<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 26, 1997
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
KEMPER INVESTORS LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
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<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:
Frank Julian, Esq.
Kemper Investors Life Insurance Company
KLIC Legal T-1
1 Kemper Drive
Long Grove, Illinois 60049
Joan E. Boros, Esq.
Katten Muchin & Zavis
1025 Thomas Jefferson Street, N.W.
Washington, D.C. 20007
------------------
Approximate date of commencement of proposed sale to the public: as soon as
practicable after this Registration Statement 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]
------------------
CALCULATION OF REGISTRATION FEE
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========================================================================================================================
PROPOSED PROPOSED
MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO OFFERING AGGREGATE REGISTRATION
TO BE REGISTERED BE REGISTERED PRICE PER UNIT OFFERING PRICE FEE
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<S> <C> <C> <C> <C>
Market Value Adjusted Deferred Annuity
Contracts and Participating Interests
therein......................................... * * $50,000,000* $15,151.52
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* The maximum aggregate offering price is estimated solely for the purpose of
determining the registration fee. The amount being registered and the proposed
maximum offering price per unit is not applicable in that these contracts are
not issued in predetermined amounts or units.
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<PAGE> 2
KEMPER INVESTORS LIFE INSURANCE COMPANY
CROSS REFERENCE SHEET
PURSUANT TO REGULATION S-K, ITEM 501(B)
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FORM S-1
ITEM NO. FORM S-1 CAPTION CAPTION IN PROSPECTUS
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<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 Funds--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.
9. Description of Securities to be Registered........ Summary; The Contracts; The Accumulation
Period; Contract 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 on
Indemnification For Securities Act Liabilities.... Part II, Item 17.
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<PAGE> 3
PROSPECTUS--
- --------------------------------------------------------------------------------
VARIABLE AND MARKET VALUE ADJUSTED
DEFERRED ANNUITY CONTRACTS
- --------------------------------------------------------------------------------
ISSUED BY
KEMPER INVESTORS LIFE INSURANCE COMPANY
IN CONNECTION WITH
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
HOME OFFICE: 1 KEMPER DRIVE, LONG GROVE, ILLINOIS 60049 (847) 550-5500
The types of Variable and Market Value Adjusted Deferred Annuity Contracts
("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.
Purchase payments for the Contracts may be allocated to one or more of the
options under which Contract values accumulate on a variable basis, a fixed
basis, or a fixed basis subject to a market value adjustment. These options
consist of the thirteen Subaccounts of the Separate Account, the Fixed Option of
the General Account and the Market Value Adjustment Option ("MVA Option"). Each
Subaccount invests in one of the Portfolios of the following funds: the Kemper
Investors Fund ("KINF"), the Janus Aspen Series ("Janus"), the Lexington Natural
Resources Trust ("Lexington") and the Warburg Pincus Trust ("Warburg").
The Kemper Investors Fund currently consists of the following Portfolios: Money
Market, Total Return, High Yield, Growth, International and Value+Growth. The
following Portfolios of the Janus Aspen Series are available under the
Contracts: Growth, Worldwide Growth and Balanced. The Lexington Natural
Resources Trust currently consists of only one Portfolio. The following
Portfolios of the Warburg Pincus Trust are available under the Contracts:
International Equity, Small Company Growth and Post-Venture Capital.
Subaccounts and Portfolios may be added in the future. Contract values allocated
to any of the Subaccounts will vary to reflect the investment objectives and the
attendant risks of the Funds. Contract values allocated to the Fixed Option or
one or more MVA 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 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 KILICO by writing or calling the address or
telephone number listed above. A table of contents for the Statement of
Additional Information is on page 48 of this Prospectus.
THIS PROSPECTUS IS VALID ONLY IF ACCOMPANIED OR PRECEDED BY A CURRENT PROSPECTUS
FOR THE KEMPER INVESTORS FUND, JANUS ASPEN SERIES, LEXINGTON NATURAL RESOURCES
TRUST AND WARBURG PINCUS TRUST. 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 NOR HAS THE 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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PAGE
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DEFINITIONS................................................. 1
SUMMARY..................................................... 2
SUMMARY OF EXPENSES......................................... 5
KILICO, THE MVA OPTION, THE SEPARATE ACCOUNT AND THE
FUNDS..................................................... 7
FIXED OPTION................................................ 11
THE CONTRACTS............................................... 12
CONTRACT CHARGES AND EXPENSES............................... 18
THE ANNUITY PERIOD.......................................... 21
FEDERAL INCOME TAXES........................................ 23
DISTRIBUTION OF CONTRACTS................................... 27
VOTING RIGHTS............................................... 27
REPORTS TO CONTRACT OWNERS AND INQUIRIES.................... 27
DOLLAR COST AVERAGING....................................... 28
SYSTEMATIC WITHDRAWAL PLAN.................................. 28
LEGAL PROCEEDINGS........................................... 28
BUSINESS.................................................... 29
PROPERTIES.................................................. 33
EXPERTS..................................................... 33
LEGAL MATTERS............................................... 33
SELECTED FINANCIAL DATA..................................... 33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 34
DIRECTORS AND OFFICERS OF KILICO............................ 43
EXECUTIVE COMPENSATION...................................... 45
TABLE OF CONTENTS--STATEMENT OF ADDITIONAL INFORMATION...... 48
FINANCIAL STATEMENTS........................................ 48
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<PAGE> 5
DEFINITIONS
The following terms as used in this Prospectus have the indicated meanings:
ACCUMULATION PERIOD--The period between the Date of Issue of a Contract and
the Annuity Date.
ACCUMULATION UNIT--A unit of measurement used to determine the value of
each Subaccount 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 Contract
upon the death of the Annuitant or the Owner prior to the Annuity Period.
CONTRACT--A Variable and Market Value Adjusted Annuity Contract offered by
this Prospectus.
CONTRACT OWNER OR OWNER--The person designated in the Contract as having
the privileges of ownership defined in the Contract.
CONTRACT VALUE--The sum of the values of the Owner's Separate Account
Contract Value, MVA Contract Value and General Account Contract Value.
CONTRACT YEAR--Period between anniversaries of the Date of Issue of a
Contract.
CONTRACT QUARTER--Periods between quarterly anniversaries of the Date of
Issue of the Contract.
CONTRIBUTION YEAR--Each Contract Year in which a Purchase Payment is made
and each succeeding year measured from the end of the Contract Year during
which such Purchase Payment was made. For example, if a Contract Owner
makes an initial payment of $15,000 and then makes a subsequent payment of
$10,000 during the fourth Contract Year, the fifth Contract Year will be
the fifth Contribution Year for the purpose of Accumulation Units
attributable to the initial payment and the second Contribution Year with
respect to Accumulation Units attributable to the subsequent $10,000
payment.
DATE OF ISSUE--The date on which the first Contract Year commences.
DEBT--The principal of any outstanding loan from the General Account
Contract Value, plus any accrued interest. Requests for loans must be made
in writing to KILICO.
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 OR FUNDS--Kemper Investors Fund, Janus Aspen Series, Lexington Natural
Resources Trust and Warburg Pincus Trust including any Portfolios
thereunder.
GENERAL ACCOUNT--All the assets of KILICO other than those allocated to any
Separate Account. KILICO guarantees a minimum rate of interest on Purchase
Payments allocated to the General Account.
GENERAL ACCOUNT CONTRACT VALUE--The value of the Owner's Contract interest
in the General Account.
GUARANTEED INTEREST RATE--The rate of interest established by KILICO for a
given MVA Period.
MVA PERIOD--A period of time during which an amount is to be credited with
a Guaranteed Interest Rate. MVA Period options may have durations of one,
three, five, seven or ten years, as elected by the Owner.
MVA PERIOD VALUE--The MVA Period Value is the sum of the Owner's: (1)
Purchase Payment allocated or amount transferred to a MVA 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 MVA Period Value adjusted by the market value
adjustment formula on any date prior to the end of a MVA Period.
1
<PAGE> 6
MARKET VALUE ADJUSTMENT--An adjustment of values under a MVA Period in
accordance with the market value adjustment formula prior to the end of
that MVA Period. The adjustment reflects the change in the value of the MVA
Period Value due to changes in interest rates since the date the MVA Period
commenced. The adjustment is computed using the market value adjustment
formula stated in the Contract.
MVA CONTRACT VALUE--The sum of an Owner's MVA Period Values.
NON-QUALIFIED PLAN CONTRACT--A Contract 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.
PORTFOLIO--A series of a Fund with its own objective and policies, which
represents shares of beneficial interest in a separate portfolio of
securities and other assets. Portfolio is sometimes referred to herein as a
Fund.
PURCHASE PAYMENTS--Amounts paid to KILICO by or on behalf of a Contract
Owner.
QUALIFIED PLAN CONTRACT--A Contract 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 CONTRACT VALUE--The sum of the Owner's Contract interest
in the Subaccount(s).
SUBACCOUNTS--The thirteen subdivisions of the Separate Account, the assets
of which consist solely of shares of the corresponding Portfolios.
SUBACCOUNT VALUE--The value of the Owner's Contract interest in each
Subaccount.
UNITHOLDER--The person holding the voting rights with respect to an
Accumulation or Annuity Unit.
VALUATION DATE--Each day when the New York Stock Exchange is open for
trading, as well as each day otherwise required. (See "Accumulation Unit
Value.")
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
Contract has an interest.
WITHDRAWAL CHARGE--The "contingent deferred sales charge" assessed against
certain withdrawals of Accumulation Units in their first seven Contribution
Years or against certain annuitization of Accumulation Units in their first
seven Contribution Years.
WITHDRAWAL VALUE--Contract Value less Debt, and any premium tax payable if
the Contract is being annuitized, minus any Withdrawal Charge applicable to
that Contract.
SUMMARY
The Contracts 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 Contract has
been purchased. The Prospectus offers both Non-Qualified Plan and Qualified Plan
Contracts. KILICO makes underlying investment options, including thirteen
variable Subaccounts, a Fixed Option and five durations of MVA Periods,
available for the Contract Owner to pursue his or her investment objectives.
The minimum initial Purchase Payment is $1,000 and the minimum subsequent
payment is $500. However, if contributions are made from a payroll or salary
reduction plan under a Qualified Plan Contract, minimum Purchase Payments of $50
per month will be accepted. An allocation to a Subaccount, General Account or
MVA Period must be at least $500. However, if contributions are made from a
payroll or salary reduction plan, minimum allocations of $50 per month will be
accepted. The maximum Purchase Payment without KILICO's prior approval is
$1,000,000, or, if less, the maximum permitted under the plan pursuant to which
the Contract is issued. (See "The Contracts," page 12.)
2
<PAGE> 7
KILICO provides for variable accumulations and benefits under the Contracts by
crediting purchase payments to one or more Subaccounts of the Separate Account
as selected by the Contract Owner. Each Subaccount invests in one of the
following corresponding Portfolios: KINF Money Market, KINF Total Return, KINF
High Yield, KINF Growth, KINF International and Value+Growth; Janus Growth,
Janus Worldwide Growth and Janus Balanced; Lexington Natural Resources Trust;
Warburg International Equity, Warburg Small Company Growth and Warburg
Post-Venture Capital. (See "The Funds" page 8.) The Contract Values allocated to
the Separate Account will vary with the investment performance of the Portfolios
and Funds selected by the Contract Owner.
KILICO provides for fixed accumulations and benefits under the Contracts in the
Fixed Option of the General Account. Any portion of the purchase payment
allocated to the Fixed Option is credited with interest daily at a rate
periodically declared by KILICO in its sole discretion, but not less than 3%.
(See "Fixed Option," page 11.)
KILICO also provides for fixed accumulations under the Contracts in the MVA
Option. The MVA Option is only available during the Accumulation Period. An
Owner may allocate amounts to one or more MVA Periods available under the MVA
Option with durations of one, three, five, seven and ten years. KILICO may, in
its discretion, offer additional MVA Periods or, limit for new Contracts the
number of MVA 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 MVA 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 MVA Period; however, Guaranteed Interest
Rates for subsequent MVA Periods will be determined at the sole discretion of
KILICO. At the end of any Owner's MVA Period, a subsequent MVA Period
automatically renews for the same duration as the terminating MVA Period unless
the Owner elects another MVA Period during the designated period before and
after the end of the MVA Period. The interests under the Contract 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.)
The investment risk under the Contracts is borne by the Contract Owner, except
to the extent that Contract Values are allocated to the MVA Option and are
guaranteed to receive the Guaranteed Interest Rate or to the Fixed Option and
are guaranteed to earn at least 3% interest.
Transfers between Subaccounts are permitted before and after annuitization, if
allowed by the applicable retirement plan and subject to certain limitations. A
transfer from a MVA Period is subject to a Market Value Adjustment if effected
within 15 days before or 15 days after the existing MVA Period ends.
Restrictions apply to transfers out of the Fixed Option. (See "Transfer During
Accumulation Period" and "Transfer During Annuity Period," pages 15 and 22,
respectively.)
No sales charge is deducted from any Purchase Payment. Each Contract Year, a
Contract Owner may withdraw the greater of (i) the excess of Contract Value over
total Purchase Payments less prior withdrawals that were previously assessed a
Withdrawal Charge, and (ii) 10% of the Contract Value less Debt, without
assessment of any charge. If the Contract Owner withdraws an amount in excess of
the above amount in any Contract Year, the amount withdrawn in excess of the
above amount is subject to a contingent deferred sales charge ("Withdrawal
Charge"). The Withdrawal Charge is 7% in the first Contribution Year, 6% in the
second Contribution Year, 5% in the third and fourth Contribution Years, 4% in
the fifth Contribution Year, 3% in the sixth Contribution Year, 2% in the
seventh Contribution Year and 0% thereafter. (See "Withdrawal Charge," page 19.)
The Withdrawal Charge also applies at the annuitization of Accumulation Units in
their seventh Contribution Year or earlier, except as set forth under
"Withdrawal Charge." Please note that adverse tax consequences may occur with
respect to certain withdrawals. (See "Tax Treatment of Withdrawals, Loans and
Assignments," page 24.)
KILICO makes charges under the Contract for assuming the mortality and expense
risk and administrative expenses under the Contract, for records maintenance,
and for any applicable premium taxes. (See "Charges Against the Separate
Account," page 18.) In addition, the investment advisers to the Funds deduct
varying charges against the assets of the Funds for which they provide
investment advisory services. (See the Funds' prospectuses for such
information.)
The Contracts 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 Contracts are also available in connection with
state and municipal deferred compensation plans and other entities qualified
under Section 457 of the Code and under
3
<PAGE> 8
other deferred compensation arrangements, and are also offered under other
retirement plans which may not qualify for similar tax advantages. (See
"Non-Qualified Plan Contracts," page 24 and "Qualified Plans," page 25.)
A Contract Owner has the right within the "free look" period (generally ten
days, subject to state variation) after receiving the Contract to cancel the
Contract by delivering or mailing it to KILICO. Upon receipt by KILICO, the
Contract will be cancelled and a refund will be made. The amount of the refund
will depend on the state in which the Contract is issued; however, it generally
will be an amount at least equal to the Separate Account Contract Value plus
amounts allocated to the General Account or to the MVA Periods which will not be
subject to a Market Value Adjustment. (See "The Contracts," page 12.)
4
<PAGE> 9
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SUMMARY OF EXPENSES
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CONTRACT OWNER TRANSACTION EXPENSES
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Sales Load Imposed on Purchases (as a percentage of purchase payments).............................. None
Contingent Deferred Sales Load (as a percentage of amount surrendered)*
Year of Withdrawal After Purchase
First year........................... 7%
Second year.......................... 6%
Third year........................... 5%
Fourth year.......................... 5%
Fifth year........................... 4%
Sixth year........................... 3%
Seventh year......................... 2%
Eighth year and following............ 0%
Surrender Fees...................................................................................... None
Exchange Fee........................................................................................ None
ANNUAL CONTRACT FEE (Records Maintenance Charge)**.................................................. $30
</TABLE>
FUND ANNUAL EXPENSES
(as percentage of each Portfolio's average net assets
for the period ended December 31, 1995)
<TABLE>
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KINF KINF KINF
MONEY TOTAL KINF KINF KINF VALUE+
MARKET RETURN HIGH YIELD GROWTH INTERNATIONAL GROWTH
------ ------ ---------- ------ ------------- ------
<S> <C> <C> <C> <C> <C> <C>
Management Fees......................... .50% .55% .60% .60% .75% .75%
Other Expenses.......................... .05 .05 .05 .04 .17 .15
- - - - - -
Total Portfolio Annual Expenses......... .55% .60% .65% .64% .92% .90%
= = = = = =
</TABLE>
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Separate Account Annual Expenses
(as a percentage of average daily account value)
<S> <C>
Mortality and Expense Risk.............. 1.25%
Administration.......................... .10%
Account Fees and Expenses............... 0%
Total Separate Account
Annual Expenses....................... 1.35%
</TABLE>
FUND ANNUAL EXPENSES
(as percentage of each Portfolio's average net assets
for the period ended December 31, 1995)
<TABLE>
<CAPTION>
JANUS LEXINGTON WARBURG WARBURG WARBURG
JANUS WORLDWIDE JANUS NATURAL INTERNATIONAL SMALL COMPANY POST-VENTURE
GROWTH*** GROWTH*** BALANCED*** RESOURCES EQUITY GROWTH CAPITAL
--------- --------- ----------- --------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Management Fees..... .65% .66% .79% 1.00%
Other Expenses...... .04 .04 .15 .47%
- - - -- -- - -
Total Portfolio
Annual Expenses.... .69% .80% .94% 1.47%
== ==
= = = = =
</TABLE>
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* A Contract Owner may withdraw up to the greater of (i) the excess of
Contract Value over total Purchase Payments less prior withdrawals that
were previously assessed a Withdrawal Charge, and (ii) 10% of the Contract
Value less Debt in any Contract Year without assessment of any charge.
Under certain circumstances the contingent deferred sales charge may be
reduced or waived, including when certain annuity options are selected.
** Applies to Contracts with a Contract Value less than $50,000 on the date of
assessment. Under certain circumstances the annual Records Maintenance
Charge may be reduced or waived by KILICO.
*** The expense figures shown are net of certain fee waivers or reductions from
Janus Capital Corporation. Without such waivers, Management Fees, Other
Expenses and Total Portfolio Annual Expenses for the Portfolios for the
fiscal year ended December 31, 1995 were: .85%, .13% and .98%,
respectively, for the Growth Portfolio; .87%, .22% and 1.09%, respectively,
for the Worldwide Growth Portfolio; 1.00%, .55% and 1.55%, respectively,
for the Balanced Portfolio. See the prospectus and Statement of Additional
Information of Janus Aspen Series for a description of these waivers.
5
<PAGE> 10
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EXAMPLE
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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 applicable KINF Money Market $83 $108 $134 $239
time period: KINF Total Return 83 110 137 245
You would pay the following expenses on a $1,000 KINF High Yield 84 111 139 250
investment,
assuming 5% annual return on assets: KINF Growth 84 111 139 249
KINF International 86 119 153 278
KINF Value+Growth 86 130 -- --
Janus Growth 85 115 -- --
Janus Worldwide Growth 86 119 -- --
Janus Balanced 91 132 -- --
Lexington Natural Resources 30 93 -- --
Trust
Warburg International Equity
Warburg Small Company Growth
Warburg Post-Venture Capital
If you do not surrender your Contract: KINF Money Market 21 65 111 239
You would pay the following expenses KINF Total Return 21 66 114 245
on a $1,000 investment, assuming KINF High Yield 22 68 116 250
5% annual return on assets: KINF Growth 22 68 116 249
KINF International 25 76 130 278
KNIF Value+Growth 25 76 -- --
Janus Growth 24 74 -- --
Janus Worldwide Growth 25 76 -- --
Janus Balanced 29 90 -- --
Lexington Natural Resources 30 93 -- --
Trust
Warburg International Equity
Warburg Small Company Growth
Warburg Post-Venture Capital
</TABLE>
- --------------------------------------------------------------------------------
The purpose of the preceding table which includes the "SUMMARY OF EXPENSES" on
the prior page, is to assist Contract Owners in understanding the various costs
and expenses that a Contract Owner in a Subaccount will bear directly or
indirectly. The table reflects expenses of both the Separate Account and the
Fund. THE EXAMPLE SHOULD NOT BE CONSIDERED TO BE A REPRESENTATION OF PAST OR
FUTURE EXPENSES AND DOES NOT INCLUDE THE DEDUCTION OF STATE PREMIUM TAXES, WHICH
MAY BE ASSESSED BEFORE OR UPON ANNUITIZATION. ACTUAL EXPENSES MAY BE GREATER OR
LESS THAN THOSE SHOWN. "Management Fees" and "Other Expenses" in the "SUMMARY OF
EXPENSES" for the Portfolios have been provided by Zurich Kemper Investments
Inc., Janus Capital Corporation, Lexington Management Corporation and Warburg,
Pincus Counsellors, Inc., as applicable, and have not been independently
verified. 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 in the Example 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. See "Contract Charges and Expenses" for more information regarding the
various costs and expenses.
6
<PAGE> 11
KILICO, THE MVA OPTION, THE SEPARATE ACCOUNT AND THE FUNDS
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. ("I.P."), 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 MVA Periods with
durations of one, three, five, seven or ten years during the Accumulation
Period. KILICO may, at its discretion, offer additional MVA Periods or limit,
for new Contracts, the number of durations of MVA Periods available to no less
than three (3).
The amounts allocated to the MVA Option under the Contracts are invested in
accordance with the standards applicable to KILICO's general account. Assets
supporting the amounts allocated to MVA Periods under the Contracts are held in
a "non-unitized" separate account of KILICO. However, all of KILICO's general
account assets are available to fund benefits under the Contracts. A
non-unitized separate account is a separate account in which the Owner does not
participate in the performance of the assets through unit values. There are no
discrete units for this separate account. The assets of the non-unitized
separate account are held as reserves for the guaranteed 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.
State insurance laws concerning the nature and quality of investments regulate
KILICO's investments for its general account and any non-unitized separate
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 ZKI Holding Corporation. ZKI Holding Corporation is a more than 90% owned
subsidiary of Zurich Holding Company of America, 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 Contracts 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 for this non-unitized separate account is generally
to invest in debt instruments that it uses to match its liabilities with regard
to a MVA 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 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.")
7
<PAGE> 12
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, initially 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 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 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 and certain other variable annuity contracts. The obligations
to Contract Owners and beneficiaries arising under the Contracts are general
corporate obligations of KILICO.
The Separate Account is currently divided into thirteen Subaccounts. Each
Subaccount invests exclusively in shares of one of the corresponding Portfolios
of the Funds. Additional Subaccounts may be added in the future.
The Separate Account will purchase and redeem shares from the Funds at net asset
value. KILICO will redeem shares of the Funds as necessary to provide benefits,
to deduct charges under the Contracts and to transfer assets from one Subaccount
to another as requested by Contract Owners. All dividends and capital gains
distributions received by the Separate Account from a Portfolio of a 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 FUNDS
The Separate Account invests in shares of the Kemper Investors Fund, the Janus
Aspen Series, the Lexington Natural Resources Trust and the Warburg Pincus Trust
open-end, management investment companies. Registration of the Funds by the
Securities and Exchange Commission does not involve supervision of their
management, investment practices or policies by the Commission. The Funds are
designed to provide investment vehicles for variable life insurance and variable
annuity contracts and, in the case of the Janus Aspen Series, certain qualified
retirement plans. Shares of the Funds are sold only to insurance company
separate accounts and qualified retirement plans. In addition to selling shares
to separate accounts of KILICO and its affiliates, shares of the Funds may be
sold to 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 variable life insurance separate accounts,
variable annuity separate accounts and qualified retirement plans to invest
simultaneously in the Funds. Currently, neither KILICO nor the Funds foresee any
such disadvantages to variable life insurance owners, variable annuity owners or
qualified retirement plans. Management of the Funds 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 a Fund's
response to any of those events or conflicts insufficiently protects Contract
Owners, it will take appropriate action on its own.
A Fund may consist of separate Portfolios. 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.
8
<PAGE> 13
The thirteen Portfolios are summarized below:
KEMPER INVESTORS FUND
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.
INTERNATIONAL PORTFOLIO seeks total return, a combination of capital growth and
income, principally through an internationally diversified portfolio of equity
securities.
VALUE+GROWTH PORTFOLIO seeks growth of capital through professional management
of a portfolio of growth and value stocks.
JANUS ASPEN SERIES
GROWTH PORTFOLIO seeks long-term growth of capital in a manner consistent with
the preservation of capital. It is a diversified Portfolio that pursues its
objective by investing in common stocks of companies of any size. This Portfolio
generally invests in larger, more established issuers.
WORLDWIDE GROWTH PORTFOLIO seeks long-term growth of capital in a manner
consistent with the preservation of capital. It is a diversified Portfolio that
pursues its objective primarily through investments in common stocks of foreign
and domestic issuers.
BALANCED PORTFOLIO seeks long-term capital growth, consistent with preservation
of capital and balanced by current income. It is a diversified Portfolio that,
under normal circumstances, pursues its objective by investing 40-60% of its
assets in securities selected primarily for their growth potential and 40-60% of
its assets in securities selected primarily for their income potential.
LEXINGTON NATURAL RESOURCES TRUST
This Fund seeks long-term growth of capital through investment primarily in
common stocks of companies that own or develop natural resources and other basic
commodities, or supply goods and services to such companies. Current income will
not be a factor. Total return will consist primarily of capital appreciation.
WARBURG PINCUS TRUST
INTERNATIONAL EQUITY PORTFOLIO seeks long-term capital appreciation by investing
in equity securities of non-U.S. issuers.
SMALL COMPANY GROWTH PORTFOLIO seeks capital growth by investing in equity
securities of small-sized U.S. companies.
POST-VENTURE CAPITAL PORTFOLIO seeks long-term growth of capital by investing
primarily in equity securities of issuers in their post-venture-capital stage of
development and pursues an aggressive investment strategy.
------------------
There is no assurance that any of the Portfolios of the Funds will achieve their
objective as stated in their prospectuses. More detailed information, including
a description of risks involved in investing in each of the Subaccounts that
invest in the Funds, may be found in the corresponding prospectuses for the
Funds, which must accompany or precede this Prospectus, and the Funds'
Statements of Additional Information available upon request. Read the
prospectuses carefully before investing.
Zurich Kemper Investments, Inc. ("ZKI"), an affiliate of KILICO, is the
investment manager for the six available Portfolios of the Kemper Investors
Fund. Dreman Value Advisors, Inc. ("DVA"), a wholly owned subsidiary of ZKI, is
the sub-adviser for the KINF Value+Growth Portfolio. Under the terms of the
Sub-Advisory Agreement with ZKI, DVA will manage the value portion of this
Portfolio and will provide such other investment advice,
9
<PAGE> 14
research and assistance as ZKI may from time to time, reasonably request. Janus
Capital Corporation is the investment adviser for the three available Portfolios
of the Janus Aspen Series. Lexington Management Corporation is the investment
adviser for the Lexington Natural Resources Trust. Warburg, Pincus Counsellors,
Inc. is the investment adviser for the three available Portfolios of the Warburg
Pincus Trust. The investment advisers are paid fees for their services by the
Funds they manage. KILICO may receive compensation from the Funds or the
investment advisers of the Funds for services related to the Funds. Such
compensation will be consistent with the services rendered or the cost savings
resulting from the arrangement.
For their services to the Portfolios, the managers receive compensation at the
following rates:
KEMPER INVESTORS FUND
For its services, ZKI is paid a management fee based upon the average daily net
assets of each KINF Portfolio, as follows: Money Market (.50 of 1%), Total
Return (.55 of 1%), High Yield (.60 of 1%), Growth (.60 of 1%), International
(.75 of 1%) and Value+Growth (.75 of 1%). DVA serves as sub-adviser for the KINF
Value+Growth Portfolio. 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.
JANUS ASPEN SERIES
Janus Capital Corporation receives a monthly advisory fee for the Janus Growth
Portfolio, Janus Worldwide Growth Portfolio and Janus Balanced Portfolio based
on the following schedule (expressed as an annual rate):
<TABLE>
<CAPTION>
AVERAGE DAILY NET
ASSETS OF PORTFOLIO ANNUAL RATE
------------------- -----------
<S> <C>
First $30,000,000.................... 1.00%
Next $270,000,000.................... .75%
Next $200,000,000.................... .70%
Over $500,000,000.................... .65%
</TABLE>
However, Janus Capital Corporation has agreed to reduce each of the above
Portfolios' advisory fees to the extent that such fee exceeds the effective rate
of a fund managed by Janus Capital Corporation with similar investment objective
and policies.
LEXINGTON NATURAL RESOURCES TRUST
Lexington Management Corporation receives a monthly investment advisory fee at
the annual rate of 1.00% of the Fund's average net assets.
WARBURG PINCUS TRUST
Warburg, Pincus Counsellors, Inc. receives a monthly advisory fee based upon the
average daily net assets of each Warburg Portfolio, as follows: International
Equity 1.00%, Small Company Growth 0.90% and Post-Venture Capital 1.25%.
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 Funds and to substitute shares of
another Portfolio of the Funds 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 a Contract Owner's interest in a Subaccount of the Separate
Account without notice to the Contract 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 Contract 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 Funds, or
in shares of another investment company, with a specified investment objective.
New subaccounts may be established when, in the sole discretion of KILICO,
marketing needs or
10
<PAGE> 15
investment conditions warrant, and any new subaccounts may be made available to
existing Contract 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 Contract Owners of any
such changes.
If deemed by KILICO to be in the best interests of persons having voting rights
under the Contract, 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 Contract 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." The KINF High Yield Subaccount
may also advertise 'yield'. The KINF Money Market Subaccount may 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 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 the KINF Money Market Subaccount) expressed as a percentage of the
value of the Subaccount's 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 the KINF Money Market Subaccount is calculated similarly
but includes the effect of assumed compounding calculated under rules prescribed
by the Securities and Exchange Commission. The KINF Money Market Subaccount's
effective yield will be slightly higher than its yield 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 Subaccounts 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 seven years after
purchase may be subject to a Withdrawal Charge that ranges from 7% the first
year to 0% after seven years. Yield, effective yield and total return figures do
not include the effect of any Withdrawal Charge that may be imposed upon the
redemption of units, and thus may be higher than if such charges were deducted.
Average annual total return figures include the effect of the applicable
Withdrawal Charge that may be imposed at the end of the period in question.
Additional information concerning a Subaccount's performance appears in the
Statement of Additional Information. The Subaccounts may provide comparative
information with regard to the Dow Jones Industrial Average, the Standard &
Poor's 500 Stock Index, the Consumer Price Index, the CDA Certificate of Deposit
Index, the Lehman Brothers Government and Corporate Bond Index, the Salomon
Brothers High Grade Corporate Bond Index and the Merrill Lynch
Government/Corporate Master Index, the CDA Mutual Fund--International Index, and
the Morgan Stanley Capital International Europe, Australia, Far East Index, and
may provide Lipper Analytical Services, Inc., the VARDS Report and Morningstar,
Inc. performance analysis rankings. In addition, the Subaccounts may provide
comparative information with regard to the Standard & Poor's Midcap Index,
Lehman Brothers Government/Corporate 1-3 Year Bond Index, Lehman Brothers Long
Government/Corporate Bond Index, Russell 2000 Index and the NASDAQ Composite
Index and the Morgan Stanley International World Index and may provide Ibbotson
Associates or Micropal 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,
INVESTMENT ADVISOR AND VARDS.
FIXED OPTION
CONTRIBUTIONS UNDER THE FIXED PORTION OF THE CONTRACT AND TRANSFERS TO THE FIXED
PORTION BECOME PART OF THE GENERAL ACCOUNT OF THE INSURANCE COMPANY, WHICH
SUPPORTS INSURANCE AND ANNUITY OBLIGATIONS. BECAUSE OF
11
<PAGE> 16
EXEMPTIVE AND EXCLUSIONARY PROVISIONS, INTERESTS IN THE GENERAL ACCOUNT HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 ("1933 ACT") NOR IS THE GENERAL
ACCOUNT REGISTERED AS AN INVESTMENT COMPANY UNDER THE INVESTMENT COMPANY ACT OF
1940 ("1940 ACT"). ACCORDINGLY, NEITHER THE GENERAL ACCOUNT NOR ANY INTERESTS
THEREIN GENERALLY ARE SUBJECT TO THE PROVISIONS OF THE 1933 OR 1940 ACTS AND
KILICO HAS BEEN ADVISED THAT THE STAFF OF THE SECURITIES AND EXCHANGE COMMISSION
HAS NOT REVIEWED THE DISCLOSURES IN THIS PROSPECTUS WHICH RELATE TO THE FIXED
PORTION. DISCLOSURES REGARDING THE FIXED PORTION OF THE CONTRACT AND THE GENERAL
ACCOUNT, HOWEVER, MAY BE SUBJECT TO CERTAIN GENERALLY APPLICABLE PROVISIONS OF
THE FEDERAL SECURITIES LAWS RELATING TO THE ACCURACY AND COMPLETENESS OF
STATEMENTS MADE IN PROSPECTUSES.
The Contracts offer a Fixed Option (the General Account) under which KILICO
allocates payments to its General Account and pays a fixed interest rate for
stated periods. This Prospectus describes only the element of the Contract
pertaining to the Separate Account except where it makes specific reference to
fixed accumulation and annuity elements.
The Contracts guarantee that payments allocated to the General Account will earn
a minimum fixed interest rate of 3%. KILICO, at its discretion, may credit
interest in excess of 3%. KILICO reserves the right to change the rate of excess
interest credited as provided under the terms of the Contract. KILICO also
reserves the right to declare separate rates of excess interest for Purchase
Payments or amounts transferred at designated times, with the result that
amounts at any given designated time may be credited with a higher or lower rate
of excess interest than the rate or rates of excess interest previously credited
to such amounts and Purchase Payments paid or amounts transferred at any other
designated time.
THE CONTRACTS
A. GENERAL INFORMATION.
This Prospectus offers both Non-Qualified Plan Contracts and Qualified Plan
Contracts. The minimum initial Purchase Payment is $1,000 and the minimum
subsequent payment is $500. However, if contributions are made from a payroll or
salary reduction plan under a Qualified Plan Contract, minimum Purchase Payments
of $50 per month will be accepted. Purchase Payments in excess of $1,000,000
require the prior approval of KILICO. The maximum annual amount of Purchase
Payments may also be limited by the provisions of the retirement plan pursuant
to which the Contract has been purchased. An allocation to a Subaccount, the
General Account or a MVA Period must be at least $500. However, if contributions
are made from a payroll or salary reduction plan, minimum allocations of $50 per
month will be accepted.
KILICO may at any time amend the Contract in accordance with changes in the law,
including applicable tax laws, regulations or rulings, and for other purposes.
A Contract Owner is allowed a "free look" period (generally 10 days, subject to
state variation) after receiving the Contract, to review it and decide whether
or not to keep it. If the Contract Owner decides to return the Contract, it may
be cancelled by delivering or mailing it to KILICO. Upon receipt by KILICO, the
Contract will be cancelled and a refund will be made. The amount of the refund
will depend on the state in which the Contract is issued; however, it generally
will be an amount at least equal to the Separate Account Contract Value plus
amounts allocated to the General Account and the MVA Periods on the date of
receipt by KILICO, without any deduction for Withdrawal Charges or Records
Maintenance Charges. However, in some states applicable law requires that the
amount of the Purchase Payment be returned.
During the Accumulation Period, the Contract Owner may assign the Contract 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 Contract. If a
Beneficiary is not named, or if no named Beneficiary survives the Annuitant, the
Beneficiary shall be the Annuitant's or Owner's estate.
Assignment of interest in the Contract or change of Beneficiary designation
under a Qualified Plan Contract may be prohibited by the provisions of the
applicable plan.
12
<PAGE> 17
B. THE ACCUMULATION PERIOD.
1. APPLICATION OF PURCHASE PAYMENTS.
Purchase Payments are allocated to the Subaccount(s), MVA Periods, or General
Account as selected by the Contract Owner. 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 on each day that the New York Stock Exchange is open for trading. Purchase
Payments allocated to a MVA Period or to the General Account will begin earning
interest one day after receipt in proper form. However, with respect to initial
Purchase Payments, the amount will be credited only after an affirmative
determination by KILICO to issue the Contract, but no later than the second day
following receipt of the Purchase Payment. 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 will be reduced upon assessment of the Records Maintenance
Charge.
If KILICO has not been provided with information sufficient to establish a
Contract 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 Contract
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.
KILICO will issue a Contract 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
Contract with a copy of the completed application. The Contract 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.
2. ACCUMULATION UNIT VALUE.
Each Subaccount has an Accumulation Unit value. When Purchase Payments or other
amounts are allocated to a Subaccount, a number of units are purchased based on
the Subaccount's Accumulation Unit value at the end of the Valuation Period
during which the allocation is made. When amounts are transferred out of or
deducted from a Subaccount, units are redeemed in a similar manner.
The Accumulation Unit value for each subsequent Valuation Period is the
investment experience factor for that period multiplied by the Accumulation Unit
value for the immediately preceding period. Each Valuation Period has a single
Accumulation Unit value which is applied to each day in the period.
Each Subaccount has its own investment experience factor. The investment
experience of the Separate Account is calculated by applying the investment
experience factor to the Accumulation Unit value in each Subaccount during a
Valuation Period.
The investment experience factor of a Subaccount for a Valuation Period is
determined by dividing (1) by (2) and subtracting (3) from the result, where:
(1) is the net result of:
a. the net asset value per share of the investment held in the
Subaccount determined at the end of the current Valuation Period; plus
b. the per share amount of any dividend or capital gain distributions
made by the investments held in the Subaccount, if the "ex-dividend"
date occurs during the current Valuation Period; plus or minus
c. a charge or credit for any taxes reserved for the current Valuation
Period which KILICO determines to have resulted from the investment
operations of the Subaccount;
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<PAGE> 18
(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 Contract for the number of days in
the Valuation Period.
3. MVA PERIODS OF THE MVA OPTION.
An Owner may select, on the application form, one or more MVA Periods with
durations of one, three, five, seven or ten years. Any subsequently permitted
Purchase Payments are allocated to MVA Periods as selected by the Owner. The MVA
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 MVA Period for
that Purchase Payment remaining in the MVA Period. Interest is credited daily at
a rate equivalent to the effective annual rate.
Set forth below is an illustration of how KILICO will credit interest during a
MVA Period. For the purpose of this example, certain assumptions were made as
indicated.
EXAMPLE OF GUARANTEED INTEREST RATE ACCUMULATION
<TABLE>
<S> <C>
Purchase Payment: $40,000
MVA Period: 5 Years
Guaranteed Interest Rate: 4.0% Effective Annual Rate
</TABLE>
<TABLE>
<CAPTION>
INTEREST CREDITED CUMULATIVE
YEAR DURING YEAR INTEREST 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 CONTRACT. ACTUAL INTEREST RATES GUARANTEED FOR ANY GIVEN
TIME MAY BE MORE OR LESS THAN THOSE SHOWN.
At the end of any MVA Period, a subsequent MVA Period begins. KILICO provides
written notification of the beginning of a subsequent MVA Period. The subsequent
MVA Period automatically renews for the same duration as the terminating MVA
Period unless the Owner elects another MVA Period within 15 days before or 15
days after the end of the terminating MVA Period. The Owner may choose a
different MVA Period by preauthorized telephone instructions or written
notification to KILICO within 15 days before or 15 days after the beginning of
the subsequent MVA Period (or such longer period as stated in KILICO's
notification). An Owner should not select a subsequent MVA Period that would
extend beyond the Annuity Date then in effect for that Contract as the MVA
Period Amount available for annuitization in such MVA 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 MVA Period is equal to
the MVA Period Value in the MVA Period just ended. The Guaranteed Interest Rate
in effect when the subsequent MVA Period begins applies for the entire duration
of the subsequent MVA 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.
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<PAGE> 19
4. ESTABLISHMENT OF GUARANTEED INTEREST RATES.
KILICO declares the Guaranteed Interest Rates for each of the five durations of
MVA Periods from time to time as market conditions dictate, but once
established, rates will be guaranteed for the duration of the respective MVA
Periods. KILICO advises an Owner of the Guaranteed Interest Rate for a chosen
MVA Period at the time a Purchase Payment is received, a transfer is effectuated
or a MVA Period renews. Any portion of an Owner's MVA Contract 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 MVA 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 Contracts. (See "The MVA
Option".) KILICO, in determining Guaranteed Interest Rates, may also consider,
among other factors, the duration of a MVA 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.
5. CONTRACT VALUE.
Separate Account Contract 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 Contract interest in each
Subaccount in which the Contract is participating. That amount, when added to
the Owner's MVA Contract Value in the MVA Option and the Owner's Contract
interest in the General Account, equals the Contract Value.
6. TRANSFER DURING ACCUMULATION PERIOD.
During the Accumulation Period, a Contract Owner may transfer the Contract Value
among the Subaccounts, the MVA Periods and the Fixed Option subject to the
following provisions: (i) the amount transferred must be at least $500 unless
the total Contract Value attributable to a Subaccount, MVA Period or General
Account is being transferred; (ii) the Contract Value remaining in a Subaccount,
MVA Period or General Account must be at least $500 unless the total value was
transferred; and (iii) transfers from the General Account are limited to 30% of
the General Account Contract Value at the beginning of the Contract Year. In
addition, transfers of all or a portion of MVA 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 MVA Period.
Because a transfer before the end of a MVA Period is subject to a Market Value
Adjustment, the amount actually transferred from the MVA 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 Contract Owner. Transfers involving a Subaccount will be
based upon the Accumulation Unit values next determined following receipt of
valid, complete transfer instructions by KILICO. The transfer privilege may be
suspended, modified or terminated at any time (subject to state requirements).
KILICO disclaims all liability for acting in good faith in following
instructions which are given in accordance with procedures established by
KILICO, including requests for personal identifying information, that are
designed to limit unauthorized use of the privilege. Therefore, a Contract Owner
would bear the risk of loss in the event of a fraudulent telephone transfer.
KILICO reserves the right to charge a fee of $25 for each transfer in excess of
12 transfers per calendar year.
If a Contract Owner authorizes a third party to transact transfers on the
Contract Owner's behalf, KILICO will reallocate the Contract Value pursuant to
the asset allocation program determined by such third party. However, KILICO
does not offer or participate in any asset allocation program and takes no
responsibility for any third party asset allocation program. KILICO may suspend
or cancel acceptance of a third party's instructions at any time and may
restrict the investment options that will be available for transfer under third
party authorizations.
A Contract Owner may elect to have transfers made automatically among the
Subaccounts of the Separate Account on an annual or a quarterly basis so that
Contract Value is reallocated to match the percentage
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<PAGE> 20
allocations in the Contract Owner's predefined allocation elections. Transfers
under this program will not be subject to the $500 minimum transfer amounts
described above. An election to participate in the automatic asset reallocation
program must be in writing in the form prescribed by KILICO and returned to
KILICO at its home office.
7. WITHDRAWAL DURING ACCUMULATION PERIOD.
The Contract Owner may redeem all or a portion of the Contract Value less Debt
and previous withdrawals, plus or minus any applicable Market Value Adjustment
and less any Withdrawal Charge. Contract 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, Loans and Assignments.") A withdrawal of the entire Contract Value
is called a surrender.
A Contract Owner may withdraw up to the greater of (i) the excess of Contract
Value over total Purchase Payments less prior withdrawals that were previously
assessed a Withdrawal Charge, and (ii) 10% of the Contract Value less Debt in
any Contract Year, without assessment of any Withdrawal Charge. If the Contract
Owner withdraws an amount in excess of the above amount in any Contract Year,
the excess amount is subject to a Withdrawal Charge. The Withdrawal Charge is 7%
in the first Contribution Year, 6% in the second Contribution Year, 5% in the
third and fourth Contribution Years, 4% in the fifth Contribution Year, 3% in
the sixth Contribution Year, 2% in the seventh Contribution Year and 0% in the
eighth and later Contribution Years.
In the case of a Contract invested other than solely in one Subaccount or MVA
Period or the General Account, a Contract Owner requesting a partial withdrawal
must specify what portion of the Owner's Contract interest is to be redeemed. If
a Contract Owner does not specify what portion of the Owner's Contract interest
is to be redeemed, KILICO will redeem Accumulation Units from all Subaccounts,
MVA Periods and the General Account in which the Contract Owner has an interest.
The number of Accumulation Units redeemed from each Subaccount and the amount
redeemed from the MVA Periods and the General Account will be in approximately
the proportion which the Owner's Contract interest in each Subaccount, MVA
Period and in the General Account bears to the Contract Value. In all cases, the
Accumulation Units attributable to the earliest Contribution Years will be
redeemed first.
The Contract Owner may request a partial withdrawal subject to the following
conditions:
(1) The amount requested must be at least $100 (before application of the
Market Value Adjustment), or the Owner's entire interest in the Subaccount,
MVA Period or the General Account from which withdrawal is requested.
(2) The Owner's Contract interest in the Subaccount, MVA Period or the
General Account from which the withdrawal is requested must be at least
$500 after the withdrawal is completed.
Election to withdraw shall be made in writing to KILICO at its home office at 1
Kemper Drive, Long Grove, Ill. 60049 and should be accompanied by the Contract
if the request is for total withdrawal. 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. The Withdrawal Value 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 Value
attributable to the Subaccounts 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 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 Subaccount's 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 Contract Owners or Unitholders. For withdrawal requests from the
MVA Option and the General Account, KILICO may defer any payment for the period
permitted by the appropriate state of jurisdiction, but in no event for more
than six months after the written request is received by KILICO. During the
period of deferral interest at the current Guaranteed Interest Rate for the same
MVA Period as declared by KILICO will continue to be credited.
A participant in the Texas Optional Retirement Program ("ORP") is required to
obtain a certificate of termination from the participant's employer before a
Contract can be redeemed. This requirement is imposed because the Attorney
General of Texas has ruled that participants in the ORP may redeem their
interest in a
16
<PAGE> 21
Contract issued pursuant to the ORP only upon termination of employment in Texas
public institutions of higher education, or upon retirement, death or total
disability. In those states adopting identical requirements for optional
retirement programs, KILICO will follow the same procedures. See "Qualified
Plans" for information on tax-sheltered annuities.
8. MARKET VALUE ADJUSTMENT.
Any withdrawal (except payments of death benefits), transfer or any
annuitization of MVA Period Value other than if effected during the "free look"
period or within 15 days before or 15 days after a MVA 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 reflects the relationship between (a) the currently
established interest rate ("Current Interest Rate") for a MVA Period equal to
the remaining length of the MVA 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 MVA 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:
(t/365)
[ [ (1 + I) ] ]
MVA = MPV X | | -------| -1 |
[ [ (1 + J) ] ]
Where I is the Guaranteed Interest Rate being credited to the MVA Period
Value (MPV) 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 MVA Period the length of which is equal to the balance of the MVA
Period for the MVA 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 MVA Period.
For an illustration showing an upward and a downward adjustment, see Appendix A.
9. DEATH BENEFIT.
A death benefit will be paid to the designated Beneficiary upon any of the
following events during the Accumulation Period:
1. the death of the Owner, or a joint owner,
2. the death of the Annuitant if no contingent annuitant is named or
if the contingent annuitant does not survive the Annuitant, or
3. if a contingent annuitant is named and survives the Annuitant, the
death of the contingent annuitant.
The amount of the death benefit will depend on the ages of the deceased Owner or
Annuitant at the time the death benefit becomes payable. If the deceased had not
attained age 90 prior to the date of death, the greatest of the following
amounts will be paid to the designated Beneficiary: (a) the total amount of
Purchase Payments, less both Debt and the aggregate dollar amount of all
previous partial withdrawals; (b) the Contract Value less Debt; and (c) Purchase
Payments less previous partial withdrawals accumulated at 5.00% interest per
year to the earlier of the deceased's age 80 or the date of death plus the total
amount of Purchase Payments less the aggregate dollar amount of all partial
withdrawals from age 80 to the date of death, less Debt. If the deceased had
attained age 90 prior to the date of death, the Contract Value will be paid to
the designated Beneficiary. The Owner or Beneficiary, as appropriate, may elect
to have all or a part of the death proceeds paid to the Beneficiary under one of
the Annuity Options described under "Annuity Options" below.
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<PAGE> 22
For Non-Qualified Plan Contracts, if the Beneficiary is the surviving spouse of
the Owner, the surviving spouse may elect to be treated as the successor Owner
of the Contract with no requirement to begin Death Benefit distribution.
10. LOANS.
The Owner of a Contract issued as a tax sheltered annuity under Section 403(b)
of the Code or as a qualified plan under Section 401 of the Code may request a
loan any time during the accumulation period. Loans are made from the General
Account and are limited to the General Account Contract Value minus any
withdrawal charge that would apply to the Contract Value and minus interest on
the loan for the remainder of the Contract Year. In addition, loans may not
exceed 50% of the Contract Value, or, if less, $50,000. The minimum loan is
$1,000.
For non-ERISA loans, the loan interest rate is 5.5% per year. For loans issued
under ERISA plans, the loan interest rate will vary based on current rates.
Interest that is not paid when due is added to the loan and will bear interest
at the same rate as the loan. While the loan is outstanding, the portion of the
General Account Contract Value that equals the debt will earn interest at a rate
2.5% less than the loan rate.
Loans must be repaid in substantially equal quarterly payments within 5 years.
Loans used to purchase the principal residence of the Owner must be repaid
within 30 years.
If a loan payment is not made when due, interest will continue to accrue. On
403(b) Contracts, to the extent permitted by law, the amount of the defaulted
payment plus accrued interest will be deducted from the Contract and paid to
KILICO. Any loan payment which is not made when due, plus interest, will be
treated as a distribution as permitted by law, may be taxable to the borrower,
and may be subject to early withdrawal tax penalty.
If there is an outstanding loan balance when the Contract is surrendered or
annuitized, or when a death benefit is paid, the amount payable will be reduced
by the amount of the loan outstanding plus accrued interest. Any loans made
under a Contract will be subject to administrative procedures then in effect as
reflected under the loan agreement used by KILICO.
CONTRACT CHARGES AND EXPENSES
Charges and deductions under the Contracts are made for KILICO's assumption of
mortality and expense risk and administrative expenses, and for an annual
Records Maintenance Charge. Subject to certain expense limitations, investment
management fees and other expenses of the Funds are indirectly borne by the
Contract Owner. KILICO will deduct state premium taxes from Contract Value when
paid by KILICO. Where applicable, the dollar amount of state premium taxes
previously paid or paid upon annuitization by KILICO will be charged back
against the Contract Value when and if the Contract is annuitized. 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 the Accumulation Period and the Annuity Period, KILICO assesses that
portion of each Subaccount with a daily asset charge for mortality and expense
risks and administrative costs, which amounts to an aggregate of 1.35% per annum
(consisting of 1.25% for mortality and expense risks and .10% for administrative
costs). The administrative charge is intended to cover the average anticipated
administrative expenses to be incurred over the period the Contracts 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 Contract as described
below. The Records Maintenance Charge is not assessed during the Annuity Period.
These charges may be decreased by KILICO without notice but may not exceed the
rate or amount shown above. If the daily asset charge is insufficient to cover
the risks and costs, 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.
18
<PAGE> 23
1. RECORDS MAINTENANCE CHARGE.
KILICO will assess an annual Records Maintenance Charge of $30 during the
Accumulation Period against each Contract which has a Contract Value of less
than $50,000 on the date of assessment whether or not any Purchase Payments have
been made during the year. The charge is assessed at the end of each Contract
Year, on surrender of a Contract and on surrender upon annuitization. This
charge is to reimburse KILICO for expenses incurred in establishing and
maintaining the records relating to the Contract. The imposition of the Records
Maintenance Charge will constitute a reduction in the net assets of each
Subaccount, MVA Period and the General Account.
At any time the Records Maintenance Charge is assessed, an equal portion of the
applicable charge will be assessed against each Subaccount, MVA Period and the
General Account in which the Contract is participating and a number of
Accumulation Units sufficient to equal the proper portion of the charge will be
redeemed from each Subaccount, and an amount deducted from the General Account
Contract Value and MVA Period Value to meet the assessment.
2. MORTALITY RISK.
Variable Annuity payments reflect the investment experience 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 Contract Owner or of the Annuitant prior to
the deceased's 90th birthday, and prior to the Annuity Date, KILICO may, in some
cases, pay an amount greater than the Contract Value. (see "Death Benefit", page
17) 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 Contract and relieves the Annuitant from the
risk of outliving the amounts accumulated for retirement.
3. EXPENSE RISK.
KILICO also assumes the risk that all actual expenses involved in administering
the Contracts including Contract 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.
4. ADMINISTRATIVE COSTS.
The daily asset charge for administrative costs is imposed to reimburse KILICO
for the expenses it incurs for administering the Contracts, which include, among
other things, responding to Contract Owner inquiries, processing changes in
Purchase Payment allocations and providing reports to Contract Owners.
B. WITHDRAWAL CHARGE.
No sales charge is deducted from any Purchase Payment. However, a contingent
deferred sales charge ("Withdrawal Charge") will be used to cover expenses
relating to the sale of the Contracts, including commissions paid to sales
personnel, and other promotion and acquisition expenses. Also, withdrawals
(which may include certain loans) may be subject to certain adverse tax
consequences. (See "Tax Treatment of Withdrawals, Loans and Assignments.")
Each Contract Year, a Contract Owner may withdraw up to the greater of (i) the
excess of Contract Value over total Purchase Payments less prior withdrawals
that were previously assessed a Withdrawal Charge, and (ii) 10% of the Contract
Value less Debt determined at the time the withdrawal is requested, without
assessment of any charge. If the Contract Owner withdraws an amount in excess of
the above amount, the amount withdrawn in
19
<PAGE> 24
excess of the above amount subjects the Contract to a Withdrawal Charge. The
Withdrawal Charge applies in the first seven Contribution Years following each
Purchase Payment as shown below:
<TABLE>
<CAPTION>
YEAR OF
WITHDRAWAL WITHDRAWAL
AFTER PURCHASE CHARGE
-------------- ----------
<S> <C>
First.................................. 7%
Second................................. 6%
Third.................................. 5%
Fourth................................. 5%
Fifth.................................. 4%
Sixth.................................. 3%
Seventh................................ 2%
Eighth and following................... 0%
</TABLE>
When a withdrawal is requested, the recipient will receive a check in the amount
requested. To the extent that any Withdrawal Charge is applicable, the Contract
Value will be reduced by the amount of the Withdrawal Charge in addition to the
actual dollar amount sent to the Owner.
Because the Contribution Years are Contract Years in which a Purchase Payment is
made, Contract Owners may be subject to a Withdrawal Charge as indicated above,
even though the Contract may have been issued many years earlier. (For
additional details, see "Withdrawal During Accumulation Period.")
The Withdrawal Charges are intended to compensate KILICO for expenses in
connection with distribution of the Contracts. 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 also applies at the time of annuitization to amounts
attributable to Accumulation Units in their seventh Contribution Year or
earlier. The amount annuitized is subject to the Withdrawal Charge, as
applicable. There shall be no Withdrawal Charge assessed upon annuitization so
long as annuity payments provide for payment under Annuity Options 2, 3 or 4, or
payments under Annuity Option 1 are scheduled to continue for at least five
years.
The Withdrawal Charge may be reduced or eliminated, but only to the extent
KILICO anticipates that it will incur lower sales expenses or perform fewer
services because of economies arising from the size of the particular group, the
average contribution per participant, or the use of mass enrollment procedures.
Units of a Subaccount sold to officers, directors and employees of KILICO and
Kemper Investors Fund, KINF investment advisers, 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.
C. INVESTMENT MANAGEMENT FEES AND OTHER EXPENSES.
The net asset value of each of the Portfolios of the Funds reflects investment
management fees and certain general operating expenses already deducted from the
assets of the Portfolios. Subject to certain limitations, these fees and
expenses are indirectly borne by the Contract Owners. Investment management fees
are described on pages 9 and 10. Further detail about fees and expenses of the
Portfolios is provided in the attached prospectuses for the Funds and in the
Funds' statements of additional information.
D. STATE PREMIUM TAXES.
Certain state and local governments impose a premium tax ranging from 0% to 3.5%
on the amount of Purchase Payments. Where applicable, the dollar amount of state
premium taxes previously paid or payable upon annuitization by KILICO may be
charged against the Contract Value if not previously assessed, when and if the
Contract is annuitized. See "Appendix--State Premium Tax Chart" in the Statement
of Additional Information.
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<PAGE> 25
THE ANNUITY PERIOD
Contracts may be annuitized under one of several Annuity Options. Annuity
payments will begin on the Annuity Date and under the Annuity Option selected by
the Owner. The Annuity Date may not be deferred beyond the Annuitant's 90th
birthday subject to state variation.
1. ANNUITY PAYMENTS.
Annuity payments will be determined on the basis of (i) the annuity table
specified in the Contract, (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. Annuity payments may
be subject to a Withdrawal Charge if made within the seventh Contribution Year
or earlier. 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 Contract Owner may elect to have annuity payments made under any one of the
Annuity Options specified in the Contract and described below. The Contract
Owner may decide at any time (subject to the provisions of any applicable
retirement plan and state variations) to commence annuity payments prior to the
Annuitant's 90th birthday. A change of Annuity Option is permitted if made
before the date annuity payments are to commence. For a Non-Qualified Plan
Contract, if no other Annuity Option is elected, monthly annuity payments will
be made in accordance with Option 3 below with a ten (10) year period certain.
For a Qualified Plan Contract, 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 $2,000, KILICO shall have the right to pay the
annuity in one lump sum. In addition, if the first payment provided would be
less than $25, 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 $25.
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 presumably the older
the payee, the shorter the life expectancy and the larger the payments. Finally,
if the Contract Owner participates in a Subaccount with higher investment
performance, it is likely the Contract Owner will receive a higher periodic
payment.
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.
21
<PAGE> 26
OPTION 2--LIFE INCOME.
An annuity payable monthly during the lifetime of the payee, terminating with
the last monthly payment due prior to the death of the payee. If this Option is
elected, annuity payments terminate automatically and immediately on the death
of the payee without regard to the number or total amount of payments made.
Thus, it is possible for an individual to receive only one payment if death
occurred prior to the date the second payment was due.
OPTION 3--LIFE INCOME WITH INSTALLMENTS GUARANTEED.
An annuity payable monthly during the lifetime of the payee with the provision
that if, at the death of the payee, payments have been made for less than five,
ten, fifteen or twenty years as elected, and the Beneficiary is a natural
person, KILICO will automatically continue payments for the remainder of the
elected period to the Beneficiary. If the Beneficiary is either an estate or
trust, KILICO will pay a commuted value of the remaining payments.
OPTION 4--JOINT AND SURVIVOR ANNUITY.
An annuity payable monthly while both payees are living. Upon the death of
either payee, the monthly income payable will continue during the lifetime of
the surviving payee at the percentage of such full amount chosen at the time of
election of this Option. Annuity payments terminate automatically and
immediately upon the death of the surviving payee without regard to the number
or total amount of payments received.
Payees under Option 1 by written notice to KILICO may cancel all or part of the
remaining payments due and receive that part of the remaining value of the
Contract.
3. ALLOCATION OF ANNUITY.
The Contract Owner may elect to have payments made on a fixed or variable basis,
or a combination of both. An Owner may exercise the transfer privilege during
the Accumulation Period for the purposes of such allocation. Any General Account
Contract Value or MVA Period Value will be annuitized on a fixed basis. Any
Separate Account Contract 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
Contract 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 Contract'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
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the effect of the assumed investment earnings rate of 2.5% per annum which is
assumed in the annuity tables contained in the Contract.
The net investment factor for each Subaccount for any Valuation Period is
determined by dividing (a) by (b) where:
(a) Is the value of an Accumulation Unit for the applicable Subaccount as
of the end of the current Valuation Period, plus or minus the per share
charge or credit for taxes reserved.
(b) Is the value of an Accumulation Unit for the applicable Subaccount as
of the end of the immediately preceding Valuation Period, plus or minus the
per share charge or credit for taxes reserved.
6. FIRST PERIODIC PAYMENT.
At the time annuity payments begin, the value of the Owner's Contract 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
Contract 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 is 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 Contract Value less deduction for Debt and premium taxes, if
applicable.
A 2.5% per annum assumed investment rate is built into the annuity tables
contained in the Contracts. If the actual net investment rate exceeds 2.5% per
annum, payments will increase at a rate equal to the amount of such excess.
Conversely, if the actual rate is less than 2.5% per annum, 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.
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
Contract Value 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 while the Contract is in force, 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 Contract Value, on annuity
payments and on the economic benefit to the Contract Owner, Annuitant or
Beneficiary depends on KILICO's tax status, the type of retirement plan for
which the Contract is purchased and upon the tax status of the individual
concerned. Each individual Contract 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.
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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 Contract 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 Contract and the balance is taxed as ordinary
income. For payments made on a fixed basis, the excludable amount is generally
the same for each payment. 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 Contract as of the Annuity Date by the number of Annuity Units
to be received under the payment option chosen.
For a Non-Qualified Plan Contract, the investment in the Contract is equal to
the Purchase Payments minus any withdrawals thereof. For a Qualified Plan
Contract, the investment in the Contract 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 Contract 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 Contract has been
fully recovered.
C. NON-QUALIFIED PLAN CONTRACTS.
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 Contracts, 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
annuity contract could lose its overall tax status as an annuity, resulting in
current taxation of the excess of cash value over the "investment in the
contract" (as defined above) to the Contract Owner. KILICO has reviewed the
diversification regulations and believes that the Contracts are in compliance
with these regulations and that there is no threat to their current favorable
tax status as annuities. Furthermore, KILICO intends to make whatever changes
may be necessary and appropriate to these Contracts in the future in order to
maintain their 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 may need to be modified to comply with such guidance.
Accordingly, KILICO reserves the right to modify the Contract as necessary to
prevent the Contract 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, LOANS AND ASSIGNMENTS.
Withdrawals from Non-Qualified Plan Contracts will be allocable first to any
investment in the Contract made prior to August 14, 1982 (if any), then to
ordinary income attributable to such investment, then to ordinary income
attributable to investment in the Contract made after August 13, 1982, and
finally to investment in the Contract made after August 13, 1982. Loans under a
Contract or collateral assignments or pledges of any portion of the value of
such Contract attributable to investment in the Contract after August 13, 1982
or income attributable to such investment are treated as withdrawals.
If the Owner transfers a Non-Qualified Plan Contract by gift, the Owner must
include in gross income the excess of the Contract Value over the investment in
the Contract as of the date of transfer.
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Non-Qualified Plan Contracts which were 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, loan, or assigned or
pledged cash value includible in the Owner's gross income.
If the Contract Owner is not an individual, income attributable to Purchase
Payments generally is taxed to the Contract Owner.
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
Contract, prior to age 59 1/2, death or disability of the participant or
Non-Qualified Plan Contract Owner.
The 10% penalty does not apply to any distribution which is part of a series of
substantially equal periodic payments (not less frequently than annually) made
for the life or life expectancy of the qualified plan participant or
Non-Qualified Plan Contract 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 Contract: (i) attributable to investment in the Contract
before August 14, 1982, or (ii) where the Contract is an "immediate annuity"
under the Internal Revenue Code ("Code").
D. QUALIFIED PLANS.
The Contracts offered by this Prospectus are designed to be suitable for use
under Qualified Plans. Such contracts are commonly referred to as "Qualified
Plan Contracts." 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 Contract 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 Contracts issued pursuant to the plan. Following are general descriptions
of the types of Qualified Plans and of the use of the Contracts in connection
therewith. Purchasers intending to use the Contracts in connection with
Qualified Plans should seek competent tax advice.
(a) PENSION AND PROFIT-SHARING PLANS.
Sections 401(a) of the 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 Contracts 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. Generally, the annual
contribution limit is 20% of an employee's includible compensation times
the number of years of service, less previously excluded contributions. For
salary reduction plans the maximum contribution is $9,500. These annuity
contracts are commonly referred to as "tax-sheltered annuities."
To the extent attributable to contributions to your tax-sheltered annuity
contract under a salary reduction agreement (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 Internal Revenue
Code. Further, all amounts transferred to your contract from a Section
403(b)(7) custodial account are subject to such restrictions upon
withdrawal. Under your employer's tax-sheltered annuity plan, you may be
allowed to transfer your contract value to other types of options, such as
other fixed or variable annuity contracts or Section 403(b)(7) custodial
accounts.
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(c) TREATMENT OF CERTAIN DISTRIBUTIONS FROM PENSION AND PROFIT SHARING
PLANS AND TAX-SHELTERED ANNUITIES.
Distributions from Pension and Profit Sharing Plans and Tax-Sheltered
Annuities which are eligible to be rolled over to an IRA or another
employer's retirement plan are generally subject to 20% withholding, unless
the participant exercises the right to a "direct rollover." A "direct
rollover" may be accomplished when the sponsor of a participant's existing
pension or profit sharing plan or tax-sheltered annuity makes a
distribution payable to the sponsor of the new IRA or new employer plan for
the participant's benefit.
If the participant does not exercise the right to a "direct rollover," in
general, 20% will be withheld from the distribution and credited against
the participant's income taxes incurred in the taxable year of the
distribution. Other rules may apply, therefore, KILICO suggests that
participants consult their tax advisors before making a decision.
(d) INDIVIDUAL RETIREMENT ANNUITIES.
Section 408(b) of the Code permits eligible individuals to make deductible
contributions to an individual retirement program known as an "Individual
Retirement Annuity" ("IRA"). Generally, the maximum contribution is $2,000
for an individual and $4,000 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 Contract will be amended to conform to the requirements under such
plans. Purchasers have the right to revoke an IRA Contract within seven (7)
days of the receipt of the IRA disclosure statement. The IRA disclosure
statement also provides more information on contribution limits. A
purchaser can revoke the IRA Contract 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. Contracts 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 Contracts 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 Contracts, also retains
all voting and redemption rights which may accrue through the Contracts
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. TAX WITHHOLDING.
KILICO is required to withhold federal income tax on the taxable portion of all
distributions under the Contracts unless the individual elects under a
nonqualified plan not to be subject to withholding. The rate of withholding will
depend on the type of distribution.
F. 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
Contract or the exercise of elections under a Contract. The above comments
concerning the Federal income tax consequences are not exhaustive, and special
rules are provided with respect to situations not discussed in this Prospectus.
The preceding description is based upon KILICO's understanding of current
Federal income tax law. KILICO cannot assess the probability that changes in tax
laws, particularly affecting annuities, will be made.
The preceding comments do not take into account state income or other tax
considerations which may be involved in the purchase of a Contract or the
exercise of elections under the Contract. For complete information on such
Federal and state tax considerations, a qualified tax adviser should be
consulted.
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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 Contracts.
DISTRIBUTION OF CONTRACTS
The Contracts are sold by licensed insurance agents, where the Contracts 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. 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. 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 or other
contracts issued by KILICO. The Contracts are distributed through the principal
underwriter for the Separate Account, which is Investors Brokerage Services,
Inc. ("IBS"), a wholly owned subsidiary of KILICO, which enters into selling
group agreements with affiliated and unaffiliated broker-dealers. All of the
investment options are not available to all Contract Owners. The investment
options are available only under Contracts that are sold or serviced by
broker-dealers that have entered into a selling group agreement that authorizes
the sale of Contracts with all of the investment options. Other distributors may
sell and service contracts with limited investment options.
VOTING RIGHTS
Proxy materials in connection with any shareholder meeting of a Fund will be
delivered to each Contract Owner with Subaccount interests invested in such 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 such 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
Contract Owners vote. A Fund is not required to hold annual shareholders'
meetings. They 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.
Contract Owners of all Contracts participating in each Subaccount shall have
voting rights with respect to the Portfolio invested in by that Subaccount,
based upon each Contract Owner's proportionate interest in that Subaccount as
measured by units. The person having such voting rights will be the Contract
Owner before surrender, the Annuity Date or the death of the Annuitant, and
thereafter, the payee entitled to receive Variable Annuity payments under the
Contract. During the Annuity Period, voting rights attributable to a Contract
will generally decrease as Annuity Units attributable to an Annuitant decrease.
REPORTS TO CONTRACT OWNERS AND INQUIRIES
Immediately after each Contract anniversary, Contract Owners will be sent
statements for their own Contract showing the amount credited to each Subaccount
and to the Fixed Option. It will also show the interest rate(s) that KILICO is
crediting upon amounts then held under the Fixed Option. In addition, Contract
Owners transferring amounts among the investment options or making additional
payments will receive written confirmation of such transactions. Upon request,
any Contract Owner will be sent a current statement in a form similar to that of
the annual statement described above. Each Contract Owner will also be sent
annual and semi-annual reports for the Portfolios that correspond to the
Subaccounts in which the Contract Owner is invested and a list of the securities
held in each such Portfolio, as required by the 1940 Act. In addition, KILICO
will calculate for a Contract Owner the portion of a total amount that must be
invested in a selected MVA Period so that the portion grows to equal the
original total amount at the expiration of the MVA Period.
A Contract Owner may direct inquiries to the individual who sold him or her the
Contract or may call 1-800-621-5001 or write to Kemper Investors Life Insurance
Company, Customer Service, 1 Kemper Drive, Long Grove, Illinois 60049.
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DOLLAR COST AVERAGING
A Contract Owner may predesignate a portion of the Contract Value under a
Contract attributable to a Subaccount to be automatically transferred on a
monthly, quarterly, semiannual or annual basis for a specified duration to one
or more of the other Subaccounts, MVA Period and the General Account during the
Accumulation Period. A Contract Owner may also elect such transfers from a MVA
Period or from the General Account on a monthly or quarterly basis for a minimum
duration of one year. Transfers from a MVA Period will be subject to a Market
Value Adjustment. A Contract 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").
Transfers will be made in the amounts designated by the Contract Owner and must
be at least $100 per Subaccount, MVA Period or General Account. The total
Contract Value in an account 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 Contract 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 Contract Value attributable to the
transferring account is insufficient to complete the next transfer, (iii) the
Contract Owner requests termination in writing and such writing is received by
KILICO at its home office at least five (5) business days prior to the next
Transfer Date in order to cancel the transfer scheduled to take effect on such
date, or (iv) the Contract is surrendered or annuitized.
If the General Account has a balance of at least $10,000, a Contract Owner may
elect automatic calendar quarter transfers of interest accrued in the General
Account to one or more of the Subaccounts or MVA Periods. A Contract Owner may
enroll in this program at any time by completing the proper Dollar Cost
Averaging enrollment form and returning it to KILICO at its home office at least
ten (10) days prior to the end of the calendar quarter. The Transfer Date will
be within five business days of the end of the calendar quarter.
Following the Issue Date, a Contract Owner may initiate, reinstate or change
Dollar Cost Averaging or change existing Dollar Cost Averaging terms by properly
completing the new enrollment form and returning it to KILICO at its home office
at least five (5) business days, ten (10) business days for General Account
transfers, prior to the next Transfer Date such transfer is to be made.
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
Contract Owners to pre-authorize periodic withdrawals during the Accumulation
Period. Contract Owners entering into a SWP agreement instruct KILICO to
withdraw selected amounts from the General Account, or from any of the
Subaccounts or MVA Periods on a monthly, quarterly, semi-annual or annual basis.
Currently the SWP is available to Contract Owners who request a minimum $100
periodic payment. If the amounts distributed under the SWP exceed the amount
free of withdrawal charge then the withdrawal charge will be applied on any
amounts exceeding the free withdrawal. WITHDRAWALS TAKEN UNDER THE SWP MAY BE
SUBJECT TO THE 10% FEDERAL TAX PENALTY ON EARLY WITHDRAWALS AND TO INCOME TAXES
AND WITHHOLDING. SEE "FEDERAL INCOME TAXES." Contract owners interested in SWP
may obtain an application and full information concerning this program and its
restrictions 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 Contract Owner or KILICO.
LEGAL PROCEEDINGS
There are no material legal proceedings pending to which the Separate Account,
KILICO or ZKI is a party.
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BUSINESS [TO BE UPDATED BY AMENDMENT]
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 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.
29
<PAGE> 34
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".
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
30
<PAGE> 35
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.
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
31
<PAGE> 36
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.
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)
Aa3
Moody's Investors Service......................... (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.
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
32
<PAGE> 37
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.
EXPERTS
[TO BE UPDATED BY AMENDMENT]
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
Frank J. Julian, Associate General Counsel and Assistant 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.
SELECTED FINANCIAL DATA
[TO BE UPDATED BY AMENDMENT]
The following table sets forth selected financial information for KILICO for the
five years ended December 31, 1995. Such information should be read in
conjunction with KILICO's consolidated financial statements and notes thereto
included in this Prospectus. All amounts are shown in millions.
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
TOTAL REVENUE.................................. $ 68.1(1) $ 330.5 $ 337.4 $ 353.6 $ 404.6
======== ======== ======== ======== ========
NET INCOME EXCLUDING REALIZED INVESTMENT
LOSSES....................................... $ 74.2 $ 61.9 $ 33.7 $ 10.3 $ 32.3
======== ======== ======== ======== ========
NET INCOME (LOSS).............................. $ (133.0)(1) $ 26.4 $ 14.0 $ (51.9) $ (29.2)
======== ======== ======== ======== ========
FINANCIAL SUMMARY
Total separate account assets.................. $1,761.1 $1,508.0 $1,499.5 $1,140.3 $ 831.2
======== ======== ======== ======== ========
Total assets................................... $7,581.7 $7,537.1 $8,113.7 $6,845.9 $6,989.3
======== ======== ======== ======== ========
Future policy benefits......................... $4,573.2 $4,843.7 $5,040.0 $5,040.7 $5,268.2
======== ======== ======== ======== ========
Stockholder's equity........................... $ 605.9 $ 434.0 $ 654.6 $ 488.7 $ 469.8
======== ======== ======== ======== ========
</TABLE>
- ---------------
(1) Total revenue and net income (loss) for 1995 were adversely impacted by real
estate-related investment losses. Such losses reflect a change in KILICO's
strategy with respect to its real estate-related investments in connection
with the January 4, 1996 acquisition of Kemper by the Zurich-led investor
group. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
33
<PAGE> 38
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
[TO BE UPDATED BY AMENDMENT]
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.
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
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<PAGE> 39
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 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.
35
<PAGE> 40
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 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+
36
<PAGE> 41
(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 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.
37
<PAGE> 42
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 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.
38
<PAGE> 43
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.)
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.
39
<PAGE> 44
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.
(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.
40
<PAGE> 45
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 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.)
41
<PAGE> 46
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.
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.
42
<PAGE> 47
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 Chief Kemper Life Assurance Company and Fidelity Life Association
Financial Officer since November since November 1995. Treasurer and Chief Financial Officer
1995. of 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.
James E. Hohmann (40) Senior Vice President and Chief Actuary of Federal Kemper
Senior Vice President and Chief Life Assurance Company and Fidelity Life Association since
Actuary since December 1995. December 1995. Senior Vice President and Chief Actuary of
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.
</TABLE>
43
<PAGE> 48
<TABLE>
<S> <C>
Debra P. Rezabek (40) Senior Vice President of Federal Kemper Life Assurance Company and Fidelity Life
Senior Vice President since 1996. Association since 1996. General Counsel of Federal Kemper Life Assurance Company
General Counsel since 1992. and Fidelity Life Association since 1992. Corporate Secretary of Federal Kemper
Corporate Secretary since January Life Assurance Company and Fidelity Life Association since January 1996. Senior
1996. 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 Life Association and
Director since January 1996. 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 Assurance Company and
Chairman of the Board and Director Fidelity Life Association since January 1996. Chairman of the Board and Director
since January 1996. 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.
Daniel L. Doctoroff (37) Director of Kemper Corporation, Federal Kemper Life Assurance Company and Fidelity
Director since January 1996. 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 Company and Fidelity
Director since January 1996. 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.
</TABLE>
44
<PAGE> 49
<TABLE>
<CAPTION>
NAME AND AGE
POSITION WITH KILICO
YEAR OF ELECTION OTHER BUSINESS EXPERIENCE DURING PAST 5 YEARS OR MORE
--------------------- ------------------------------------------------------
<S> <C>
Michael P. Stramaglia (36) Director of Federal Kemper Life Assurance Company and Fidelity Life Association
Director since January 1996. 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 Company and Fidelity
Director since January 1996. 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>
EXECUTIVE COMPENSATION
[TO BE UPDATED BY AMENDMENT]
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.
45
<PAGE> 50
(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.
(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.
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
46
<PAGE> 51
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 $80,317, respectively,
in 1996.
(7) Pursuant to the terms of a Termination Protection Agreement with Kemper
dated March 17, 1994, Mr. Scott received payments in 1995 and 1996. These
payments were made by Kemper and no portion of the payments were allocated
to KILICO.
TABLE II
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
VALUE
AT
ASSUMED
ANNUAL
RATES
OF
STOCK
PRICE
APPRECIATION
FOR
OPTION
INDIVIDUAL GRANTS TERM(4)
- ------------------------------------------------------------------------------------------------------------------------
(A) (B) (C) (D) (E) (F)
% OF TOTAL
OPTIONS/
SARS
OPTIONS/ GRANTED TO
SARS EMPLOYEES EXERCISE OR
GRANTED IN FISCAL BASE PRICE EXPIRATION
NAME (#)(1) YEAR(2) ($/SH)(3) DATE(4) 5% ($)
- ------------------------------------------------------------------------------------------------------------------------
<S> <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 $45.125 -- --
<CAPTION>
- -----------------------------------------------------------------------
(A) (G)
NAME 10% ($)
- ----------------------------------------------------------------------
<S> <C>
John B. Scott........................................... --
Jerome J. Cwiok......................................... --
Eliane C. Frye.......................................... --
</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 $1,525,185.
TABLE III
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
(A) (B) (C) (D)
NUMBER OF UNEXERCISED
OPTIONS/SARS AT
FY-END (#)(1)
SHARES ACQUIRED ON
NAME EXERCISE (#) VALUE REALIZED ($) EXERCISABLE/UNEXERCISABLE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
John B. Scott(2)........................ -- -- --
Jerome J. Cwiok(2)...................... -- -- --
Eliane C. Frye(2)....................... 11,278 $125,948 --
<CAPTION>
(A) (E)
VALUE OF UNEXERCISED
IN-THE-MONEY OPTIONS/
SARS AT FY-END ($)(1)
NAME EXERCISABLE/UNEXERCISABLE
- ---------------------------------------------------------------------------------------------
<S> <C>
John B. Scott(2)........................ --
Jerome J. Cwiok(2)...................... --
Eliane C. Frye(2)....................... --
</TABLE>
- ---------------
(1) See footnote (4) under Table II above.
(2) Includes options granted related to service for FKLA.
47
<PAGE> 52
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 Contracts. The Contracts are not entitled to participate
in earnings, dividends or surplus of KILICO.
48
<PAGE> 53
[FINANCIAL STATEMENTS TO BE FILED BY AMENDMENT]
49
<PAGE> 54
APPENDIX A
ILLUSTRATION OF A MARKET VALUE ADJUSTMENT
Purchase Payment: $40,000
MVA Period: 5 Years
Guaranteed Interest Rate: 5% Annual Effective Rate
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 MVA Period Value for this $40,000 Purchase Payment is $51,051.26 at the end
of the five-year MVA Period. After one year, when the withdrawals occur in these
examples, the MVA 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 MVA Period as
the time remaining in your MVA 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 MVA 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 MVA Period. Upon a full withdrawal, the market value adjustment
factor would be:
-.0551589* = (1 + .05) 4 -1
[ ---------- ]
(1 + .065)
The Market Value Adjustment is a reduction of $2,316.67 from the MVA Period
Value:
- 2,316.67 = -.0551589 X 42,000.00
The Market Adjusted Value would be:
$39,683.33 = $42,000.00 - $2,316.67
A Withdrawal Charge of 6% would be assessed against the Market Adjusted Value in
excess of the amount available as a free withdrawal. In this case, there are no
prior withdrawals, so 10% of the Market Adjusted Value is not subject to a
Withdrawal Charge. The Withdrawal Charge is thus:
$2,142.90 = $39,683.33 X .90 X .06
Thus, the amount payable on a full withdrawal would be:
$37,540.43 = $39,683.33 - $2,142.90
If instead of a full withdrawal, 50% of the MVA Period Value was withdrawn
(partial withdrawal of 50%), the Market Value Adjustment would be 50% of that of
the full withdrawal:
-$1,158.34 = -.0551589 X $21,000.00
The Market Adjusted Value would be:
$19,841.66 = $21,000.00 - $1,158.34
- ---------------
* Actual calculation utilizes 10 decimal places.
50
<PAGE> 55
The Withdrawal Charge of 6% would apply to the Market Adjusted Value being
withdrawn, less 10% of the full Market Adjusted Value as there are no prior
withdrawals:
$952.39 = ($19,841.46 - .10 X $39,683.33) X .06
Thus, the amount payable on this partial withdrawal would be:
$18.889.07 = $19,841.46 -$952.39
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 MVA Period. Upon a full
withdrawal, the market value adjustment factor would be:
+.0390198 = (1 + .05) 4
( --------- ) -1
(1 + .04)
The Market Value Adjustment is an increase of $1638.83 to the MVA Period Value:
$1,638.83 = $42,000.00 X .0390198
The Market Adjusted Value would be:
$43,638.33 = $42,000.00 +$1,638.83
A Withdrawal Charge of 6% would apply to the Market Adjusted Value being
withdrawn, less 10% of the full Market Adjusted Value, as there were no prior
withdrawals:
$2,356.47 = $43,638.33 X .90 X .06
Thus, the amount payable on withdrawal would be:
$41,281.85 = $43,638.33 - $2,356.47
If instead of a full withdrawal, 50% of the MVA Period Value was withdrawn
(partial withdrawal of 50%), the Market Value Adjustment would be:
$819.42 = $21,000.00 X .0390198
The Market Adjusted Value of $21,000.00 would be:
$21,819.42 = $21,000.00 + $819.42
The Withdrawal Charge of 6% would apply to the Market Adjusted Value being
withdrawn, less 10% of the full Market Adjusted Value as there are no prior
withdrawals:
$1,047.34 = ($21,819.42 - .1 X $43,638.33) X .06
Thus, the amount payable on this partial withdrawal would be:
$20,772.08 = $21,819.42 - $1,047.34
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 MVA Period.
51
<PAGE> 56
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 contract 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 contract 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 merits. If you set up an IRA
using an annuity contract it must meet the following requirements:
1. The amount in your IRA must be fully vested at all times.
2. The contract must provide that you cannot transfer it to someone else.
3. The contract must have flexible premiums.
4. You must start receiving distributions by April 1 of the year following the
year in which you reach age 70 1/2 (see "Required Distributions").
5. The contract must provide that you cannot contribute more than $2,000 for any
year. (This requirement does not apply to rollovers. See "Rollovers and Direct
Transfers").
C. ROLLOVERS AND DIRECT TRANSFERS
1. A rollover is a tax-free transfer of cash or other assets from one retirement
program to another. There are two kinds of rollover payments. In one, you
transfer amounts from one IRA to another. With the other, you transfer amounts
from a qualified employee benefit plan or tax-sheltered annuity to an IRA. A
rollover is an allowable payment that you cannot deduct on your tax return.
2. You must complete the transfer by the 60th day after the day you receive the
distribution from your IRA or other qualified employee benefit plan.
3. A rollover distribution from an IRA may be made to you only once a year. The
one-year period begins on the date you receive the IRA distribution, not on the
date you roll it over (reinvest it) into another IRA.
4. A direct transfer of funds in an IRA from one trustee or insurance company to
another is NOT a rollover. It is a transfer that is not affected by the one-year
waiting period.
5. All or a part of the premium for this contract 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 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
52
<PAGE> 57
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 self-employed 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 an
employer retirement plan, you can deduct the lesser of $2,000 or your taxable
compensation. If either you or your spouse are covered by a retirement plan at
work, the $2,000 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 an
employer retirement plan, you can deduct the lesser of $2,250 or your taxable
compensation. If you or your spouse is covered by a retirement plan, the $2,250
limit is reduced $10 for each $44.44 that your adjusted gross income exceeds
$40,000.
E. SEP-IRA'S
1. The maximum deductible contribution for a Simplified Employee Pension (SEP)
IRA is the lesser of $30,000 or 15% of compensation.
2. A SEP must be established and maintained by an employer (corporation,
partnership, sole proprietor). Information about the Kemper SEP is available
upon request.
F. TAX STATUS OF THE CONTRACT AND DISTRIBUTIONS
1. Earnings of your IRA annuity contract are not taxed until they are
distributed to you.
2. In general, taxable distributions are included in your gross income in the
year you receive them.
3. Distributions are non-taxable to the extent they represent a return of
non-deductible contributions. The non-taxable percentage of a distribution is
determined by dividing your total undistributed, non-deductible IRA
contributions by the value of all your IRAs (including SEPs and rollovers).
4. You cannot choose the special five-year or ten-year averaging that may apply
to lump sum distributions from qualified employer plans.
G. REQUIRED DISTRIBUTIONS
You must start receiving minimum distributions from your IRA starting with the
year you reach age 70 1/2 (your 70 1/2 year). Ordinarily, you must receive the
minimum distribution for any year by December 31. However, you may delay the
minimum distribution for your 70 1/2 year until April 1 of the following year.
Figure your required minimum distribution for each year by dividing the value of
your IRA as of the close of business 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
53
<PAGE> 58
beneficiary. Life expectancies are determined using the expected return multiple
tables shown in IRS Publication 590 "Individual Retirement Arrangements." If a
designated beneficiary is more than 10 years younger than you, that beneficiary
is assumed to be exactly 10 years younger. To obtain a free copy of IRS
Publication 590 and other IRS forms, phone the IRS toll free at 1-800-829-3676
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 total up these minimum
amounts and take the total from any one or more of the IRAs.
If the actual distribution from your IRA during a year after you die or reach
age 70 1/2 is less than the minimum amount that should be distributed in
accordance with the rules set forth at Items 5, 6 and 7 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 request the IRS to excuse the tax.
H. TAX ON EXCESS CONTRIBUTIONS
1. You must pay a 6% excise tax each year on excess contributions that remain in
your IRA. Generally, an excess contribution is the amount contributed to your
IRA that is more than you can contribute or roll over. The excess is taxed for
the year of the excess contribution and for each year after that until you
correct it.
2. You will not have to pay the 6% excise tax if you withdraw the excess amount
by the date your tax return is due including extensions for the year of the
contribution. You do not have to include in your gross income an excess
contribution that you withdraw from your IRA before your tax return is due if
the income earned on the excess was also withdrawn and no deduction was allowed
for the excess contribution.
3. If an excess contribution in your IRA is a result of a rollover and the
excess occurred because information required to be supplied by the payor of the
distribution was incorrect, you may withdraw the excess amount attributable to
the incorrect information after the date your return is due and still not
include the amount withdrawn in your gross income. It is not necessary to
withdraw the income earned on the excess. You will, however, have to pay the 6%
tax on the excess amount for each year the excess contribution was in the IRA at
the end of the year.
I. TAX ON PREMATURE DISTRIBUTIONS
There is an additional tax on premature distributions equal to 10% of the amount
of the premature distribution that you must include in your gross income.
Premature distributions are generally amounts you withdraw from your IRA before
you are age 59 1/2. However, the tax on premature distributions does not apply:
1. To amounts that are rolled over tax free.
2. To a series of substantially equal periodic payments made over your life or
life expectancy, or the joint life or life expectancy of you and your
beneficiary.
3. If you are permanently disabled. You are considered disabled if you cannot do
any substantial gainful activity because of your physical or mental condition. A
physician must determine that the condition has lasted or can be expected to
last continuously for 12 months or more or that the condition can be expected to
lead to death.
J. IRA EXCISE TAX REPORTING
Use Form 5329, Return for Individual Retirement Arrangement Taxes, to report the
excise taxes on excess contributions, premature distributions, and excess
accumulations. If you do not owe any IRA excise taxes, you do not need Form
5329. Further information can be obtained from any district office of the
Internal Revenue Service.
54
<PAGE> 59
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
1. If this is a regular contribution IRA, the following information, based on
the charts shown at the back of this form, which assumes you were to make a
level contribution to the fixed account at the beginning of each year of $1,000,
must be completed prior to your signing the enrollment application.
<TABLE>
<CAPTION>
END OF LUMP SUM TERMINATION AT LUMP SUM TERMINATION
YEAR VALUE OF CONTRACT * AGE VALUE OF CONTRACT *
<C> <C> <C> <C>
------------------------------------------------------------------------------------------------------------------------
1 60
------------------------------------------------------------------------------------------------------------------------
2 65
------------------------------------------------------------------------------------------------------------------------
3 70
------------------------------------------------------------------------------------------------------------------------
4
------------------------------------------------------------------------------------------------------------------------
5
------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Includes applicable withdrawal charges as described in Item M below.
2. If this is a rollover IRA, the following information, based on the charts
shown at the back of this form, and all of which assumes you make one
contribution to the fixed account of $1,000 at the beginning of this year, must
be completed prior to your signing the enrollment application.
<TABLE>
<CAPTION>
END OF LUMP SUM TERMINATION AT LUMP SUM TERMINATION
YEAR VALUE OF CONTRACT * AGE VALUE OF CONTRACT *
<C> <C> <C> <C>
------------------------------------------------------------------------------------------------------------------------
1 60
------------------------------------------------------------------------------------------------------------------------
2 65
------------------------------------------------------------------------------------------------------------------------
3 70
------------------------------------------------------------------------------------------------------------------------
4
------------------------------------------------------------------------------------------------------------------------
5
------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Includes applicable withdrawal charges as described in Item M below.
M. FINANCIAL DISCLOSURE FOR THE SEPARATE ACCOUNT (VARIABLE ACCOUNT)
1. If on the enrollment application you indicated an allocation to a Subaccount,
this contract will be assessed a daily charge of an amount which will equal an
aggregate of 1.30% per annum for Periodic Payment Contracts.
2. An annual records maintenance charge of $36.00 will be assessed ratably each
quarter against the Separate Account value, if you have participated in a
Subaccount during the year. If insufficient values are in the Subaccounts when
the charge is assessed, the charge will be assessed against General Account
value.
3. Withdrawal (early annuitization) charges as follows will be assessed based on
the years elapsed since purchase payments (in a given contract year) were
received by the Company; under 1 year, 6%; over 1 to 2 years, 5%; over 2 to 3
years, 4%; over 3 to 4 years, 3%; over 4 to 5 years, 2%; over 5 to 6 years, 1%;
6th year and thereafter, 0%.
4. The method used to compute and allocate the annual earnings is contained in
the prospectus under the heading "Accumulation Unit Value."
5. The growth in value of your contract is neither guaranteed nor projected but
is based on the investment experience of the Separate Account.
55
<PAGE> 60
GUARANTEED LUMP SUM TERMINATION OF DEFERRED FIXED AND VARIABLE ANNUITY
COMPLETELY ALLOCATED TO THE GENERAL ACCOUNT WITH 3% GUARANTEED EACH YEAR.
(TERMINATION VALUES ARE BASED ON $1,000 ANNUAL CONTRIBUTIONS AT THE BEGINNING OF
EACH YEAR.)
<TABLE>
<CAPTION>
End of Termination End of Termination End of Termination End of Termination
Year Values* Year Values* Year Values* Year Values*
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 $ 1,000 14 $17,371 27 $41,703 40 $ 77,436
- -----------------------------------------------------------------------------------------
2 2,000 15 18,929 28 43,991 41 80,796
- -----------------------------------------------------------------------------------------
3 3,038 16 20,534 29 46,348 42 84,256
- -----------------------------------------------------------------------------------------
4 4,130 17 22,187 30 48,775 43 87,821
- -----------------------------------------------------------------------------------------
5 5,264 18 23,889 31 51,275 44 91,492
- -----------------------------------------------------------------------------------------
6 6,442 19 25,643 32 53,850 45 95,274
- -----------------------------------------------------------------------------------------
7 7,665 20 27,449 33 56,503 46 99,169
- -----------------------------------------------------------------------------------------
8 8,932 21 29,309 34 59,235 47 103,181
- -----------------------------------------------------------------------------------------
9 10,236 22 31,225 35 62,048 48 107,313
- -----------------------------------------------------------------------------------------
10 11,580 23 33,199 36 64,947 49 111,569
- -----------------------------------------------------------------------------------------
11 12,965 24 35,232 37 67,932 50 115,953
- -----------------------------------------------------------------------------------------
12 14,390 25 37,326 38 71,007
- -----------------------------------------------------------------------------------------
13 15,859 26 39,482 39 74,174
- -----------------------------------------------------------------------------------------
</TABLE>
GUARANTEED LUMP SUM TERMINATION OF DEFERRED FIXED AND VARIABLE ANNUITY
COMPLETELY ALLOCATED TO THE GENERAL ACCOUNT WITH 3% GUARANTEED EACH YEAR.
(TERMINATION VALUES ARE BASED ON $1,000 SINGLE PREMIUM.)
<TABLE>
<CAPTION>
End of Termination End of Termination End of Termination End of Termination
Year Values* Year Values* Year Values* Year Values*
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 $1,000 14 $1,513 27 $2,221 40 $3,262
- -----------------------------------------------------------------------------------------
2 1,013 15 1,558 28 2,288 41 3,360
- -----------------------------------------------------------------------------------------
3 1,053 16 1,605 29 2,357 42 3,461
- -----------------------------------------------------------------------------------------
4 1,095 17 1,653 30 2,427 43 3,565
- -----------------------------------------------------------------------------------------
5 1,138 18 1,702 31 2,500 44 3,671
- -----------------------------------------------------------------------------------------
6 1,183 19 1,754 32 2,575 45 3,782
- -----------------------------------------------------------------------------------------
7 1,230 20 1,806 33 2,652 46 3,895
- -----------------------------------------------------------------------------------------
8 1,267 21 1,860 34 2,732 47 4,012
- -----------------------------------------------------------------------------------------
9 1,305 22 1,916 35 2,814 48 4,132
- -----------------------------------------------------------------------------------------
10 1,344 23 1,974 36 2,898 49 4,256
- -----------------------------------------------------------------------------------------
11 1,384 24 2,033 37 2,985 50 4,384
- -----------------------------------------------------------------------------------------
12 1,426 25 2,094 38 3,075
- -----------------------------------------------------------------------------------------
13 1,469 26 2,157 39 3,167
- -----------------------------------------------------------------------------------------
</TABLE>
* Includes applicable withdrawal charges.
56
<PAGE> 61
STATEMENT OF ADDITIONAL INFORMATION
------------------------, 1997
- --------------------------------------------------------------------------------
PERIODIC PAYMENT
VARIABLE AND MARKET VALUE ADJUSTED DEFERRED ANNUITY CONTRACTS
- --------------------------------------------------------------------------------
ISSUED BY
KEMPER INVESTORS LIFE INSURANCE COMPANY
IN CONNECTION WITH
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
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-10
Experts..................................................... B-10
Financial Statements........................................ B-10
</TABLE>
<PAGE> 62
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 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 Contracts are sold by licensed insurance agents, where the Contracts 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 Contracts are distributed
through the principal underwriter for the Separate Account, Investors Brokerage
Services, Inc. ("IBS"), a wholly owned subsidiary of KILICO, which enters into
selling group agreements with 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.
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; "yield" information may be provided
in the case of the KINF High Yield Subaccount; and "yield" and "effective yield"
information may be provided in the case of the KINF Money Market Subaccount.
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 that may be imposed at the end of the period as
well as all other recurring charges and fees applicable under the Contract to
all Contract Owner 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 the table
below.
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 $10,000 below) in each Subaccount's
units on the first day of the period at the maximum offering price, which is the
Accumulation Unit Value per unit ("initial investment") and computing the ending
value ("ending value") of that investment at the end of the period. The ending
value does not include the effect of the applicable Withdrawal Charge that may
be imposed at the end of the period, and thus may be higher than if such charge
were deducted. The total return percentage is then determined by subtracting the
initial investment from the ending value and dividing the remainder by the
initial investment and expressing the result as a percentage. An assumed
investment of $10,000 was chosen because that approximates the 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 the table below.
The yield for the KINF High Yield Subaccount is computed in accordance with a
standard method prescribed by rules of the Securities and Exchange Commission.
The yield for the KINF High Yield Subaccount, based upon the one month period
ended March 31, 1996, was 8.07%. 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
B-1
<PAGE> 63
values on the last day of the period, according to the following formula that
assumes a semi-annual reinvestment of income:
<TABLE>
<CAPTION>
<S> <C>
a - b
------- 6
YIELD = 2[( cd +1) - 1]
</TABLE>
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 KINF Money Market Subaccount's yield is 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
KINF Money Market Subaccount's yield for the seven-day period ended March 31,
1996 was 3.48% and average portfolio maturity was 43 days.
The KINF Money Market Subaccount's effective yield is determined by taking the
base period return (computed as described above) and calculating the effect of
assumed compounding. The formula for the effective yield is: (base period return
+1) (365) / (7) - 1. The KNIF Money Market Subaccount's effective yield for the
seven day period ended March 31, 1996 was 3.55%.
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 semi-annual financial
statements.
A Subaccount's performance quotations are based upon historical earnings and are
not necessarily representative of future performance. The Subaccount's units are
sold at Accumulation Unit value. Performance figures and Accumulation Unit value
will fluctuate. Factors affecting a Subaccount's performance include general
market conditions, operating expenses and investment management. Units of a
Subaccount are redeemable at Accumulation Unit value, which may be more or less
than original cost. The performance figures include the deduction of all
expenses and fees, including a prorated portion of the Records Maintenance
Charge. Redemptions within the first seven years after purchase may be subject
to a Withdrawal Charge that ranges from 7% the first year to 0% after seven
years. 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
period in question.
Performance of the Subaccounts will vary from time to time, and these results
are not necessarily representative of future results. The total return
performance of each Subaccount is calculated for a specified period of time by
assuming an initial Purchase Payment of $10,000 fully allocated to each Separate
Account 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 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 and
the Merrill Lynch Government/Corporate Master Index is also included.
Comparative information may be shown for the KINF International Subaccount with
respect to the CDA Mutual Fund International Index and the Morgan Stanley
Capital International Europe Australia Far East Index. The KINF Total Return,
KINF Growth and KINF Value+Growth Subaccounts are compared to, and the KINF
International Subaccount 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 in general. The Consumer
Price Index is generally considered
B-2
<PAGE> 64
to be a measure of inflation and thus the performance of the KINF Money Market,
KINF Total Return, KINF High Yield, KINF Growth and KINF Value+Growth
Subaccounts, the Janus Subaccounts, the Lexington Subaccounts and the Fidelity
Subaccounts is compared to, and the KINF International Subaccount may be
compared to, that index. The KINF High Yield Subaccount is 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 KINF Money
Market Subaccount is also compared to the CDA Certificate of Deposit Index
because certificates of deposit represent an alternative current income
producing product. The KINF 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 KINF International Subaccount also may 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. The Janus Growth, Janus Worldwide Growth and
Janus Balanced Subaccounts may also be compared to the Standard & Poor's Midcap
Index, the Lehman Brothers Government/Corporate 1-3 Year Bond Index, the Lehman
Brothers Long Government/Corporate Bond Index, the Russell 2000 Index, and the
NASDAQ Composite Index. In addition, the Janus Worldwide Growth Subaccount's
performance may also be compared to the Morgan Stanley International World
Index. Please note the differences and similarities between the investments
which a Subaccount may purchase and the investments measured by the indexes
which are described below. In particular, it should be noted that certificates
of deposit may offer fixed or variable yields and principal is guaranteed and
may be insured. The units of the Subaccounts are not insured. Also, the value of
the Subaccounts will fluctuate.
B-3
<PAGE> 65
TABLES OF HISTORICAL HYPOTHETICAL PERFORMANCE INFORMATION
The following tables reflect historical hypothetical performance information
based on the performance of the underlying Funds from the inception date of each
Fund. The Contracts were not offered during these periods but the performance
information reflects the investment performance of the underlying Funds for the
periods shown and the fees and charges under the Contracts. Actual performance
of the underlying Funds might have been altered by the additional investments
under the Contracts. In addition, the past performance of the Funds is no
indication of their future performance.
<TABLE>
<CAPTION>
VALUES OF INITIAL
$10,000 INVESTMENT
IN SUBACCOUNTS--AS COMPARED TO
OF 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>
KINF GROWTH SUBACCOUNT
Life of Subaccount(4)................................ % 524.07% 459.33% 51.51% 524.14%
Ten years............................................ 360.85 299.55 40.45 269.21
Five years........................................... 124.49 115.19 14.72 58.92
One year............................................. 36.94 37.53 2.54 11.55
KINF TOTAL RETURN SUBACCOUNT
Life of Subaccount(5)................................ % 950.50% 794.16% 62.26% 728.88%
Ten years............................................ 360.85 299.55 40.45 269.21
Five years........................................... 124.49 115.19 14.72 58.92
One year............................................. 36.94 37.53 2.54 11.55
KINF INTERNATIONAL SUBACCOUNT
Life of Subaccount(14)............................... % 80.68% 65.02% 11.31% 41.27%
One year............................................. 36.94 37.53 2.54 11.55
</TABLE>
<TABLE>
<CAPTION>
COMPARED TO
VALUES OF INITIAL --------------------------------------------------------------
$10,000 INVESTMENT SALOMON
IN SUBACCOUNTS--AS BROS. LEHMAN MERRILL
OF DECEMBER 31, 1995 CDA HIGH GRADE BROS. LYNCH
------------------------- CONSUMER CERT. CORP. GOVT./CORP. GOVT./CORP.
ENDING PERCENTAGE PRICE OF DEPOSIT BOND BOND MASTER
TOTAL RETURN VALUE INCREASE INDEX(3) INDEX(6) INDEX(7) INDEX(8) INDEX(9)
TABLE ------ ---------- -------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
KINF MONEY MARKET SUBACCOUNT
Life of Subaccount(10)............. % 62.26% N/A* 561.41% 385.19% 474.22%
Ten years.......................... 40.45 N/A* 192.35 151.19 170.74
Five years......................... 14.72 22.0% 77.99 59.60 69.97
One year........................... 2.54 5.2 27.20 19.24 21.23
KINF HIGH YIELD SUBACCOUNT
Life of Subaccount(11)............. % 62.26% N/A* 561.41% 385.19% 474.22%
Ten years.......................... 40.45 N/A* 192.35 151.19 170.74
Five years......................... 14.72 22.0% 77.99 59.60 69.97
One year........................... 2.54 5.2 27.20 19.24 21.23
</TABLE>
B-4
<PAGE> 66
<TABLE>
<CAPTION>
VALUES OF
INITIAL $10,000
INVESTMENT IN
SUBACCOUNTS-- COMPARED TO
AS OF ----------------------------------------------------------------------------
DECEMBER 31, MORGAN LEHMAN LEHMAN
1995 STANLEY STANDARD BROS. LONG BROS.
------------------- INTERNAT. & POOR'S GOVT./CORP. GOVT./CORP. RUSSELL
TOTAL RETURN ENDING PERCENTAGE WORLD MIDCAP BOND 1-3 YR. BOND 2000 NASDAQ
TABLE VALUE INCREASE INDEX(17) INDEX(18) INDEX(19) INDEX(20) INDEX(21) COMPOS.(22)
------------ ------ ---------- --------- --------- ----------- ------------ --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
JANUS GROWTH
Life of the
Subaccount(16)........... -- .53% 4.66% 2.47% .53% .10%
JANUS WORLDWIDE GROWTH
Life of the
Subaccount(16)........... 5.34% .53% 4.66% 2.47% .53% .10%
JANUS BALANCED
Life of the
Subaccount(16)........... -- .53% 4.66% 2.47% .53% .10%
LEXINGTON NATURAL RESOURCES
Life of the
Subaccount(16)........... 10,032 .32% -- .53% 4.66% 2.47% .53% .10%
</TABLE>
<TABLE>
<CAPTION>
COMPARED TO
-----------------------------------------
AVERAGE ANNUAL STANDARD
TOTAL RETURN DOW JONES & POOR'S CONSUMER
AVERAGE ANNUAL TOTAL (BASED ON $1,000 INDUSTRIAL 500 STOCK PRICE EAFE
RETURN TABLE INVESTMENT) AVERAGE(1) INDEX(2) INDEX(3) (13)
-------------------- ---------------- ---------- --------- -------- ----
<S> <C> <C> <C> <C> <C>
KINF GROWTH SUBACCOUNT
Life of Subaccount(4)..................................... 16.48% 15.43% 3.52% 16.49%
Ten years................................................. 16.51 14.86 3.46 13.95
Five years................................................ 17.55 16.56 2.79 9.71
One year.................................................. 36.94 37.53 2.54 11.55
KINF TOTAL RETURN SUBACCOUNT
Life of Subaccount(5)..................................... 18.53% 17.16% 3.56% 16.52%
Ten years................................................. 16.51 14.86 3.46 13.95
Five years................................................ 17.55 16.56 2.79 9.71
One year.................................................. 36.94 37.53 2.54 11.55
KINF INTERNATIONAL SUBACCOUNT
Life of Subaccount(14).................................... 15.94% 13.34% 2.72% 9.02%
One year.................................................. 36.94 37.53 2.54 11.55
</TABLE>
B-5
<PAGE> 67
<TABLE>
<CAPTION>
COMPARED TO
---------------------------------------------------------------
LEHMAN
AVERAGE ANNUAL SALOMON BROS. BROS. MERRILL LYNCH
TOTAL RETURN CONSUMER HIGH GRADE GOVT./CORP. GOVT./CORP.
AVERAGE ANNUAL TOTAL (BASED ON $1,000 PRICE CORP. BOND BOND MASTER
RETURN TABLE INVESTMENT) INDEX(3) INDEX(7) INDEX(8) INDEX(9)
-------------------- ---------------- -------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
KINF HIGH YIELD SUBACCOUNT
Life of Subaccount(11)................ 3.56% 14.63% 12.09% 13.47%
Ten years............................. 3.46 11.32 9.65 10.47
Five years............................ 2.79 12.22 9.80 11.19
One year.............................. 2.54 27.20 19.24 21.23
</TABLE>
<TABLE>
<CAPTION>
COMPARED TO
---------------------------------------------------------------------------
LEHMAN
MORGAN LEHMAN BROS.
AVERAGE ANNUAL STANLEY STANDARD BROS. LONG GOVT./CORP.
TOTAL RETURN INTERNAT. & POOR'S GOVT./CORP. 1-3 YR. RUSSELL
AVERAGE ANNUAL TOTAL (BASED ON $1,000 WORLD MIDCAP BOND BOND 2000 NASDAQ
RETURN TABLE INVESTMENT) INDEX(17) INDEX(18) INDEX(19) INDEX(20) INDEX(21) COMPOS.(22)
-------------------- ---------------- --------- --------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
JANUS GROWTH
Life of the Subaccount(16).... -- .53% 4.66% 2.47% .53% .10%
JANUS WORLDWIDE GROWTH
Life of the Subaccount(16).... 5.34% .53% 4.66% 2.47% .53% .10%
JANUS BALANCED
Life of the Subaccount(16).... -- .53% 4.66% 2.47% .53% .10%
LEXINGTON NATURAL RESOURCES
Life of the Subaccount(16).... (18.32)% -- .53% 4.66% 2.47% .53% .10%
</TABLE>
<TABLE>
<CAPTION>
YIELD INFORMATION QUALIFIED AND NON-QUALIFIED
----------------- ---------------------------
<S> <C>
KINF HIGH YIELD SUBACCOUNT
30 day period ended 3/31/96............................... 8.07%
KINF MONEY MARKET SUBACCOUNT
7 day period ended 3/31/96................................ 3.48%
</TABLE>
* N/A Not Available
Information for the indices used for comparisons have been provided by the Funds
and has not been independently verified.
(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.
(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.
B-6
<PAGE> 68
(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) EAFE is the Morgan Stanley Capital International 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.
(16) From September 15, 1995 to December 31, 1995.
(17) The Morgan Stanley International World Index is an arithmetic, market
value-weighted average of the performance of over 1,470 securities listed on the
stock exchanges of Australia, Austria, Belgium, Canada, Denmark, Finland,
France, Germany, Hong Kong, Italy, Japan, Netherlands, New Zealand, Norway,
Singapore/Malaysia, South Africa Gold, Spain, Switzerland, United Kingdom, and
the United States. The Index is calculated on a total return basis, which
includes reinvestment of gross dividends before deduction of withholding taxes.
The index covers about 60% of the issues listed on the exchanges of the
countries included.
(18) The Standard & Poor's Midcap 400 Index is a capitalization-weighted index
that measures the performance of the mid-range sector of the U.S. stock market
where the median market capitalization is approximately $700 million. The index
was developed with a base level of 100 as of December 31, 1990.
(19) The Lehman Brothers Long Government/Corporate Bond Index is composed of all
bonds covered by the Lehman Brothers Government/Corporate Bond Index with
maturities of 10 years or greater. Total return comprises price
appreciation/depreciation and income as a percentage of the original investment.
Indexes are balanced monthly by market capitalization.
(20) The Lehman Brothers Government/Corporate 1-3 Year Bond Index is composed of
all bonds covered by the Lehman Brothers Government/Corporate Bond Index with
maturities between one and three years.
(21) The Russell 2000 Index is comprised of the smallest 2000 companies in the
Russell 3000 Index, representing approximately 11% of the Russell 3000 total
market capitalization. The index was developed with a base value of 135.00 as of
December 31, 1986.
(22) The NASDAQ Composite Index is a broad-based capitalization-weighted index
of all NASDAQ stocks. The index was developed with a base level of 100 as of
February 5, 1971.
B-7
<PAGE> 69
The following tables illustrate an assumed $10,000 investment in shares of
certain Subaccounts. 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. Each table covers the
period from commencement of operations of the Subaccount to December 31, 1995.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
KINF TOTAL RETURN SUBACCOUNT
NON-
YEAR QUALIFIED QUALIFIED
ENDED TOTAL TOTAL
12/31 VALUE VALUE
- ----- --------- ---------
<C> <S> <C> <C>
1982 .................... $12,336 $11,769
1983 .................... 14,313 13,211
1984 .................... 13,427 12,508
1985 .................... 17,019 15,853
1986 .................... 19,328 18,003
1987 .................... 19,188 17,872
1988 .................... 21,207 19,752
1989 .................... 25,945 24,164
1990 .................... 26,889 25,043
1991 .................... 36,583 34,069
1992 .................... 36,703 34,179
1993 .................... 40,598 37,805
1994 .................... 36,253 33,758
1995 .................... 45,056 41,953
</TABLE>
<TABLE>
<CAPTION>
KINF HIGH YIELD SUBACCOUNT
NON-
YEAR QUALIFIED QUALIFIED
ENDED TOTAL TOTAL
12/31 VALUE VALUE
- ----- --------- ---------
<C> <S> <C> <C>
1982 .................... $12,363 $11,920
1983 .................... 14,000 13,427
1984 .................... 15,557 15,155
1985 .................... 18,686 18,203
1986 .................... 21,710 21,149
1987 .................... 22,693 22,105
1988 .................... 25,944 25,273
1989 .................... 25,278 24,624
1990 .................... 21,092 20,546
1991 .................... 31,597 30,778
1992 .................... 36,712 35,760
1993 .................... 43,466 42,338
1994 .................... 41,931 40,843
1995 .................... 48,576 47,315
</TABLE>
<TABLE>
<CAPTION>
KINF INTERNATIONAL SUBACCOUNT
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ----- ---------
<C> <S> <C> <C>
1992 .................... $ 9,803
1993 .................... 12,836
1994 .................... 12,187
1995 .................... 13,559
</TABLE>
<TABLE>
<CAPTION>
KINF GROWTH SUBACCOUNT
NON-
YEAR QUALIFIED QUALIFIED
ENDED TOTAL TOTAL
12/31 VALUE VALUE
- ----- --------- ---------
<C> <S> <C> <C>
1983 .................... $10,290 $10,271
1984 .................... 11,254 11,237
1985 .................... 13,898 13,877
1986 .................... 14,986 14,965
1987 .................... 15,043 15,022
1988 .................... 14,908 14,887
1989 .................... 18,871 18,844
1990 .................... 18,736 18,709
1991 .................... 29,479 29,437
1992 .................... 30,123 30,080
1993 .................... 34,063 34,011
1994 .................... 32,261 32,215
1995 .................... 42,330 42,269
</TABLE>
<TABLE>
<CAPTION>
KINF MONEY MARKET SUBACCOUNT
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ----- ---------
<C> <S> <C> <C>
1982 .................... $10,747
1983 .................... 11,575
1984 .................... 12,630
1985 .................... 13,479
1986 .................... 14,185
1987 .................... 14,922
1988 .................... 15,827
1989 .................... 17,045
1990 .................... 18,195
1991 .................... 19,003
1992 .................... 19,385
1993 .................... 19,661
1994 .................... 20,157
1995 .................... 21,001
</TABLE>
B-8
<PAGE> 70
<TABLE>
<CAPTION>
JANUS GROWTH*
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ----- ---------
<C> <S> <C>
1995 ................................ 10,327
<CAPTION>
JANUS WORLDWIDE GROWTH*
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ---- -----
<C> <S> <C>
1995 ................................ 10,425
JANUS BALANCED*
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ---- -----
1995 ................................ 10,547
LEXINGTON NATURAL RESOURCES
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ---- -----
1995 ................................ 10,032
</TABLE>
- ---------------
* Commencement of operations September 15, 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
dividends 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
publishes performance analyses on a regular basis from which the following
rankings were derived.
<TABLE>
<CAPTION>
LIPPER VARIABLE ANNUITY
PERFORMANCE ANALYSIS
-----------------------
2/28/95 2/28/91
TO TO
SUBACCOUNT 2/29/96 2/29/96
---------- ------- --------
<S> <C> <C>
KINF Total Return (Q)....................................... 22.38 54.77
KINF Total Return (NQ)...................................... 22.38 54.77
KINF High Yield (Q)......................................... 14.31 102.58
KINF High Yield (NQ)........................................ 14.31 102.60
KINF Growth (Q)............................................. 30.49 108.35
KINF Growth (NQ)............................................ 30.49 108.35
KINF Money Market (Q)....................................... 4.27 15.69
KINF Money Market (NQ)...................................... 4.27 15.69
KINF International (Q & NQ)................................. 20.99 --
</TABLE>
The KINF Total Return Subaccount, KINF High Yield Subaccount, KINF Growth
Subaccount, KINF Money Market Subaccount and KINF International Subaccount are
ranked by Lipper in the Flexible Portfolio, High Current Yield, Capital
Appreciation, Money Market and International categories, respectively. Variable
annuity funds in these categories have a variety of objectives, policies and
market and credit risks that should be considered in reviewing the rankings. The
performance of the Subaccount may also be compared to other variable annuity
funds ranked by Morningstar, Inc. or VARDS Inc.
TAX-DEFERRED ACCUMULATION
<TABLE>
<CAPTION>
NON-QUALIFIED
ANNUITY CONVENTIONAL
AFTER-TAX CONTRIBUTIONS SAVINGS PLAN
AND TAX-DEFERRED EARNINGS. AFTER-TAX
-------------------------------- CONTRIBUTIONS
TAXABLE LUMP AND TAXABLE
NO WITHDRAWALS SUM WITHDRAWAL 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
B-9
<PAGE> 71
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 Contracts. 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 annuity charges and expenses: 1.25% mortality and expense
risk; .10% administration charges; 7% 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.
STATE REGULATION
KILICO is subject to the laws of Illinois governing insurance companies and to
regulation by the Illinois Department of Insurance. An annual statement in a
prescribed form is filed with the Illinois Department of Insurance each year.
KILICO's books and accounts are subject to review by the Department of Insurance
at all times, and a full examination of its operations is conducted
periodically. Such regulation does not, however, involve any supervision of
management or investment practices or policies. In addition, KILICO is subject
to regulation under the insurance laws of other jurisdictions in which it may
operate.
EXPERTS
[TO BE UPDATED BY AMENDMENT]
The financial statements of KILICO and the Separate Account have been included
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 other variable annuity
contracts offered by KILICO through the Separate Account. As of the date of this
Statement of Additional Information, no assets attributable to the Contracts are
reflected as the Contracts were not offered prior to such date.
B-10
<PAGE> 72
[FINANCIAL STATEMENTS TO BE FILED BY AMENDMENT]
B-11
<PAGE> 73
APPENDIX
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 Contract Value.
B-12
<PAGE> 74
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses of issuance and distribution of the Contracts, other than any
underwriting discounts and commissions, are as follows:
<TABLE>
<CAPTION>
AMOUNT*
----------
<S> <C>
Securities and Exchange Commission Registration Fees........ $15,151.52
Printing and Engraving...................................... $50,000.00
Accounting Fees and Expenses................................ $15,000.00
Legal Fees and Expenses..................................... $15,000.00
----------
Total Expenses............................... $95,151.52
==========
</TABLE>
- ---------------
* Expenses are estimated and are for period ending May 1, 1998 for continuous
offering of interest pursuant to Rule 415 but are not deducted from proceeds.
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> 75
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 Variable Annuity Contract
*4(b) Form of Application
5 Opinion and Consent of Counsel regarding legality (To be
filed by amendment)
23(a) Consent of KPMG Peat Marwick LLP, Independent Auditors (To
be filed by amendment)
23(b) Consent of Counsel (See Exhibit 5)
***28 Schedule V: Valuation and qualifying accounts
</TABLE>
- ---------------
* Incorporated herein by reference to the Registration Statement on Form N-4
filed concurrently herewith.
** Incorporated herein by reference to the Registration Statement on Form S-1
(File No. 333-02491) filed on or about April 12, 1996.
*** Incorporated herein by reference to the Exhibits filed with Amendment No. 1
to the Registration Statement on Form S-1 for KILICO Variable Annuity
Separate Account (File No. 333-02491) filed on or about April 25, 1996.
(B) FINANCIAL STATEMENTS (TO BE FILED BY AMENDMENT)
Report of Independent Auditors
KILICO and Subsidiaries Consolidated Balance Sheets, as of December 31,
1996 and 1995
KILICO and Subsidiaries Consolidated Statements of Operations, years ended
December 31, 1996, 1995 and 1994
KILICO and Subsidiaries Consolidated Statements of Stockholder's Equity,
years ended December 31, 1996, 1995 and 1994
KILICO and Subsidiaries Consolidated Statements of Cash Flows, years ended
December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
Schedule V: Valuation and qualifying accounts
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.
II-2
<PAGE> 76
(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> 77
SIGNATURES
As required by the Securities Act of 1933, the Registrant has duly caused this
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 18th day
of February, 1997.
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 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 18th day of
February, 1997.
<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/ LOREN J. ALTER Director
- -----------------------------------------------------
Loren J. Alter
/s/ DANIEL L. DOCTOROFF Director
- -----------------------------------------------------
Daniel L. Doctoroff
/s/ STEVEN M. GLUCKSTERN Director
- -----------------------------------------------------
Steven M. Gluckstern
/s/ MICHAEL P. STRAMAGLIA Director
- -----------------------------------------------------
Michael P. Stramaglia
/s/ PAUL H. WARREN Director
- -----------------------------------------------------
Paul H. Warren
</TABLE>
II-4
<PAGE> 78
EXHIBIT LIST
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER PAGES*
------- DESCRIPTION ------------
<S> <C> <C>
None
</TABLE>
- ---------------
* In manually signed original only.
