KEMPER INVESTORS LIFE INSURANCE CO, S-1/A, 1996-04-25

KEMPER INVESTORS LIFE INSURANCE CO
S-1/A, 1996-04-25

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 25, 1996

REGISTRATION NO. 333-02491

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1

AMENDMENT NO. 1 TO

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
------------------------- ---------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

1 Kemper Drive
Long Grove, Illinois 60049
(847) 550-5500
---------------------------------------------------- 6312
(Address, including zip code, and telephone number, ------------------------
including area code, of registrant's principal executive (Primary Standard Industrial
offices) Classification Code Number)
</TABLE>

Debra P. Rezabek, Esq.
Kemper Investors Life Insurance Company
1 Kemper Drive
Long Grove, Illinois 60049

(847) 550-7390

--------------------------------------------------
(Name, address, including zip code, and telephone number,
including area code, of agent for service)

COPIES TO:

<TABLE>
<S> <C>
Frank Julian, Esq.
Kemper Investors Life Insurance Company Joan E. Boros, Esq.
KLIC Legal T-11025 Katten Muchin & Zavis
1 Kemper Drive Thomas Jefferson Street, N.W.
Long Grove, Illinois 60049 Washington, D.C. 20007

</TABLE>
------------------

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, No. 33-43462 and
No. 33-46881.

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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>
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, 1996

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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 (847) 550-5500

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 fifteen 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"). The Fund currently
consists of the following Portfolios: Money Market, Total Return, High Yield,
Growth (formerly "Equity"), Government Securities, International, Small Cap
Growth (formerly "Small Capitalization Equity"), Investment Grade Bond, Value,
Small Cap Value, Value+Growth, Horizon 20+, Horizon 10+ and Horizon 5. Zurich
Kemper Investments, Inc. (formerly named Kemper Financial Services, Inc.)
("ZKI"), is the investment manager of each Portfolio other than the Value and
Small Cap Value Portfolios and provides each with continuous professional
investment supervision. Dreman Value Advisors, Inc. ("DVA"), a wholly owned
subsidiary of ZKI, is the investment manager of the Value and Small Cap Value
Portfolios and provides each with continuous professional investment
supervision. DVA is also the sub-advisor for the Value+Growth, Horizon 20+,
Horizon 10+, and Horizon 5 Portfolios. Under the terms of its Sub-Advisory
Agreement with ZKI, DVA will manage the value portion of each of these
Portfolios and will provide such other investment advice, research and
assistance as ZKI may, from time to time, reasonably request. 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, 1996 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 58 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.

THE CONTRACTS ARE NOT INSURED BY THE FDIC. THEY ARE OBLIGATIONS OF THE ISSUING
INSURANCE COMPANY AND ARE NOT A DEPOSIT OF, OR GUARANTEED BY, ANY BANK OR
SAVINGS INSTITUTION AND ARE SUBJECT TO RISKS, INCLUDING POSSIBLE LOSS OF
PRINCIPAL.

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
-----
<S> <C>
DEFINITIONS............................................................................ 1
SUMMARY................................................................................ 3
SUMMARY OF EXPENSES.................................................................... 5
KILICO, THE MVA OPTION, THE SEPARATE ACCOUNT AND THE FUND.............................. 7
THE CERTIFICATES....................................................................... 12
THE ACCUMULATION PERIOD................................................................ 13
CERTIFICATE CHARGES AND EXPENSES....................................................... 20
THE ANNUITY PERIOD..................................................................... 23
FEDERAL INCOME TAXES................................................................... 27
DISTRIBUTION OF CONTRACTS AND CERTIFICATES............................................. 31
VOTING RIGHTS.......................................................................... 31
REPORTS TO OWNERS AND INQUIRIES........................................................ 31
DOLLAR COST AVERAGING.................................................................. 32
SYSTEMATIC WITHDRAWAL PLAN............................................................. 33
EXPERTS................................................................................ 33
LEGAL MATTERS.......................................................................... 33
SPECIAL CONSIDERATIONS................................................................. 34
AVAILABLE INFORMATION.................................................................. 34
BUSINESS............................................................................... 35
PROPERTIES............................................................................. 40
LEGAL PROCEEDINGS...................................................................... 40
MANAGEMENT'S DISCUSSION AND ANALYSIS................................................... 41
DIRECTORS AND OFFICERS OF KILICO....................................................... 52
EXECUTIVE COMPENSATION................................................................. 55
TABLE OF CONTENTS--STATEMENT OF ADDITIONAL INFORMATION................................. 58
FINANCIAL STATEMENTS................................................................... 58
</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 fifteen 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.

DVA--Dreman Value Advisors, Inc., whose Home Office is at 10 Exchange
Place, 20th floor, Jersey City, New Jersey 07302.

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--Kemper Investors Fund, an open-end management investment company
consisting of fourteen 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.

1
<PAGE> 6

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.

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.

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 fifteen 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.

ZKI--Zurich Kemper Investments, Inc., (formerly named Kemper Financial
Services, Inc.), whose Home Office is at 120 South LaSalle Street, Chicago,
Illinois 60603.

2
<PAGE> 7

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 fifteen 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 $2,000. Subsequent
Purchase Payments of at least $500 each will be accepted at any time while the
Certificate is in force. (See "The Accumulation Period" page 13.)

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 fourteen
corresponding Portfolios (the "Portfolios") of the Kemper Investors Fund (the
"Fund"), a series mutual fund. (See "The Fund," page 8.) Zurich Kemper
Investments, Inc. (formerly named Kemper Financial Services, Inc.) ("ZKI"), is
the investment manager of each Portfolio other than the Value and Small Cap
Value Portfolios and provides each with continuous professional investment
supervision. Dreman Value Advisors, Inc. ("DVA"), a wholly owned subsidiary of
ZKI, is the investment manager of the Value and Small Cap Value Portfolios and
provides each with continuous professional investment supervision. DVA is also
the sub-adviser for the Value+Growth, Horizon 20+, Horizon 10+, and Horizon 5
Portfolios. Under the terms of its Sub-Advisory Agreement with ZKI, DVA will
manage the value portion of each of these Portfolios and will provide such other
investment advice, research and assistance as ZKI may, from time to time,
reasonably request. The Certificate Value allocated to the Separate Account will
vary with the investment performance of the Portfolios selected by the Owner.

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 7.)

3
<PAGE> 8

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 16 and
25.)

An Owner may withdraw up to 15% of the Certificate Value in any Certificate Year
without assessment of a Withdrawal Charge. If the Owner withdraws an amount in
excess of 15% of the Certificate Value in any Certificate Year, the amount
withdrawn in excess of 15% is subject to a 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 28.)

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 12.)

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 20.) In addition,
ZKI is paid a management fee based upon the average daily net assets of the
Portfolios for which it serves as investment manager. DVA serves as the
investment manager for the Value and Small Cap Value Portfolios and is paid a
management fee at an annual rate of .75 of 1% of the average daily net assets of
these Portfolios. ZKI pays DVA for DVA's services as sub-adviser for the
Value+Growth and Horizon Portfolios. (See "The Fund," page 8 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 29.)

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 12.)

4
<PAGE> 9

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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
(as a percentage of average daily account value)
<S> <C>
Mortality and Expense
Risk................... 1.10 %
Administration......... .15 %
Account Fees and
Expenses............. 0 %
Total Separate Account
Annual Expenses...... 1.25 %
</TABLE>

<TABLE>
<CAPTION>
FUND ANNUAL EXPENSES
(as percentage of each Portfolio's average net assets for the period ended December 31, 1995)
MONEY TOTAL GOVERNMENT SMALL CAP
MARKET RETURN HIGH YIELD GROWTH SECURITIES INTERNATIONAL GROWTH
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
--------- --------- ---------- --------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Management Fees..... .50% .55% .60% .60% .55% .75% .65%
Other Expenses...... .05 .05 .05 .04 .10 .17 .22
--- --- --- --- --- --- ---
Total Portfolio
Annual Expenses.... .55% .60% .65% .64% .65% .92% .87%
=== === === === === === ====

</TABLE>

<TABLE>
<CAPTION>
INVESTMENT SMALL CAP VALUE+
GRADE BOND VALUE VALUE GROWTH HORIZON 20+ HORIZON 10+ HORIZON 5
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
---------- --------- --------- --------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Management
Fees... .60% .75% .75% .75% .60% .60% .60%
Other
Expenses... .15 .15 .15 .15 .15 .15 .15
--- --- --- --- --- --- ---
Total
Portfolio
Annual
Expenses... .75 .90 .90 .90 .75 .75 .75
=== === === === === === ===
</TABLE>

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EXAMPLE
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
SUBACCOUNT 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C> <C>
If you surrender your contract at the end of the Money Market #1+ 81 114 148 220
applicable Total Return 81 115 151 225
time period: High Yield 82 117 153 231
You would pay the following expenses on a Growth 82 117 153 230
$1,000 investment, assuming 5% annual return Government Securities 82 117 153 231
on assets: International 85 125 167 259
Small Cap Growth 84 123 -- --
Investment Grade Bond 83 120 -- --
Value 84 124 -- --
Small Cap Value 84 124 -- --
Value+Growth 84 124 -- --
Horizon 20+ 83 120 -- --
Horizon 10+ 83 120 -- --
Horizon 5 83 120 -- --
If you do not surrender your contract: Money Market #1+ 19 59 102 220
You would pay the following expenses Total Return 20 61 104 225
on a $1,000 investment, assuming High Yield 20 62 107 231
5% annual return on assets: Growth 20 62 106 230
Government Securities 20 62 107 231
International 23 71 121 259
Small Cap Growth 22 69 -- --
Investment Grade Bond 21 65 -- --
Value 23 70 -- --
Small Cap Value 23 70 -- --
Value+Growth 23 70 -- --
Horizon 20+ 21 65 -- --
Horizon 10+ 21 65 -- --
Horizon 5 21 65 -- --

</TABLE>

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

The purpose of the preceding table is to assist Owners in understanding the
various costs and expenses that an Owner in an 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

5
<PAGE> 10

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. "OTHER EXPENSES" FOR THE INVESTMENT GRADE
BOND, VALUE, SMALL CAP VALUE, VALUE+GROWTH AND HORIZON PORTFOLIOS ARE BASED ON
ESTIMATED AMOUNTS FOR THE CURRENT FISCAL YEAR. 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 15% 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 including the annual Records Maintenance Charge will be
waived for Certificates with a Certificate Value exceeding $50,000 on the
date of assessment.
+ 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.

- --------------------------------------------------------------------------------
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, 1995:

<TABLE>
<CAPTION>
ACCUMULATION UNIT VALUE AT BEGINNING OF PERIOD* 1995 1994 1993 1992
------ ------ ------ ------
<S> <C> <C> <C> <C>
Money Market Subaccount #1 1.065 1.037 1.021 1.000
Money Market Subaccount #2 1.105 1.063 1.034 1.000
Total Return Subaccount .991 1.109 1.002 1.000
High Yield Subaccount 1.308 1.354 1.143 1.000
Growth Subaccount 1.093 1.153 1.018 1.000
Government Securities Subaccount 1.061 1.104 1.050 1.000
International Subaccount 1.225 1.287 .981 1.000
Small Cap Growth Subaccount** 1.031
</TABLE>

<TABLE>
<CAPTION>
ACCUMULATION UNIT VALUE AT END OF PERIOD 1995 1994 1993 1992
------ ------ ------ ------
<S> <C> <C> <C> <C>
Money Market Subaccount #1 1.112 1.065 1.037 1.021
Money Market Subaccount #2 1.168 1.105 1.063 1.034
Total Return Subaccount 1.234 .991 1.109 1.002
High Yield Subaccount 1.515 1.308 1.354 1.143
Growth Subaccount 1.436 1.093 1.153 1.018
Government Securities Subaccount 1.247 1.061 1.104 1.050
International Subaccount 1.365 1.225 1.287 .981
Small Cap Growth Subaccount** 1.324 1.031
</TABLE>

<TABLE>
<CAPTION>
NUMBER OF ACCUMULATION UNITS OUTSTANDING AT END
OF PERIOD
(000'S OMITTED) 1995 1994 1993 1992
------ ------ ------ ------
<S> <C> <C> <C> <C>
Money Market Subaccount #1 8,710 14,423 5,757 3,037
Money Market Subaccount #2 1,981 3,333 3,033 6,561
Total Return Subaccount 65,648 68,207 51,444 27,355
High Yield Subaccount 37,502 28,545 22,109 6,519
Growth Subaccount 55,059 55,308 37,678 19,693
Government Securities Subaccount 21,288 24,760 28,414 16,647
International Subaccount 20,930 21,035 12,503 4,699
Small Cap Growth Subaccount** 5,316 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.

6
<PAGE> 11

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 Corporation, a nonoperating holding company. Zurich Insurance Company
("Zurich"), Insurance Partners, L.P. ("IP") and Insurance Partners Offshore
(Bermuda), L.P. (together with IP, "Insurance Partners") indirectly and directly
own 80 percent and 20 percent, respectively, of Kemper Corporation.

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 Zurich Kemper Investments, Inc. ("ZKI") an affiliate of KILICO and a
wholly owned subsidiary of Kemper Financial Services Holding Corporation. Kemper
Financial Services Holding Corporation is a more than 90% owned subsidiary of
Zurich Holding Company of America, Inc., which is a wholly-owned subsidiary of
Zurich.

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, 1995 included approximately
85.2 percent in U.S. Treasuries, investment grade corporate, foreign and
municipal bonds, and commercial paper, 1.8 percent in

7
<PAGE> 12

below investment grade (high risk) bonds, 6.3 percent in mortgage loans and
other real estate-related investments and 6.7 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 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 divided into Subaccounts, including the fifteen
Subaccounts currently offered under the Certificates. 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

8
<PAGE> 13

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, Growth, Government Securities, International, Small Cap
Growth, Investment Grade Bond, Value, Small Cap Value, Value+Growth, Horizon
20+, Horizon 10+ and Horizon 5. 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. Pending regulatory
approval, the Investment Grade Bond, Value, Small Cap Value, Value+Growth,
Horizon 20+, Horizon 10+ and Horizon 5 Portfolios are not available in
California.

The fourteen Portfolios of the Fund are summarized below:

MONEY MARKET PORTFOLIO seeks maximum current income to the extent consistent
with stability of principal from a portfolio of high quality money market
instruments that mature in twelve months or less.

TOTAL RETURN PORTFOLIO seeks a high total return, a combination of income and
capital appreciation, by investing in a combination of debt securities and
common stocks.

HIGH YIELD PORTFOLIO seeks to provide a high level of current income by
investing in fixed-income securities.

GROWTH PORTFOLIO seeks maximum appreciation of capital through diversification
of investment securities having potential for capital appreciation.

GOVERNMENT SECURITIES PORTFOLIO seeks high current return consistent with
preservation of capital from a portfolio composed primarily of U.S. Government
securities.

INTERNATIONAL PORTFOLIO seeks total return, a combination of capital growth and
income, principally through an internationally diversified portfolio of equity
securities.

SMALL CAP GROWTH PORTFOLIO seeks maximum appreciation of investors' capital.

INVESTMENT GRADE BOND PORTFOLIO seeks high current income by investing primarily
in a diversified portfolio of investment grade debt securities.

VALUE PORTFOLIO seeks to achieve a high rate of total return.

SMALL CAP VALUE PORTFOLIO seeks long-term capital appreciation.

VALUE+GROWTH PORTFOLIO seeks growth of capital through professional management
of a portfolio of growth and value stocks.

HORIZON 20+ PORTFOLIO, designed for investors with approximately a 20+ year
investment horizon, seeks growth of capital, with income as a secondary
objective.

9
<PAGE> 14

HORIZON 10+ PORTFOLIO, designed for investors with approximately a 10+ year
investment horizon, seeks a balance between growth of capital and income,
consistent with moderate risk.

HORIZON 5 PORTFOLIO, designed for investors with approximately a 5 year
investment horizon, seeks income consistent with preservation of capital, with
growth of capital as a secondary objective.

There is no assurance that any of the Portfolios of the Fund will achieve its
objective as stated in the Fund's prospectus. 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 Zurich Kemper Investments, Inc., 120 South
LaSalle Street, Chicago, Illinois 60603. Read the prospectus carefully before
investing.

Responsibility for overall management of the Fund rests with the Board of
Trustees and officers of the Fund. Zurich Kemper Investments, Inc. (formerly
named Kemper Financial Services, Inc.) ("ZKI"), is the investment manager of
each Portfolio other than the Value and Small Cap Value Portfolios and provides
each with continuous professional investment supervision. Dreman Value Advisors,
Inc. ("DVA"), a wholly owned subsidiary of ZKI, is the investment manager of the
Value and Small Cap Value Portfolios and provides each with continuous
professional investment supervision. DVA is also the sub-adviser for the
Value+Growth, Horizon 20+, Horizon 10+, and Horizon 5 Portfolios. Under the
terms of its Sub-Advisory Agreement with ZKI, DVA will manage the value portion
of each of these Portfolios and will provide such other investment advice,
research and assistance as ZKI may, from time to time, reasonably request.

For its services, ZKI is paid a management fee based upon the average daily net
assets of such Portfolios, as follows: Money Market (.50 of 1%), Total Return
(.55 of 1%), High Yield (.60 of 1%), Growth (.60 of 1%), Government Securities
(.55 of 1%), International (.75 of 1%), Small Cap Growth (.65 of 1%), Investment
Grade Bond (.60 of 1%), Value+Growth (.75 of 1%), Horizon 20+ (.60 of 1%),
Horizon 10+ (.60 of 1%), and Horizon 5 (.60 of 1%). DVA serves as the investment
manager for the Value and Small Cap Value Portfolios and is paid a management
fee at an annual rate of .75 of 1% of the average daily net assets of these
Portfolios. DVA also serves as sub-adviser for the Value+Growth and Horizon
Portfolios. ZKI pays DVA for its services as sub-adviser for the Value+Growth
Portfolio a sub-advisory fee, payable monthly, at an annual rate of .25 of 1% of
the average daily net assets of that Portfolio. ZKI also pays DVA a sub-advisory
fee, payable monthly, at an annual rate of .25 of 1% of the portion of the
average daily net assets of each Horizon Portfolio allocated by ZKI to DVA for
management.

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

10
<PAGE> 15

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 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,
Investment Grade Bond, 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

11
<PAGE> 16

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 $2,000 will be
accepted at any time while the Certificate is in force. In addition, subsequent
Purchase Payments of at least $500 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.

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.

12
<PAGE> 17

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.

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, unless the Owner specifically consents to KILICO
retaining the purchase payment until the application is made complete.

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

13
<PAGE> 18

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.

14
<PAGE> 19

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

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<PAGE> 20

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.

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 16 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

16
<PAGE> 21

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.

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.

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<PAGE> 22

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.

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

18
<PAGE> 23

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> 24

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.

20
<PAGE> 25

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.

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 not unfairly discriminate against any person. The Records Maintenance
Charge will be waived for Certificates with a Certificate Value exceeding
$50,000 on the date of assessment.

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

21
<PAGE> 26

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.")

Subject to state approval, a nursing care or hospitalization waiver endorsement
will be issued under the Certificate. The endorsement provides that subject to
certain exceptions withdrawal charges will not be assessed on withdrawals:

1. after an Owner has been confined in a hospital or skilled health care
facility for at least thirty days and the Owner remains confined at the
time of the request; or

2. within thirty days following an Owner's discharge from a hospital or
skilled health care facility after a confinement of at least thirty
days.

Restrictions and provisions related to the nursing care or hospitalization
waiver are more fully described in the endorsement.

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.

22
<PAGE> 27

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 10. Further detail
about fees and expenses of the Portfolios is provided in the 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

23
<PAGE> 28

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.

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

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<PAGE> 29

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.

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.

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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 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.

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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.

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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, 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

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<PAGE> 33

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.

(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,

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<PAGE> 34

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 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.

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<PAGE> 35

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.

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

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<PAGE> 36

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

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<PAGE> 37

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 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 WITHDRAWAL CHARGE (CURRENTLY
15% OF CERTIFICATE VALUE) THEN THE WITHDRAWAL CHARGE WILL BE APPLIED ON ANY
AMOUNTS EXCEEDING THE 15% 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, 1995 and
1994, and for each of the years in the three-year period ended December 31, 1995
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.

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, Vice President, General Counsel, Director of Government
Affairs and Corporate Secretary 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.

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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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<PAGE> 39

BUSINESS

CORPORATE STRUCTURE

KEMPER INVESTORS LIFE INSURANCE COMPANY ("KILICO"), founded in 1947, is
incorporated under the insurance laws of Illinois. KILICO is licensed in the
District of Columbia and all states except New York. KILICO is a wholly owned
subsidiary of Kemper Corporation ("Kemper"), a nonoperating holding company.

CORPORATE CONTROL EVENTS

On January 4, 1996, an investor group comprised of Zurich Insurance Company
("Zurich"), Insurance Partners, L.P. ("IP") and Insurance Partners Offshore
(Bermuda), L.P. (together with IP, "Insurance Partners") acquired all of the
issued and outstanding common stock of Kemper. As a result of the change in
control, Zurich and Insurance Partners indirectly and directly own 80 percent
and 20 percent, respectively, of Kemper and therefore KILICO.

STRATEGIC INITIATIVES

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"). 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 market conditions. KILICO also successfully
implemented strategies over the last several years to reduce both its joint
venture operating losses and the level of its real estate-related investments.
These strategies included individual property sales, cash sales of real
estate-related investments amounting to $646.0 million since 1991 to affiliated
non-life realty companies, refinancings and restructurings as well as bulk sale
transactions completed in December 1995 in anticipation of the 1996 change in
control. As a result of these strategies, KILICO reduced its holdings of real
estate-related investments from 36.2 percent of its total invested assets and
cash at year-end 1991 to 6.3 percent at year-end 1995.

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 1.8 percent at year-end 1995.

Since 1991, KILICO has also received $342.5 million in capital contributions
from Kemper. KILICO also ceded approximately $932 million of fixed-rate annuity
liabilities in reinsurance transactions in 1991 and 1992.

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

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<PAGE> 40

combination of both to help policyholders meet multiple insurance and financial
objectives. Financial institutions, securities brokerage firms, insurance agents
and financial planners are important distribution channels for KILICO's
products. In 1995, INVEST Financial Corporation, an affiliated company, and
EVEREN Securities, Inc., ("EVEREN"), an affiliated company until September 13,
1995, accounted for approximately 37 percent and 21 percent, respectively, of
KILICO's first-year sales, compared with 36 percent and 20 percent,
respectively, in 1994. KILICO's sales mainly consist of deposits received on
certain long duration annuity contracts. (See the table captioned "Sales"
below.)

Annuities accounted for approximately 99 percent of KILICO's sales in recent
years. KILICO's annuities generally have 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.

Over the last several years, in part reflecting the current interest rate
environment, and to reduce its exposure to investment risk, KILICO's strategy
has been to place 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, as policyholders
invest in one or more of several underlying investment funds. KILICO in turn
receives fee revenue. KILICO's separate account assets totaled $1.76 billion at
December 31, 1995 and $1.50 billion at December 31, 1994 and 1993. KILICO's
sales of its separate account annuities were $151.3 million in 1995, $250.7
million in 1994 and $263.7 million in 1993. Despite KILICO's strategy to
emphasize the sale of variable annuities, such sales have declined in each of
the last two years due to competitive conditions in certain distribution
channels, in part reflecting KILICO's financial strength and performance ratings
and uncertainty concerning KILICO's ownership. Rating improvements in 1996 (see
"Rankings and ratings" below) and the 1996 change in control are expected to
increase KILICO's future sales.

In order to increase variable annuity sales, KILICO introduced Kemper PASSPORT
in 1992. Kemper PASSPORT is a variable and market value adjusted annuity
featuring a choice of investment portfolios, an increasing estate benefit,
tax-free transfers and guaranteed rates for a variety of terms. 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 option. In 1995, KILICO also added seven new
subaccounts as investment portfolio choices for certain purchasers of the Kemper
Advantage III variable annuity product.

Reductions in crediting rates and investment portfolio issues have also lowered
general account annuity sales for KILICO over the last several years. Beginning
in the second half of 1994 and in early 1995, KILICO began raising crediting
rates on certain of its existing and new general account products, reflecting
both competitive conditions and a rising interest rate environment during 1994
and early 1995. As a result of these actions, sales of general account annuities
increased and represented 62.0 percent of KILICO's total sales in 1995, compared
with 46.0 percent in 1994, and 47.9 percent in 1993.

NAIC RATIOS

The National Association of Insurance Commissioners (the "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".

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<PAGE> 41

Based on statutory financial data as of December 31, 1995, KILICO had three
ratios outside the usual ranges. KILICO's net income to total income was
adversely affected by realized investment losses, primarily from dispositions of
real estate-related investments. (See the discussion captioned "INVESTMENTS"
below.) KILICO's change in premium and change in reserving ratios reflected
declines in variable annuity sales and interest-sensitive life sales,
respectively. 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 1995 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 1995, 1994 and 1993 amounted to $5.8 million, $0.0 million and $5.8
million, respectively. Such amounts relate to accrued guaranty fund assessments
of $5.0 million, $4.0 million and $8.9 million at December 31, 1995, 1994 and
1993, respectively. No assessments were charged to expense during 1994 as KILICO
had established adequate accruals for all known insolvencies where an estimate
of the cost to cover losses to policyholders was available as of December 31,
1994. Additional assessments charged to expense in 1995 reflect accruals for the
life insurance industry's revised loss estimates for certain insolvent insurance
companies.

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.

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<PAGE> 42

RESERVES AND REINSURANCE

The following table provides a breakdown of KILICO's reserves for future policy
benefits by product type at December 31, 1995, 1994 and 1993 (in millions):

<TABLE>
<CAPTION>
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
General account annuities..................................... $3,794 $4,010 $4,180
Interest-sensitive life insurance............................. 779 833 860
Ceded future policy benefits.................................. 503 643 746
------ ------ ------
Total............................................... $5,076 $5,486 $5,786
====== ====== ======
</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, 1995, KILICO's reinsurance recoverable from FLA related to these
coinsurance transactions totaled approximately $502.8 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" in the notes to the
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 securities
brokerage and investment advisory firms as well as other 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, 1994 and 1995 than in earlier years, and they were
under review in 1994 and 1995 due to uncertainty with respect to Kemper's and
KILICO's ownership. These ratings impacted sales efforts in certain markets;
however, increases in KILICO's financial strength ratings and
claims-paying/performance ratings in January 1996 should favorably impact future
sales.

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

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<PAGE> 43

RANKINGS AND RATINGS

According to BEST'S AGENTS GUIDE TO LIFE INSURANCE COMPANIES, 1995, as of
December 31, 1994, KILICO ranked 61 of 1,315 life insurers by admitted assets;
440 of 1,137 by insurance in force; and 143 of 1,219 by net premiums written.

Following the January 1996 change in control, certain of KILICO's financial
strength ratings and claims-paying ability ratings were upgraded. KILICO's
ratings are as follows:

<TABLE>
<CAPTION>
CURRENT RATING PRIOR RATING
-------------- ---------------
<S> <C> <C>
A.M. Best Company............................... A (Excellent) A- (Excellent)
Moody's Investors Service....................... Aa3 (Excellent) Baa1 (Adequate)
Duff & Phelps Credit Rating Co.................. AA (Very High) A+ (High)
Standard & Poor's............................... Aq (Good) Aq (Good)
</TABLE>

EMPLOYEES

At December 31, 1995, KILICO utilized the services of approximately 380
employees of FKLA which are also shared with FLA. On January 1, 1996,
approximately 160 employees of Zurich Life Insurance Company of America ("Zurich
Life"), an affiliated company, became employees of FKLA in connection with the
integration of Zurich Life's operations with those of FKLA's. Beginning on
January 5, 1996, KILICO, FKLA, FLA and Zurich Life operate under the trade name
the Zurich Kemper Life Insurance Companies.

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 have 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, as
investments are an integral part of KILICO's business, and strengthened its
capital position.

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<PAGE> 44

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 optimize investment return. Portfolio management is handled by an
affiliated company, Zurich Kemper Investments, Inc. ("ZKI"), and its
subsidiaries and affiliates, with KILICO's real estate-related investments being
handled by a Kemper subsidiary. Investment policy is 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" below.

PROPERTIES

KILICO primarily shares the office space leased by FKLA from Lumbermens Mutual
Casualty Company, a former affiliate, ("Lumbermens"), 78,000 sq. ft. in Long
Grove, Illinois. FKLA anticipates increasing its Long Grove office space by up
to 43,000 sq. ft. in 1996. KILICO also has utilized 12,000 sq. ft. of office
space presently leased by ZKI in Chicago, although virtually all of this space
is expected to be eliminated by the end of 1996.

LEGAL PROCEEDINGS

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.

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<PAGE> 45

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

KILICO recorded a net loss of $133.0 million in 1995, compared with net income
of $26.4 million in 1994 and $14.0 million in 1993. The net loss in 1995 was
primarily due to an increase in the level of real estate-related realized
investment losses. In connection with the Zurich-led investor group's
acquisition of Kemper in early January 1996, KILICO's strategy with respect to
its real estate-related investments changed dramatically as of year-end 1995.
This change, as further discussed below, resulted in significant reductions in
real estate-related investments and significant realized capital losses in the
second half of 1995.

The improvement in 1994 net income, compared with 1993, 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 in 1994
were partially offset by higher realized investment losses in 1994, compared
with 1993.

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" in the notes to the Consolidated Financial
Statements.)

REALIZED INVESTMENT RESULTS, AFTER TAX
(in millions)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------
1995 1994 1993
------- ------ ------
<S> <C> <C> <C>
Real estate-related
losses.................... $(211.6) $(27.1) $(51.7)
Fixed maturity
write-downs............... (4.7) -- (12.3)
Other gains (losses), net... 9.1 (8.4) 44.3
------- ------ ------
Total............. $(207.2) $(35.5) $(19.7)
======= ====== ======
</TABLE>

Real estate-related losses increased in 1995, compared with 1994 and 1993,
reflecting realized capital losses predominately from real estate-related bulk
sale transactions in December 1995 and a higher level of write-downs on real
estate-related investments. These sales and write-downs reflect Zurich's and
Insurance Partners' strategies, now adopted by KILICO, with respect to the
disposition of real estate-related investments. Other realized investment gains
and losses for 1995, 1994 and 1993 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) improved
to $74.2 million in 1995, compared with $61.9 million and $33.7 million in 1994
and 1993, respectively, primarily due to an increase in fees and other income,
reductions in operating expenses and an increase in the net deferral of
insurance acquisition costs, offset by an increase in commissions, taxes,
licenses and fees. Operating earnings also improved in 1994, compared with 1993,
as a result of improvements in spread income.

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<PAGE> 46

KILICO improved spread income by increasing investment income in 1993 and 1994
and by also reducing crediting rates on certain existing blocks of 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 also
declined. Operating earnings then began to improve as crediting rates declined
at a faster rate than KILICO's investment income. Beginning in late 1994,
however, as a result of rising interest rates and other competitive market
factors, KILICO began to increase crediting rates on such interest-sensitive
products which actions adversely impacted spread income. The recent declines in
interest rates during the last three quarters of 1995, however, have mitigated
at present competitive pressures to increase existing renewal crediting rates
further.

Investment income was positively impacted in 1995, 1994 and 1993 from the
benefits of capital contributions to KILICO and from 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 $3.5 million in 1995, $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 1995 and 1994 also benefitted from the
above-mentioned repositioning of KILICO's investment portfolio and a $5.0
million pre-tax adjustment in 1994 related to the amortization of the discount
or premium on mortgage-backed securities. Investment income for 1995, 1994 and
1993 has also been impacted by a shift over the last few years to
higher-quality, lower yielding investments and foregone income on nonperforming
investments.

SALES
(in millions)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Annuities:
General account................ $247.4 $214.2 $244.2
Separate account............... 151.3 250.8 263.7
------ ------ ------
Total annuities...... 398.7 465.0 507.9
Interest-sensitive life insurance
and other...................... .4 .8 2.0
------ ------ ------
Total sales.......... $399.1 $465.8 $509.9
====== ====== ======
</TABLE>

Sales of annuity products consist of total deposits received. The increase in
1995 general account (fixed annuity) sales reflected KILICO's strategy to
increase sales of fixed annuities. KILICO's longer-term strategy is 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 1995 and 1994,
compared with 1993, due to competitive conditions in certain distribution
channels, in part reflecting KILICO's financial strength and performance ratings
and uncertainty concerning KILICO's ownership. KILICO believes that the increase
in its financial strength and performance ratings in January 1996 together with
KILICO's association with Zurich, will assist in KILICO's future sales efforts.

Included in fees and other income are fees received from KILICO's separate
account products of $21.9 million in 1995, compared with $20.8 million and $18.1
million in 1994 and 1993, respectively. Administrative fee revenue increased in
each of the last three years due to growth in average separate account assets.
Also included in other income in 1995 is a ceding commission experience
adjustment which resulted in income of $4.4 million related to certain
reinsurance transactions entered into by KILICO during 1992. (See the note
captioned "Reinsurance" in the notes to the Consolidated Financial Statements.)
Other income also included

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<PAGE> 47

surrender charge revenue of $7.7 million in 1995, compared with $7.4 million and
$6.3 million in 1994 and 1993, respectively, as total general account and
separate account policyholder surrenders and withdrawals increased in each of
the last three years.

POLICYHOLDER SURRENDERS AND WITHDRAWALS
(in millions)

<TABLE>
<CAPTION>
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
General account................ $755.9 $652.5 $516.3
Separate account............... 205.6 150.3 104.4
------ ------ ------
Total..................... $961.5 $802.8 $620.7
====== ====== ======
</TABLE>

Policyholder withdrawals increased during each of the last three years due to
planned reductions in fixed annuity crediting rates, a rising interest rate
environment during the last half of 1994 and early 1995, uncertainty regarding
KILICO's ownership until 1996 and KILICO's financial strength ratings and
claims-paying/performance ratings which were lower in 1993, 1994, and 1995 than
in earlier years and in 1996. KILICO's crediting rate increases in late 1994 and
in early 1995 were designed to reduce the level of future withdrawals. As a
result of increases in renewal crediting rates and declining interest rates in
the last three quarters of 1995, together with the benefits of the planned
association with Zurich, policyholder surrenders and withdrawals for the last
half of 1995 declined substantially from the level of surrenders and withdrawals
in the first half of 1995. KILICO expects that the level of surrender and
withdrawal activity experienced should remain relatively stable for 1996 as a
result of projected stable interest rates, the majority ownership of KILICO by
Zurich and the upgrades in KILICO's ratings in January 1996.

Commissions, taxes, licenses and fees were higher in 1995, compared with 1994,
primarily reflecting an increased level of guaranty fund assessments. Expenses
for such assessments totaled $5.8 million, $0.0, and $5.8 million in 1995, 1994
and 1993, respectively. (See "Guaranty association assessments" above.)
Commissions, taxes, licenses and fees were lower in 1994, compared with 1993,
primarily reflecting lower annuity sales and reduced guaranty fund assessments.

The higher level of deferral of policy acquisition costs in 1995, compared with
1994, 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 1995 due
to real estate-related capital losses and in 1994 due to the repositioning of
KILICO's investment portfolio. These repositionings in 1995 and 1994 favorably
impacted the amortization of policy acquisition costs because they 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 repositionings, the amortization of policy acquisition costs increased in
both 1995 and 1994, compared with 1993, primarily as a result of improved net
operating earnings during 1995 and 1994.

Operating expenses in 1995, compared with 1994 and 1993, declined as a result of
expense control efforts and the integration of the two life insurance
subsidiaries' operations and management beginning in 1992. Operating expenses in
1995 declined by approximately 18 percent, compared with the 1994 level.

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 $646.0
million of certain real estate-related investments to affiliated non-life realty
companies through December 31, 1995, third-party sales and

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<PAGE> 48

refinancings of certain mortgage and other real estate loans, approximately $932
million in annuity reinsurance transactions with an affiliated mutual life
insurance company, and capital contributions of $342.5 million through December
31, 1995.

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. In addition, as previously discussed, KILICO's strategy
with respect to its real estate-related investments changed dramatically by
year-end 1995.

INVESTED ASSETS AND CASH
(in millions)

<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------------
1995 1994
---------------- ----------------
<S> <C> <C> <C> <C>
Cash and short-term investments......................... $ 398 8.3% $ 227 4.6%
Fixed maturities:
Investment-grade:
NAIC(1) Class 1.................................... 3,096 64.9 2,569 52.2
NAIC(1) Class 2.................................... 570 12.0 760 15.5
Below investment grade:
Performing(2)...................................... 79 1.7 135 2.8
Nonperforming...................................... 7 .1 -- --
Equity securities....................................... 4 .1 15 .3
Joint venture mortgage loans(3)......................... 120 2.5 351 7.1
Third-party mortgage loans(3)........................... 144 3.0 319 6.5
Other real estate-related investments................... 36 .8 237 4.8
Policy loans............................................ 289 6.1 278 5.7
Other................................................... 26 .5 26 .5
------ ----- ------ -----
Total(4)...................................... $4,769 100.0% $4,917 100.0%
====== ===== ====== =====
</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, at December 31, 1994 of bonds
carried in other real estate-related investments. All such bonds were sold
during 1995.
(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" in
the notes to the consolidated financial statements.

FIXED MATURITIES

KILICO is carrying its fixed maturity investment portfolio, which it considers
available for sale, at estimated fair value, with the aggregate unrealized
appreciation or depreciation being recorded as a separate component of
stockholder's equity, net of any applicable income tax expense. The aggregate
unrealized appreciation, net

44
<PAGE> 49

of tax, on fixed maturities at December 31, 1995 was $70.4 million, compared
with unrealized depreciation of $243.6 million, at December 31, 1994. KILICO
does not record a net deferred tax benefit for the aggregate unrealized
depreciation on investments. Fair 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.

At December 31, 1995, investment-grade fixed maturities and cash and short-term
investments accounted for 85.2 percent of KILICO's invested assets and cash,
compared with 72.3 percent at December 31, 1994. Approximately 66 percent of
KILICO's NAIC Class 1 bonds were rated AAA or equivalent at year-end 1995,
compared with 70 percent at December 31, 1994.

Approximately 45.7 percent of KILICO's investment-grade fixed maturities at
December 31, 1995 were mortgage-backed securities, down from 49.2 percent at
December 31, 1994. 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
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 these investments have been and are
expected to remain liquid. KILICO plans to continue to reduce its holding of
such investments over time.

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 were predominately made since 1992,
the current interest rate environment is not expected to cause any material
extension of the average maturities of these investments. With the exception of
many of KILICO's September 1994 purchases of such investments, most of these
investments were purchased by KILICO at discounts. Prepayment activity on
securities purchased at a discount is not expected to result in any material
losses to KILICO because prepayments would generally accelerate the reporting of
the discounts as investment income. Prepayment activity resulting from a decline
in interest rates on such securities purchased at a premium would accelerate the
amortization of the premiums which would result in reductions of investment
income related to such securities. At December 31, 1995, KILICO had unamortized
discounts and premiums of $17.0 million and $11.0 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 11 issuers at December 31, 1995, totaled 1.8 percent
of cash and invested assets at December 31, 1995, compared with 2.8 percent at
December 31, 1994. See the note captioned "Invested Assets and Related Income"
in the notes to the 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.
KILICO has significantly reduced its exposure to below investment-grade
securities since 1990. 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.

45
<PAGE> 50

REAL ESTATE-RELATED INVESTMENTS

The $300 million real estate portfolio held by KILICO, consisting of joint
venture and third-party mortgage loans and other real estate-related
investments, constituted 6.3 percent of cash and invested assets at December 31,
1995, compared with $907 million, or 18.4 percent, at December 31, 1994. The
decrease in real estate-related investments was primarily due to bulk sale
transactions in December 1995, write-downs reflecting Kemper's and therefore
KILICO's new owners' future plans for real estate-related investments and other
sales during 1995.

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

<TABLE>
<CAPTION>
DECEMBER 31
--------------
1995 1994
---- ------
<S> <C> <C>
Investments before reserves, write-downs and net
joint venture operating losses:
Joint venture mortgage loans.................... $120 $ 358
Third-party mortgage loans...................... 159 353
Other real estate-related investments........... 124 350
---- ------
Subtotal................................... 403 1,061
Reserves........................................ (15) (43)
Write-downs..................................... (18) (97)
Cumulative net operating losses of joint
ventures owned............................... (70) (14)
---- ------
Net real estate investments....................... $300 $ 907
==== ======
</TABLE>

As reflected in the "Real estate portfolio" table on the following page, KILICO
has continued to fund both existing projects and legal commitments. The future
legal commitments were $248.2 million at December 31, 1995. This amount
represented a net decrease of $127.9 million since December 31, 1994, primarily
due to sales and fundings in 1995. As of December 31, 1995, KILICO expects to
fund approximately $56.4 million of these legal 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" in the notes to the 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 1996 will be rolled over, restructured or foreclosed if not
earlier disposed of.

Excluding the $0.5 million of real estate owned and $17.1 million of net equity
investments in joint ventures, KILICO's real estate loans totaled $282.0 million
at December 31, 1995, after reserves and write-downs. Of this amount, $278.5
million are on accrual status with a weighted average interest rate of
approximately 8.2 percent. Of these accrual loans, 33.0 percent have terms
requiring current periodic payments of their full

46
<PAGE> 51

contractual interest, 46.0 percent require only partial payments or payments to
the extent of cash flow of the borrowers, and 21.0 percent defer all interest to
maturity.

The equity investments in real estate at December 31, 1995 consisted of KILICO's
other equity investments in joint ventures. These 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.

REAL ESTATE PORTFOLIO
(in millions)

<TABLE>
<CAPTION>
MORTGAGE LOANS OTHER REAL ESTATE-RELATED INVESTMENTS
----------------- -------------------------------------------------
JOINT THIRD- OTHER REAL ESTATE EQUITY
VENTURE PARTY BONDS(2) LOANS(3) OWNED INVESTMENTS TOTAL
------- ------ -------- -------- ----------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1994................... $ 351.4 $318.7 $ 49.9 $ 84.6 $ 57.3 $ 45.4 $ 907.3(1)
Additions (deductions):
Fundings................. 36.2 3.7 -- 1.6 3.8 21.2 66.5
Interest added to
principal.............. 23.1 9.1 -- .4 -- -- 32.6
Sales/paydowns/
distributions.......... (147.5) (97.9) (25.1) (27.3) (76.1) (2.2) (376.1)
Sales to KFC Portfolio
Corp................... (1.7) (1.0) -- (.8) -- -- (3.5)
Operating loss........... -- -- -- -- -- (.4) (.4)
Transfers to real estate
owned.................. (3.6) (15.9) (2.8) -- 22.3 -- --
Realized investments
losses................. (127.3) (61.2) (13.2) (47.5) (2.8) (73.6) (325.6)
Other transfers, net..... 24.8 (25.4) (11.2) 13.1 -- (1.3) --
Other transactions,
net.................... (35.0) 14.4 2.4 (7.0) (4.0) 28.0 (1.2)
------- ------ ------ ------ ------- ------- -------
Balance at December 31,
1995................... $ 120.4 $144.5 $ -- $ 17.1 $ .5 $ 17.1 $ 299.6(4)
======= ====== ====== ====== ======= ======= =======
</TABLE>

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

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

(2) KILICO's real estate-related bonds, all of which were rated below
investment-grade, were 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 various purposes. All such bonds
were disposed of during 1995.

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

(4) Net of $33.2 million reserve and write-downs. Excludes $5.6 million of real
estate-related accrued interest.

REAL ESTATE CONCENTRATIONS

KILICO's real estate portfolio is distributed by geographic location and
property type. However, KILICO has concentration exposures in certain states and
in certain types of properties. In addition to these exposures, KILICO also has
exposures to certain real estate developers and partnerships. (See the notes
captioned "Unconsolidated Investors" and "Concentration of Credit Risk" in the
notes to the Consolidated Financial Statements.)

47
<PAGE> 52

PROVISIONS FOR REAL ESTATE-RELATED LOSSES

KILICO evaluates its real estate-related investments (including accrued
interest) by estimating the probabilities of loss. (See the discussion of SFAS
114, "Accounting by Creditors for Impairment of a Loan" in the note captioned
"Summary of Significant Accounting Policies" in the notes to the Consolidated
Financial Statements.) 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 12/31/93...... $ 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
1995 change in reserve... (7.0) (3.9) (16.7) (27.6)
------- ----- ------ ------
Balance at 12/31/95...... $ .1 $ 6.5 $ 8.8 $ 15.4
======= ===== ====== ======
</TABLE>

The substantial reductions in reserves and write-downs by year-end 1995 reflect
the sales of real estate-related investments primarily in the fourth quarter of
1995.

REAL ESTATE OUTLOOK

KILICO's $300 million investment in real estate-related investments is expected
to decline further through future sales. KILICO's net income could be materially
reduced in future periods if real estate market conditions worsen in areas where
KILICO's portfolio is located or if Kemper's and KILICO's plans with respect to
certain projects change.

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
--------------------
1995 1994
----- ------
<S> <C> <C>
Potential problem loans(1)..................... $17.9 $ 57.9
Past due loans(2).............................. -- --
Nonaccrual loans(3)............................ 3.5 274.6
Restructured loans (currently performing)(4)... .2 50.5
Real estate owned.............................. .5 57.3
----- ------
Total................................ $22.1 $440.3
===== ======
</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.

48
<PAGE> 53

(3) KILICO does not accrue interest on real estate-related investments when it
judges that the likelihood of collection of interest is doubtful.

(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).

KILICO continues to devote significant attention to its real estate portfolio,
enhancing monitoring of the portfolio and formulating specific action plans
addressing nonperforming and potential problem loans. KILICO is continuing to
analyze various potential transactions designed to further 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 $348.4 million in 1995, compared
with $353.1 million in 1994 and $339.3 million in 1993. Included in pre-tax net
investment income is KILICO's share of the operating losses from equity
investments in real estate consisting of 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
---------------------------
1995 1994 1993
----- ----- -----
<S> <C> <C> <C>
Fixed maturities....................... $ .4 $ -- $ 8.6
Real estate-related investments........ 20.5 28.4 32.2
----- ----- -----
Total........................... $20.9 $28.4 $40.8
===== ===== =====
Basis points........................... 43 55 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, 1995, KILICO
estimates foregone investment income in 1996 will decrease compared with the
1995 level. Any increase in 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

49
<PAGE> 54

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, higher
financial strength and claims-paying ability ratings 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 $207.2
million, $35.5 million and $19.7 million for 1995, 1994 and 1993, respectively.
(See the note captioned "Invested Assets and Related Income" in the notes to the
Consolidated Financial Statements.)

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 "Accounting for
Income Taxes" at January 1, 1993 (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" in the notes to the
Consolidated Financial Statements.)

INTEREST RATES

In 1994, rapidly rising short-term interest rates resulted in a much flatter
yield curve as the Federal Reserve Board raised rates five times during the year
and once during first-quarter 1995. Interest rates subsequently declined through
the remainder of 1995.

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 rising interest rate environment in 1994 contributed to an increase in net
investment income as well as to both realized and unrealized fixed maturity
investment losses in 1994. Also, lower renewal crediting rates on annuities,
compared with competitors' higher new money crediting rates influenced certain
annuity holders to seek alternative products. KILICO mitigates this risk
somewhat by charging surrender fees which decrease over time 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,
1995, however, were no longer subject to significant surrender fees.

As interest rates rose during 1994 and early 1995, KILICO's capital resources
were adversely impacted by unrealized loss positions from its fixed maturity
investments. As interest rates declined during the remainder of 1995, KILICO's
capital resources were positively impacted by the elimination of the 1994
year-end unrealized loss position on its fixed maturity investments.

50
<PAGE> 55

LIQUIDITY AND CAPITAL RESOURCES

KILICO carefully monitors cash and short-term investments to maintain adequate
balances for timely payment of policyholder benefits, expenses, taxes and
policyholder's 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, investment income, other operating
revenue and cash provided from maturing or sold investments. (See the
Policyholder surrenders and withdrawals table and related discussion and
"INVESTMENTS" above.)

RATINGS

Ratings are an important factor in establishing the competitive position of life
insurance companies. Rating organizations continue to review the financial
performance and condition of life insurers and their investment portfolios,
including those of KILICO. Any reductions in KILICO's claims-paying ability or
financial strength ratings could result in its products being less attractive to
consumers. Any reductions in KILICO's parent's ratings could also adversely
impact KILICO's financial flexibility.

Ratings reductions for Kemper or its subsidiaries and other financial events can
also trigger obligations to fund certain real estate-related commitments to take
out other lenders. In such events, those lenders can be expected to renegotiate
their loan terms, although they are not contractually obligated to do so.

Each rating is subject to revision or withdrawal at any time by the assigning
organization and should be evaluated independently of any other rating. (See
"Ranking and ratings" above.)

STOCKHOLDER'S EQUITY

Stockholder's equity totaled $605.9 million at December 31, 1995, compared with
$434.0 million and $654.6 million at December 31, 1994 and 1993, respectively.
The 1995 increase in stockholder's equity was primarily due to a $304.9 million
benefit related to the change in the unrealized gain position of KILICO's fixed
maturity investment portfolio due to declining interest rates, offset by a net
loss of $133.0 million. The 1994 decrease in stockholder's equity was primarily
due to a $329.5 million unrealized loss related to the change in the unrealized
loss position of KILICO's fixed maturity investment portfolio due to rising
interest rates, offset by a capital contribution of $82.5 million and net income
of $26.4 million.

51
<PAGE> 56

DIRECTORS AND OFFICERS OF KILICO

<TABLE>
<CAPTION>
NAME AND AGE
POSITION WITH KILICO
YEAR OF ELECTION OTHER BUSINESS EXPERIENCE DURING PAST 5 YEARS OR MORE
- ------------------------------ -------------------------------------------------------------
<S> <C>
John B. Scott (51) Chief Executive Officer and President of Federal Kemper Life
Chief Executive Officer since Assurance Company and Fidelity Life Association since 1988.
February 1992. President since Chief Executive Officer and President of Zurich Life
November 1993. Director since Insurance Company of America since January 1996. Chairman of
1992. the Board of Federal Kemper Life Assurance Company from April
1988 to January 1996. Chairman of the Board of KILICO from
February 1992 to January 1996. Executive Vice President and
director of Kemper Corporation from January 1994 and March
1996, respectively. Executive Vice President of Kemper
Financial Companies, Inc. from January 1994 to January 1996
and Director from 1992 to January 1996.
Jerome J. Cwiok (48) Executive Vice President of Federal Kemper Life Assurance
Executive Vice President since Company and Fidelity Life Association since 1995. Executive
1995. Vice President of Zurich Life Insurance Company of America
since March 1996. Senior Vice President of KILICO, Federal
Kemper Life Assurance Company and Fidelity Life Association
from 1993 to 1995. Vice President of Federal Kemper Life
Assurance Company and Fidelity Life Association since 1993.
Executive Vice President of Academy Insurance Group from 1986
to 1993.
Eliane C. Frye (47) Executive Vice President of Federal Kemper Life Assurance
Executive Vice President since Company and Fidelity Life Association since 1995. Executive
1995. Vice President of Zurich Life Insurance Company of America
since March 1996. Senior Vice President of KILICO from 1992
to 1995. Senior Vice President of Federal Kemper Life
Assurance Company and Fidelity Life Association from 1993 to
1995. Vice President of Federal Kemper Life Assurance Company
and Fidelity Life Association from 1988 to 1993.
Frederick L. Blackmon (43) Senior Vice President and Chief Financial Officer of Federal
Senior Vice President and Kemper Life Assurance Company and Fidelity Life Association
Chief Financial Officer since November 1995. Treasurer and Chief Financial Officer of
since November 1995. Kemper Corporation since January 1996. Senior Vice President
and Chief Financial Officer of Zurich Life Insurance Company
of America since March 1996. Chief Financial Officer of
Alexander Hamilton Life Insurance Company from April 1989 to
November 1995.
</TABLE>

52
<PAGE> 57

<TABLE>
<CAPTION>
NAME AND AGE
POSITION WITH KILICO
YEAR OF ELECTION OTHER BUSINESS EXPERIENCE DURING PAST 5 YEARS OR MORE
- ------------------------------ -------------------------------------------------------------
<S> <C>
James E. Hohmann (39) Senior Vice President and Chief Actuary of Federal Kemper
Senior Vice President and Life Assurance Company and Fidelity Life Association since
Chief Actuary since December December 1995. Senior Vice President and Chief Actuary of
1995. Zurich Life Insurance Company of America since March 1996.
Managing Principal (Partner) of Tillinghast--Towers Perrin
from January 1991 to December 1995. Consultant/Principal
(Partner) of Tillinghast--Towers Perrin from November 1986 to
January 1991.
Debra P. Rezabek (40) Senior Vice President of Federal Kemper Life Assurance
Senior Vice President since Company and Fidelity Life Association since 1996. General
1996. General Counsel since Counsel of Federal Kemper Life Assurance Company and Fidelity
1992. Corporate Secretary Life Association since 1992. Corporate Secretary of Federal
since January 1996. Kemper Life Assurance Company and Fidelity Life Association
since January 1996. Senior Vice President and General Counsel
of Zurich Life Insurance Company of America since March 1996.
Assistant General Counsel of Federal Kemper Life Assurance
Company and Fidelity Life Association from 1988 to 1992.
Assistant Secretary of KILICO, Federal Kemper Life Assurance
Company and Fidelity Life Association from 1992 to 1996.
Assistant Secretary of Kemper Corporation since January 1996.
Loren J. Alter (57) Director of Federal Kemper Life Assurance Company, Fidelity
Director since January 1996. Life Association and Zurich Kemper Investments, Inc. since
January 1996. Director of Zurich Life Insurance Company of
America since May 1979. Executive Vice President of Zurich
Insurance Company since 1979. President, Chief Executive
Officer and Director of Kemper Corporation since January
1996.
William H. Bolinder (52) Chairman of the Board and Director of Federal Kemper Life
Chairman of the Board and Assurance Company and Fidelity Life Association since January
Director since January 1996. 1996. Chairman of the Board and Director of Zurich Life
Insurance Company of America since March 1995. Chairman of
the Board of Kemper Corporation since January 1996. Vice
Chairman and Director of Zurich Kemper Investments, Inc.
since January 1996. Chairman of the Board of American
Guarantee and Liability Insurance Company, Zurich American
Insurance Company of Illinois, American Zurich Insurance
Company and Steadfast Insurance Company since 1986. Chief
Executive Officer of American Guarantee and Liability
Company, Zurich American Insurance Company of Illinois,
American Zurich Insurance Company and Steadfast Insurance
Company from 1986 to June 1995. President of Zurich Holding
Company of America since 1986. U.S. Manager of Zurich
Insurance Company, U.S. Branch since 1986. Underwriter for
Zurich American Lloyds since 1986.
</TABLE>

53
<PAGE> 58

<TABLE>
<CAPTION>
NAME AND AGE
POSITION WITH KILICO
YEAR OF ELECTION OTHER BUSINESS EXPERIENCE DURING PAST 5 YEARS OR MORE
- ------------------------------ -------------------------------------------------------------
<S> <C>
Daniel L. Doctoroff (37) Director of Kemper Corporation, Federal Kemper Life Assurance
Director since January 1996. Company and Fidelity Life Association since January 1996.
Managing Partner of Insurance Partners Advisors, L.P. since
February 1994. Vice President of Keystone, Inc. since October
1992. Managing Director of Rosecliff Inc./Oak Hill Partners,
Inc. since August 1987. Director of Bell & Howell Company
since 1989; National Re Corporation since 1990; Specialty
Foods Corporation since 1993; and Transport Holdings Inc.
since 1995.
Steven M. Gluckstern (45) Director of Kemper Corporation, Federal Kemper Life Assurance
Director since January 1996. Company and Fidelity Life Association since January 1996.
Chairman of the Board and Director of Zurich Kemper
Investments, Inc. since January 1996. Chairman of the Board
and Chief Executive Officer of Zurich Reinsurance Centre,
Inc. since May 1993. President of Centre Re, Bermuda from
December 1986 to May 1993.
Michael P. Stramaglia (36) Director of Federal Kemper Life Assurance Company and
Director since January 1996. Fidelity Life Association since January 1996. Chief Executive
Officer and President of Zurich Life Insurance Company of
Canada since June 1994. Executive Vice-President and Chief
Operating Officer of Zurich Life Insurance Company of Canada
from June 1993 to June 1994. Senior Vice-President of the
Corporate Division of Zurich Life Insurance Company of Canada
from November 1990 to January 1993. Director of Zurich Life
Insurance Company of Canada, Zurich Life of Canada Holdings
Limited, Zurich Indemnity Company of Canada, Zurich Canadian
Holdings Limited, and Zurmex Canada Holdings Limited.
Paul H. Warren (40) Director of Kemper Corporation, Federal Kemper Life Assurance
Director since January 1996. Company and Fidelity Life Association since January 1996.
Partner of Insurance Partners Advisors, L.P. since March
1994. Managing Director of International Insurance Advisors
since March 1992. Vice President of J.P. Morgan from June
1986 to March 1992. Director of Unionamerica Holdings plc
since 1993; Unionamerica Insurance Company since 1993;
Tarquin plc since 1994; and Chairman Underwriting Agencies
Ltd. since 1994.
</TABLE>

54
<PAGE> 59

EXECUTIVE COMPENSATION

TABLE I

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
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)(6)(7)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
John B. Scott..................... 1995 $172,800 $129,600 $ 20,035 $ -- $ 15,360 $260,106
Chief Executive Officer(1) 1994 163,200 160,800 396,801 125,280 16,080 256,915
1993 153,600 129,600 11,492 80,730 6,720 21,204
Jerome J. Cwiok................... 1995 95,000 67,500 23,381 -- 9,000 28,357
Executive Vice President(1) 1994 84,896 59,000 113,926 40,600 2,000 9,922
Eliane C. Frye.................... 1995 91,200 67,200 9,261 -- 10,560 41,546
Executive Vice President(1) 1994 73,800 58,560 57,525 38,976 1,920 57,913
</TABLE>

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

(1) Also served in same positions for FKLA and FLA. An allocation of the time
devoted to duties as executive officer of KILICO has been made. All
compensation items reported in the Summary Compensation Table reflect this
allocation.

(2) The amounts disclosed in this column include:

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

(b) The cash value of shares of Kemper common stock when awarded under the
Kemper Anniversary Award Plan. Employees were 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.

(c) The taxable benefit from personal use of an employer-provided automobile
and certain estate planning services facilitated for executives.

(d) Relocation expense reimbursements of $109,760 in 1994 and $15,474 in
1995 for Mr. Cwiok.

(e) Compensation income reported in 1994 of $384,822 for Mr. Scott and
$55,974 for Ms. Frye, based on the market value on the vesting date of
restricted stock awarded under Kemper's long-term incentive plans.

(3) Due to the June 1994 vesting of all outstanding shares of restricted stock
granted in 1992 or earlier and the cancellation of shares awarded in 1993
and 1994, no shares of restricted stock were held by any of the named
executive officers at December 31, 1995.

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

55
<PAGE> 60

(5) The amounts in this column include:

(a) The amounts of employer contributions allocated to the accounts of the
named persons under profit sharing plans or under supplemental plans
maintained to provide benefits in excess of applicable ERISA limitations.

(b) Distributions from the Kemper and FKLA supplemental plans.

(c) Amounts representing a portion of the executives' income tax payments
arising from the June 1994 vesting of shares of restricted stock due to the
approval of a merger agreement among Kemper, Conseco, Inc. ("Conseco") and a
wholly owned subsidiary of Conseco (the "Conseco Merger Agreement.") The
Committee on Compensation and Organization of the Kemper board of directors
(the "Committee") authorized such payments to 16 senior executives who were
either precluded under pertinent securities law limitations or discouraged
as a matter of appearance from subsequently selling their vested shares of
restricted stock prior to the closing of the then-planned Conseco merger
transaction. The executives' tax liabilities were based on the $61.375 fair
market value of the restricted stock on the vesting date. Kemper's payments
to the executives were derived from a formula based on certain relative
stock values but approximated one-third of the executives' total income tax
liabilities from the imputed income on vesting. Mr. Scott and Ms. Frye
received $96,318 and $17,103, respectively, reported for 1994, under this
tax liability payment arrangement.

(d) Income related to the distribution of shares of the preferred stock of
EVEREN to holders of Kemper employee stock options and/or phantom stock
units as a result of the spin-off of EVEREN by Kemper.

(6) Pursuant to the Conseco Merger Agreement, the restricted stock awards for
1993 and 1994 were cancelled. To replace these awards, on June 30, 1994, the
Committee, under the Kemper Bonus Restoration Plan and in its sole
discretion, granted cash awards to the named executive officers and other
affected executives entitling each of them to receive an amount in cash
immediately prior to the effective time of the then-planned Conseco merger
equal to the product of the number of shares of restricted stock previously
granted to such individual under the 1993 Senior Executive Long-Term
Incentive Plan multiplied by the consideration payable in the merger. As a
result of the termination of the Conseco Merger Agreement, no cash awards
were paid pursuant to the Kemper Bonus Restoration Plan.

In January 1995, the board of directors, upon the advice of the Committee,
approved the adoption of the Kemper 1995 Executive Incentive Plan under
which active employee holders of the previously cancelled shares of
restricted stock were granted phantom stock units by the Committee equal to
the number of shares cancelled plus an added amount representing 20 percent
of the aggregate cancelled shares. The 20 percent supplement was awarded in
recognition of the imposition of new vesting periods on the phantom awards
(to the extent the restricted stock held prior to cancellation would
otherwise have vested in June 1994 had stockholder approval of the affected
restricted stock plan been obtained as earlier anticipated).

By their terms, the phantom stock units associated with cancelled shares of
restricted stock originally awarded in 1993, as supplemented, would have
vested on December 31, 1995 and entitle the holders to a cash payment (net
of any required tax withholding) determined by the value of Kemper's common
stock based on an average trading range to December 31, 1995, and those
phantom stock units associated with the cancelled restricted stock
originally awarded in 1994 could similarly have vested and been paid on
December 31, 1996, subject to ongoing employment to the respective vesting
dates. Notwithstanding these vesting provisions, the phantom stock units
earlier vested and entitled payment upon the consummation of a "change of
control" of Kemper. Dividend equivalents were payable to holders of the
phantom stock units as compensation income when and as dividends were paid
on Kemper's outstanding common stock, and the Executive Incentive Plan
provided for standard anti-dilution adjustments.

56
<PAGE> 61

Phantom units awarded to the named executive officers subject to vesting on
December 31, 1995 and December 31, 1996, were Mr. Scott 5,400 and 12,600
phantom units, respectively, Ms. Frye 1,680 and 1,680 phantom units,
respectively, and Mr. Cwiok 0 and 1,680 phantom units, respectively. All
phantom stock units vested and were paid immediately prior to the
effectiveness of the January 4, 1996 acquisition of Kemper by Zurich and
Insurance Partners. Messrs. Scott and Cwiok and Ms. Frye received allocated
cash out payments of $430,272, $41,832 and $80,317, respectively, in 1996.

(7) Pursuant to the terms of a Termination Protection Agreement with Kemper
dated March 17, 1994, Mr. Scott received payments in 1995 and 1996. These
payments were made by Kemper and no portion of the payments were allocated
to KILICO.

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) ($/SH)(3) DATE(4) 5% ($) 10% ($)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
John B. Scott..................................... 15,360 2.3 $45.125 -- -- --
Jerome J. Cwiok................................... 9,000 1.4 $45.125 -- -- --
Eliane C. Frye.................................... 10,560 1.6 $45.125 -- -- --
</TABLE>

- ---------------
(1) Each of the options reflected in the table, when granted, were subject to
installment vesting provisions whereby only a portion of the underlying
stock would become eligible for exercise on successive anniversaries of the
date of grant. Such options became exercisable in full, however, in
connection with the approval of the merger agreement with Zurich and
Insurance Partners in May, 1995.

(2) Based on 654,750 shares, the total number of shares under options granted in
1995 for all eligible employees of KILICO, Kemper and eligible affiliates.

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

(4) All unexercised Kemper stock options were cancelled immediately prior to the
January 4, 1996 effectiveness of the acquisition of Kemper by Zurich and
Insurance Partners. Optionees were paid the spread between their option
exercise price and $49.80 per share. Mr. Cwiok and Ms. Frye received $84,150
and $112,370, respectively, in 1996 as a result of such payments. Mr. Scott
exercised 133,325 options in 1996 prior to the acquisition for a total
realized income of $1,525,185.

57
<PAGE> 62

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 (#)(1) 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)............ -- -- -- --
Jerome J. Cwiok(2).......... -- -- -- --
Eliane C. Frye(2)........... 11,278 $125,948 -- --
</TABLE>

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

(1) See footnote (4) under Table II above.

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

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.

58
<PAGE> 63

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, 1995 and 1994, 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, 1995. In
connection with our audits of the consolidated financial statements, we also
have audited the supplementary schedule as listed in the accompanying index.
These consolidated financial statements and the supplementary schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and the supplementary
schedule 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, 1995 and 1994, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1995, in conformity with generally accepted
accounting principles. Also in our opinion, the related supplementary 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.

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.

KPMG PEAT MARWICK LLP
Chicago, Illinois
March 15, 1996

59
<PAGE> 64

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET
(in thousands, except share data)

<TABLE>
<CAPTION>
DECEMBER 31
---------------------------
1995 1994
---------- ----------
<S> <C> <C>
ASSETS
Fixed maturities, available for sale, at fair value (cost:
1995, $3,643,985; 1994, $3,707,356).......................... $3,752,325 $3,463,732
Short-term investments......................................... 372,515 204,164
Joint venture mortgage loans................................... 120,359 351,359
Third-party mortgage loans..................................... 144,450 318,682
Other real estate-related investments.......................... 34,780 237,242
Policy loans................................................... 289,390 277,743
Other invested assets.......................................... 29,809 40,527
---------- ----------
Total investments.................................... 4,743,628 4,893,449
Cash........................................................... 25,811 23,189
Accrued investment income...................................... 104,402 125,543
Deferred insurance acquisition costs........................... 318,636 310,465
Federal income tax receivable.................................. 112,646 25,656
Reinsurance recoverable........................................ 502,836 642,801
Other assets and receivables................................... 12,617 7,993
Assets held in separate accounts............................... 1,761,110 1,507,984
---------- ----------
Total assets......................................... $7,581,686 $7,537,080
========== ==========
LIABILITIES
Future policy benefits......................................... $4,573,212 $4,843,690
Ceded future policy benefits................................... 502,836 642,801
Other accounts payable and liabilities......................... 25,943 67,261
Deferred income taxes.......................................... 112,709 41,364
Liabilities related to separate accounts....................... 1,761,110 1,507,984
---------- ----------
Total liabilities.................................... 6,975,810 7,103,100
---------- ----------
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..................................... 491,994 491,994
Unrealized gain (loss) on investments.......................... 68,502 (236,443)
Retained earnings.............................................. 42,880 175,929
---------- ----------
Total stockholder's equity........................... 605,876 433,980
---------- ----------
Total liabilities and stockholder's equity........... $7,581,686 $7,537,080
========== ==========
</TABLE>

See accompanying notes to consolidated financial statements.

60
<PAGE> 65

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
REVENUE
Net investment income................................. $ 348,448 $ 353,084 $ 339,274
Realized investment losses............................ (318,700) (54,557) (27,584)
Fees and other income................................. 38,337 31,950 25,687
--------- --------- ---------
Total revenue............................... 68,085 330,477 337,377
--------- --------- ---------
BENEFITS AND EXPENSES
Benefits and interest credited to policyholders....... 245,615 248,494 275,689
Commissions, taxes, licenses and fees................. 31,793 26,910 33,875
Operating expenses.................................... 20,837 25,324 24,383
Deferral of insurance acquisition costs............... (36,870) (31,852) (31,781)
Amortization of insurance acquisition costs........... 14,423 20,809 12,376
--------- --------- ---------
Total benefits and expenses................. 275,798 289,685 314,542
--------- --------- ---------
Income (loss) before income tax expense (benefit) and
cumulative effect of change in accounting
principle........................................... (207,713) 40,792 22,835
Income tax expense (benefit).......................... (74,664) 14,431 11,142
--------- --------- ---------
Income (loss) before cumulative effect of
change in accounting principle............ (133,049) 26,361 11,693
Cumulative effect of change in accounting principle... -- -- 2,350
--------- --------- ---------
Net income (loss)........................... $(133,049) $ 26,361 $ 14,043
========= ========= =========
</TABLE>

See accompanying notes to consolidated financial statements.

61
<PAGE> 66

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
(in thousands)

<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
CAPITAL STOCK, beginning and end of year........... $ 2,500 $ 2,500 $ 2,500
--------- --------- ---------
ADDITIONAL PAID-IN CAPITAL, beginning of year...... 491,994 409,423 310,237
Capital contributions from parent.................. -- 82,500 90,000
Transfer of limited partnership interest to
parent........................................... -- 71 9,186
--------- --------- ---------
End of year.............................. 491,994 491,994 409,423
--------- --------- ---------
UNREALIZED GAIN (LOSS) ON INVESTMENTS, beginning of
year............................................. (236,443) 93,096 39,872
Unrealized gain (loss) on revaluation of
investments, net................................. 304,945 (329,539) 53,224
--------- --------- ---------
End of year.............................. 68,502 (236,443) 93,096
--------- --------- ---------
RETAINED EARNINGS, beginning of year............... 175,929 149,568 136,055
Net income (loss).................................. (133,049) 26,361 14,043
Dividend of limited partnership interest to
parent........................................... -- -- (530)
--------- --------- ---------
End of year.............................. 42,880 175,929 149,568
--------- --------- ---------
Total stockholder's equity............... $ 605,876 $ 433,980 $ 654,587
========= ========= =========
</TABLE>

See accompanying notes to consolidated financial statements.

62
<PAGE> 67

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

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------------
1995 1994 1993
--------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss).............................. $(133,049) $ 26,361 $ 14,043
Reconcilement of net income (loss) to net cash
provided:
Realized investment losses.................. 318,700 54,557 27,584
Interest credited and other charges......... 237,984 242,591 269,766
Deferred insurance acquisition costs........ (22,447) (11,043) (19,405)
Amortization of discount and premium on
investments............................... 4,586 (1,383) (203)
Deferred income taxes....................... 38,423 20,809 14,596
Federal income tax receivable............... (86,990) 809 (10,110)
Other, net.................................. (29,905) (14,161) 40,258
--------- ----------- -----------
Net cash provided from operating
activities........................... 327,302 318,540 336,529
--------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash from investments sold or matured:
Fixed maturities held to maturity........... 320,143 144,717 187,949
Fixed maturities sold prior to maturity..... 297,637 910,913 1,652,119
Mortgage loans, policy loans and other
invested assets........................... 450,573 536,668 881,505
Cost of investments purchased or loans
originated:
Fixed maturities............................ (549,867) (1,447,393) (2,322,085)
Mortgage loans, policy loans and other
invested assets........................... (131,966) (281,059) (443,445)
Short-term investments, net.................... (168,351) 198,299 (214,999)
Net change in receivable and payable for
securities transactions..................... (1,397) (16,553) 39,078
Net reductions in other assets................. 1,996 2,678 8,062
--------- ----------- -----------
Net cash provided by (used in)
investing activities................. 218,768 48,270 (211,816)
--------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Policyholder account balances:
Deposits.................................... 247,778 215,034 246,219
Withdrawals................................. (755,917) (652,513) (516,340)
Capital contributions from parent.............. -- 82,500 90,000
Other.......................................... (35,309) 3,871 16,776
--------- ----------- -----------
Net cash used in financing
activities........................... (543,448) (351,108) (163,345)
--------- ----------- -----------
Net increase (decrease) in cash... 2,622 15,702 (38,632)
CASH, beginning of period........................ 23,189 7,487 46,119
--------- ----------- -----------
CASH, end of period.............................. $ 25,811 $ 23,189 $ 7,487
========= =========== ===========
</TABLE>

See accompanying notes to consolidated financial statements.

63
<PAGE> 68

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 licensed in the District of Columbia and all
states except New York. The Company is a wholly-owned subsidiary of Kemper
Corporation ("Kemper"). On January 4, 1996, an investors group comprised of
Zurich Insurance Company ("Zurich"), Insurance Partners, L.P. ("IP") and
Insurance Partners Offshore (Bermuda), L.P. (together with IP, "Insurance
Partners") acquired all of the issued and outstanding common stock of Kemper. As
a result of the change in control, Zurich and Insurance Partners indirectly and
directly own 80 percent and 20 percent, respectively, of Kemper and therefore
the Company. The consolidated financial statements of the Company as of December
31, 1995 have been prepared on a historical cost basis and have not been
adjusted to reflect the fair values of the Company's assets and liabilities as
of the date of the acquisition by Zurich and Insurance Partners.

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.

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
could affect the reported amounts of assets and liabilities as well as the
disclosure of contingent assets or liabilities at the date of the financial
statements. As a result, actual results reported as revenue and expenses could
differ from the estimates reported in the accompanying financial statements. As
further discussed in the accompanying notes to the consolidated financial
statements, significant estimates and assumptions affect deferred insurance
acquisition costs, provisions for real estate-related losses and reserves, other
than temporary declines in values for fixed maturities, the valuation allowance
for deferred income taxes and the calculation of fair value disclosures for
certain financial instruments.

LIFE INSURANCE REVENUE AND EXPENSES

Revenue for annuities and interest-sensitive life insurance 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 is a ceding commission experience adjustment
received in 1995 as a result of certain reinsurance transactions entered into by
the Company during 1992. (See the note captioned "Reinsurance".)

DEFERRED INSURANCE ACQUISITION COSTS

The costs of acquiring new business, principally commission expense and certain
policy issuance and underwriting expenses, have been deferred to the extent they
are recoverable from estimated future gross profits on the related contracts and
policies. The deferred insurance acquisition costs for annuities, separate
account business and interest-sensitive life insurance products are being
amortized over the estimated contract life in relation to the present value of
estimated gross profits. Beginning in 1994, deferred insurance

64
<PAGE> 69

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 8.35 percent.
Future minimum guaranteed interest rates vary from 4 percent to 8.35 percent for
periods ranging from a portion of 1996 up to a portion of 1998 and are generally
3 percent to 4.5 percent thereafter. For contracts that have annuitized,
interest rates 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 are carried at fair value. Short-term
investments are carried at cost, which approximates fair value. (See the note
captioned "Fair Value of Financial Instruments".)

Mortgage loans are carried at their unpaid balance net of unamortized discount
and any applicable reserves or write-downs. Other real estate-related
investments net of any applicable 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.

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, ACCOUNTING BY
CREDITORS FOR IMPAIRMENT OF A LOAN, indicate a likelihood of loss. Prior to
year-end 1995, the Company evaluated its real estate-related assets (including
accrued interest) by estimating the probabilities of loss utilizing various
projections that included several factors relating to the borrower, property,
term of the loan, tenant composition, rental rates, other supply and demand
factors and overall economic conditions. Generally, at that time, the reserve
was 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. At year-end 1995, reflecting the
Company's change in strategy with respect to its real estate portfolio, and the
disposition thereof, real estate-related investments were valued using an
estimate of the investments observable market price, net of estimated costs to
sell.

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.

65
<PAGE> 70

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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. Such
unrealized gains are recorded net of deferred income tax expense, while
unrealized losses are not tax benefitted.

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.

Policy loans are carried at their unpaid balance. Other invested assets consist
primarily of venture capital investments and a leveraged lease and are carried
at cost. Other invested assets also included equity securities which are carried
at fair value.

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 fees from the separate account and retains varying amounts of
withdrawal charges to cover expenses in the event of early withdrawals by
contract holders. The assets and liabilities of the separate accounts are
carried at fair value.

INCOME TAX

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

Under SFAS 109, ACCOUNTING FOR INCOME TAXES, deferred taxes are provided on the
temporary differences between the tax and financial statement basis of assets
and liabilities.

66
<PAGE> 71

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(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, 1995, 1994 and 1993 amounted to $(25.2 million),
$(10.7 million) and $4.2 million, respectively.

Not reflected in the statement of cash flows are rollovers of mortgage loans,
other loans and investments totaling approximately $57.0 million and $146.0
million in 1994 and 1993, respectively.

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

(3) INVESTED ASSETS AND RELATED INCOME

The Company is carrying its fixed maturity investment portfolio at estimated
fair value as fixed maturities are considered available for sale, depending upon
certain economic and business conditions. The carrying value (estimated fair
value) of fixed maturities compared with amortized cost, adjusted for
other-than-temporary declines in value, at December 31, 1995 and 1994, were as
follows:

<TABLE>
<CAPTION>
ESTIMATED UNREALIZED
CARRYING AMORTIZED ---------------------
(in thousands) VALUE COST GAINS LOSSES
---------- ---------- -------- ---------
<S> <C> <C> <C> <C>
1995
U.S. treasury securities and obligations of
U.S. government agencies and authorities.... $ 215,637 $ 212,494 $ 3,163 $ (20)
Obligations of states and political
subdivisions, special revenue and
nonguaranteed............................... 24,241 22,469 1,772 --
Debt securities issued by foreign
governments................................. 139,361 134,715 5,120 (474)
Corporate securities.......................... 1,698,270 1,638,178 65,075 (4,983)
Mortgage-backed securities.................... 1,674,816 1,636,129 40,278 (1,591)
---------- ---------- -------- ---------
Total fixed maturities................. $3,752,325 $3,643,985 $115,408 $ (7,068)
========== ========== ======== =========
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)
========== ========== ======== =========
</TABLE>

67
<PAGE> 72

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(3) INVESTED ASSETS AND RELATED INCOME (CONTINUED)
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 fair value would no longer be
considered by the Company to be temporary, would be analyzed for possible
write-down. Any such issue would be written down to its net realizable value
during the fiscal quarter in which the impairment was determined to have become
other than temporary. Thereafter, each issue on nonaccrual status is regularly
reviewed, and additional write-downs may be taken in light of later
developments.

The Company's computation of net realizable value involves judgments and
estimates, so such value should be used with care. Such value determination
considers such factors as the existence and value of any collateral security;
the capital structure of the issuer; the level of actual and expected market
interest rates; where the issue ranks in comparison with other debt of the
issuer; the economic and competitive environment of the issuer and its business;
the Company's view on the likelihood of success of any proposed issuer
restructuring plan; and the timing, type and amount of any restructured
securities that the Company anticipates it will receive.

The Company's $300 million real estate portfolio consists of joint venture and
third-party mortgage loans and other real estate-related investments.

At December 31, 1995 and 1994, total impaired loans amounted to $21.9 million
and $75.9 million, respectively. Impaired loans with reserves were $21.9 million
and $67.6 million with corresponding reserves of $6.5 million and $18.8 million
at December 31, 1995 and 1994, respectively. The Company had an average balance
of $124.2 million and $93.9 million in impaired loans for 1995 and 1994,
respectively. Cash payments received on impaired loans are generally applied to
reduce the outstanding loan balance. At December 31, 1995 and 1994, loans on
nonaccrual status amounted to $3.5 million and $274.6 million, respectively.
Impaired loans are generally included in the Company's nonaccrual loans.

At December 31, 1995, securities carried at approximately $5.9 million were on
deposit with governmental agencies as required by law.

Proceeds from sales of investments in fixed maturities prior to maturity were
$297.6 million, $910.9 million and $1.7 billion during 1995, 1994 and 1993,
respectively. Gross gains of $21.2 million, $6.0 million and $80.4 million and
gross losses of $4.7 million, $55.9 million and $37.8 million were realized on
sales of fixed maturities in 1995, 1994 and 1993, respectively.

68
<PAGE> 73

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(3) INVESTED ASSETS AND RELATED INCOME (CONTINUED)
The following table sets forth the maturity aging schedule of fixed maturity
investments at December 31, 1995:

<TABLE>
<CAPTION>
CARRYING AMORTIZED
(in thousands) VALUE COST VALUE
---------- ----------
<S> <C> <C>
One year or less................................................... $ 25,617 $ 25,202
Over one year through five......................................... 576,138 562,374
Over five years through ten........................................ 1,248,675 1,200,157
Over ten years..................................................... 227,079 220,123
Securities not due at a single maturity date(1).................... 1,674,816 1,636,129
---------- ----------
Total fixed maturities...................................... $3,752,325 $3,643,985
========== ==========
</TABLE>

- ---------------
(1) Weighted average maturity of 5.4 years.

The sources of net investment income were as follows:

<TABLE>
<CAPTION>
(in thousands) 1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Interest and dividends on fixed maturities............. $269,934 $274,231 $221,144
Dividends on equity securities......................... 681 1,751 3,084
Income from short-term investments..................... 13,159 10,668 12,155
Income from mortgage loans............................. 40,494 41,713 82,028
Income from policy loans............................... 19,658 18,517 16,826
Income from other real estate-related investments...... 15,565 21,239 11,755
Income from other loans and investments................ 1,555 3,533 8,008
-------- -------- --------
Total investment income......................... 361,046 371,652 355,000
Investment expense..................................... (12,598) (18,568) (15,726)
-------- -------- --------
Net investment income........................... $348,448 $353,084 $339,274
======== ======== ========
</TABLE>

69
<PAGE> 74

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(3) INVESTED ASSETS AND RELATED INCOME (CONTINUED)
Realized gains (losses) for the years ended December 31, 1995, 1994 and 1993,
were as follows:

<TABLE>
<CAPTION>
REALIZED GAINS (LOSSES)
-------------------------------------------
(in thousands) 1995 1994 1993
--------- -------- --------
<S> <C> <C> <C>
Real estate-related............................... $(325,611) $(41,720) $(79,652)
Fixed maturities.................................. 9,336 (49,857) 36,234
Equity securities................................. (346) 28,243 17,086
Other............................................. (2,079) 8,777 (1,252)
--------- -------- --------
Realized investment losses before income tax
benefit...................................... (318,700) (54,557) (27,584)
Income tax benefit................................ (111,545) (19,095) (7,917)
--------- -------- --------
Net realized investment losses.................. $(207,155) $(35,462) $(19,667)
========= ======== ========
</TABLE>

Unrealized gains (losses) are computed below as follows: fixed maturities--the
difference between fair value and amortized cost, adjusted for
other-than-temporary declines in value; equity securities and other--the
difference between fair value and cost. The change in unrealized investment
gains (losses) by class of investment for the years ended December 31, 1995,
1994 and 1993 were as follows:

<TABLE>
<CAPTION>
CHANGE IN UNREALIZED GAINS (LOSSES)
------------------------------------------
(in thousands) 1995 1994 1993
-------- --------- -------
<S> <C> <C> <C>
Fixed maturities................................. $351,964 $(351,646) $60,258
Equity securities................................ 180 (32,710) 19,882
Adjustment to deferred insurance acquisition
costs.......................................... (14,277) 11,325 --
-------- --------- -------
Unrealized gain (loss) before income tax
expense (benefit)........................... 337,867 (373,031) 80,140
Income tax expense (benefit)..................... 32,922 (43,492) 26,916
-------- --------- -------
Net unrealized gain (loss) on
investments............................ $304,945 $(329,539) $53,224
======== ========= =======
</TABLE>

(4) UNCONSOLIDATED INVESTEES

At December 31, 1995, the Company, along with other Kemper subsidiaries,
directly held partnership interests or options to acquire equity interests (or
has made loans with additional interest features) in a number of real estate
joint ventures. The Company's direct and indirect real estate joint venture
investments are accounted for utilizing the equity method, with the Company
recording its share of the operating results of the respective partnerships. The
Company, as an equity owner, has the ability to fund, and historically has
elected to fund, operating requirements of certain of the joint ventures.
Consolidation accounting methods are not utilized as the Company, in most
instances, does not own more than 50 percent in the aggregate, and in any event,
major decisions of the partnership must be made jointly by all partners.

As of December 31, 1995 and 1994, the Company's net equity investment in
unconsolidated investees amounted to $17.1 million and $45.4 million,
respectively. The Company's share of net losses related to such

70
<PAGE> 75

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(4) UNCONSOLIDATED INVESTEES (CONTINUED)
unconsolidated investees amounted to $453 thousand and $6.3 million for the
years ended December 31, 1995 and 1994, respectively.

Also at December 31, 1995, the Company had joint venture-related loans totaling
$21.8 million before reserves to partnerships in which Lumbermens Mutual
Casualty Company, an affiliate until August 1993 ("Lumbermens"), and Fidelity
Life Association ("FLA"), an affiliated mutual insurance company, had equity
interests. These joint venture-related loans totaled $37.5 million before
reserves at December 31, 1994. (See the note captioned "Financial
Instruments--Off-Balance-Sheet Risk".)

(5) CONCENTRATION OF CREDIT RISK

The Company generally strives to maintain a diversified invested asset
portfolio; however, certain concentrations of credit risk exist in
mortgage-backed securities (see "INVESTMENTS" above) and real estate.

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

<TABLE>
<CAPTION>
GEOGRAPHIC DISTRIBUTION AS OF DECEMBER 31, 1995 DISTRIBUTION BY PROPERTY TYPE AS OF DECEMBER 31, 1995
<S> <C> <C> <C>
Hotel........................ 34.3%
California................... 28.7% Office....................... 30.2
Illinois..................... 24.4 Land......................... 17.2
Texas........................ 10.2 Residential.................. 4.8
Oregon....................... 7.4 Retail....................... 4.5
Colorado..................... 6.5 Industrial................... 3.0
Hawaii....................... 6.2 Other........................ 6.0
Washington................... 5.7 -----
Florida...................... 4.8 Total.............. 100.0%
Ohio......................... 2.9 =====
Other(1)..................... 3.2
-----
Total.............. 100.0%
=====
</TABLE>

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

Real estate markets have been depressed in recent periods in areas where most of
the Company's real estate portfolio is located. California real estate market
conditions have continued to be worse than in many other areas of the country.
Real estate markets in northern California and Illinois show some stabilization
and improvement.

Undeveloped land represented approximately 17.2 percent of the Company's real
estate portfolio at December 31, 1995. To maximize the value of certain land and
other projects, additional development has been proceeding or has been planned.
Such development of existing projects would continue to require funding, either
from the Company or third parties. In the present real estate markets,
third-party financing can require credit enhancing arrangements (e.g., standby
financing arrangements and loan commitments)

71
<PAGE> 76

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(5) CONCENTRATION OF CREDIT RISK (CONTINUED)
from the Company. The values of development projects are dependent on a number
of factors, including Kemper's and the Company's plans with respect thereto,
obtaining necessary permits and market demand for the permitted use of the
property. The values of certain development projects have been written down as
of December 31, 1995, reflecting changes in plans in connection with the
Zurich-led acquisition of Kemper. There can be no assurance that such permits
will be obtained as planned or at all, nor that such expenditures will occur as
scheduled, nor that Kemper's and the Company's plans with respect to such
projects may not change substantially.

The majority of the Company's real estate loans are on properties or projects
where the Company, Kemper, or their affiliates have taken ownership positions in
joint ventures with a small number of partners. (See the note captioned
"Unconsolidated Investees".)

At December 31, 1995, loans to and investments in joint ventures in which
Patrick M. Nesbitt or his affiliates ("Nesbitt") have interests constituted
approximately $99.7 million, or 33.3 percent, of the Company's real estate
portfolio. The Nesbitt ventures primarily consist of eleven hotel properties. At
December 31, 1995, the Company did not have any Nesbitt-related
off-balance-sheet legal funding commitments outstanding.

At December 31, 1995, loans to and investments in a master limited partnership
(the "MLP") between subsidiaries of Kemper and subsidiaries of Lumbermens,
constituted approximately $66.0 million, or 22.0 percent, of the Company's real
estate portfolio. The Company's interest in the MLP is a less than one percent
limited partnership interest, and Kemper's interest is 75 percent at December
31, 1995. Prior to 1995, Kemper's interest was 50 percent. At December 31, 1995,
MLP-related commitments accounted for approximately $29.8 million of the
Company's off-balance-sheet legal commitments, of which the Company expects to
fund $17.0 million.

At December 31, 1995, the Company's loans to and investments in projects with
the Prime Group, Inc. or its affiliates totaled approximately $24.8 million, or
8.3 percent, of the Company's real estate portfolio. Prime Group-related
commitments accounted for $165.6 million of the off-balance-sheet legal
commitments at December 31, 1995, of which the Company expects to fund $15.0
million.

(6) INCOME TAXES

Income tax expense (benefit) was as follows for the years ended December 31,
1995, 1994 and 1993:

<TABLE>
<CAPTION>
(in thousands) 1995 1994 1993
--------- -------- --------
<S> <C> <C> <C>
Current............................................... $(113,087) $(6,898) $(5,773)
Deferred.............................................. 38,423 21,329 16,915
--------- ------- -------
Total....................................... $ (74,664) $14,431 $11,142
========= ======= =======
</TABLE>

Included in the current tax benefit is the recognition of a net operating loss
carryover at December 31, 1995 which will be utilized against taxable income on
Kemper's consolidated short period Federal income tax return for the January 1
through January 4, 1996 tax year. Beginning January 5, 1996, the Company will
file a stand alone Federal income tax return. Previously, the Company had filed
a consolidated Federal income tax return with Kemper. In the first quarter of
1996, the Company and Kemper settled the outstanding balances

72
<PAGE> 77

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(6) INCOME TAXES (CONTINUED)
for the short period under the tax allocation agreement with Kemper making a
payment to the Company of approximately $30 million. The Company's receivable
from Kemper for all remaining balances under the tax allocation agreement, after
adjusting for the $30 million payment, totaled approximately $82.6 million at
December 31, 1995. Such remaining amounts are expected to be settled in the
fourth quarter of 1996.

The actual income tax expense (benefit) for 1995, 1994 and 1993 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 1995, 1994, and 1993 to income (loss) before
income tax expense (benefit) and cumulative effect of change in accounting
principle.

<TABLE>
<CAPTION>
(in thousands) 1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Computed expected tax expense (benefit)................ $(72,700) $14,277 $ 7,992
Difference between "expected" and actual tax expense
(benefit):
State taxes.......................................... (1,370) 645 332
Foreign tax credit................................... (183) (155) 358
Change in tax rate................................... -- -- 1,441
Change in valuation allowance........................ -- -- 701
Other, net........................................... (411) (336) 318
-------- ------- -------
Total actual tax expense (benefit)........... $(74,664) $14,431 $11,142
======== ======= =======
</TABLE>

Under SFAS 109 ACCOUNTING FOR INCOME TAXES, 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 in 1993 resulted in a one-time increase to
earnings of $2.4 million.

Under SFAS 109, a valuation allowance is 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 1995 and 1994, the change in the
valuation allowance related solely to the change in the net deferred Federal tax
asset or liability from unrealized gains or losses on investments.

73
<PAGE> 78

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(6) INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant portions
of the Company's net deferred Federal tax liability were as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------
(in thousands) 1995 1994 1993
--------- --------- --------
<S> <C> <C> <C>
Deferred Federal tax assets:
Unrealized losses on investments.................. $ -- $ 85,331 $ --
Life policy reserves.............................. 42,512 51,519 60,446
Real estate-related............................... 21,920 39,360 45,851
Other investment-related.......................... 1,725 7,435 12,498
Other............................................. 6,864 6,415 5,804
--------- --------- --------
Total deferred Federal tax assets.............. 73,021 190,060 124,599
Valuation allowance............................... (15,201) (100,532) (15,201)
--------- --------- --------
Total deferred Federal tax assets after
valuation allowance.......................... 57,820 89,528 109,398
--------- --------- --------
Deferred Federal tax liabilities:
Deferred insurance acquisition costs.............. 111,523 108,663 100,834
Unrealized gains on investments................... 37,919 -- 49,193
Depreciation and amortization..................... 18,767 18,878 21,367
Other............................................. 2,320 3,351 2,049
--------- --------- --------
Total deferred Federal tax liabilities......... 170,529 130,892 173,443
--------- --------- --------
Net deferred Federal tax liabilities................ $(112,709) $ (41,364) $(64,045)
========= ========= ========
</TABLE>

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

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 of $82.5 million and $90.0
million during 1994 and 1993, respectively.

In 1994 and 1993, the Company transferred the majority of its deficit equity
ownership interest in two limited partnerships to another Kemper subsidiary
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 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

74
<PAGE> 79

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(7) RELATED-PARTY TRANSACTIONS (CONTINUED)
limited partnerships amounted to $0.4 million, $1.4 million and $5.4 million in
1995, 1994 and 1993, 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, 1995 and 1994, joint venture mortgage loans
totaled $120 million and $351 million, respectively, and during 1995, 1994 and
1993, the Company earned interest income on these joint venture loans of $19.6
million, $22.0 million and $63.1 million, respectively.

All of the Company's personnel are employees of Federal Kemper Life Assurance
Company ("FKLA"), an affiliated company. The Company is allocated expenses for
the utilization of FKLA employees and facilities, the investment management
services of Zurich Kemper Investments, Inc. ("ZKI"), an affiliated company, and
the information systems of Kemper Service Company ("KSvC"), a ZKI subsidiary,
based on the Company's share of administrative, legal, marketing, investment
management, information systems and operation and support services. During 1995,
1994 and 1993, expenses allocated to the Company from ZKI and KSvC amounted to
$4.4 million, $6.5 million and $3.1 million, respectively. The Company also paid
to ZKI investment management fees of $3.4 million, $6.0 million and $6.7 million
during 1995, 1994 and 1993, respectively. In addition, expenses allocated to the
Company from FKLA during 1995, 1994 and 1993 amounted to $14.3 million, $11.1
million and $13.1 million, respectively.

During 1995, 1994 and 1993, the Company sold certain mortgages and real
estate-related investments, net of reserves, amounting to approximately $3.5
million, $154.0 million and $343.7 million respectively, to KFC Portfolio Corp.,
an affiliated non-life realty company, in exchange for cash. No gain or loss was
recognized on these sales. The Company also paid KFC Portfolio Corp. $1.8
million in 1995 related to the management of the Company's real estate
portfolio.

(8) REINSURANCE

In the ordinary course of business, the Company enters into reinsurance
agreements to diversify risk and limit its overall financial exposure to certain
blocks of fixed-rate annuities. 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 common board members with
the Company, FKLA and Kemper. As of December 31, 1995, the reinsurance
recoverable related to the fixed-rate annuity liabilities ceded to FLA amounted
to approximately $503 million. During 1995 the Company recorded income of $4.4
million related to a ceding commission experience adjustment from the 1992
reinsurance agreement.

75
<PAGE> 80

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(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 7.25 percent and 8 percent for 1995 and 1994, respectively. The
assumed health care trend rate used was based on projected experience for 1995
and 1996, 10 percent in 1997, gradually declining to 6 percent by the year 2000
and remaining at that level thereafter.

The status of the plan as of December 31, 1995 and 1994, was as follows:

Accumulated postretirement benefit obligation:

<TABLE>
<CAPTION>
(in thousands) 1995 1994
---- ----
<S> <C> <C>
Retirees..................................................................... $234 $206
Fully eligible active plan participants...................................... 111 58
Other active plan participants............................................... 427 101
Unrecognized gain (loss) from actuarial experience........................... (85) 314
---- ----
Accrued liability.................................................. $687 $679
==== ====
Components of the net periodic postretirement benefit cost:
</TABLE>

<TABLE>
<CAPTION>
(in thousands) 1995 1994
---- ----
<S> <C> <C>
Service cost-benefits attributed to service during the period................ $ 58 $ 31
Interest cost on accumulated postretirement benefit obligations.............. 41 43
Amortization of unrecognized actuarial gain.................................. (19) (35)
---- ----
Total.............................................................. $ 80 $ 39
==== ====
</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, 1995 and 1994 by $146 thousand and $48 thousand, respectively, and
the net postretirement health care interest and service costs for the years
ended December 31, 1995 and 1994 by $24 thousand and $14 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.

76
<PAGE> 81

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(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
1995 and prior. The Company's financial statements include provisions for all
known assessments that are expected to be levied against the Company as well as
an estimate of amounts (net of estimated future premium tax recoveries) that the
Company believes it will be assessed in the future for which the life insurance
industry has estimated the cost to cover losses to policyholders. 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, 1995.

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

At December 31, 1995, the Company had loan commitments and stand-by financing
agreements totaling $248.2 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 $56.4 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.

77
<PAGE> 82

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(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, 1995 and 1994:

<TABLE>
<CAPTION>
WEIGHTED
WEIGHTED AVERAGE
AVERAGE REPRICING
(in thousands) NOTIONAL CARRYING ESTIMATED YEARS TO FREQUENCY
1995 AMOUNT VALUE FAIR VALUE EXPIRATION (DAYS)
- ---- -------- -------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Non-trading foreign exchange forward options.................. $43,754 $112 $112 .32 30
1994
- ----
Non-trading foreign exchange forward options.................. 34,541 18 18 .25 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 1995, 1994 and
1993 totaled $(1.0 million), $6.4 million and $(2.8 million), respectively.

(13) FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair value estimates are made at specific points in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from offering
for sale at one time the Company's entire holdings of a particular financial
instrument. A significant portion of the Company's financial instruments are
carried at fair value. (See the note captioned "Invested Assets and Related
Income".) Fair value estimates for financial instruments not carried at fair
value are generally determined using discounted cash flow models and assumptions
that are based on judgments regarding current and future economic conditions and
the risk characteristics of the investments. Although fair value estimates are
calculated using assumptions that management believes are appropriate, changes
in assumptions could significantly affect the estimates and such estimates
should be used with care.

Fair value estimates are determined for existing on- and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and certain liabilities that are not
considered financial instruments. Accordingly, the aggregate fair value
estimates presented do not represent the underlying value of the Company. For
example, the Company's subsidiaries are not considered financial instruments,
and their value has not been incorporated into the fair value estimates. In
addition, tax ramifications related to the realization of unrealized gains and
losses can have a significant effect on fair value estimates and have not been
considered in any of the estimates.

The following methods and assumptions were used by the Company in estimating the
fair value of its financial instruments:

Fixed maturities and equity securities: Fair values for fixed maturity
securities and for equity securities were determined by using market quotations,
or independent pricing services that use prices provided by market

78
<PAGE> 83

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(13) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
makers or estimates of fair values obtained from yield data relating to
instruments or securities with similar characteristics, or fair value as
determined in good faith by the Company's portfolio manager, ZKI.

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 for year-end 1994 were
estimated on a project-by-project basis. Generally, the projected cash flows of
the collateral were 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. Fair values for mortgage loans and
other real estate-related investments for year-end 1995 were estimated based
upon the investments observable market price, net of estimated costs to sell.
The estimates of fair value should be used with care given the inherent
difficulty 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 1995 and 1994 to be 4.5 percent and 5.5 percent,
respectively, while the assumed average market crediting rate was 5.5 percent in
1995 and 6.5 percent in 1994.

The carrying values and estimated fair values of the Company's financial
instruments at December 31, 1995 and 1994 were as follows:

<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------------------------------
1995 1994
------------------------ ------------------------
CARRYING FAIR CARRYING FAIR
(in thousands) VALUE VALUE VALUE VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Financial instruments recorded as assets:
Fixed maturities(1)..................... $3,752,325 $3,752,325 $3,463,732 $3,463,732
Cash and short-term investments......... 398,326 398,326 227,353 227,353
Mortgage loans and other real
estate-related assets................ 299,589 299,589 907,283 804,867
Policy loans............................ 289,390 289,390 277,743 277,743
Other invested assets................... 29,809 21,043 40,527 40,527
Financial instruments recorded as
liabilities:
Life policy benefits.................... 4,573,212 4,488,297 4,843,690 4,709,561
</TABLE>

- ---------------
(1) Includes $112 and $18 carrying value and fair value for 1995 and 1994,
respectively, of derivative securities used to hedge the foreign currency
exposure on certain specific foreign fixed maturity investments.

79
<PAGE> 84

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. The maximum amount of dividends which can
be paid by the Company without prior approval in 1996, assuming that there is
sufficient statutory earned surplus, is $38.3 million. The Company paid no cash
dividends in 1995, 1994 or 1993.

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

<TABLE>
<CAPTION>
(in thousands) 1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Net income (loss)......................................... $(64,707) $ 44,491 $(36,178)
======== ======== ========
Statutory surplus......................................... $383,374 $416,243 $329,430
======== ======== ========
</TABLE>

80
<PAGE> 85

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:

(1 + .05) 4
-.0726961* = [ ------------------ ] -1
(1 + .065 + .005)

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 15% of the Market Adjusted Value is not subject to a
Withdrawal Charge. The Withdrawal Charge is thus:

$1,986.29 = $38,946.76 X .85 X .06

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

$36,960.48 = $38,946.76 - $1,986.29
- ---------------
* Actual calculation utilizes 10 decimal places.

81
<PAGE> 86

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 15% of the full Market Adjusted Value as there are no prior
withdrawals:

$819.68 = ($19,473.38 - .15 X $38,946.76) X .06

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

$18,653.70 = $19,473.38 - $819.68

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:

(1 + .05) 4
+.0192766 = [ ----------------- ] -1
(1 + .04 + .005)

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 15% of the full Market Adjusted Value, as there were no prior
withdrawals:

$2,183.29 = $42,809.62 X .85 X .06

Thus, the amount payable on withdrawal would be:

$40,626.33 = $42,809.62 - $2,183.29

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 15% of the full Market Adjusted Value as there are no prior
withdrawals:

$899.00 = ($21,404.81 - .1 X $42,809.62) X .06

82
<PAGE> 87

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

$20,505.81 = $21,404.81 - $899.00

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.

83
<PAGE> 88

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 received a favorable
determination letter from the Internal Revenue Service as to the form of the
annuity. However, this is not a determination by the IRS of the IRA's merit. 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.

84
<PAGE> 89

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.
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.

85
<PAGE> 90

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 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.

86
<PAGE> 91

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.

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.

87
<PAGE> 92

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.

88
<PAGE> 93
PROSPECTUS, MAY 1, 1996

KEMPER
PASSPORT

[GRAPHIC]

This prospectus does not constitute an offer to sell or a solicitation of an
offer to buy securities in any state, to any person, to whom it is not lawful
to make such an offer in such state.

A Variable and Market Value Adjusted Annuity Issued By Kemper Investors Life
Insurance Company

[LOGO]
KEMPER PASSPORT

Distributor:
INVESTORS BROKERAGE SERVICES, INC.

A Variable and Market Value Adjusted Annuity
Issued by:
KEMPER INVESTORS LIFE INSURANCE COMPANY

1 Kemper Drive
Long Grove, Illinois 60049

ANN-1 Policy Form Series L-1600
<PAGE> 94

STATEMENT OF ADDITIONAL INFORMATION

MAY 1, 1996

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

INDIVIDUAL AND GROUP VARIABLE AND MARKET VALUE ADJUSTED

DEFERRED ANNUITY CONTRACTS

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

KEMPER PASSPORT

ISSUED BY

KEMPER INVESTORS LIFE INSURANCE COMPANY

HOME OFFICE: 1 KEMPER DRIVE, LONG GROVE, ILLINOIS 60049 (847) 550-5500

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, 1996. 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-5

Financial Statements............................................... B-5

Independent Auditors' Report....................................... B-7

Financial Statements of the Separate Account....................... B-8
</TABLE>

<PAGE> 95

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 1995 and 1994, KILICO incurred gross commissions payable of
approximately $2.8 and $5.5 million, respectively, 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, Investment Grade Bond 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

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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, 1996, were 8.20% and 5.06%, 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, 1996 was 3.58% for Money Market Subaccount #1
and 4.83% for Money Market Subaccount #2. The average portfolio maturity was 43
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) (3)65 L 7 - 1. The effective yield for the seven-day period ended March 31,
1996 was 3.64% for Money Market Subaccount #1 and 4.95% 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.

B-2
<PAGE> 97

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
Growth Subaccount to December 31, 1995. 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, 1995. 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.

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, Growth, International, Value,
Value+Growth, Small Cap Value, Horizon 20+, Horizon 10+, and Horizon 5
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, Growth, Government Securities, International,
Investment Grade Bond, Horizon 20+, Horizon 10+, Horizon 5, Value, Value+Growth,
and Small Cap Value Subaccounts may be compared to that index. The High Yield,
Government Securities and Investment Grade Bond 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

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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, Growth
Subaccount, Government Securities Subaccount, International Subaccount,
Investment Grade Bond Subaccount, Value Subaccount, Small Cap Value Subaccount,
Value+Growth Subaccount, Horizon 20+ Subaccount, Horizon 10+ Subaccount, and
Horizon 5 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.

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,

B-4
<PAGE> 99

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.

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-5
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[This page intentionally left blank]

B-6
<PAGE> 101

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, 1995, 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, 1995 and 1994. 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, 1995, 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, 1995 and 1994, in
conformity with generally accepted accounting principles.

KPMG PEAT MARWICK LLP

Chicago, Illinois

February 16, 1996

B-7
<PAGE> 102
d

KILICO VARIABLE ANNUITY SEPARATE ACCOUNT

COMBINED STATEMENT OF ASSETS AND LIABILITIES AND CONTRACT OWNERS' EQUITY

DECEMBER 31, 1995

(IN THOUSANDS)

<TABLE>
<CAPTION>
MONEY MONEY TOTAL HIGH
MARKET MARKET RETURN YIELD
COMBINED SUBACCOUNT SUBACCOUNT #2 SUBACCOUNT SUBACCOUNT
---------- ---------- ------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
ASSETS
Investments, at current
value.................................. $1,646,249 57,768 2,309 657,336 255,289
Dividends and other
receivables............................ 284 152 6 41 16
----------- ------ ----- ------- -------
Total assets.................... 1,646,533 57,920 2,315 657,377 255,305
----------- ------ ----- ------- -------
LIABILITIES AND CONTRACT
OWNERS' EQUITY
Liabilities:
Mortality and expense risk
and administrative
charges.............................. 1,761 68 -- 710 271
Other.................................. 32 18 -- -- --
----------- ------ ----- ------- -------
Total liabilities............... 1,793 86 -- 710 271
----------- ------ ----- ------- -------
Contract owners' equity.................. $1,644,740 57,834 2,315 656,667 255,034
=========== ====== ===== ======= =======
ANALYSIS OF CONTRACT
OWNERS' EQUITY
Excess (deficiency) of
proceeds from units sold
over payments for units
redeemed............................... $ 884,451 (6,607) 1,755 332,260 105,433
Accumulated net investment
income (loss).......................... 435,857 64,441 560 169,606 140,747
Accumulated net realized
gain (loss) on sales of
investments............................ 85,973 -- -- 49,493 (3,430)
Unrealized appreciation
of investments......................... 238,459 -- -- 105,308 12,284
----------- ------ ----- ------- -------
Contract owners'
equity................................. $1,644,740 57,834 2,315 656,667 255,034
=========== ====== ===== ======= =======

<CAPTION>
GOVERNMENT SMALL CAP
GROWTH SECURITIES INTERNATIONAL GROWTH
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
ASSETS
Investments, at current
value.................................. 412,608 91,084 134,482 35,373
Dividends and other
receivables............................ 45 5 18 1
------- ------ ------- ------
Total assets.................... 412,653 91,089 134,500 35,374
------- ------ ------- ------
LIABILITIES AND CONTRACT
OWNERS' EQUITY
Liabilities:
Mortality and expense risk
and administrative
charges.............................. 436 96 143 37
Other.................................. -- -- 14 --
------- ------ ------- ------
Total liabilities............... 436 96 157 37
------- ------ ------- ------
Contract owners'equity................... 412,217 90,993 134,343 35,337
======= ====== ======= ======
ANALYSIS OF CONTRACT
OWNERS' EQUITY
Excess (deficiency) of
proceeds from units sold
over payments for units
redeemed............................... 241,971 63,856 115,774 30,009
Accumulated net investment
income (loss).......................... 39,981 20,768 205 (451)
Accumulated net realized
gain (loss) on sales of
investments............................ 35,726 1,040 2,960 184
Unrealized appreciation
of investments......................... 94,539 5,329 15,404 5,595
------- ------ ------- ------
Contract owners' equity.................. 412,217 90,993 134,343 35,337
======= ====== ======= ======

</TABLE>

See accompanying notes to combined financial statements.

B-8
<PAGE> 103

KILICO VARIABLE ANNUITY SEPARATE ACCOUNT

COMBINED STATEMENT OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 1995

(IN THOUSANDS)

<TABLE>
<CAPTION>
MONEY MONEY TOTAL GOVERNMENT SMALL CAP
MARKET MARKET RETURN HIGH YIELD GROWTH SECURITIES INTERNATIONAL GROWTH
COMBINED SUBACCOUNT SUBACCOUNT #2 SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
-------- ---------- -------------- ---------- ---------- ---------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Dividends and
capital gains
distributions... $ 79,375 3,896 140 18,674 22,075 25,653 5,951 2,910 76
Expenses
Mortality and
expense
risk and
administrative
charges...... 21,591 911 -- 8,840 3,384 4,999 1,293 1,798 366
-------- ----- --- ------- ------ ------ ------ ------ -----
Net investment
income
(loss)......... 57,784 2,985 140 9,834 18,691 20,654 4,658 1,112 (290)
-------- ----- --- ------- ------ ------ ------ ------ -----
Net realized and
unrealized gain
(loss) on
investments
Net realized
gain (loss)
on sales of
investments... 13,441 -- -- 5,320 1,290 5,966 (1) 605 261
Change in
unrealized
appreciation
of
investments... 229,805 -- -- 119,468 15,252 67,323 10,500 11,955 5,307
-------- ----- --- ------- ------ ------ ------ ------ -----
Net realized and
unrealized gain
on investments...243,246 -- -- 124,788 16,542 73,289 10,499 12,560 5,568
-------- ----- --- ------- ------ ------ ------ ------ -----
Net increase in
contract
owners' equity
resulting from
operations..... $301,030 2,985 140 134,622 35,233 93,943 15,157 13,672 5,278
======== ===== === ======= ====== ====== ====== ====== =====
</TABLE>

See accompanying notes to combined financial statements.

B-9
<PAGE> 104

KILICO VARIABLE ANNUITY SEPARATE ACCOUNT

COMBINED STATEMENTS OF CHANGES IN CONTRACT OWNERS' EQUITY

FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
(IN THOUSANDS)

<TABLE>
<CAPTION>
MONEY MARKET MONEY MARKET TOTAL RETURN
COMBINED SUBACCOUNT SUBACCOUNT #2 SUBACCOUNT
---------------------- ----------------- --------------- ------------------
1995 1994 1995 1994 1995 1994 1995 1994
---------- --------- ------- ------- ------ ------ ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss)................. $ 57,784 85,162 2,985 2,574 140 152 9,834 49,815
Net realized gain (loss) on sales of
investments................................ 13,441 11,105 -- -- -- -- 5,320 878
Change in unrealized appreciation
(depreciation) of investments.............. 229,805 (199,366) -- -- -- -- 119,468 (121,752)
---------- --------- ------- ------- ------ ------ ------- --------
Net increase (decrease) in contract owners'
equity resulting from operations......... 301,030 (103,099) 2,985 2,574 140 152 134,622 (71,059)
---------- --------- ------- ------- ------ ------ ------- --------
ACCOUNT UNIT TRANSACTIONS:
Proceeds from units sold..................... 143,614 254,411 7,440 19,971 1,994 6,673 47,745 89,169
Net transfers (to) from affiliate and
subaccounts................................ (23,766) 3,471 (14,703) 16,310 (3,412) (6,297) (21,697) (16,297)
Payments for units redeemed.................. (207,292) (152,336) (16,838) (24,064) (92) (68) (87,868) (58,032)
---------- --------- ------- ------- ------ ------ ------- --------
Net increase (decrease) in contract owners'
equity from account unit transactions.... (87,444) 105,546 (24,101) 12,217 (1,510) 308 (61,820) 14,840
---------- --------- ------- ------- ------ ------ ------- --------
Total increase (decrease) in contract owners'
equity....................................... 213,586 2,447 (21,116) 14,791 (1,370) 460 72,802 (56,219)
CONTRACT OWNERS' EQUITY:
Beginning of period.......................... 1,431,154 1,428,707 78,950 64,159 3,685 3,225 583,865 640,084
---------- --------- ------- ------- ------ ------ ------- --------
End of period................................ $1,644,740 1,431,154 57,834 78,950 2,315 3,685 656,667 583,865
========== ========= ======= ======= ====== ====== ======= ========
</TABLE>

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

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

See accompanying notes to combined financial statements.

B-10
<PAGE> 105

<TABLE>
<CAPTION>
GOVERNMENT SMALL CAP
HIGH YIELD GROWTH SECURITIES INTERNATIONAL GROWTH
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
- ------------------- ------------------- ------------------- ------------------- -------------------
1995 1994 1995 1994 1995 1994 1995 1994 1995 1994(A)
- ------- ------- ------- ------- ------- ------- ------- ------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
18,691 16,158 20,654 10,723 4,658 6,316 1,112 (415) (290) (161)
1,290 3,164 5,966 5,853 (1) (726) 605 2,013 261 (77)
15,252 (27,264) 67,323 (32,435) 10,500 (10,070) 11,955 (8,133) 5,307 288
- ------- ------- ------- ------- ------- ------- ------- ------- ------ ------
35,233 (7,942) 93,943 (15,859) 15,157 (4,480) 13,672 (6,535) 5,278 50
- ------- ------- ------- ------- ------- ------- ------- ------- ------ ------
21,167 34,261 35,473 52,913 5,546 15,214 17,837 32,734 6,412 3,476
13,859 (15,720) 1,693 25,150 (6,225) (24,188) (6,157) 15,006 12,876 9,507
(32,713) (24,877) (39,162) (24,735) (14,994) (12,918) (13,593) (7,412) (2,032) (230)
- ------- ------- ------- ------- ------- ------- ------- ------- ------ ------
2,313 (6,336) (1,996) 53,328 (15,673) (21,892) (1,913) 40,328 17,256 12,753
- ------- ------- ------- ------- ------- ------- ------- ------- ------ ------
37,546 (14,278) 91,947 37,469 (516) (26,372) 11,759 33,793 22,534 12,803
217,488 231,766 320,270 282,801 91,509 117,881 122,584 88,791 12,803 --
- ------- ------- ------- ------- ------- ------- ------- ------- ------ ------
255,034 217,488 412,217 320,270 90,993 91,509 134,343 122,584 35,337 12,803
======= ======= ======= ======= ======= ======= ======= ======= ====== ======
</TABLE>

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<PAGE> 106

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").
KILICO is owned by Kemper Corporation which was acquired by an investor group
led by Zurich Insurance Company ("Zurich") on January 4, 1996.

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
Subaccounts. Various Subaccount options are available to Contract Owners
depending upon their respective Contracts. 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, 1995.

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.

B-12
<PAGE> 107

NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)

(2) SUMMARY OF INVESTMENTS

Investments, at cost, at December 31, 1995, 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)................................... 60,077 $ 60,077
Kemper Investors Fund Total Return Portfolio...................... 254,906 552,028
Kemper Investors Fund High Yield Portfolio........................ 202,799 243,005
Kemper Investors Fund Growth Portfolio............................ 126,496 318,069
Kemper Investors Fund Government Securities Portfolio............. 71,762 85,755
Kemper Investors Fund International Portfolio..................... 98,119 119,078
Kemper Investors Fund Small Cap Growth Portfolio.................. 26,283 29,778
----------
TOTAL INVESTMENTS............................................ $1,407,790
==========
</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 the
other Subaccounts. This option is only available to PASSPORT individual and
group variable and market value adjusted deferred annuity contracts. At December
31, 1995, 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, 1995,
the Portfolio had 21.9% of its assets invested in U.S. Government Obligations.
No other 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, 1995, the Portfolio
had 21.4% of its assets invested in the broadcasting, cable systems and
publishing industry. No other industry exceeded 20% of the Portfolio's assets.

GROWTH PORTFOLIO (FORMERLY "EQUITY"): 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

B-13
<PAGE> 108

NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)

(2) SUMMARY OF INVESTMENTS (CONTINUED)
placement investments (which are normally restricted securities). At December
31, 1995, 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, 1995, the Portfolio had 84.2% of its
assets invested in U.S. Government obligations. No other industry exceeded 20%
of the Portfolio's assets.

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, 1995, the Portfolio had 23.5% of its assets invested
in Japan. No other industry or country exceeded 20% of the Portfolio's assets.

SMALL CAP GROWTH PORTFOLIO (FORMERLY "SMALL CAPITALIZATION EQUITY"): 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, 1995 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.

B-14
<PAGE> 109

NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)

(3) TRANSACTIONS WITH AFFILIATES (CONTINUED)

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 Growth
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 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, 1995, 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, 1995, KILICO received contingent deferred sales charges of
$2,474,658.

Zurich Kemper Investments, Inc. ("ZKI") (formerly named Kemper Financial
Services, Inc.), an affiliated company, is the investment manager of the
Portfolios of the Fund which serve as the underlying investments of the Separate
Accounts. In connection with the acquisition of Kemper Corporation on January 4,
1996, Zurich also acquired 100% of ZKI.

(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-15
<PAGE> 110

NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)

Contract owners' equity at December 31, 1995, is as follows (in thousands,
except unit value; differences are due to rounding):

<TABLE>
<CAPTION>
CONTRACT
NUMBER OF UNIT OWNERS'
ADVANTAGE III SUBACCOUNT UNITS VALUE EQUITY
--------- ------ ----------
<S> <C> <C> <C>
MONEY MARKET
Flexible Payment, Qualified.............................................. 629 $2.208 $ 1,389
Flexible Payment, Nonqualified........................................... 5,567 2.208 12,292
Periodic Payment, Qualified.............................................. 10,998 2.120 23,316
Periodic Payment, Nonqualified........................................... 5,193 2.120 11,010
----------
Total.................................................................. 48,007
----------
TOTAL RETURN
Flexible Payment, Qualified.............................................. 1,083 4.735 5,128
Flexible Payment, Nonqualified........................................... 5,628 4.384 24,673
Periodic Payment, Qualified.............................................. 101,033 4.546 459,296
Periodic Payment, Nonqualified........................................... 20,394 4.236 86,388
----------
Total.................................................................. 575,485
----------
HIGH YIELD
Flexible Payment, Qualified.............................................. 508 5.082 2,582
Flexible Payment, Nonqualified........................................... 2,866 4.865 13,943
Periodic Payment, Qualified.............................................. 25,429 4.879 124,068
Periodic Payment, Nonqualified........................................... 12,101 4.753 57,518
----------
Total.................................................................. 198,111
----------
GROWTH
Flexible Payment, Qualified.............................................. 286 4.404 1,260
Flexible Payment, Nonqualified........................................... 1,363 4.389 5,982
Periodic Payment, Qualified.............................................. 60,275 4.250 256,169
Periodic Payment, Nonqualified........................................... 16,415 4.244 69,664
----------
Total.................................................................. 333,075
----------
GOVERNMENT SECURITIES
Flexible Payment, Qualified.............................................. 273 1.575 430
Flexible Payment, Nonqualified........................................... 1,408 1.575 2,218
Periodic Payment, Qualified.............................................. 21,866 1.547 33,827
Periodic Payment, Nonqualified........................................... 18,000 1.547 27,846
----------
Total.................................................................. 64,321
----------
INTERNATIONAL
Flexible Payment, Qualified.............................................. 612 1.379 844
Flexible Payment, Nonqualified........................................... 1,257 1.379 1,733
Periodic Payment, Qualified.............................................. 63,561 1.363 86,634
Periodic Payment, Nonqualified........................................... 12,091 1.363 16,480
----------
Total.................................................................. 105,691
----------
SMALL CAP GROWTH
Flexible Payment, Qualified.............................................. 81 1.330 108
Flexible Payment, Nonqualified........................................... 874 1.330 1,162
Periodic Payment, Qualified.............................................. 17,405 1.323 23,027
Periodic Payment, Nonqualified........................................... 3,024 1.323 4,001
----------
Total.................................................................. 28,298
----------
TOTAL ADVANTAGE III CONTRACT OWNERS' EQUITY................................ $1,352,988
----------
</TABLE>

B-16
<PAGE> 111

NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)

<TABLE>
<CAPTION>
CONTRACT
NUMBER OF UNIT OWNERS'
PASSPORT SUBACCOUNT UNITS VALUE EQUITY
--------- ------ ----------
<S> <C> <C> <C>
MONEY MARKET #1
Qualified................................................................ 2,873 $1.112 $ 3,193
Nonqualified............................................................. 5,967 1.112 6,634
----------
Total.................................................................. 9,827
----------
MONEY MARKET #2
Qualified................................................................ 455 1.168 532
Nonqualified............................................................. 1,526 1.168 1,783
----------
Total.................................................................. 2,315
----------
TOTAL RETURN
Qualified................................................................ 17,019 1.234 21,002
Nonqualified............................................................. 48,768 1.234 60,180
----------
Total.................................................................. 81,182
----------
HIGH YIELD
Qualified................................................................ 9,285 1.515 14,076
Nonqualified............................................................. 28,256 1.515 42,847
----------
Total.................................................................. 56,923
----------
GROWTH
Qualified................................................................ 16,145 1.436 23,185
Nonqualified............................................................. 38,980 1.436 55,957
----------
Total.................................................................. 79,142
----------
GOVERNMENT SECURITIES
Qualified................................................................ 5,105 1.247 6,366
Nonqualified............................................................. 16,284 1.247 20,306
----------
Total.................................................................. 26,672
----------
INTERNATIONAL
Qualified................................................................ 6,194 1.365 8,459
Nonqualified............................................................. 14,790 1.365 20,193
----------
Total.................................................................. 28,652
----------
SMALL CAP GROWTH
Qualified................................................................ 1,637 1.324 2,168
Nonqualified............................................................. 3,679 1.324 4,871
----------
Total.................................................................. 7,039
----------
TOTAL PASSPORT CONTRACT OWNERS' EQUITY..................................... 291,752
----------
TOTAL CONTRACT OWNERS' EQUITY.............................................. $1,644,740
==========
</TABLE>

B-17
<PAGE> 112

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. Values may have varied had assets actually been allocated to
the Separate Account under the Certificates.

HISTORICAL HYPOTHETICAL ACCUMULATION UNIT VALUES
<TABLE>
<CAPTION>
MONEY MARKET
SUBACCOUNT #1
- ----------------------------------------
UNIT
DATE VALUES
- --------- --------
<S> <C> <C>
04/06/82 .................... .521904
12/31/82 .................... .561706
12/31/83 .................... .605415
12/31/84 .................... .661060
12/31/85 .................... .705934
12/31/86 .................... .743260
12/31/87 .................... .782353
12/31/88 .................... .830274
12/31/89 .................... .894703
12/31/90 .................... .955536
12/31/91 .................... .999459
12/31/92 .................... 1.021027
12/31/93 .................... 1.037409
12/31/94 .................... 1.065127
12/31/95 .................... 1.111573

<CAPTION>
MONEY MARKET
SUBACCOUNT #2
- ----------------------------------------
UNIT
DATE VALUES
- --------- --------
<S> <C> <C>
04/06/82 .................... .488861
12/31/82 .................... .526477
12/31/83 .................... .569164
12/31/84 .................... .623384
12/31/85 .................... .669150
12/31/86 .................... .709261
12/31/87 .................... .752167
12/31/88 .................... .804725
12/31/89 .................... .874829
12/31/90 .................... .944037
12/31/91 .................... .999255
12/31/92 .................... 1.033619
12/31/93 .................... 1.063332
12/31/94 .................... 1.105349
12/31/95 .................... 1.167919
<CAPTION>
TOTAL RETURN
SUBACCOUNT
- ----------------------------------------
UNIT
DATE VALUES
- --------- --------
<S> <C> <C>
04/14/82 .................... .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
12/31/95 .................... 1.233678
</TABLE>
<TABLE>
<CAPTION>
HIGH YIELD
SUBACCOUNT
- ----------------------------------------
UNIT
DATE VALUES
- --------- --------
<S> <C> <C>
04/14/82 .................... .309713
12/31/82 .................... .382894
12/31/83 .................... .433711
12/31/84 .................... .482077
12/31/85 .................... .579127
12/31/86 .................... .673071
12/31/87 .................... .703823
12/31/88 .................... .805071
12/31/89 .................... .784945
12/31/90 .................... .655406
12/31/91 .................... .982658
12/31/92 .................... 1.142847
12/31/93 .................... 1.354484
12/31/94 .................... 1.307729
12/31/95 .................... 1.516342

<CAPTION>
GROWTH
SUBACCOUNT
- ----------------------------------------
UNIT
DATE VALUES
- --------- --------
<S> <C> <C>
12/13/83 .................... .336632
12/31/83 .................... .346384
12/31/84 .................... .378954
12/31/85 .................... .468051
12/31/86 .................... .504874
12/31/87 .................... .507011
12/31/88 .................... .502672
12/31/89 .................... .636443
12/31/90 .................... .632214
12/31/91 .................... .995577
12/31/92 .................... 1.018405
12/31/93 .................... 1.152836
12/31/94 .................... 1.092975
12/31/95 .................... 1.435510
<CAPTION>
GOVERNMENT SECURITIES
SUBACCOUNT
- ----------------------------------------
UNIT
DATE VALUES
- --------- --------
<S> <C> <C>
07/13/87 .................... .700085
12/31/87 .................... .710087
12/31/88 .................... .723278
12/31/89 .................... .811610
12/31/90 .................... .881949
12/31/91 .................... 1.004106
12/31/92 .................... 1.050227
12/31/93 .................... 1.104499
12/31/94 .................... 1.060977
12/31/95 .................... 1.246817
</TABLE>
<TABLE>
<CAPTION>
INTERNATIONAL SUBACCOUNT
- ----------------------------------------
UNIT
DATE VALUES
- --------- --------
<S> <C> <C>
12/31/92 .................... .980721
12/31/93 .................... 1.286576
12/31/94 .................... 1.225134
12/31/95 .................... 1.365361

<CAPTION>
SMALL CAP GROWTH SUBACCOUNT
- ----------------------------------------
UNIT
DATE VALUES
- --------- --------
<S> <C> <C>
12/31/94 .................... 1.030937
12/31/95 .................... 1.324483
<CAPTION>
<S> <C> <C>
</TABLE>

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

B-18
<PAGE> 113

PERFORMANCE INFORMATION

<TABLE>
<CAPTION>
VALUES OF INITIAL
$40,000 INVESTMENT IN
SUBACCOUNTS-- COMPARED TO
DECEMBER 31, 1995 ------------------------------------
----------------------- 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>
GROWTH SUBACCOUNT
Life of Subaccount(4)..................... 170,023 325.06% 524.07% 459.33% 51.51% 524.14%
Ten years................................. 122,389 205.97 360.85 299.55 40.45 269.21
Five years................................ 90,671 126.68 124.49 115.19 14.72 58.92
One year.................................. 52,504 31.26 36.94 37.53 2.54 11.55
TOTAL RETURN SUBACCOUNT
Life of Subaccount(5)..................... 169,489 323.72% 950.50% 794.16% 62.26% 728.88%
Ten years................................. 106,496 166.24 360.85 299.55 40.45 269.21
Five years................................ 67,222 68.06 124.49 115.19 14.72 58.92
One year.................................. 49,733 24.33 36.94 37.53 2.54 11.55
INTERNATIONAL SUBACCOUNT(14)
Life of Subaccount........................ 54,565 36.41% 80.68% 65.02% 11.31% 41.27%
One year.................................. 44,556 11.39 36.94 37.53 2.54 11.55
SMALL CAP GROWTH SUBACCOUNT
Life of Subaccount(15).................... 52,958 32.40% 45.33% 42.99% 4.14% 11.64%
One year.................................. 51,368 28.42 36.94 37.53 2.54 11.55
</TABLE>

<TABLE>
<CAPTION>
VALUES OF INITIAL COMPARED TO
$40,000 --------------------------------------------------------------
INVESTMENT IN SALOMON
SUBACCOUNTS-- BROS. LEHMAN MERRILL
DECEMBER 31, 1995 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)................. 84,898 112.25% 62.26% N/A* 561.41% 385.19% 474.22%
Ten years.............................. 62,756 56.89 40.45 N/A* 192.35 151.19 170.74
Five years............................. 46,393 15.98 14.72 2.20% 77.99 59.60 69.97
One year............................... 41,706 4.27 2.54 5.2 27.20 19.24 21.23
MONEY MARKET SUBACCOUNT #2
Life of Subaccount(10)................. 95,274 138.19% 62.26% N/A* 561.41% 385.19% 474.22%
Ten years.............................. 69,602 74.01 40.45 N/A* 192.35 151.19 170.74
Five years............................. 49,370 23.43 14.72 22.0% 77.99 59.60 69.97
One year............................... 42,243 5.61 2.54 5.2 27.20 19.24 21.23
HIGH YIELD SUBACCOUNT
Life of Subaccount(11)................. 190,462 376.16% 62.26% N/A* 561.41% 385.19% 474.22%
Ten years.............................. 104,450 161.13 40.45 N/A* 192.35 151.19 170.74
Five years............................. 92,389 130.97 14.72 22.0% 77.99 59.60 69.97
One year............................... 46,352 15.88 2.54 5.2 27.20 19.24 21.23
GOVERNMENT SECURITIES SUBACCOUNT
Life of Subaccount(12)................. 70,304 75.76% 34.18% 55.9% 154.47% 119.94% 136.86%
Five years............................. 56,428 41.07 14.72 22.0 77.99 59.60 69.97
One year............................... 46,977 17.44 2.54 5.2 27.20 19.24 21.23
</TABLE>

B-19
<PAGE> 114

<TABLE>
<CAPTION>
COMPARED TO
--------------------------------------
AVERAGE DOW STANDARD
ANNUAL JONES & POOR'S CONSUMER
AVERAGE ANNUAL TOTAL TOTAL INDUSTRIAL 500 STOCK PRICE EAFE
RETURN TABLE RETURN AVERAGE(1) INDEX(2) INDEX(3) (13)
- ---------------------------------------------------------- -------- -------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
GROWTH SUBACCOUNT
Life of Subaccount(4)................................... 12.08% 16.48% 15.43% 3.52% 16.49%
Ten years............................................... 10.73 16.51 14.86 3.46 13.95
Five years.............................................. 15.34 17.55 16.56 2.79 9.71
One year................................................ 21.20 36.94 37.53 2.54 11.55
TOTAL RETURN SUBACCOUNT
Life of Subaccount(5)................................... 10.10% 18.53% 17.16% 3.56% 16.52%
Ten years............................................... 8.68 16.51 14.86 3.46 13.95
Five years.............................................. 8.04 17.55 16.56 2.79 9.71
One year................................................ 14.43 36.94 37.53 2.54 11.55
INTERNATIONAL SUBACCOUNT
Life of Subaccount(14).................................. 5.91% 15.94% 13.34% 2.72% 9.02%
One year................................................ 3.27 36.94 37.53 2.54 11.55
SMALL CAP GROWTH SUBACCOUNT
Life of Subaccount(15).................................. 13.45% 25.14% 23.93% 2.46% 6.83%
One year................................................ 19.54 36.94 37.53 2.54 11.55
</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).................................. 11.49% 3.56% 14.63% 12.09% 13.47%
Ten years............................................... 8.85 3.46 11.32 9.65 10.47
Five years.............................................. 15.78 2.79 12.22 9.80 11.19
One year................................................ 6.95 2.54 27.20 19.24 21.23
GOVERNMENT SECURITIES SUBACCOUNT
Life of Subaccount(12).................................. 5.83% 3.59% 11.86% 9.92% 10.90%
Five years.............................................. 4.51 2.79 12.22 9.80 11.19
One year................................................ 8.37 2.54 27.20 19.24 21.23
</TABLE>

<TABLE>
<CAPTION>
YIELD INFORMATION QUALIFIED AND NON-QUALIFIED
- --------------------------------------------------------------------------------------------- ----------------------------
<S> <C>
HIGH YIELD SUBACCOUNT
30 day period ended 3/31/96................................................................ 8.20%
GOVERNMENT SECURITIES SUBACCOUNT
30 day period ended 3/31/96................................................................ 5.06%
MONEY MARKET SUBACCOUNT
7 day period ended 3/31/96................................................................. 3.58%
</TABLE>

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

* N/A: Not Available.

(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, 1995.

B-20
<PAGE> 115

(5) From March 5, 1982 to December 31, 1995.

(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.

(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, 1995.

(11) From March 5, 1982 to December 31, 1995.

(12) From September 3, 1987 to December 31, 1995.

(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, 1995.

(15) From May 2, 1994 to December 31, 1995.

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, Growth 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 subaccounts in
these categories have a variety of objectives, policies and market and credit
risks that should be considered in reviewing the

B-21
<PAGE> 116

rankings. The performance of the Subaccount may also be compared to other
variable annuity subaccounts ranked by Morningstar, Inc. or VARDS Inc.

<TABLE>
<CAPTION>
SUBACCOUNT
----------------------------------------------
LIPPER VARIABLE ANNUITY
PERFORMANCE ANALYSES
-----------------------
2/28/95 TO 2/29/96
-----------------------
<S> <C>
Total Return.................................. 22.44%
High Yield.................................... 14.36%
Growth........................................ 30.55%
Money Market #1............................... 4.32%
Money Market #2............................... 5.62%
Government Securities......................... 10.45%
International................................. 21.05%
</TABLE>

TAX-DEFERRED ACCUMULATION

<TABLE>
<CAPTION>
NON-QUALIFIED
ANNUITY
AFTER-TAX CONTRIBUTIONS
AND TAX-DEFERRED EARNINGS
-------------------------------- CONVENTIONAL SAVINGS PLAN
TAXABLE LUMP AFTER-TAX CONTRIBUTIONS
NO WITHDRAWALS SUM WITHDRAWAL AND TAXABLE EARNINGS
-------------- -------------- -------------------------
<S> <C> <C> <C>
10 Years......... $107,946 $ 86,448 $ 81,693
20 Years......... 233,048 165,137 133,476
30 Years......... 503,133 335,021 218,082
</TABLE>

This chart compares the accumulation of a $50,000 initial investment into a
Non-Qualified Annuity and a Conventional Savings Plan. Contributions to the
Non-qualified Annuity and the Conventional Savings Plan are made after-tax. Only
the gain in the Non-Qualified Annuity will be subject to income tax in a taxable
lump sum withdrawal. The chart assumes a 37.1% federal marginal tax rate and an
8% annual return. The 37.1% federal marginal tax is based on a marginal tax rate
of 36%, representative of the target market, adjusted to reflect a decrease of
$3 of itemized deductions for each $100 of income over $117,950. Tax rates are
subject to change as is the tax-deferred treatment of the Certificates. Income
on Non-Qualified Annuities is taxed as ordinary income upon withdrawal. A 10%
tax penalty may apply to early withdrawals. See "Federal Income Taxes" in the
prospectus. The chart does not reflect the following charges and expenses under
Kemper Passport: 1.10% mortality and expense risk; .15% administration charges;
6% maximum deferred withdrawal charge; and $30 annual records maintenance
charge. The tax-deferred accumulation would be reduced if these charges were
reflected. No implication is intended by the use of these assumptions that the
return shown is guaranteed in any way or that the return shown represents an
average or expected rate of return over the period of the Contracts.
[IMPORTANT--THIS IS NOT AN ILLUSTRATION OF YIELD OR RETURN]

Unlike savings plans, contributions to Non-Qualified Annuities provide
tax-deferred treatment on earnings. In addition, contributions to tax-deferred
retirement annuities are not subject to current tax in the year of contribution.
When monies are received from a Non-Qualified Annuity (and you have many
different options on how you receive your funds), they are subject to income
tax. At the time of receipt, if the person receiving the monies is retired, not
working or has additional tax exemptions, these monies may be taxed at a lesser
rate.

B-22
<PAGE> 117

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%
Nevada............................................................. -- 3.50%*
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-23
<PAGE> 118

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.............. $17,241.38**
Printing and Engraving............................................ $50,000
Accounting Fees and Expenses...................................... $15,000
Legal Fees and Expenses........................................... $ 2,500
----------
Total Expenses..................................... $84,741.38
==========
</TABLE>

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

* Expenses are estimated and are for period from May 1, 1995 to May 1, 1996 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, No. 33-43462 and No.
33-46881, 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> 119

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(A) EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- ----------------------------------------------------------------------------------
<C> <S>
***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
23 (a) Consent of KPMG Peat Marwick LLP, Independent Auditors
***23 (b) Consent of Counsel (See Exhibit 5)
28 Schedule V: Valuation and qualifying accounts
***99.29 Notice Concerning Regulatory Relief
</TABLE>

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

* 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 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.

*** Incorporated herein by reference to the Registration Statement on Form S-1
(File No. 333-02491) filed on or about April 12, 1996.

(B) FINANCIAL STATEMENTS

Report of Independent Auditors

KILICO and Subsidiaries Consolidated Balance Sheets, as of December 31,
1995 and 1994

KILICO and Subsidiaries Consolidated Statements of Operations, years ended
December 31, 1995, 1994 and 1993

KILICO and Subsidiaries Consolidated Statements of Stockholder's Equity,
years ended December 31, 1995, 1994 and 1993

KILICO and Subsidiaries Consolidated Statements of Cash Flows, years ended
December 31, 1995, 1994 and 1993

Notes to Consolidated Financial Statements

Schedule V: Valuation and qualifying accounts

II-2
<PAGE> 120

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> 121

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 23rd day of April, 1996.

KEMPER INVESTORS LIFE INSURANCE COMPANY

(Registrant)

BY: /s/ JOHN B. SCOTT

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

John B. Scott, 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 23rd day of April, 1996.

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

/s/ W.H. BOLINDER Chairman of the Board and Director
- ---------------------------------------------
William H. Bolinder

/s/ FREDERICK L. BLACKMON Senior Vice President and Chief Financial Officer
- --------------------------------------------- (Principal Financial Officer and Principal
Frederick L. Blackmon Accounting Officer)

/s/ DANIEL L. DOCTOROFF Director
- ---------------------------------------------
Daniel L. Doctoroff

/s/ LOREN J. ALTER Director
- ---------------------------------------------
Loren J. Alter

/s/ STEVEN M. GLUCKSTERN Director
- ---------------------------------------------
Steven M. Gluckstern

/s/ MICHAEL P. STRAMAGLIA Director
- ---------------------------------------------
Michael P. Stramaglia
</TABLE>

II-4
<PAGE> 122

EXHIBIT LIST

<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGES*
-------- -----
<S> <C> <C>
23 (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 23(A)

CONSENT OF INDEPENDENT AUDITORS

The Board of Directors
Kemper Investors Life Insurance Company:

The audits referred to in our report dated March 15, 1996, included the related
financial statement schedule for the year ended December 31, 1995 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, and impairment of loans receivable and income taxes in 1993.

We consent to the use of our reports included herein and to the references to
our firm under the heading "Experts" in the Prospectus, and under the headings
"Services to the Separate Account" and "Experts" in the Statement of Additional
Information.

KPMG PEAT MARWICK LLP
Chicago, Illinois

April 24, 1996

<PAGE> 1

EXHIBIT 28

SCHEDULE V
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

VALUATION AND QUALIFYING ACCOUNTS

YEAR ENDED DECEMBER 31, 1995
(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................ $ 7,077 $ -- $ -- $ 7,006 $ 71
Third-party mortgage
loans................ 10,373 -- -- 3,840 6,533
Other real
estate-related
investments.......... 25,505 -- -- 16,676 8,829
-------- ---- ----- ------- --------
Total.............. $ 42,955 $ -- $ -- $27,522(1) $ 15,433
======== ==== ===== ======= ========
</TABLE>

- ---------------
(1) These deductions represent the net effect on the valuation reserve of
write-downs, sales, foreclosures and restructurings.