates with the same Guarantee
Period as the time remaining in your Guarantee Period rounded to the next higher
number of complete years. One year after the Purchase Payment there would have
been four years remaining in your Guarantee Period. These examples also show the
Withdrawal Charge (if any) which would be calculated separately after the Market
Value Adjustment.

EXAMPLE OF A DOWNWARD MARKET VALUE ADJUSTMENT

A downward Market Value Adjustment results from a full or partial withdrawal
that occurs when interest rates have increased. Assume interest rates have
increased one year after the Purchase Payment and KILICO is then crediting 6.5%
for a four-year Guarantee Period. Upon a full withdrawal, the market value
adjustment factor would be:

The Market Value Adjustment is a reduction of $3,053.24 from the Guarantee
Period Value:

-3,053.24 = -.0726961 X 42,000.00

The Market Adjusted Value would be:

$38,946.76 = $42,000.00 - $3,053.24

A Withdrawal Charge of 6% would be assessed against the Market Adjusted Value in
excess of the amount available as a free withdrawal. In this case, there are no
prior withdrawals, so 10% of the Market Adjusted Value is not subject to a
Withdrawal Charge. The Withdrawal Charge is thus:

$2,103.13 = $38,946.76 X .9 X .06

Thus, the amount payable on a full withdrawal would be:

$36,843.64 = $38,946.76 - $2,103.13

If instead of a full withdrawal, 50% of the Guarantee Period Value was withdrawn
(partial withdrawal of 50%), the Market Value Adjustment would be 50% of that of
the full withdrawal:

-$1,526.62 = -.0726961 X $21,000.00

The Market Adjusted Value would be:

$19,473.38 = $21,000.00 - $1,526.62

The Withdrawal Charge of 6% would apply to the Market Adjusted Value being
withdrawn, less 10% of the full Market Adjusted Value as there are no prior
withdrawals:

$934.72 = ($19,473.38 - .1 X $38,946.76) X .06
- ---------------
* Actual calculation utilizes 10 decimal places.

Thus, the amount payable on this partial withdrawal would be:

$18,538.66 = $19,473.38 - $934.72

69
<PAGE> 74

EXAMPLE OF AN UPWARD MARKET VALUE ADJUSTMENT

An upward Market Value Adjustment results from a withdrawal that occurs when
interest rates have decreased. Assume interest rates have decreased one year
later and KILICO is then crediting 4% for a four-year Guarantee Period. Upon a
full withdrawal, the market value adjustment factor would be:

The Market Value Adjustment is an increase of $809.62 to the Guarantee Period
Value:

$809.62 = $42,000.00 X .0192766

The Market Adjusted Value would be:

$42,809.62 = $42,000.00 + $809.62

A Withdrawal Charge of 6% would apply to the Market Adjusted Value being
withdrawn, less 10% of the full Market Adjusted Value, as there were no prior
withdrawals:

$2,311.72 = $42,809.62 X .9 X .06

Thus, the amount payable on withdrawal would be:

$40,497.90 = $42,809.62 - $2,311.72

If instead of a full withdrawal, 50% of the Guarantee Period Value was withdrawn
(partial withdrawal of 50%), the Market Value Adjustment would be:

$404.81 = $21,000.00 X .0192766

The Market Adjusted Value of $21,000.00 would be:

$21,404.81 = $21,000.00 + $404.81

The Withdrawal Charge of 6% would apply to the Market Adjusted Value being
withdrawn, less 10% of the full Market Adjusted Value as there are no prior
withdrawals:

$1,027.43 = ($21,404.81 - .1 X $42,809.62) X .06

Thus, the amount payable on this partial withdrawal would be:

$20,377.38 = $21,404.81 - $1,027.43

Actual Market Value Adjustment may have a greater or lesser impact than that
shown in the Examples, depending on the actual change in interest crediting
rates and the timing of the withdrawal or transfer in relation to the time
remaining in the Guarantee Period.

70
<PAGE> 75

APPENDIX B

KEMPER INVESTORS LIFE INSURANCE COMPANY DEFERRED FIXED AND
VARIABLE ANNUITY IRA DISCLOSURE STATEMENT

This Disclosure Statement describes the statutory and regulatory provisions
applicable to the operation of Individual Retirement Annuities. Internal Revenue
Service regulations require that this be given to each person desiring to
establish an IRA.

A. REVOCATION

Within 7 days of the date you signed your enrollment application, you may revoke
it and receive back 100% of your money. To do so, wire Kemper Investors Life
Insurance Company, 1 Kemper Drive, Long Grove, Illinois 60049, or call
1-800-621-5001.

B. STATUTORY REQUIREMENTS

The provisions of this Certificate meet the requirements of Section 408(b) of
the Internal Revenue Code as to form for use as an IRA annuity contract
described in Items 1 through 5 below. The Certificate has not been approved as
to form by the Internal Revenue Service. If you set up an IRA using an annuity
contract it must meet the following requirements:

1. The amount in your IRA must be fully vested at all times.

2. The contract must provide that you cannot transfer it to someone else.

3. The contract must have flexible premiums.

4. You must start receiving distributions by April 1 of the year following the
year in which you reach age 70 1/2 (see "Required Distributions").

5. The contract must provide that you cannot contribute more than $2,000 for any
year. (This requirement does not apply to rollovers. See "Rollovers and Direct
Transfers").

C. ROLLOVERS AND DIRECT TRANSFERS

1. A rollover is a tax-free transfer of cash or other assets from one retirement
program to another. There are two kinds of rollover payments. In one, you
transfer amounts from one IRA to another. With the other, you transfer amounts
from a qualified employee benefit plan or tax-sheltered annuity to an IRA. A
rollover is an allowable payment that you cannot deduct on your tax return.

2. You must complete the transfer by the 60th day after the day you receive the
distribution from your IRA or other qualified employee benefit plan.

3. A rollover distribution from an IRA may be made to you only once a year. The
one-year period begins on the date you receive the IRA distribution, not on the
date you roll it over (reinvest it) into another IRA.

4. A direct transfer of funds in an IRA from one trustee or insurance company to
another is not a rollover. It is a transfer that is not affected by the one-year
waiting period.

5. All or a part of the premium for this Certificate may be paid from a rollover
from an IRA, qualified pension or profit-sharing plan or tax-sheltered annuity,
or from a direct transfer from another IRA. The proceeds from this contract may
be used as a rollover contribution to another IRA.

6. Beginning January 1, 1993, a distribution that is eligible for rollover
treatment from a qualified employee benefit plan or tax-sheltered annuity will
be subject to twenty percent (20%) withholding by the Internal Revenue Service
even if you roll the distribution over to an IRA within the 60-day rollover
period. To avoid withholding, the distribution should be made as a direct
transfer to the IRA trustee or insurance company.

D. ALLOWANCE OF DEDUCTION

1. In general, the amount you can contribute each year is the lesser of $2,000
or your taxable compensation for the year. If you have more than one IRA, the
limit applies to the total contributions made to your own IRAs for the year.

71
<PAGE> 76

Generally, if you work the amount that you earn is compensation. Wages,
salaries, tips, professional fees, bonuses and other amounts you receive for
providing personal services are compensation. If you own and operate your own
business as a sole proprietor, your net earnings reduced by your deductible
contributions on your behalf to self-employed retirement plans is compensation.
If you are an active partner in a partnership and provide services to the
partnership, your share of partnership income reduced by deductible
contributions made on your behalf to qualified retirement plans is compensation.
All taxable alimony and separate maintenance payments received under a decree of
divorce or separate maintenance is compensation.

2. If neither you nor your spouse are covered for any part of the year by a
qualified retirement plan, the amount you can deduct each year is also the
lesser of $2,000 or your taxable compensation. If either you or your spouse are
covered by a qualified retirement plan, the $2,000 deduction limit is reduced
$10 for each $50 that your adjusted gross income exceeds $40,000 (married filing
jointly), $25,000 (single) or zero (married filing separately).

3. Contributions to your IRA can be made at any time. If you make the
contribution between January 1 and April 15, however, you may elect to treat the
contribution as made either in that year or in the preceding year. You may file
a tax return claiming deduction for your IRA contribution before the
contribution is actually made. You must, however, make the contribution by the
due date of your return not including extensions.

4. You cannot make a contribution other than a rollover contribution to your IRA
for the year in which you reach age 70 1/2 or thereafter.

5. If both you and your spouse have compensation you can each set up your own
IRA. The contribution for each of you is figured separately and depends on how
much each earns. Both of you cannot participate in the same IRA account or
contract.

6. If you file a joint return, you can contribute up to the lesser of $2,000 or
your taxable compensation to an IRA for a spouse who has not reached age 70 1/2
(even if you have reached age 70 1/2) and who has no compensation or elects to
be treated as having no compensation for the year. The total combined amount you
can contribute each year to your own IRA and the spousal IRA is the lesser of
$2,250 or your taxable compensation for the year.

7. If neither you nor your spouse are covered for any part of the year by a
qualified retirement plan, the total combined amount you can deduct is also the
lesser of $2,250 or your taxable compensation. If either you or your spouse is
covered by a qualified retirement plan, the $2,250 deduction limit is reduced
$10 for each $44.44 that your adjusted gross income exceeds $40,000.

E. SEP-IRA'S

1. The maximum deductible contribution for a Simplified Employee Pension (SEP)
IRA is the lesser of $30,000 or 15% of compensation.

2. A SEP must be established and maintained by an employer (corporation,
partnership, sole proprietor). Information about the Kemper SEP is available
upon request.

F. TAX STATUS OF THE CONTRACT AND DISTRIBUTIONS

1. Earnings of your IRA annuity contract are not taxed until they are
distributed to you.

2. In general, taxable distributions are included in your gross income in the
year you receive them.

3. Distributions are non-taxable to the extent they represent a return of
non-deductible contributions. The non-taxable percentage of a distribution is
determined by dividing your total undistributed, non-deductible IRA
contributions by the value of all your IRAs (including SEPs and rollovers).

4. You cannot choose the special five-year or ten-year averaging that may apply
to lump sum distributions from qualified employer plans.

G. REQUIRED DISTRIBUTIONS

You must start receiving minimum distributions from your IRA starting with the
year you reach age 70 1/2. Ordinarily, the required minimum distribution for a
particular year must be received by December 31 of that year. However, you may
delay the required minimum distribution for the year you reach age 70 1/2 until
April 1 of the following year.

Figure your required minimum distribution for each year by dividing the value of
your IRA on December 31 of the preceding year by the applicable life expectancy.
The applicable life expectancy is your remaining life expectancy or

72
<PAGE> 77

the remaining joint life and last survivor expectancy of you and your designated
beneficiary. If a designated beneficiary is more than 10 years younger than you,
that beneficiary is assumed to be exactly 10 years younger. Life expectancies
are determined using the expected return multiple tables shown in IRS
Publication 590 "Individual Retirement Arrangements." To obtain a free copy of
IRS Publication 590 and other IRS forms, phone the IRS toll free at
1-800-729-3676 or write the IRS Forms Distribution Center for your area as shown
in your income tax return instructions.

Annuity payments which begin by April 1 of the year following your 70 1/2 year
satisfy the minimum distribution requirement if they provide for non-increasing
payments over the life or the lives of you and your spouse, provided that, if
installments are guaranteed, the guaranty period does not exceed the lesser of
20 years or the applicable life expectancy.

If you have more than one IRA, you must determine the required minimum
distribution separately for each IRA; however, you can take the actual
distributions of these amounts from any one or more of your IRAs.

If the actual distribution from your IRA is less than the minimum amount that
should be distributed in accordance with the rules set forth above, the
difference is an excess accumulation. There is a 50% excise tax on any excess
accumulations. However, if you have a good reason for having an excess
accumulation in your IRA you may not have to pay the tax. For example, if you
have been given wrong advice or you made a mistake in using or did not
understand the excess accumulation rules, you may ask the IRS to excuse the tax.

H. TAX ON EXCESS CONTRIBUTIONS

1. You must pay a 6% excise tax each year on excess contributions that remain in
your IRA. Generally, an excess contribution is the amount contributed to your
IRA that is more than you can contribute or roll over. The excess is taxed for
the year of the excess contribution and for each year after that until you
correct it.

2. You will not have to pay the 6% excise tax if you withdraw the excess amount
by the date your tax return is due including extensions for the year of the
contribution. You do not have to include in your gross income an excess
contribution that you withdraw from your IRA before your tax return is due if
the income earned on the excess was also withdrawn and no deduction was allowed
for the excess contribution.

3. If an excess contribution in your IRA is a result of a rollover and the
excess occurred because information required to be supplied by the payor of the
distribution was incorrect, you may withdraw the excess amount attributable to
the incorrect information after the date your return is due and still not
include the amount withdrawn in your gross income. It is not necessary to
withdraw the income earned on the excess. You will, however, have to pay the 6%
tax on the excess amount for each year the excess contribution was in the IRA at
the end of the year.

I. TAX ON PREMATURE DISTRIBUTIONS

There is an additional tax on premature distributions equal to 10% of the amount
of the premature distribution that you must include in your gross income.
Premature distributions are generally amounts you withdraw from your IRA before
you are age 59 1/2. However, the tax on premature distributions does not apply:

1. To amounts that are rolled over tax free.

2. To a series of substantially equal periodic payments made over your life or
life expectancy, or the joint life or life expectancy of you and your
beneficiary.

3. If you are permanently disabled. You are considered disabled if you cannot do
any substantial gainful activity because of your physical or mental condition. A
physician must determine that the condition has lasted or can be expected to
last continuously for 12 months or more or that the condition can be expected to
lead to death.

J. IRA EXCISE TAX REPORTING

Use Form 5329, Return for Individual Retirement Arrangement Taxes, to report the
excise taxes on excess contributions, premature distributions, and excess
accumulations. If you do not owe any IRA excise taxes, you do not need Form
5329. Further information can be obtained from any district office of the
Internal Revenue Service.

73
<PAGE> 78

K. BORROWING

If you borrow money against your IRA contract or use it as security for a loan,
you must include in gross income the fair market value of the IRA contract as of
the first day of your tax year. (Note: This contract does not allow borrowings
against it, nor may it be assigned or pledged as collateral for a loan.)

L. FINANCIAL DISCLOSURE FOR THE SEPARATE ACCOUNT (VARIABLE ACCOUNT)
AND MVA OPTION.

1. If on the enrollment application you indicated an allocation to a Subaccount,
this Certificate will be assessed a daily charge of an amount which will equal
an aggregate of 1.25% per annum.

2. An annual records maintenance charge of $30.00 will be assessed against the
Separate Account Value each Certificate Year. If no values are in the
Subaccounts, the charge will be assessed against Guarantee Period Value.

3. Withdrawal and early annuitization charges will be assessed based on the
Certificate Years elapsed since the Certificate was issued as described in the
prospectus under the heading "Withdrawal Charge." Withdrawals, transfers and
early annuitizations of Guarantee Period Value may be subject to a Market Value
Adjustment as described in the prospectus under the heading "Market Value
Adjustment."

4. The method used to compute and allocate the annual earnings is contained in
the prospectus under the heading "Accumulation Unit Value" for Separate Account
Value and under the headings "Guarantee Periods of the MVA Option" and
"Establishment of Guaranteed Interest Rates" for Guarantee Period Value.

5. The growth in value of your contract is neither guaranteed nor projected but
is based on the investment experience of the Subaccounts or rates of interest as
declared by Kemper Investors Life Insurance Company.

74
<PAGE> 79

STATEMENT OF ADDITIONAL INFORMATION

MAY 1, 1995

- --------------------------------------------------------------------------------

INDIVIDUAL AND GROUP VARIABLE AND MARKET VALUE ADJUSTED

DEFERRED ANNUITY CONTRACTS

- --------------------------------------------------------------------------------

PASSPORT

ISSUED BY

KEMPER INVESTORS LIFE INSURANCE COMPANY

HOME OFFICE: 1 KEMPER DRIVE, LONG GROVE, ILLINOIS 60049 (708) 320-4500

This Statement of Additional Information is not a prospectus. This Statement of
Additional Information should be read in conjunction with the Prospectus of the
Separate Account dated May 1, 1995. The Prospectus may be obtained from Kemper
Investors Life Insurance Company by writing or calling the address or telephone
number listed above.

------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Services to the Separate Account....................................... B-1
Performance Information of Subaccounts................................. B-1
State Regulation....................................................... B-4
Experts................................................................ B-4
Financial Statements................................................... B-4
Independent Auditors' Report........................................... B-5
Financial Statements of the Separate Account........................... B-6
</TABLE>

<PAGE> 80
SERVICES TO THE SEPARATE ACCOUNT

Kemper Investors Life Insurance Company ("KILICO") maintains the books and
records of the KILICO Variable Annuity Separate Account (the "Separate
Account"). KILICO holds the assets of the Separate Account. The assets are kept
segregated and held separate and apart from the general funds of KILICO. KILICO
maintains records of all purchases and redemptions of shares of each Portfolio
of the Kemper Investors Fund (the "Fund") by each of the Subaccounts. All
expenses incurred in the operations of the Separate Account, except the charge
for mortality and expense risk and administrative expenses, and records
maintenance charge (as described in the Prospectus) are borne by KILICO.

The independent auditors for the Separate Account are KPMG Peat Marwick LLP,
Chicago, Illinois. The firm performs an annual audit of the financial statements
of the Separate Account and KILICO.

The Certificates are sold by licensed insurance agents, where the Certificates
may be lawfully sold, who are registered representatives of broker-dealers which
are registered under the Securities Exchange Act of 1934 and are members of the
National Association of Securities Dealers, Inc. The Certificates are
distributed through the principal underwriter for the Separate Account,
Investors Brokerage Services, Inc., a subsidiary of KILICO, which enters into
selling group agreements with the affiliated and unaffiliated broker-dealers.
Subject to the provisions of the Contracts, units of the Subaccounts under the
Contract are offered on a continuous basis.

KILICO pays commissions to the seller which may vary but are not anticipated to
exceed in the aggregate an amount equal to six percent (6%) of Purchase
Payments. During 1994 and 1993, KILICO incurred gross commissions payable of
approximately $5.5 and $4.9 million to licensed insurance agents.

PERFORMANCE INFORMATION OF SUBACCOUNTS

As described in the prospectus, a Subaccount's historical performance may be
shown in the form of "average annual total return" and "total return"
calculations in the case of all Subaccounts, except "average annual total
return" is not shown for Money Market Subaccount #1 and Money Market Subaccount
#2 (collectively, the "Money Market Subaccounts"); "yield" information may be
provided in the case of the High Yield Subaccount and the Government Securities
Subaccount; and "yield" and "effective yield" information may be provided in the
case of the Money Market Subaccounts. These various measures of performance are
described below.

A Subaccount's average annual total return quotation is computed in accordance
with a standard method prescribed by rules of the Securities and Exchange
Commission. The average annual total return for a Subaccount for a specific
period is found by first taking a hypothetical $1,000 investment in each of the
Subaccount's units on the first day of the period at the maximum offering price,
which is the Accumulation Unit value per unit ("initial investment") and
computing the ending redeemable value ("redeemable value") of that investment at
the end of the period. The redeemable value reflects the effect of the
applicable Withdrawal Charge and Record Maintenance Charge that may be imposed
at the end of the period as well as all other recurring charges and fees
applicable under the Certificates to all Owners' accounts. Premium taxes are not
included in the term charges. The redeemable value is then divided by the
initial investment and this quotient is taken to the Nth root (N represents the
number of years in the period) and 1 is subtracted from the result, which is
then expressed as a percentage. Average annual total return quotations for
various periods are set forth in Appendix A.

No standard formula has been prescribed for calculating total return
performance. Total return performance for a specific period is calculated by
first taking an investment (assumed to be $40,000) in each Subaccount's units on
the first day of the period at the maximum offering price, which is the
Accumulation Unit Value per unit ("initial investment") and computing the ending
value ("ending value") of that investment at the end of the period. The ending
value does not include the effect of the applicable Withdrawal Charge that may
be imposed at the end of the period, and thus may be higher than if such charge
were deducted. The total return percentage is then determined by subtracting the
initial investment from the ending value and dividing the remainder by the
initial investment and expressing the result as a percentage. An assumed
investment of $40,000 was chosen because that approximates the expected size of
a typical account. The account size used affects the performance figure because
the Records Maintenance Charge is a fixed per account charge. Total return
quotations for various periods are set forth in Appendix A.

The yield for the High Yield Subaccount and the Government Securities Subaccount
is computed in accordance with a standard method prescribed by rules of the
Securities and Exchange Commission. The yields for the High Yield Subaccount and
Government Securities Subaccount, based upon the one month period ended March
31, 1995, were

B-1
<PAGE> 81

% and %, respectively. The yield quotation is computed by dividing the
net investment income per unit earned during the specified one month or 30-day
period by the accumulation unit values on the last day of the period, according
to the following formula that assumes a semi-annual reinvestment of income:

a - b
YIELD = 2[( ------- +1)(6) - 1]
cd

a = net dividends and interest earned during the period by the Fund attributable
to the Subaccount

b = expenses accrued for the period (net of reimbursements)

c = the average daily number of Accumulation Units outstanding during the period

d = the Accumulation Unit value per unit on the last day of the period

The yield of each Subaccount reflects the deduction of all recurring fees and
charges applicable to each Subaccount, but does not reflect the deduction of
Withdrawal Charges or premium taxes.

The Money Market Subaccounts yields are computed in accordance with a standard
method prescribed by rules of the Securities and Exchange Commission. Under that
method, the current yield quotation is based on a seven-day period and computed
as follows: the net change in the Accumulation Unit Value during the period is
divided by the Accumulation Unit Value at the beginning of the period ("base
period return") and the result is divided by 7 and multiplied by 365 and the
current yield figure carried to the nearest one-hundredth of one percent.
Realized capital gains or losses and unrealized appreciation or depreciation of
the Account's portfolio are not included in the calculation. The yield for the
seven-day period ended March 31, 1995 was 4.36% for Money Market Subaccount #1
and 5.61% for Money Market Subaccount #2. The average portfolio maturity was 27
days.

The Money Market Subaccount's effective yield is determined by taking the base
period return (computed as described above) and calculating the effect of
assumed compounding. The formula for the effective yield is: (base period return
+1) (365/7) - 1. The effective yield for the seven-day period ended March 31,
1995 was 4.46% for Money Market Subaccount #1 and 5.77% for Money Market
Subaccount #2.

In computing yield, the Separate Account follows certain standard accounting
practices specified by Securities and Exchange Commission rules. These practices
are not necessarily consistent with the accounting practices that the Separate
Account uses in the preparation of its annual and semiannual financial
statements.

A Subaccount's performance quotations are based upon historical earnings and are
not necessarily representative of future performance. The Subaccount's units are
sold at Accumulation Unit value. Performance figures and Accumulation Unit value
will fluctuate. Factors affecting a Subaccount's performance include general
market conditions, operating expenses and investment management. Units of a
Subaccount are redeemable at Accumulation Unit value, which may be more or less
than original cost. The performance figures include the deduction of all
expenses and fees, including a prorated portion of the Records Maintenance
Charge. Redemptions within the first six years after purchase may be subject to
a Withdrawal Charge that ranges from 6% the first year to 0% after six years;
however, the aggregate Withdrawal Charge will not exceed 9% of aggregate
Purchase Payments under the Certificate. Yield, effective yield and total return
do not reflect the effect of the Withdrawal Charge or premium taxes that may be
imposed upon the redemption of units. Average annual total return reflects the
effect of the applicable Withdrawal Charge (but not premium tax) that may be
imposed at the end of the applicable period.

The figures in Appendix A show performance information for periods from March 5,
1982 (inception) for the Money Market Subaccounts, Total Return Subaccount and
High Yield Subaccount and for periods from December 9, 1983 (inception) for the
Equity Subaccount to December 31, 1994. For the Government Securities
Subaccount, performance figures will reflect investment experience as if the
Government Securities Subaccount had been available under the Certificates since
September 3, 1987, the inception date of the Government Securities Portfolio.
Performance of the Subaccounts will vary from time to time, and these results
are not necessarily representative of future results. Performance information is
also shown for the year ended December 31, 1994. The total return performance of
each Subaccount is calculated for a specified period of time by assuming an
initial Purchase Payment of $40,000 fully allocated to each Subaccount and the
deduction of all expenses and fees, including a prorated portion of the $30
annual Records Maintenance Charge. No withdrawals are assumed. The percentage
increases are determined by subtracting the initial Purchase Payment from the
ending value and dividing the remainder by the beginning value.

B-2
<PAGE> 82

Comparative information may be shown for certain Subaccounts with respect to the
Dow Jones Industrial Average, the Standard & Poor's 500 Stock Index, the
Consumer Price Index, the CDA Certificate of Deposit Index, the Lehman Brothers
Government and Corporate Bond Index, the Salomon Brothers High Grade Corporate
Bond Index, the Merrill Lynch Government/Corporate Master Index, the CDA Mutual
Fund--International Index and the Morgan Stanley Capital International Europe
Australia Far East Index. The Total Return, Equity and International Subaccounts
may be compared to the Dow Jones Industrial Average and the Standard & Poor's
500 Stock Index because these indices are generally considered representative of
the U. S. stock market. The Consumer Price Index is generally considered to be a
measure of inflation and thus the performance of the Money Market, Total Return,
High Yield, Equity, Government Securities and International Subaccounts may be
compared to that index. The High Yield and Government Securities Subaccounts may
be compared to the Lehman Brothers Government and Corporate Bond Index, the
Salomon Brothers High Grade Corporate Bond Index and the Merrill Lynch
Government/Corporate Master Index because such indices are generally considered
to represent the performance of intermediate and long term bonds during various
market cycles. The Money Market Subaccounts may also be compared to the CDA
Certificate of Deposit Index because certificates of deposit represent an
alternative current income producing product. The International Subaccount may
be compared to the CDA Mutual Fund-- International Index because the index is a
weighted performance average of other mutual funds that invest primarily in
securities of foreign issuers. The International Subaccount may also be compared
to the Morgan Stanley Capital International Europe, Australia, Far East Index
because the index is an unmanaged index that is considered to be generally
representative of major non-United States stock markets. Please note the
differences and similarities between the investments which a Subaccount may
purchase and the investments measured by the indexes which are described below.
In particular, it should be noted that certificates of deposit may offer fixed
or variable yields and principal is guaranteed and may be insured. The units of
the Subaccounts are not insured. Also, the value of the Subaccounts will
fluctuate.

The Dow Jones Industrial Average is an unmanaged unweighted average of thirty
blue chip industrial corporations listed on the New York Stock Exchange which
assumes reinvestment of dividends. The Standard & Poor's 500 Stock Index is an
unmanaged weighted average of 500 stocks, over 95% of which are listed on the
New York Stock Exchange which assumes reinvestment of dividends. The Consumer
Price Index, published by the U.S. Bureau of Labor Statistics, is a statistical
measure of change, over time, in the prices of goods and services in major
expenditure groups. The CDA Certificate of Deposit Index is provided by CDA
Investment Technologies, Inc., Silver Spring, Maryland, and is based upon a
statistical sampling of the yield of 30-day certificates of deposit of major
commercial banks. Yield is based upon a monthly compounding of interest. The
Salomon Brothers High Grade Corporate Bond Index is on a total return basis with
all dividends reinvested and is comprised of high grade long-term industrial and
utility bonds rated in the top two rating categories. The Lehman Brothers
Government/ Corporate Bond Index is on a total return basis and is comprised of
all publicly issued, non-convertible, domestic debt of the U.S. Government or
any agency thereof, quasi-Federal corporation, or corporate debt guaranteed by
the U.S. Government and all publicly issued, fixed-rate, non-convertible,
domestic debt of the three major corporate classifications: industrial, utility,
and financial. Only notes and bonds with a minimum outstanding principal amount
of $1,000,000 and a minimum of one year are included. Bonds included must have a
rating of at least Baa by Moody's Investors Service, BBB by Standard & Poor's
Corporation or in the case of bank bonds not rated by either Moody's or Standard
& Poor's, BBB by Fitch Investors Service. The Merrill Lynch Government/Corporate
Master Index is based upon the total return with all dividends reinvested of
4,000 corporate and 300 government bonds issued with an intermediate average
maturity and an average quality rating of Aa (Moody's Investors Service, Inc.)
/AA (Standard & Poor's Corporation).

The performance of the Subaccounts may be compared over various periods with
that of other variable annuity funds within the categories described below
according to data reported by Lipper Analytical Services, Inc. ("Lipper"), New
York, New York, a mutual fund reporting service. Lipper rankings are based on
changes in net asset value, with all income and capital gain dividends
reinvested. Such calculations do not include the effect of any sales charges and
may not include the deduction of mortality and expense risk charges and other
asset based charges. Deductions of these charges may cause the rankings to be
different. Future performance cannot be guaranteed. Lipper publishes performance
analyses on a regular basis from which the rankings are derived. The Money
Market Subaccounts, Total Return Subaccount, High Yield Subaccount, Equity
Subaccount, Government Securities Subaccount and International Subaccount are
ranked by Lipper in the Money Market, Flexible Portfolio, High Current Yield,
Capital Appreciation, U.S. Government and International Funds categories,
respectively. Variable annuity funds in these categories have a variety of
objectives, policies and market and credit risks that should be considered in
reviewing the rankings. The performance of the Subaccounts may also be compared
to other variable annuity funds ranked by the VARDS Report and Morningstar, Inc.

B-3
<PAGE> 83

STATE REGULATION

KILICO is subject to the laws of Illinois governing insurance companies and to
regulation by the Illinois Department of Insurance. An annual statement in a
prescribed form is filed with the Illinois Department of Insurance each year.
KILICO's books and accounts are subject to review by the Department of Insurance
at all times, and a full examination of its operations is conducted
periodically. Such regulation does not, however, involve any supervision of
management or investment practices or policies. In addition, KILICO is subject
to regulation under the insurance laws of other jurisdictions in which it may
operate.

EXPERTS

The financial statements of KILICO and the Separate Account have been included
in the Prospectus and in the Statement of Additional Information in reliance
upon the reports of KPMG Peat Marwick LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing. As discussed in the notes to KILICO's
consolidated financial statements, effective January 1, 1994, KILICO changed its
method of accounting for investment securities to adopt the provisions of the
Financial Accounting Standards Board's Statement of Financial Accounting
Standards ("SFAS") 115, Accounting for Certain Investments in Debt and Equity
Securities. Also, as discussed in the notes effective January 1, 1993, KILICO
changed its method of accounting for impairment of loans receivable to adopt the
provisions of SFAS 114 Accounting by Creditors for Impairment of a Loan, and
changed its method of accounting for income taxes to adopt the provisions of
SFAS 109, Accounting for Income Taxes. Further, as discussed in the notes,
KILICO adopted the provisions of SFAS 106, Employers' Accounting for
Postretirement Benefits Other than Pensions in 1992.

FINANCIAL STATEMENTS

This Statement of Additional Information contains financial statements for the
Separate Account which reflect assets attributable to the Certificates and also
reflect assets attributable to other variable annuity contracts offered by
KILICO through the Separate Account.

B-4
<PAGE> 84

INDEPENDENT AUDITORS' REPORT

THE BOARD OF DIRECTORS
KEMPER INVESTORS LIFE INSURANCE COMPANY:

We have audited the accompanying combined statement of assets and liabilities
and contract owners' equity of the KILICO Variable Annuity Separate Account as
of December 31, 1994, and the related combined statement of operations for the
year then ended, and the combined statements of changes in contract owners'
equity for the years ended December 31, 1994 and 1993. 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.

In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of the KILICO
Variable Annuity Separate Account as of December 31, 1994, and the combined
results of its operations for the year then ended, and the combined changes in
its contract owners' equity for the years ended December 31, 1994 and 1993, in
conformity with generally accepted accounting principles.

KPMG PEAT MARWICK LLP

Chicago, Illinois

February 13, 1995

B-5
<PAGE> 85

KILICO VARIABLE ANNUITY SEPARATE ACCOUNT

COMBINED STATEMENT OF ASSETS AND LIABILITIES AND CONTRACT OWNERS' EQUITY

DECEMBER 31, 1994 (IN THOUSANDS)

<TABLE>
<CAPTION>
SMALL
MONEY MONEY TOTAL HIGH GOVERNMENT CAPITALIZATION
MARKET MARKET RETURN YIELD EQUITY SECURITIES INTERNATIONAL EQUITY
COMBINED SUBACCOUNT SUBACCOUNT #2 SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ---------- ------------- ---------- ---------- ---------- ---------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Investments,
at
current
value... $1,432,488 78,837 3,676 584,469 217,698 320,586 91,604 122,709 12,909
Dividends
and
other
receivables... 301 216 9 23 10 21 4 6 12
---------- ---------- ----- ---------- ---------- ---------- ---------- ------------- ------
Total
assets... 1,432,789 79,053 3,685 584,492 217,708 320,607 91,608 122,715 12,921
---------- ---------- ----- ---------- ---------- ---------- ---------- ------------- ------
LIABILITIES AND
CONTRACT
OWNERS' EQUITY
Liabilities:
Mortality
and
expense
risk
and
administrative
charges... 1,525 99 -- 627 220 337 99 131 12
Other... 110 4 -- -- -- -- -- -- 106
---------- ---------- ----- ---------- ---------- ---------- ---------- ------------- ------
Total
liabilities... 1,635 103 -- 627 220 337 99 131 118
---------- ---------- ----- ---------- ---------- ---------- ---------- ------------- ------
Contract
owners'
equity... $1,431,154 78,950 3,685 583,865 217,488 320,270 91,509 122,584 12,803
========== ========== ============== ========== ========== ========== =========== ============ ============
ANALYSIS OF CONTRACT
OWNERS' EQUITY
Excess of
proceeds
from
units
sold
over
payments
for
units
redeemed... $ 971,895 17,494 3,265 394,080 103,120 243,967 79,529 117,687 12,753
Accumulated
net
investment
income
(loss)... 378,073 61,456 420 159,772 122,056 19,327 16,110 (907) (161)
Accumulated
net
realized
gain
(loss)
on sales
of
investments... 72,532 -- -- 44,173 (4,720) 29,760 1,041 2,355 (77)
Unrealized
appreciation
(depreciation)
of
investments... 8,654 -- -- (14,160) (2,968) 27,216 (5,171) 3,449 288
---------- ---------- ----- ---------- ---------- ---------- ---------- ------------- ------
Contract
owners'
equity... $1,431,154 78,950 3,685 583,865 217,488 320,270 91,509 122,584 12,803
========== ========== ============== ========== ========== ========== =========== ============ ============
</TABLE>

See accompanying notes to combined financial statements.

B-6
<PAGE> 86

KILICO VARIABLE ANNUITY SEPARATE ACCOUNT

COMBINED STATEMENT OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 1994 (IN THOUSANDS)

<TABLE>
<CAPTION>
SMALL
MONEY MONEY TOTAL GOVERNMENT CAPITALIZATION
MARKET MARKET RETURN HIGH YIELD EQUITY SECURITIES INTERNATIONAL EQUITY
COMBINED SUBACCOUNT SUBACCOUNT #2 SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT(A)
--------- ---------- -------------- ---------- ---------- ---------- ---------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Dividends
and
capital
gains
distributions... $ 105,315 3,840 153 58,451 19,146 14,860 7,695 1,170 --
Expenses:
Mortality
and
expense
risk and
administrative
charges... 20,153 1,266 1 8,636 2,988 4,137 1,379 1,585 161
--------- ---------- --- ---------- ---------- ---------- ---------- ------------- -----
Net
investment
income
(loss).... 85,162 2,574 152 49,815 16,158 10,723 6,316 (415) (161)
--------- ---------- --- ---------- ---------- ---------- ---------- ------------- -----
Net realized
and
unrealized
gain
(loss) on
investments:
Net
realized
gain
(loss)
on sales
of
investments... 11,105 -- -- 878 3,164 5,853 (726) 2,013 (77)
Change in
unrealized
appreciation
(depreciation)
of
investments... (199,366) -- -- (121,752) (27,264) (32,435) (10,070) (8,133) 288
--------- ---------- --- ---------- ---------- ---------- ---------- ------------- -----
Net realized
and
unrealized
gain
(loss) on
investments... (188,261) -- -- (120,874) (24,100) (26,582) (10,796) (6,120) 211
--------- ---------- --- ---------- ---------- ---------- ---------- ------------- -----
Net increase
(decrease)
in
contract
owners'
equity
resulting
from
operations... $(103,099) 2,574 152 (71,059) (7,942) (15,859) (4,480) (6,535) 50
========== =========== =============== =========== =========== =========== ============ ============ =============
</TABLE>

(a) For the period from May 2, 1994 (commencement of operations) to December 31,
1994.

See accompanying notes to combined financial statements.

B-7
<PAGE> 87

KILICO VARIABLE ANNUITY SEPARATE ACCOUNT

COMBINED STATEMENTS OF CHANGES IN CONTRACT OWNERS' EQUITY

FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993
(IN THOUSANDS)

<TABLE>
<CAPTION>
MONEY MARKET MONEY MARKET
COMBINED SUBACCOUNT SUBACCOUNT #2
---------------------------- ----------------------- ---------------------
1994 1993 1994 1993 1994 1993
---------- --------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Operations:
Net investment income (loss)....... $ 85,162 49,841 2,574 997 152 127
Net realized gain (loss) on sales
of investments................... 11,105 19,074 -- -- -- --
Change in unrealized appreciation
(depreciation) of investments.... (199,366) 72,722 -- -- -- --
---------- --------- ------- ------- ------ ------
Net increase (decrease) in
contract owners' equity
resulting from operations...... (103,099) 141,637 2,574 997 152 127
---------- --------- ------- ------- ------ ------

Account unit transactions:
Proceeds from units sold........... 254,411 266,721 19,971 12,800 6,673 4,794
Net transfers (to) from affiliate
and subaccounts.................. 3,471 48,524 16,310 (2,660) (6,297) (8,394)
Payments for units redeemed........ (152,336) (104,210) (24,064) (13,103) (68) (84)
---------- --------- ------- ------- ------ ------
Net increase (decrease) in
contract owners' equity from
account unit transactions...... 105,546 211,035 12,217 (2,963) 308 (3,684)
---------- --------- ------- ------- ------ ------
Total increase (decrease) in contract
owners' equity..................... 2,447 352,672 14,791 (1,966) 460 (3,557)

Contract owners' equity:
Beginning of period................ 1,428,707 1,076,035 64,159 66,125 3,225 6,782
---------- --------- ------- ------- ------ ------
End of period...................... $1,431,154 1,428,707 78,950 64,159 3,685 3,225
========== ========= ======= ======= ====== ======
</TABLE>

(a) For the period from May 2, 1994 (commencement of operations) to December 31,
1994.

See accompanying notes to combined financial statements.

B-8
<PAGE> 88
<TABLE>
<CAPTION>
SMALL
GOVERNMENT CAPITALIZATION
TOTAL RETURN HIGH YIELD EQUITY SECURITIES INTERNATIONAL EQUITY
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
- -------------------- ------------------- ------------------- ------------------- ------------------ ------
1994 1993 1994 1993 1994 1993 1994 1993 1994 1993 1994(A)
- -------- ------- ------- ------- ------- ------- ------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
49,815 28,972 16,158 11,854 10,723 2,502 6,316 5,694 (415) (305) (161)
878 6,051 3,164 2,654 5,853 9,420 (726) 632 2,013 317 (77)
(121,752) 23,970 (27,264) 19,150 (32,435) 18,912 (10,070) (1,182) (8,133) 11,872 288
- -------- ------- ------- ------- ------- ------- ------- ------- ------- ------ ------
(71,059) 58,993 (7,942) 33,658 (15,859) 30,834 (4,480) 5,144 (6,535) 11,884 50
- -------- ------- ------- ------- ------- ------- ------- ------- ------- ------ ------

89,169 104,977 34,261 39,600 52,913 56,537 15,214 32,889 32,734 15,124 3,476
(16,297) (5,727) (15,720) 15,978 25,150 9,542 (24,188) (4,289) 15,006 44,074 9,507
(58,032) (43,640) (24,877) (18,723) (24,735) (16,241) (12,918) (10,666) (7,412) (1,753) (230)
- -------- ------- ------- ------- ------- ------- ------- ------- ------- ------ ------
14,840 55,610 (6,336) 36,855 53,328 49,838 (21,892) 17,934 40,328 57,445 12,753
- -------- ------- ------- ------- ------- ------- ------- ------- ------- ------ ------
(56,219) 114,603 (14,278) 70,513 37,469 80,672 (26,372) 23,078 33,793 69,329 12,803

640,084 525,481 231,766 161,253 282,801 202,129 117,881 94,803 88,791 19,462 --
- -------- ------- ------- ------- ------- ------- ------- ------- ------- ------ ------
583,865 640,084 217,488 231,766 320,270 282,801 91,509 117,881 122,584 88,791 12,803
======== ======= ======= ======= ======= ======= ======= ======= ======= ====== ======

TOTA
SUB
- --------------
1994 1993
- -------- ----
<S> <C>
49,815 --
878 --
(121,752 --
- -------- ----
(71,059 --
- -------- ----
89,169 --
(16,297 --
(58,032 --
- -------- ----

14,840 --
- -------- ----
(56,219 --
640,084 --
- -------- ----
583,865 --
======== =====
</TABLE>

B-9
<PAGE> 89

KILICO VARIABLE ANNUITY SEPARATE ACCOUNT

NOTES TO COMBINED FINANCIAL STATEMENTS

(1) GENERAL INFORMATION AND SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION.

KILICO Variable Annuity Separate Account (the "Separate Account") is a unit
investment trust registered under the Investment Company Act of 1940, as
amended, established by Kemper Investors Life Insurance Company ("KILICO"). The
Separate Account is used to fund contracts or certificates (collectively
referred to as "contracts") for ADVANTAGE III periodic and flexible payment
variable annuity contracts and PASSPORT individual and group variable and market
value adjusted deferred annuity contracts. The Separate Account is divided into
eight Subaccounts and each Subaccount invests exclusively in a corresponding
Portfolio of the Kemper Investors Fund (the "Fund"), an open-end diversified
management investment company.

SECURITY VALUATION.

The investments are stated at current value which is based on the closing bid
price, net asset value, at December 31, 1994.

SECURITY TRANSACTIONS AND INVESTMENT INCOME.

Security transactions are accounted for on the trade date (date the order to buy
or sell is executed). Dividends and capital gains distributions are recorded as
income on the ex-dividend date. Realized gains and losses from security
transactions are reported on an identified 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.
(Chicago 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 contract and are, therefore, not taxed. Thus the Separate Account may
realize net investment income and capital gains and losses without Federal
income tax consequences.

(2) SUMMARY OF INVESTMENTS

Investments, at cost, at December 31, 1994, are as follows (in thousands):

<TABLE>
<CAPTION>
SHARES
OWNED COST
-------- ----------
<S> <C> <C>
INVESTMENTS
Kemper Investors Fund Money Market Portfolio (Money Market and
Money Market #2 Subaccounts)................................................................ 82,513 $ 82,513
Kemper Investors Fund Total Return Portfolio.................................................. 276,685 598,629
Kemper Investors Fund High Yield Portfolio.................................................... 183,754 220,666
Kemper Investors Fund Equity Portfolio........................................................ 120,300 293,370
Kemper Investors Fund Government Securities Portfolio......................................... 80,232 96,775
Kemper Investors Fund International Portfolio................................................. 98,620 119,260
Kemper Investors Fund Small Capitalization Equity Portfolio................................... 12,420 12,621
----------
TOTAL INVESTMENTS....................................................................... $1,423,834
==========
</TABLE>

The underlying investments and significant industry concentrations of the Fund's
portfolios are summarized below.

MONEY MARKET PORTFOLIO: This Portfolio invests primarily in short-term
obligations of major banks and corporations. The Money Market Subaccount
represents the ADVANTAGE III Money Market Subaccount and the PASSPORT Money
Market Subaccount #1. Money Market Subaccount #2 represents funds allocated by
the owner of a contract to the dollar cost averaging program. Under the dollar
cost averaging program, an owner may predesignate a portion of the Subaccount
value to be automatically transferred on a monthly basis to one or more of

B-10
<PAGE> 90

NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)

the other Subaccounts. This option is only available to PASSPORT individual and
group variable and market value adjusted deferred annuity contracts. At December
31, 1994, no industry exceeded 20% of the Portfolio's assets.

TOTAL RETURN PORTFOLIO: This Portfolio's investments will normally consist of
fixed-income and equity securities. Fixed-income securities will include bonds
and other debt securities and preferred stocks. Equity investments normally will
consist of common stocks and securities convertible into or exchangeable for
common stocks, however, the Portfolio may also make private placement
investments (which are normally restricted securities). At December 31, 1994, no
industry exceeded 20% of the Portfolio's assets.

HIGH YIELD PORTFOLIO: This Portfolio invests in fixed-income securities, a
substantial portion of which are high yielding fixed-income securities. These
securities ordinarily will be in the lower rating categories of recognized
rating agencies or will be non-rated, and generally will involve more risk than
securities in the higher rating categories. At December 31, 1994, 21.3% of the
Portfolio's assets were invested in the manufacturing, metals and mining
industry. No other industry exceeded 20% of the Portfolio's assets.

EQUITY PORTFOLIO: This Portfolio's investments normally will consist of common
stocks and securities convertible into or exchangeable for common stocks,
however, it may also make private placement investments (which are normally
restricted securities). At December 31, 1994, no industry exceeded 20% of the
Portfolio's assets.

GOVERNMENT SECURITIES PORTFOLIO: This Portfolio invests primarily in U.S.
Government securities. The Portfolio will also invest in fixed-income securities
other than U.S. Government securities and will engage in options and financial
futures transactions. At December 31, 1994, the Portfolio had 89.6% of its
assets invested in U.S. Government obligations.

INTERNATIONAL PORTFOLIO: This Portfolio's investments will normally consist of
equity securities of non-United States issuers, however, it may also invest in
convertible and debt securities of non-United States issuers and foreign
currencies. At December 31, 1994, 32% of the Portfolio's assets were invested in
Japan. No other industry or country exceeded 20% of the Portfolio's assets.

SMALL CAPITALIZATION EQUITY PORTFOLIO: This Portfolio's investments will consist
primarily of common stocks and securities convertible into or exchangeable for
common stocks and to a limited degree in preferred stocks and debt securities.
At least 65% of the Portfolio's total assets will be invested in equity
securities of companies having a market capitalization of $1 billion or less at
the time of initial investment. At December 31, 1994 no industry exceeded 20% of
the Portfolio's assets.

(3) TRANSACTIONS WITH AFFILIATES

KILICO assumes mortality risks associated with the annuity contracts and incurs
all expenses involved in administering the contracts. In return, KILICO assesses
that portion of each Subaccount representing assets under the ADVANTAGE III
flexible payment contracts with a daily charge for mortality and expense risk
and administrative costs which amounts to an aggregate of one percent (1.00%)
per annum. KILICO also assesses that portion of each Subaccount representing
assets under the ADVANTAGE III periodic payment contracts with a daily asset
charge for mortality and expense risk and administrative costs which amounts to
an aggregate of one and three-tenths percent (1.30%) per annum. KILICO assesses
that portion of each Subaccount representing assets under PASSPORT individual
and group variable and market value adjusted deferred annuity contracts with a
daily asset charge for mortality and expense risk and administrative costs which
amounts to an aggregate of one and one-quarter percent (1.25%) per annum. The
PASSPORT DCA Money Market Subaccount #2, available for participation in the
dollar cost averaging program, has no daily asset charge deduction.

KILICO also assesses against each ADVANTAGE III contract participating in one or
more of the Subaccounts at any time during the year a records maintenance
charge. For contracts purchased prior to June 1, 1993, the charge is $25 and is
assessed on December 31st of each calendar year. For contracts purchased June 1,
1993 and subsequent, the charge is $36 and is assessed ratably every quarter of
each calendar year, except in those states which have yet to approve these
contract changes. The charge is assessed whether or not any purchase payments
have been made during the year. KILICO also assesses against each PASSPORT
contract participating in one or more of the Subaccounts a records maintenance
charge of $30 at the end of each contract year.

For contracts issued prior to May 1, 1994, KILICO has undertaken to reimburse
each of the ADVANTAGE III Money Market, Total Return, High Yield, and Equity
Subaccounts whose direct and indirect operating expenses exceed eighty
hundredths of one percent (.80%) of average daily net assets. In determining
reimbursement of direct and

B-11
<PAGE> 91

NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)

indirect operating expenses, for each Subaccount, charges for mortality and
expense risks and administrative expenses, and records maintenance charges are
excluded and, for each Portfolio, charges for taxes, extraordinary expenses, and
brokerage and transaction costs are excluded. During the year ended December 31,
1994, no such payment was made.

Proceeds payable on the redemption of units are reduced by the amount of any
applicable contingent deferred sales charge due to KILICO. During the year ended
December 31, 1994, KILICO received contingent deferred sales charges of
$1,568,200.

Kemper Financial Services, Inc., an affiliated company, is the investment
manager and principal underwriter of the Portfolios of the Fund which serve as
the underlying investments of the Separate Accounts.

(4) NET TRANSFERS (TO) FROM AFFILIATED DIVISIONS AND SUBACCOUNTS

Net transfers (to) from affiliated divisions or accounts include transfers of
all or part of the contract owner's interest to or from another Subaccount or to
the general account of KILICO.

(5) CONTRACT OWNERS' EQUITY

The contract owners' equity is affected by the investment results of each
Portfolio and contract charges. The accompanying financial statements include
only contract owners' payments pertaining to the variable portions of their
contracts and exclude any payments for the market value adjusted or fixed
portions, the latter being included in the general account of KILICO. Contract
owners may elect to annuitize the contract under one of several annuity options,
as specified in the prospectus.

B-12
<PAGE> 92

NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)

Contract owners' equity at December 31, 1994, is as follows (in thousands,
except unit value; differences are due to rounding):

<TABLE>
<CAPTION>
CONTRACT
NUMBER OF UNIT OWNERS'
UNITS VALUE EQUITY
--------- ------ ----------
<S> <C> <C> <C>
ADVANTAGE III SUBACCOUNT
MONEY MARKET
Flexible Payment, Qualified.................................... 733 $2.111 $ 1,547
Flexible Payment, Nonqualified................................. 6,914 2.111 14,596
Periodic Payment, Qualified.................................... 15,997 2.033 32,519
Periodic Payment, Nonqualified................................. 7,343 2.033 14,926
----------
Total........................................................ 63,588
----------
TOTAL RETURN
Flexible Payment, Qualified.................................... 1,299 3.796 4,932
Flexible Payment, Nonqualified................................. 6,613 3.515 23,244
Periodic Payment, Qualified.................................... 110,428 3.656 403,681
Periodic Payment, Nonqualified................................. 24,773 3.406 84,376
----------
Total........................................................ 516,233
----------
HIGH YIELD
Flexible Payment, Qualified.................................... 532 4.372 2,324
Flexible Payment, Nonqualified................................. 3,621 4.186 15,157
Periodic Payment, Qualified.................................... 26,546 4.210 111,758
Periodic Payment, Nonqualified................................. 12,416 4.101 50,918
----------
Total........................................................ 180,157
----------
EQUITY
Flexible Payment, Qualified.................................... 238 3.345 795
Flexible Payment, Nonqualified................................. 1,370 3.334 4,568
Periodic Payment, Qualified.................................... 58,845 3.238 190,522
Periodic Payment, Nonqualified................................. 19,776 3.233 63,935
----------
Total........................................................ 259,820
----------
GOVERNMENT SECURITIES
Flexible Payment, Qualified.................................... 237 1.337 317
Flexible Payment, Nonqualified................................. 1,465 1.337 1,958
Periodic Payment, Qualified.................................... 24,332 1.317 32,039
Periodic Payment, Nonqualified................................. 23,487 1.317 30,926
----------
Total........................................................ 65,240
----------
INTERNATIONAL
Flexible Payment, Qualified.................................... 625 1.234 771
Flexible Payment, Nonqualified................................. 2,450 1.234 3,024
Periodic Payment, Qualified.................................... 61,490 1.223 75,223
Periodic Payment, Nonqualified................................. 14,546 1.223 17,795
----------
Total........................................................ 96,813
----------
SMALL CAPITALIZATION EQUITY
Flexible Payment, Qualified.................................... 14 1.033 14
Flexible Payment, Nonqualified................................. 227 1.033 234
Periodic Payment, Qualified.................................... 8,304 1.031 8,558
Periodic Payment, Nonqualified................................. 1,242 1.031 1,280
----------
Total........................................................ 10,086
----------
TOTAL ADVANTAGE III CONTRACT OWNERS' EQUITY................................................ $1,191,937
----------
</TABLE>

B-13
<PAGE> 93

NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)

<TABLE>
<CAPTION>
CONTRACT
NUMBER OF UNIT OWNERS'
UNITS VALUE EQUITY
--------- ------ ----------
<S> <C> <C> <C>
PASSPORT SUBACCOUNT
MONEY MARKET #1
Qualified................................................................. 4,014 $1.065 $ 4,275
Nonqualified.............................................................. 10,409 1.065 11,087
----------
Total................................................................... 15,362
----------
MONEY MARKET #2
Qualified................................................................. 858 1.105 949
Nonqualified.............................................................. 2,475 1.105 2,736
----------
Total................................................................... 3,685
----------
TOTAL RETURN
Qualified................................................................. 17,755 0.991 17,606
Nonqualified.............................................................. 50,452 0.991 50,026
----------
Total................................................................... 67,632
----------
HIGH YIELD
Qualified................................................................. 7,119 1.308 9,311
Nonqualified.............................................................. 21,426 1.308 28,020
----------
Total................................................................... 37,331
----------
EQUITY
Qualified................................................................. 16,003 1.093 17,491
Nonqualified.............................................................. 39,305 1.093 42,959
----------
Total................................................................... 60,450
----------
GOVERNMENT SECURITIES
Qualified................................................................. 5,654 1.061 5,999
Nonqualified.............................................................. 19,106 1.061 20,270
----------
Total................................................................... 26,269
----------
INTERNATIONAL
Qualified................................................................. 5,886 1.225 7,211
Nonqualified.............................................................. 15,149 1.225 18,560
----------
Total................................................................... 25,771
----------
SMALL CAPITALIZATION EQUITY
Qualified................................................................. 881 1.031 907
Nonqualified.............................................................. 1,756 1.031 1,810
----------
Total................................................................... 2,717
----------
TOTAL PASSPORT CONTRACT OWNERS' EQUITY................................................................. 239,217
----------
TOTAL CONTRACT OWNERS' EQUITY.......................................................................... $1,431,154
==========
</TABLE>

B-14
<PAGE> 94

APPENDIX A

TABLE OF HISTORICAL HYPOTHETICAL* ACCUMULATION UNIT VALUES
AND PERFORMANCE INFORMATION

The historical accumulation unit values are for the life of the Separate Account
in its present organization as a unit investment trust and in its prior
organization as several managed separate accounts based on current deductions
and charges applicable to the Certificates. The Certificates were first offered
January 6, 1992.

HISTORICAL HYPOTHETICAL ACCUMULATION UNIT VALUES

<TABLE>
<C> <S> <C> <C> <C> <C> <C>
TOTAL
MONEY MARKET MONEY MARKET RETURN
SUBACCOUNT #1 SUBACCOUNT #2 SUBACCOUNT
- ---------------------------------------------- ---------------------------------------------- --------
UNIT UNIT
DATE VALUES DATE VALUES DATE
- -------- --------- -------- --------- --------
04/06/82 ......................... .521904 04/06/82 ......................... .488861 04/14/82
12/31/82 ......................... .561706 12/31/82 ......................... .526477 12/31/82
12/31/83 ......................... .605415 12/31/83 ......................... .569164 12/31/83
12/31/84 ......................... .661060 12/31/84 ......................... .623384 12/31/84
12/31/85 ......................... .705934 12/31/85 ......................... .669150 12/31/85
12/31/86 ......................... .743260 12/31/86 ......................... .709261 12/31/86
12/31/87 ......................... .782353 12/31/87 ......................... .752167 12/31/87
12/31/88 ......................... .830274 12/31/88 ......................... .804725 12/31/88
12/31/89 ......................... .894703 12/31/89 ......................... .874829 12/31/89
12/31/90 ......................... .955536 12/31/90 ......................... .944037 12/31/90
12/31/91 ......................... .999459 12/31/91 ......................... .999255 12/31/91
12/31/92 ......................... 1.021027 12/31/92 ......................... 1.033619 12/31/92
12/31/93 ......................... 1.037409 12/31/93 ......................... 1.063332 12/31/93
12/31/94 ......................... 1.065127 12/31/94 ......................... 1.105349 12/31/94

- --------
UNIT
DATE VALUES
- -------- ---------
04/06/82 ......................... .271127
12/31/82 ......................... .334579
12/31/83 ......................... .388564
12/31/84 ......................... .364932
12/31/85 ......................... .462836
12/31/86 ......................... .526008
12/31/87 ......................... .522732
12/31/88 ......................... .578123
12/31/89 ......................... .707717
12/31/90 ......................... .734077
12/31/91 ......................... .997337
12/31/92 ......................... 1.001657
12/31/93 ......................... 1.109293
12/31/94 ......................... .991561

GOVERNMENT
HIGH YIELD EQUITY SECURITIES
SUBACCOUNT SUBACCOUNT SUBACCOUNT
- ---------------------------------------------- ---------------------------------------------- --------
UNIT UNIT
DATE VALUES DATE VALUES DATE
- -------- --------- -------- --------- --------
04/14/82 ......................... .309713 12/13/83 ......................... .336632 07/13/87
12/31/82 ......................... .382894 12/31/83 ......................... .346384 12/31/87
12/31/83 ......................... .433711 12/31/84 ......................... .378954 12/31/88
12/31/84 ......................... .482077 12/31/85 ......................... .468051 12/31/89
12/31/85 ......................... .579127 12/31/86 ......................... .504874 12/31/90
12/31/86 ......................... .673071 12/31/87 ......................... .507011 12/31/91
12/31/87 ......................... .703823 12/31/88 ......................... .502672 12/31/92
12/31/88 ......................... .805071 12/31/89 ......................... .636443 12/31/93
12/31/89 ......................... .784945 12/31/90 ......................... .632214 12/31/94
12/31/90 ......................... .655406 12/31/91 ......................... .995577
12/31/91 ......................... .982658 12/31/92 ......................... 1.018405
12/31/92 ......................... 1.142847 12/31/93 ......................... 1.152836
12/31/93 ......................... 1.354484 12/31/94 ......................... 1.092975
12/31/94 ......................... 1.307729

<CAPTION>
- --------
UNIT
DATE VALUES
- -------- ---------
04/14/82 ......................... .700085
12/31/82 ......................... .710087
12/31/83 ......................... .723278
12/31/84 ......................... .811610
12/31/85 ......................... .881949
12/31/86 ......................... 1.004106
12/31/87 ......................... 1.050227
12/31/88 ......................... 1.104499
12/31/89 ......................... 1.060977
12/31/90
12/31/91
12/31/92
12/31/93
12/31/94

<CAPTION>
INTERNATIONAL SUBACCOUNT SMALL CAP SUBACCOUNT
- ---------------------------------------------- ----------------------------------------------
UNIT UNIT
DATE VALUES DATE VALUES
- -------- --------- -------- ---------
12/31/92 ......................... .980721 12/31/94 ......................... 1.030937
12/31/93 ......................... 1.286576
12/31/94 ......................... 1.225134

<CAPTION>
DATE
- --------
12/31/92
12/31/93
12/31/94

- ---------------
* As of January 6, 1992 the accumulation unit values are based on actual
performance.

B-15
<PAGE> 95

PERFORMANCE INFORMATION

<TABLE>
<CAPTION>
VALUES OF INITIAL
$40,000 INVESTMENT IN
SUBACCOUNTS-- COMPARED TO
DECEMBER 31, 1994 ------------------------------------
----------------------- DOW JONES STANDARD CONSUMER
ENDING PERCENTAGE INDUSTRIAL & POOR'S PRICE EAFE
TOTAL RETURN TABLE VALUE INCREASE AVERAGE(1) 500(2) INDEX(3) (13)
- -------------------------------------------- --------- ---------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
EQUITY SUBACCOUNT
Life of Subaccount(4)..................... 129,463 223.66% 351.28 304.56 47.95
Ten years................................. 115,150 187.88 349.67 282.68 42.14
Five years................................ 68,550 71.38 63.05 51.60 18.72
One year.................................. 37,895 (5.26) 5.02 1.31 2.67

TOTAL RETURN SUBACCOUNT
Life of Subaccount(5)..................... 136,238 240.6% 664.33 553.57 58.41
Ten years................................. 108,611 171.53 349.67 282.68 42.14
Five years................................ 56,023 40.06 63.05 51.60 18.72
One year.................................. 35,724 (10.69) 5.02 1.31 2.67

INTERNATIONAL SUBACCOUNT(14)
Life of Subaccount........................ 48,971 22.43% 31.94 19.99 8.56 26.64
One year.................................. 38,069 (4.83) 5.02 1.31 2.67 8.06

SMALL CAP SUBACCOUNT
Life of Subaccount(15).................... 41,228 3.07%
</TABLE>

<TABLE>
<CAPTION>
VALUES OF INITIAL COMPARED TO
$40,000 --------------------------------------------------------------
INVESTMENT IN SALOMON
SUBACCOUNTS-- BROS. LEHMAN MERRILL
DECEMBER 31, 1994 HIGH GRADE BROS. LYNCH
--------------------- CONSUMER CDA CERT. CORP. GOVT./CORP. GOVT./CORP.
ENDING PERCENTAGE PRICE OF DEPOSIT BOND BOND MASTER
TOTAL RETURN TABLE VALUE INCREASE INDEX(3) INDEX(6) INDEX(7) INDEX(8) INDEX(9)
- ----------------------------------------- ------- ---------- -------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
MONEY MARKET SUBACCOUNT #1
Life of Subaccount(10)................. 81,367 103.42% 58.41 153.99 404.53 301.86 302.39
Ten years.............................. 64,234 60.58 42.14 90.66 198.97 155.53 157.17
Five years............................. 47,474 18.68 18.72 29.69 49.43 44.93 45.45
One year............................... 41,026 2.57 2.67 5.05 (5.74) (3.51) (3.27)

MONEY MARKET SUBACCOUNT #2
Life of Subaccount(10)................. 90,181 125.45% 58.41 153.99 404.53 301.86 302.39
Ten years.............................. 70,720 76.8 42.14 90.66 198.97 155.53 157.17
Five years............................. 50,410 26.03 18.72 29.69 49.43 44.93 45.45
One year............................... 41,558 3.90 2.67 5.05 (5.74) (3.51) (3.27)

HIGH YIELD SUBACCOUNT
Life of Subaccount(11)................. 164,271 310.68% 58.41 153.99 404.53 301.86 302.39
Ten years.............................. 108,267 170.67 42.14 90.66 198.97 155.53 157.17
Five years............................. 66,480 66.2 18.72 29.69 49.43 44.93 45.45
One year............................... 38,592 (3.52) 2.67 5.05 (5.74) (3.51) (3.27)

GOVERNMENT SECURITIES SUBACCOUNT
Life of Subaccount(12)................. 59,836 49.59% 30.86 57.55 100.07 84.45 85.30
Five years............................. 52,166 30.42 18.72 29.69 49.43 44.93 45.45
One year............................... 38,395 (4.01) 2.67 5.05 (5.74) (3.51) (3.27)
</TABLE>

B-16
<PAGE> 96

<TABLE>
<CAPTION>
COMPARED TO
--------------------------------
STANDARD
&
AVERAGE DOW POOR'S
ANNUAL JONES 500 CONSUMER
AVERAGE ANNUAL TOTAL TOTAL INDUSTRIAL STOCK PRICE EAFE
RETURN TABLE RETURN AVERAGE(1) INDEX(2) INDEX(3) (13)
- -------------------------------------------------------- ------ ----- ----- ---- ----
<S> <C> <C> <C> <C> <C>
EQUITY SUBACCOUNT
Life of Subaccount(4)................................. 10.51% 14.56 13.44 3.60
Ten years............................................. 10.28 16.22 14.36 3.58
Five years............................................ 8.71 10.27 8.68 3.49
One year.............................................. (12.93) 5.02 1.31 2.67

TOTAL RETURN SUBACCOUNT
Life of Subaccount(5)................................. 9.08% 17.29 15.86 3.67
Ten years............................................. 9.12 16.22 14.36 3.58
Five years............................................ 3.86 10.27 8.68 3.49
One year.............................................. (18.31) 5.02 1.31 2.67

INTERNATIONAL SUBACCOUNT
Life of Subaccount(14)................................ 4.39% 9.68 6.26 2.77 8.19
One year.............................................. (11.92) 5.02 1.31 2.67 8.06

SMALL CAP SUBACCOUNT
Life of Subaccount(15)................................ (4.98)%
</TABLE>

<TABLE>
<CAPTION>
COMPARED TO
-----------------------------------------------------
SALOMON LEHMAN MERRILL
AVERAGE BROS. BROS. LYNCH
ANNUAL CONSUMER HIGH GRADE GOVT./CORP. GOVT./CORP.
AVERAGE ANNUAL TOTAL TOTAL PRICE CORP. BOND BOND MASTER
RETURN TABLE RETURN INDEX(3) INDEX(7) INDEX(8) INDEX(9)
- ---------------------------------------------------------- -------- -------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
HIGH YIELD SUBACCOUNT
Life of Subaccount(11).................................. 11.17% 3.67 13.53 11.53 11.54
Ten years............................................... 9.46 3.58 11.57 9.84 9.91
Five years.............................................. 7.73 3.49 8.36 7.70 7.78
One year................................................ (11.20) 2.67 (5.74) (3.51) (3.27)

GOVERNMENT SECURITIES SUBACCOUNT
Life of Subaccount(12).................................. 4.44% 3.74 9.92 8.71 8.77
Five years.............................................. 2.67 3.49 8.36 7.70 7.78
One year................................................ (11.82) 2.67 (5.74) (3.51) (3.27)
</TABLE>

<TABLE>
<CAPTION>
YIELD INFORMATION QUALIFIED AND NON-QUALIFIED
- --------------------------------------------------------------------------------------------- ----------------------------
<S> <C>
HIGH YIELD SUBACCOUNT
30 day period ended 3/31/95................................................................
GOVERNMENT SECURITIES SUBACCOUNT
30 day period ended 3/31/95................................................................
MONEY MARKET SUBACCOUNT
7 day period ended 3/31/95................................................................. 4.36%
</TABLE>

(1) The Dow Jones Industrial Average is an unmanaged unweighted average of
thirty blue chip industrial corporations listed on the New York Stock Exchange.
Assumes reinvestment of dividends.

(2) The Standard & Poor's 500 Stock Index is an unmanaged weighted average of
500 stocks, over 95% of which are listed on the New York Stock Exchange. Assumes
reinvestment of dividends.

(3) The Consumer Price Index, published by the U.S. Bureau of Labor Statistics,
is a statistical measure of change, over time, in the prices of goods and
services in major expenditure groups.

(4) From December 9, 1983 to December 31, 1994.

(5) From March 5, 1982 to December 31, 1994.

(6) The CDA Certificate of Deposit Index is provided by CDA Investment
Technologies, Inc., Silver Spring, Maryland, and is based upon a statistical
sampling of the yield of 30-day certificates of deposit of major commercial
banks. Yield is based upon a monthly compounding of interest.

(7) The Salomon Brothers High Grade Corporate Bond Index is on a total return
basis with all dividends reinvested and is comprised of high grade long-term
industrial and utility bonds rated in the top two rating categories.

(8) The Lehman Brothers Government/Corporate Bond Index is on a total return
basis and is comprised of all publicly issued, non-convertible, domestic debt of
the U.S. Government or any agency thereof, quasi-Federal corporation, or
corporate debt guaranteed by the U.S. Government and all publicly issued,
fixed-rate, non-convertible, domestic debt of the three major corporate
classifications: industrial, utility, and financial. Only notes and bonds with a
minimum outstanding principal amount of $1,000,000 and a minimum of one year are
included. Bonds included must have a rating of at least Baa by Moody's Investors
Service, BBB by Standard & Poor's Corporation or in the case of bank bonds not
rated by either Moody's or Standard & Poor's, BBB by Fitch Investors Service.

B-17
<PAGE> 97

(9) The Merrill Lynch Government/Corporate Master Index is based upon the total
return with all dividends reinvested of 4,000 corporate and 300 government bonds
issued with an intermediate average maturity and an average quality rating of Aa
(Moody's Investors Service, Inc.) /AA (Standard & Poor's Corporation).

(10) From March 5, 1982 to December 31, 1994.

(11) From March 5, 1982 to December 31, 1994.

(12) From September 3, 1987 to December 31, 1994.

(13) The EAFE is the Morgan Stanley Capital International's Europe, Australia,
Far East index. This index is an unmanaged index that is considered to be
generally representative of major non-United States stock markets.

(14) From January 6, 1992 to December 31, 1994.

(15) From May 2, 1994 to December 31, 1994.

The following table compares the performance of the subaccounts over various
periods with that of other variable annuity funds within the categories
described below according to data reported by Lipper Analytical Services Inc.
("Lipper") New York, New York, mutual fund reporting service. Lipper rankings
are based on changes in net asset value with all income and capital gain
reinvested such calculations do not include the effect of any sales charges and
include the deduction of mortality and expense risk charges and other asset
based charges. Future performance cannot be guaranteed. Lipper published
performance analyses on a regular basis from which the following rankings were
derived.

The Total Return Subaccount, High Yield Subaccount, Equity Subaccount, Money
Market Subaccount, International Subaccount and Government Securities Subaccount
are ranked by Lipper in the Flexible Portfolio, High Current Yield, Capital
Appreciation, Money Market, International, and Government Securities--U.S.
Mortgage and GNMA categories, respectively. Variable annuity funds in these
categories have a variety of objectives, policies and market and credit risks
that should be considered in reviewing the rankings. The performance of the
Subaccount may also be compared to other variable annuity funds ranked by
Morningstar, Inc. or VARDS Inc.

<TABLE>
<CAPTION>
LIPPER VARIABLE ANNUITY
PERFORMANCE ANALYSES
SUBACCOUNT -----------------------
--------------------------------------------------- 2/28/94 TO
2/28/95 ---------------
<S> <C>
Total Return....................................... 111 out of 117
High Yield......................................... 19 out of 60
Equity............................................. 40 out of 84
Money Market #1.................................... 73 out of 169
Money Market #2.................................... 3 out of 169
Government Securities.............................. 7 out of 12
International...................................... 41 out of 48
</TABLE>

B-18
<PAGE> 98

APPENDIX B

STATE PREMIUM TAX CHART

<TABLE>
<CAPTION>
RATE OF TAX
-------------------------------
QUALIFIED NON-QUALIFIED
STATE PLANS PLANS
------------------------------------------------------------------- --------- -------------
<S> <C> <C>
California......................................................... .50% 2.35%*
District of Columbia............................................... 2.25% 2.25%*
Kansas............................................................. -- 2.00%*
Kentucky........................................................... 2.00%* 2.00%*
Maine.............................................................. -- 2.00%
Mississippi........................................................ -- 1.00%
Nevada............................................................. -- 3.50%*
Pennsylvania....................................................... -- 2.00%
South Dakota....................................................... -- 1.25%
West Virginia...................................................... 1.00% 1.00%
Wyoming............................................................ -- 1.00%
</TABLE>

* Taxes become due when annuity benefits commence, rather than when the
premiums are collected. At the time of annuitization, the premium tax
payable will be charged against the Certificate Value.

B-19
<PAGE> 99

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The expenses of issuance and distribution of the Contracts and Certificates,
other than any underwriting discounts and commissions, are as follows:

<TABLE>
<CAPTION>
AMOUNT*
--------
<S> <C>
Securities and Exchange Commission Registration Fees................ $ **
Printing and Engraving.............................................. $ 50,000
Accounting Fees and Expenses........................................ $ 15,000
Legal Fees and Expenses............................................. $ 2,500
--------
Total Expenses....................................... $ 67,500
=======
</TABLE>

- ---------------

* Expenses are estimated and are for period from May 1, 1994 to May 1, 1995 for
continuous offering of interest pursuant to Rule 415 but are not deducted
from proceeds.

** $100 paid with initial registration on March 31, 1992. Registration fees of
$25,100 were previously paid under File No. 33-33547 and No. 33-43462, to
which this Registration Statement relates pursuant to Rule 429 under the
Securities Act of 1933.

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Article VI, Section 1. of the Bylaws of Kemper Investors Life Insurance Company
provides for indemnification of Directors and Officers as follows:

Section 1. The company shall indemnify any person against all expenses
(including attorneys fees), judgments, fines, amounts paid in settlement
and other costs actually and reasonably incurred by him in connection with
any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative (other than an action by
or in the right of the company) in which he is a party or is threatened to
be made a party by reason of his being or having been a director, officer,
employee or agent of the company, or serving or having served, at the
request of the company, as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
or by reason of his holding a fiduciary position in connection with the
management or administration of retirement, pension, profit sharing or
other benefit plans including, but not limited to, any fiduciary liability
under the Employee Retirement Income Security Act of 1974 and any amendment
thereof, if he acted in good faith and in a manner he reasonably believed
to be in and not opposed to the best interests of the company, and with
respect to any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful. The termination of any action, suit or
proceeding by judgment, order, settlement, conviction, or upon a plea of
nolo contendere or its equivalent, shall not, of itself, create a
presumption that he did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

Not Applicable.

II-1
<PAGE> 100

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(A) EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
--------- -----------------
<S> <C>
1 Distribution Agreement
*3 (a) Articles of Incorporation
*3 (b) Bylaws
**4 (a) Form of Group Variable and Market Value Adjusted Annuity Contract
**4 (b) Form of Certificate to Variable and Market Value Adjusted Annuity Contract and
Enrollment Application
+4 (c) Form of Individual Variable and Market Value Adjusted Annuity Contract and
Enrollment Application
+4 (d) Form of Endorsement to Variable and Market Value Adjusted Deferred Annuity Contract
+4 (e) Form of Endorsement to Certificate to Variable and Market Value Adjusted Deferred
Annuity Contract
+4 (f) Form of Revised Variable and Market Value Adjusted Deferred Annuity Contract
+4 (g) Form of Revised Certificate to Variable and Market Value Adjusted Deferred Annuity
Contract
****5 Opinion and Consent of Counsel regarding legality
24 (a) Consent of KPMG Peat Marwick LLP, Independent Auditors
****24 (b) Consent of Counsel (See Exhibit 5)
**25 (a) Powers of Attorney
****25 (c) Power of Attorney--John B. Scott
28 Schedule V: Valuation and qualifying accounts
+29 Notice Concerning Regulatory Relief
</TABLE>

- ---------------

* Incorporated herein by reference to the Registration Statement on Form S-1
(File No. 33-33547) filed on or about February 20, 1990.

** Incorporated herein by reference to the Registration Statement on Form S-1
(File No. 33-43462) filed on or about October 23, 1991.

*** Incorporated herein by reference to Pre-Effective Amendment No. 1 to the
Registration Statement on Form S-1 (File No. 33-43462) filed on or about
December 18, 1991.

**** Incorporated herein by reference to Registration Statement on Form S-1
(File No. 33-46881) filed on March 31, 1992.

+ Incorporated herein by reference to Exhibits filed with Post-Effective
Amendment No. 4 to the Registration Statement on Form N-4 for KILICO
Variable Annuity Separate Account (File No. 33-43501) filed on or about
November 19, 1993.

(B) FINANCIAL STATEMENTS

Report of Independent Auditors

KILICO and Subsidiaries Consolidated Balance Sheets, as of December 31,
1994 and 1993

KILICO and Subsidiaries Consolidated Statements of Operations, years ended
December 31, 1994, 1993 and 1992

KILICO and Subsidiaries Consolidated Statements of Stockholder's Equity,
years ended December 31, 1994, 1993 and 1992

KILICO and Subsidiaries Consolidated Statements of Cash Flows, years ended
December 31, 1994, 1993 and 1992

Notes to Consolidated Financial Statements

Schedule V: Valuation and qualifying accounts

II-2
<PAGE> 101

ITEM 17. UNDERTAKINGS.

(a) The undersigned registrant hereby undertakes:

(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:

(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;

(ii) To reflect in the Prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in the registration statement;

(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;

(2) That, for the determining of any liability under the Securities Act of
1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.

(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering.

(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liabilities under the Securities Act of 1933, each filing
of the registrant's annual report pursuant to section 13(a) or section
15(d) of the Securities Exchange Act of 1934 (and, where applicable, each
filing of an employee benefit plan's annual report pursuant to section
15(d) of the Securities Exchange Act of 1934) that is incorporated by
reference in the registration statement shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.

(c) Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment
by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.

II-3
<PAGE> 102

SIGNATURES

As required by the Securities Act of 1933, the Registrant has duly caused this
Amendment to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Long Grove and State of
Illinois on the 13th day of April, 1995.

KEMPER INVESTORS LIFE INSURANCE COMPANY
Registrant

BY: /s/ JOHN B. SCOTT
---------------------------------------
John B. Scott, Chairman, Chief
Executive Officer and President

As required by the Securities Act of 1933, this Amendment to the Registration
Statement has been signed below by the following directors and principal
officers of Kemper Investors Life Insurance Company in the capacities indicated
on the 13th day of April, 1995.

<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------------------------------------------- -------------------------------------------------
<C> <S>
/s/ JOHN B. SCOTT Chairman, Chief Executive Officer, President and
- --------------------------------------------- Director (Principal Executive Officer)
John B. Scott

/s/ JOHN H. FITZPATRICK Senior Vice President, Chief Financial Officer
- --------------------------------------------- and Director (Principal Financial Officer)
John H. Fitzpatrick

/s/ JAMES R. BORIS Director
- ---------------------------------------------
James R. Boris

/s/ DAVID B. MATHIS Director
- ---------------------------------------------
David B. Mathis

/s/ STEPHEN B. TIMBERS Director
- ---------------------------------------------
Stephen B. Timbers

/s/ JOSEPH R. SITAR Principal Accounting Officer
- ---------------------------------------------
Joseph R. Sitar
</TABLE>

II-4
<PAGE> 103

EXHIBIT LIST

<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGES*
----- ----------- -----
<S> <C> <C>
1 Distribution Agreement
24(a) Consent of KPMG Peat Marwick LLP, Independent Auditors
28 Schedule V: Valuation and qualifying accounts
</TABLE>

- ---------------
* In manually signed original only.

<PAGE> 1

EXHIBIT 1

DISTRIBUTION AGREEMENT
BETWEEN
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND
INVESTORS BROKERAGE SERVICES, INC.

THIS AGREEMENT is made on this day of , 19 between KEMPER
INVESTORS LIFE INSURANCE COMPANY ("KILICO") on its own behalf and on behalf of
the KILICO Variable Annuity Separate Account (the "Account") and INVESTORS
BROKERAGE SERVICES, INC. ("IBS"). In consideration of the mutual covenants
contained in this Agreement, the parties agree as follows:

1. KILICO appoints IBS to promote the sale of variable annuity
contracts ("Contracts") issued by KILICO and the Account. IBS will promote
such Contracts in those states in which KILICO has variable contract
authority and in which the Contracts are eligible for sale under applicable
state law. KILICO agrees to inform IBS of the status of such matters in
each of these states from time to time.

2. The solicitation of Contracts shall be made by persons who are
registered representatives of National Association of Securities Dealers,
Inc. ("NASD") member broker-dealers who have a Selling Group Agreement with
IBS, which agreement shall encompass the promotion of the sale of the
Contracts; provided that, no such registered representative shall be
allowed to participate in the solicitation of the Contracts unless such
person has been appointed to solicit variable Contracts by KILICO in any
state in which such solicitation may occur.

3. All books and records maintained by KILICO in connection with the
sale of Contracts will be maintained and preserved by KILICO in conformity
with the requirements of Rule 17a-3 and 17a-4 under the Securities Exchange
Act of 1934, to the extent that such requirements are applicable to the
Contracts.

4. KILICO assumes full responsibility for the activities of all
persons engaged directly or indirectly in the promotion of the solicitation
of the Contracts, including all sales representatives and associated
persons as defined in the Securities Exchange Act of 1934. IBS shall, in
the course of contracting with NASD member broker-dealers with which it has
agreements, require that such broker-dealers be responsible for the acts of
their registered representatives and associated persons.

5. Compensation to broker-dealers for the sale of Contracts shall be
paid by KILICO through IBS. Any obligation by IBS to pay such compensation
will occur only following receipt of such amounts by IBS from KILICO.

6. IBS, when requested by KILICO, shall suspend its efforts to
effectuate sales of the Contracts at any time KILICO shall request.

7. KILICO shall bear the expenses of printing and distributing
registration statements and prospectuses relating to the public sale of
Contracts pursuant to this Agreement. KILICO agrees to bear the expenses of
qualification of the Contracts for sale and of continuing the qualification
in the various states. KILICO shall bear the expenses of any sales
literature used by IBS or furnished by IBS to dealers in connection with
offering the Contracts and the expenses of advertising in connection with
such offerings, except for customized pieces the cost of which shall be
mutually agreed to by KILICO and IBS.

8. IBS agrees that it will not use any sales material as defined under
the rules of the NASD or by the statutes or regulations of any state in
which the Contracts may be solicited, unless such material has received
prior written approval by KILICO.

9. IBS, KILICO and the Account shall each comply with all applicable
provisions of the Investment Company Act of 1940, Securities Act of 1933
and of all Federal and state securities and insurance laws, rules and
regulations governing the issuance and sale of the Contracts.

10. KILICO agrees to indemnify IBS against any and all claims,
liabilities and expenses including but not limited to reasonable attorneys
fees which IBS may incur under the Investment Company Act of 1940,
Securities Act of 1933 and all Federal and state securities and insurance
laws, rules and regulations governing the issuance and sale of the
Contracts, common law or otherwise, arising out of or based upon any
alleged untrue statements of material fact contained in any registration
statement or prospectus of the Account, or any alleged omission to state a
material fact therein, the omission of which makes any statement contained
therein

1
<PAGE> 2

misleading or of any alleged act or omission in connection with the
offering, sale or distribution of the Contracts by any registered
representatives or associated persons of a NASD member broker-dealer which
has an agreement with IBS. IBS agrees to indemnify KILICO and the Account
against any and all claims, demands, liabilities and expenses, including
but not limited to reasonable attorneys fees, which KILICO or the Account
may incur, arising out of or based upon any act of IBS or of any registered
representative of an NASD member investment dealer which has an agreement
with IBS and is acting in accordance with KILICO's instructions. KILICO
acknowledges that IBS may similarly attempt to hold such an NASD member
broker-dealer responsible for the acts of registered representatives and
associated persons; and to the extent KILICO is obligated to indemnify IBS
under this Agreement, IBS agrees to assign its rights against such
broker-dealers to KILICO.

11. KILIC0 agrees to supply IBS with such information as may be
reasonably required by IBS including the "net accumulation unit value"
computed as of the time prescribed by and in compliance with all pertinent
requirements of the NASD and the Securities and Exchange Commission.

12. This Agreement shall be effective February 1, 1995. This Agreement
is subject to termination by either party upon thirty (30) days' prior
written notice to the other party. This Agreement may not be assigned by
either party without the written consent of the other party. This Agreement
shall be interpreted according to the laws of the State of Illinois.

IN WITNESS WHEREOF, this Agreement has been signed by the parties on the date
first above written.

KEMPER INVESTORS LIFE INSURANCE COMPANY

BY:
-----------------------------------------
TITLE:

ATTEST:

- -----------------------------------------
TITLE:

INVESTORS BROKERAGE SERVICES, INC.

BY:
-----------------------------------------
TITLE:

ATTEST:

- -----------------------------------------
TITLE:

<PAGE> 1

EXHIBIT 24(A)

CONSENT OF INDEPENDENT AUDITORS

The Board of Directors

Kemper Investors Life Insurance Company:

The audits referred to in our report dated March 3, 1995, included the related
financial statement schedule for the year ended December 31, 1994 included in
the registration statement. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement schedule based on our audits. In our
opinion, such financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.

Our report refers to changes in the method of accounting for investment
securities in 1994, impairment of loans receivable and income taxes in 1993, and
postretirement benefits other than pensions in 1992.

We consent to the use of our reports included herein and to the reference to our
firm under the headings "Services to the Separate Account" and "Experts" in the
Statement of Additional Information.

KPMG PEAT MARWICK LLP

Chicago, Illinois

April 13, 1995

<PAGE> 1

EXHIBIT 28

SCHEDULE V

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

VALUATION AND QUALIFYING ACCOUNTS

YEAR ENDED DECEMBER 31, 1994
(in thousands)

<TABLE>
<CAPTION>
ADDITIONS
------------------------------
CHARGED TO
BALANCE AT CHARGED TO OTHER BALANCE AT
BEGINNING COSTS AND ACCOUNTS-- DEDUCTIONS-- END OF
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD
- ------------------------------------- ---------- ---------- --------------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Asset valuation reserves:
Joint venture mortgage loans....... $ 35,085 $ -- $ -- $28,008 $ 7,077
Third-party mortgage loans......... -- -- 10,373 -- 10,373
Other real estate-related
investments..................... 26,058 -- -- 553 25,505
-------- -------- ------- ------- --------
Total $ 61,143 $ -- $10,373(1) $28,561(2) $ 42,955
======== ======== ======= ======= ========
</TABLE>

- ---------------
(1) Charged to realized investment losses in the consolidated statement of
operations.

(2) These deductions represent the net effect on the valuation reserve of
write-downs, sales, foreclosures and restructurings.