<PAGE> 1
MAY 1, 1999
(As Revised November 1, 1999)
PROSPECTUS
KEMPER DESTINATIONS
A Tax-Deferred Variable,
Fixed and Market Value-Adjusted Annuity
Issued by Kemper Investors
Life Insurance Company
[KEMPER ANNUITIES LOGO]
Long-term investing in a short-term world(SM)
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PROSPECTUS FOR
KEMPER INVESTORS LIFE INSURANCE COMPANY
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INDIVIDUAL AND GROUP VARIABLE,
FIXED AND MARKET
VALUE ADJUSTED DEFERRED ANNUITY
CONTRACTS
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ISSUED BY
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
AND
KEMPER INVESTORS LIFE INSURANCE COMPANY
This prospectus describes Variable, Fixed and Market Value Adjusted Deferred
Annuity Contracts of Kemper Investors Life Insurance Company that are designed
to provide benefits under retirement plans which may qualify for certain federal
tax advantages. Depending on particular state requirements, the Contracts may be
issued on a group or individual basis. Contracts issued on an individual basis
are represented by a Certificate. All discussion of "Contracts" includes issued
on an individual or group basis.
You may allocate purchase payments to one or more of the variable options, the
fixed option or the fixed option subject to a market value adjustment. The
(CONTINUED)
THE CONTRACTS ARE NOT INSURED BY THE FDIC. THEY ARE OBLIGATIONS OF THE ISSUING
INSURANCE COMPANY AND NOT A DEPOSIT OF, OR GUARANTEED BY, ANY BANK OR SAVINGS
INSTITUTION AND ARE SUBJECT TO RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
THIS PROSPECTUS CONTAINS IMPORTANT INFORMATION ABOUT THE CONTRACTS THAT YOU
SHOULD KNOW BEFORE INVESTING. YOU SHOULD READ IT BEFORE INVESTING AND KEEP IT
FOR FUTURE REFERENCE. WE HAVE FILED A STATEMENT OF ADDITIONAL INFORMATION
("SAI") WITH THE SECURITIES AND EXCHANGE COMMISSION. THE CURRENT SAI HAS THE
SAME DATE AS THIS PROSPECTUS AND IS INCORPORATED BY REFERENCE IN THIS
PROSPECTUS. YOU MAY OBTAIN A FREE COPY BY WRITING US OR CALLING (847) 550-5500.
A TABLE OF CONTENTS FOR THE SAI APPEARS ON PAGE 96. YOU MAY ALSO FIND THIS
PROSPECTUS AND OTHER INFORMATION ABOUT THE SEPARATE ACCOUNT REQUIRED TO BE FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION ("SEC") AT THE SEC'S WEB SITE AT
HTTP://WWW.SEC.GOV.
THE DATE OF THIS PROSPECTUS IS MAY 1, 1999, AS REVISED NOVEMBER 1, 1999.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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Contract currently offers thirty-seven investment options, each of which is a
Subaccount of KILICO Variable Annuity Separate Account. Currently, you may
choose among the following Portfolios or Funds:
KEMPER VARIABLE SERIES (formerly Investors Fund Series): Kemper Money Market;
Kemper Government Securities; Kemper Investment Grade Bond; Kemper Global
Income; Kemper Horizon 5; Kemper High Yield; Kemper Horizon 10+; Kemper Total
Return; Kemper Horizon 20+; Kemper Index 500; Kemper Value+Growth; Kemper Blue
Chip; Kemper International; Kemper Contrarian Value (formerly Kemper Value);
Kemper Small Cap Value; Kemper Small Cap Growth; Kemper Growth; Kemper
Aggressive Growth; Kemper Technology Growth; Kemper Global Blue Chip; Kemper
International Growth and Income; Kemper-Dreman High Return Equity; Kemper-Dreman
Financial Services; KVS Focused Large Cap Growth.
SCUDDER VARIABLE LIFE INVESTMENT FUND (CLASS A SHARES): Scudder VLIF Global
Discovery; Scudder VLIF Growth and Income; Scudder VLIF International; Scudder
VLIF Capital Growth.
JANUS ASPEN SERIES: Janus Aspen Growth; Janus Aspen Growth and Income.
WARBURG PINCUS TRUST: Warburg Pincus Emerging Markets; Warburg Pincus
Post-Venture Capital.
THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC.
DREYFUS INVESTMENT PORTFOLIOS: MidCap Stock ("Dreyfus MidCap Stock").
THE ALGER AMERICAN FUND: Alger American Leveraged AllCap; Alger American
Balanced.
Subaccounts and Portfolios may be added or deleted in the future. Contract
values allocated to any of the Subaccounts vary, reflecting the investment
experience of the selected Subaccounts. Contract values allocated to the Fixed
account or one or more Guarantee Periods of the Market Value Adjustment Option
accumulate on a fixed basis.
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TABLE OF CONTENTS
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<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DEFINITIONS................................................. 1
SUMMARY..................................................... 4
SUMMARY OF EXPENSES......................................... 7
CONDENSED FINANCIAL INFORMATION............................. 13
KILICO, THE MVA OPTION, THE SEPARATE ACCOUNT AND THE
FUNDS..................................................... 16
FIXED ACCOUNT OPTION........................................ 26
THE CONTRACTS............................................... 27
CONTRACT CHARGES AND EXPENSES............................... 37
THE ANNUITY PERIOD.......................................... 40
FEDERAL INCOME TAXES........................................ 45
DISTRIBUTION OF CONTRACTS................................... 54
VOTING RIGHTS............................................... 54
REPORTS TO CONTRACT OWNERS AND INQUIRIES.................... 54
DOLLAR COST AVERAGING....................................... 55
SYSTEMATIC WITHDRAWAL PLAN.................................. 56
EXPERTS..................................................... 56
LEGAL MATTERS............................................... 57
SPECIAL CONSIDERATIONS...................................... 57
AVAILABLE INFORMATION....................................... 57
BUSINESS.................................................... 57
PROPERTIES.................................................. 67
LEGAL PROCEEDINGS........................................... 67
SELECTED FINANCIAL DATA..................................... 68
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 69
KILICO'S DIRECTORS AND EXECUTIVE OFFICERS................... 87
EXECUTIVE COMPENSATION...................................... 93
TABLE OF CONTENTS--STATEMENT OF ADDITIONAL INFORMATION...... 96
FINANCIAL STATEMENTS........................................ 96
CHANGE OF ACCOUNTANTS....................................... 96
</TABLE>
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DEFINITIONS
The following terms as used in this Prospectus have the indicated meanings:
ACCUMULATED GUARANTEE PERIOD VALUE--The sum of an Owner's Guarantee Period
Values.
ACCUMULATION PERIOD--The period between the Date of Issue of a 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.
COMPANY ("WE", "US", "OUR", "KILICO")--Kemper Investors Life Insurance
Company. Our home office is located at 1 Kemper Drive, Long Grove, Illinois
60049.
CONTRACT--A Variable, Fixed and Market Value Adjusted Annuity Contract
offered by this Prospectus.
CONTRACT VALUE--The sum of the values of the Owner's Separate Account
Contract Value, Accumulated Guarantee Period Value and Fixed Account
Contract Value.
CONTRACT YEAR--Period between anniversaries of the Contract's Date of
Issue.
CONTRACT QUARTER--Periods between quarterly anniversaries of the Contract's
Date of Issue.
CONTRIBUTION YEAR--Each one year period following the date a Purchase
Payment is made.
DATE OF ISSUE--The date on which the first Contract Year commences.
FIXED ACCOUNT--The General Account of KILICO to which a Contract Owner may
allocate all or a portion of Purchase Payments or Contract
1
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Value. We guarantee a minimum rate of interest on Purchase Payments
allocated to the Fixed Account.
FIXED ACCOUNT CONTRACT VALUE--The value of the Owner's Contract interest in
the Fixed Account.
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 Variable Series (formerly Investors Fund Series),
Scudder Variable Life Investment Fund, Janus Aspen Series, Warburg Pincus
Trust, The Dreyfus Socially Responsible Growth Fund, Inc., Dreyfus
Investment Portfolios and The Alger American Fund including any Portfolios
thereunder.
GENERAL ACCOUNT--All the assets of KILICO other than those allocated to any
separate account.
GUARANTEED INTEREST RATE--The rate of interest we establish for a given
Guarantee Period.
GUARANTEE PERIOD--The time when an amount is credited with a Guaranteed
Interest Rate. Guarantee Period options may range from one to ten years, at
our option.
GUARANTEE PERIOD VALUE--The Guarantee Period Value is the sum of the
Owner's: (1) Purchase Payment allocated or amount transferred to a
Guarantee Period; plus (2) interest credited; minus (3) withdrawals,
previously assessed Withdrawal Charges and transfers; and (4) as adjusted
for any applicable Market Value Adjustment previously made.
MARKET ADJUSTED VALUE--A Guarantee Period Value adjusted by the market
value adjustment formula on any date prior to the end of a Guarantee
Period.
MARKET VALUE ADJUSTMENT--An adjustment of values under a Guarantee Period
in accordance with the market value adjustment formula prior to the end of
that Guarantee Period. The adjustment reflects the change in the value of
the Guarantee Period Value due to changes in interest rates since the date
the Guarantee Period commenced. The adjustment is computed using the market
value adjustment formula stated in the Contract.
NON-QUALIFIED PLAN CONTRACT--A Contract which does not receive favorable
tax treatment under Sections 401, 403, 408, 408A or 457 of the Internal
Revenue Code.
OWNER OR OWNER--The person designated in the Contract as having the
privileges of ownership defined in the Contract.
2
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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 us for an Owner.
QUALIFIED PLAN CONTRACT--A Contract issued in connection with a retirement
plan which receives favorable tax treatment under Sections 401, 403, 408,
408A or 457 of the Internal Revenue Code.
SEPARATE ACCOUNT--The KILICO Variable Annuity Separate Account.
SEPARATE ACCOUNT CONTRACT VALUE--The sum of the Owner's Contract interest
in the Subaccount(s).
SUBACCOUNTS--The thirty-seven 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 Contract Value in the first seven Contribution Years
after a Purchase Payment is made or against certain annuitizations of
Contract Value in the first seven Contribution Years after a Purchase
Payment is made.
WITHDRAWAL VALUE--Contract Value, plus or minus any applicable Market Value
Adjustment, less any premium tax payable if the Contract is being
annuitized, minus any Withdrawal Charge applicable to that Contract.
3
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SUMMARY
Because this is a summary, it does not contain all of the information that may
be important. Read the entire Prospectus and Statement of Additional Information
before deciding to invest.
The Contracts provide for investment on a tax-deferred basis and annuity
benefits. Both Non-Qualified Plan and Qualified Plan Contracts are described in
this Prospectus.
The minimum initial Purchase Payment is $1,000 and, subject to certain
exceptions, the minimum subsequent payment is $500. An allocation to a
Subaccount, Fixed Account or Guarantee Period must be at least $500. Our prior
approval is required for Purchase Payments over $1,000,000. (See "The
Contracts," page 27.)
Variable accumulations and benefits are provided by crediting Purchase Payments
to one or more Subaccounts selected by the Owner. Each Subaccount invests in one
of the following corresponding Portfolios or Funds:
- - Kemper Money Market
- - Kemper Government Securities
- - Kemper Investment Grade Bond
- - Kemper Global Income
- - Kemper Horizon 5
- - Kemper High Yield
- - Kemper Horizon 10+
- - Kemper Total Return
- - Kemper Horizon 20+
- - Kemper Index 500
- - Kemper Value+Growth
- - Kemper Blue Chip
- - Kemper International
- - Kemper Contrarian Value
- - Kemper Small Cap Value
- - Kemper Small Cap Growth
- - Kemper Growth
- - Kemper Aggressive Growth
- - Kemper Technology Growth
- - Kemper Global Blue Chip
- - Kemper International Growth and Income
- - Kemper-Dreman High
Return Equity
- - Kemper-Dreman Financial Services
- - KVS Focused Large Cap Growth
- - Scudder VLIF Global Discovery
- - Scudder VLIF Growth and Income
- - Scudder VLIF International
- - Scudder VLIF Capital Growth
- - Janus Aspen Growth
- - Janus Aspen Growth and Income
- - Warburg Pincus Emerging Markets
- - Warburg Pincus Post-Venture Capital
- - The Dreyfus Socially Responsible Growth Fund, Inc.
- - Dreyfus MidCap Stock
- - Alger American Leveraged AllCap
- - Alger American Balanced
Contract Value allocated to the Separate Account varies with the investment
experience of the selected Subaccounts.
The Fixed Account has fixed accumulations and benefits. We guarantee that
Purchase Payments allocated to the Fixed Account earn a minimum fixed
4
<PAGE> 9
interest rate of 3%. In our discretion, we may credit interest in excess of 3%.
(See "Fixed Account Option," page 26.)
The MVA Option also provides fixed accumulations. The MVA Option is only
available during the Accumulation Period. An Owner may allocate amounts to one
or more Guarantee Periods. We may offer additional Guarantee Periods at our
discretion. For new Contracts, we may limit the number of Guarantee Period
options available to three (3). We credit interest daily to amounts allocated to
the MVA Option. We declare the rate at our sole discretion. We guarantee amounts
allocated to the MVA Option at Guaranteed Interest Rates for the Guarantee
Periods selected by the Owner. These guaranteed amounts are subject to any
applicable Withdrawal Charge, Market Value Adjustment or Records Maintenance
Charge. We will not change a Guaranteed Interest Rate for the duration of the
Guarantee Period. However, Guaranteed Interest Rates for subsequent Guarantee
Periods are set at our discretion. At the end of a Guarantee Period, a new
Guarantee Period for the same duration starts, unless the Owner timely elects
another Guarantee 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 16.)
The investment risk under the Contracts is borne by the Owner, unless Contract
Values are allocated to:
- the MVA Option and are guaranteed to receive the Guaranteed Interest Rate
or
- the Fixed Option and are guaranteed to earn at least 3% interest.
Transfers between Subaccounts are permitted before and after annuitization,
subject to certain limitations. A transfer from a Guarantee Period is subject to
a Market Value Adjustment unless effected within 30 days after the existing
Guarantee Period ends. Restrictions apply to transfers out of the Fixed Account.
(See "Transfer During Accumulation Period" and "Transfer During Annuity Period,"
pages 31 and 43, respectively.)
An Owner may withdraw Contract Value subject to Withdrawal Charges, any
applicable Market Value Adjustment and other specified conditions. (See
"Withdrawal During Accumulation Period," page 32.)
We do not deduct sales charges from Purchase Payments. Each Contract Year, an
Owner may withdraw or surrender the Contract, without Withdrawal Charge, up to
the greater of:
- the excess of Contract Value over total Purchase Payments subject to
Withdrawal Charges, minus prior withdrawals that were previously assessed
a Withdrawal Charge, and
5
<PAGE> 10
- 10% of Contract Value. If the Owner withdraws a larger amount, the excess
Purchase Payments withdrawn are 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
- 0% thereafter
(See "Withdrawal Charge," page 38.) 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." Withdrawals may be
subject to income tax, a 10% penalty tax, and other tax consequences.
Withdrawals from Qualified Plan Contracts may be limited by the Internal Revenue
Code (the "Code"). (See "Federal Income Taxes," page 45.)
Contract charges include:
- mortality and expense risk
- administrative expenses
- records maintenance
- applicable premium taxes
- Guaranteed Retirement Income Benefit
(See "Charges Against the Separate Account," page 37.) 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 Contract may be purchased in connection with retirement plans qualifying
either under Section 401 or 403(b) of the Code or as individual retirement
annuities including Roth IRAs. The Contract is also available in connection with
state and municipal deferred compensation plans and non-qualified deferred
compensation plans. (See "Taxation of Annuities in General," page 45 and
"Qualified Plans," page 49.)
An Owner may examine a Contract and return it for a refund during the "free
look" period. The length of the free look period will depend on the state in
which the Contract is issued. However, it will be at least ten days from the
date the Owner receives the Contract. (See "The Contracts," page 27.) In
addition, a special free look period applies in some circumstances to Contracts
issued as Individual Retirement Annuities, Simplified Employee Pensions--IRAs or
as Roth Individual Retirement Annuities.
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SUMMARY OF EXPENSES
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CONTRACT OWNER TRANSACTION EXPENSES
<TABLE>
<S> <C>
Sales Load Imposed on Purchases (as a percentage of purchase payments).............................. None
Contingent Deferred Sales Load (as a percentage of amount surrendered)(1)
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(2)..................................................................................... $25
ANNUAL CONTRACT FEE (Records Maintenance Charge)(3)................................................. $30
</TABLE>
<TABLE>
<CAPTION>
SEPARATE ACCOUNT ANNUAL EXPENSES
(as a percentage of average daily account value)
<S> <C>
Mortality and Expense
Risk.................................... 1.25%
Administration.......................... .15%
Account Fees and
Expenses.............................. 0%
---------
Total Separate Account
Annual Expenses....................... 1.40%
=========
GUARANTEED RETIREMENT INCOME BENEFIT
CHARGE
Annual Expense (as a percentage of
Contract Value)....................... .25%
</TABLE>
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(1) A Contract Owner may withdraw up to the greater of (i) the excess of
Contract Value over total Purchase Payments subject to Withdrawal Charges
less prior withdrawals that were previously assessed a Withdrawal Charge,
and (ii) 10% of the Contract Value in any Contract Year without assessment
of any charge. In certain circumstances we may reduce or waive the
contingent deferred sales charge.
(2) We reserve the right to charge a fee of $25 for each transfer of Contract
Value in excess of 12 transfers per calendar year.
(3) Applies to Contracts with a Contract Value less than $50,000 on the date of
assessment. In certain circumstances we may reduce or waive the annual
Records Maintenance Charge.
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SUMMARY OF EXPENSES -- CONTINUED
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FUND ANNUAL EXPENSES (After Fee Waivers and Expense Reductions)
(as percentage of each Portfolio's average net assets for the period ended
December 31, 1998)
<TABLE>
<CAPTION>
KEMPER KEMPER KEMPER KEMPER
MONEY GOVERNMENT INVESTMENT GLOBAL KEMPER
MARKET SECURITIES GRADE BOND(9) INCOME(10) HORIZON 5(9)
------ ---------- ------------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Management Fees.................... .50% .55% .60% .72% .60%
Other Expenses.................... .04 .11 .07 .33 .06
Total Portfolio Annual Expenses... .54 .66 .67 1.05 .66
<CAPTION>
KEMPER KEMPER KEMPER KEMPER KEMPER KEMPER
HIGH HORIZON TOTAL HORIZON INDEX VALUE+
YIELD 10+(9) RETURN 20+(9) 500(8) GROWTH(9)
------ ------- ------ ------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Management Fees.................... .60% .60% .55% .60% .26% .75%
Other Expenses.................... .05 .04 .05 .07 .29 .03
Total Portfolio Annual Expenses... .65 .64 .60 .67 .55 .78
</TABLE>
<TABLE>
<CAPTION>
KEMPER KEMPER KEMPER KEMPER
BLUE KEMPER CONTRARIAN SMALL CAP SMALL CAP
CHIP(9) INTERNATIONAL VALUE(9) VALUE(9) GROWTH
------- ------------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Management Fees................... .65% .75% .75% .75% .65%
Other Expenses................... .11 .18 .03 .05 .05
Total Portfolio Annual
Expenses....................... .76 .93 .78 .80 .70
<CAPTION>
KEMPER KEMPER-
KEMPER KEMPER KEMPER INTERNATIONAL DREMAN
KEMPER AGGRESSIVE TECHNOLOGY GLOBAL BLUE GROWTH AND HIGH RETURN
GROWTH GROWTH(6)(10) GROWTH(6)(10) CHIP(7)(10) INCOME(7)(10) EQUITY(7)(10)
------ ------------- ------------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Management Fees................... .60% .67% .66% 0.00% 0.00% .42%
Other Expenses................... .05 .28 .29 1.56 1.12 .45
Total Portfolio Annual
Expenses....................... .65 .95 .95 1.56 1.12 .87
</TABLE>
<TABLE>
<CAPTION>
KEMPER- KVS SCUDDER SCUDDER
DREMAN FOCUSED SCUDDER VLIF VLIF SCUDDER VLIF
FINANCIAL LARGE CAP GLOBAL GROWTH AND VLIF CAPITAL
SERVICES(7)(10) GROWTH(14) DISCOVERY(11) INCOME INTERNATIONAL GROWTH
--------------- ---------- ------------- ---------- ------------- -------
<S> <C> <C> <C> <C> <C> <C>
Management Fees...... .02% .58% .91% .47% .87% .47%
Other Expenses...... .97 .57 .81 .09 .18 .04
Total Portfolio
Annual Expenses... .99 1.15 1.72 .56 1.05 .51
- ---------------------
<CAPTION>
THE
WARBURG DREYFUS
JANUS WARBURG PINCUS SOCIALLY ALGER
JANUS ASPEN PINCUS POST- RESPONSIBLE DREYFUS AMERICAN ALGER
ASPEN GROWTH AND EMERGING VENTURE GROWTH MIDCAP LEVERAGED AMERICAN
GROWTH(4) INCOME(4) MARKETS(5) CAPITAL(5) FUND, INC. STOCK(13) ALLCAP(12) BALANCED
--------- ---------- ---------- ---------- ----------- --------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees...... .65% 0.00% .20% 1.08% .75% 0.00% .85% .75%
Other Expenses...... .03 1.25 1.20 .32 .05 1.00 .11 .17
Total Portfolio
Annual Expenses... .68 1.25 1.40 1.40 .80 1.00 .96 .92
- ---------------------
</TABLE>
(4) 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, 1998 would have been: .72%, .03% and .75%,
respectively, for the Growth Portfolio; and .75%, 2.31% and 3.06%,
respectively, for the Growth and Income Portfolio. See the prospectus and
Statement of Additional Information of Janus Aspen Series for a description
of these waivers.
(5) The expense figures shown are net of certain fee waivers or reductions from
the Portfolios' investment adviser and its affiliates based on actual
expenses for fiscal year ended December 31, 1998. Without such waivers,
Management Fees, Other Expenses and Total Portfolio Annual Expenses for the
Portfolios would have been 1.25%, 6.96% and 8.21%, respectively, for the
Emerging Markets Portfolio; and 1.25%, .45% and 1.70%, respectively, for
the Post-Venture Capital Portfolio. Fee waivers and expense reimbursements
may be discontinued at any time.
(6) Portfolios commenced operations on 5/1/99. "Other Expenses" have been
estimated.
(7) Portfolios commenced operations on or after 5/1/98. "Other Expenses" have
been estimated.
(8) Portfolio commenced operations after 9/1/99. "Other Expenses" have been
estimated. Pursuant to their respective agreements with Kemper Variable
Series, the investment manager and the accounting agent have agreed, for
the period from commencement of operations to April 30, 2000, to limit
their respective fees and to reimburse other operating expenses of the
Kemper Index 500 Portfolio to the extent necessary to limit total operating
expenses to the level set forth in the table. Without taking into effect
this cap, management fees are estimated to be .45%, Other Expenses are
estimated to be .29%, and total operating expenses are estimated to be
.74%.
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<PAGE> 13
(9) Pursuant to their respective agreements with Kemper Variable Series, the
investment manager and the accounting agent have agreed, for the one year
period commencing May 1, 1999, to limit their respective fees and to
reimburse other operating expenses, to the extent necessary to limit total
operating expenses of the following described Portfolios to the amounts set
forth after the Portfolio names: Kemper Value+Growth Portfolio (.84%),
Kemper Contrarian Value Portfolio (.80%), Kemper Small Cap Value Portfolio
(.84%), Kemper Horizon 5 Portfolio (.97%), Kemper Horizon 10+ Portfolio
(.83%), Kemper Horizon 20+ Portfolio (.93%), Kemper Investment Grade Bond
Portfolio (.80%), and Kemper Blue Chip Portfolio (.95%). The amounts set
forth in the table above reflect actual expenses for the past fiscal year,
which were lower than these expense limits.
(10) Pursuant to their respective agreements with Kemper Variable Series, the
investment manager and the accounting agent have agreed, for the one year
period commencing May 1, 1999, to limit their respective fees and to
reimburse other operating expenses, to the extent necessary to limit total
operating expenses of the Kemper Aggressive Growth, Kemper Technology
Growth, Kemper-Dreman Financial Services, Kemper-Dreman High Return Equity,
Kemper International Growth and Income, Kemper Global Blue Chip and Kemper
Global Income Portfolios of Kemper Variable Series to the levels set forth
in the table above. Without taking into effect these expense caps, for the
Aggressive Growth, Technology Growth, Financial Services, High Return
Equity, International Growth and Income, Global Blue Chip and Global Income
Portfolios of Kemper Variable Series: management fees are estimated to be
.75%, .75%, .75%, .75%, 1.00%, 1.00% and .75%. Other Expenses are estimated
to be .28%, .29%, .97%, .45%, 18.54%, 11.32%, and .33%, respectively, and
total operating expenses are estimated to be 1.03%, 1.04%, 1.72%, 1.20%,
19.54%, 12.32%, and 1.08%, respectively. In addition, for Kemper
International Growth and Income and Kemper Global Blue Chip, the investment
manager has agreed to limit its management fee to .70% and .85%,
respectively, of such portfolios for one year from May 1, 1999.
(11) Until April 10, 1998, the Adviser waived a portion of its management fee to
limit the expenses of the Global Discovery Portfolio to 1.50% of the
average daily net assets.
(12) Included in Other Expenses is 0.03% of interest expense.
(13) The Dreyfus Corporation has agreed, until December 31, 1999, to waive
receipt of its fees and/or assume the expenses of the Portfolio so that
expenses (excluding taxes, brokerage commissions, extraordinary expenses,
interest expenses and commitment fees on borrowings) do not exceed 1.00%.
Without such waiver and/or assumption, Management Fees, Other Expenses and
Total Portfolio Annual Expenses for Dreyfus MidCap Stock for the fiscal
year ended December 31, 1998 would have been: .75%, 1.14% and 1.89%,
respectively.
(14) Portfolio commenced operations on or after 10/29/99. "Other Expenses" have
been estimated. Pursuant to its agreement with Kemper Variable Series, the
investment manager agreed, for the period from commencement of operations
to April 30, 2000, to limit its fees and to reimburse other operating
expenses of the KVS Focused Large Cap Growth Portfolio to the extent
necessary to limit total operating expenses to the level set forth in the
table. Without taking into effect this cap, management fees are estimated
to be .95%, Other Expenses are estimated to be .57%, and total operating
expenses are estimated to be 1.52%.
9
<PAGE> 14
EXAMPLE
<TABLE>
<CAPTION>
SUBACCOUNT 1 YEAR 3 YEARS 5 YEARS 10 YEARS
---------- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C>
If you surrender your Contract at the Kemper Money Market #1(1) $ 92 $116 $152 $228
end of
the periods shown, you would pay the Kemper Government Securities 93 120 158 241
following expenses on a $1,000 Kemper Investment Grade Bond 93 120 158 242
investment,
assuming 5% annual return on assets: Kemper Global Income 97 131 177 281
Kemper Horizon 5 93 120 158 241
Kemper High Yield 93 119 157 240
Kemper Horizon 10+ 93 119 157 239
Kemper Total Return 93 118 155 234
Kemper Horizon 20+ 93 120 158 242
Kemper Index 500 92 116 -- --
Kemper Value+Growth 94 123 164 253
Kemper Blue Chip 94 123 163 251
Kemper International 96 128 171 269
Kemper Contrarian Value 94 123 164 253
Kemper Small Cap Value 94 124 165 255
Kemper Small Cap Growth 94 121 160 245
Kemper Growth 93 119 157 240
Kemper Aggressive Growth 96 128 -- --
Kemper Technology Growth 96 128 -- --
Kemper Global Blue Chip 102 146 202 332
Kemper International Growth 98 133 181 288
and Income
Kemper-Dreman High Return Equity 95 126 168 263
Kemper-Dreman Financial Services 96 129 174 275
KVS Focused Large Cap Growth 98 134 -- --
Scudder VLIF Global Discovery 103 150 210 347
Scudder VLIF Growth 92 117 153 230
and Income
Scudder VLIF International 97 131 177 281
Scudder VLIF Capital Growth 92 115 150 225
Janus Aspen Growth 93 120 159 243
Janus Aspen Growth and Income 99 137 187 301
Warburg Pincus Emerging Markets 100 141 194 316
Warburg Pincus Post-Venture Capital 99 139 190 308
The Dreyfus Socially Responsible 94 124 -- --
Growth Fund, Inc.
Dreyfus MidCap Stock 96 130 -- --
Alger American Leveraged AllCap 96 128 -- --
Alger American Balanced 96 127 -- --
</TABLE>
10
<PAGE> 15
EXAMPLE
<TABLE>
<CAPTION>
SUBACCOUNT 1 YEAR 3 YEARS 5 YEARS 10 YEARS
---------- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C>
Kemper Money Market #1(1) $ 20 $ 61 $106 $228
Kemper Government Securities 21 65 112 241
Kemper Investment Grade Bond 21 66 112 242
Kemper Global Income 25 77 132 281
Kemper Horizon 5 21 65 112 241
Kemper High Yield 21 65 111 240
Kemper Horizon 10+ 21 65 111 239
Kemper Total Return 21 63 109 234
Kemper Horizon 20+ 21 66 112 242
Kemper Index 500 20 62 -- --
Kemper Value+Growth 22 69 118 253
Kemper Blue Chip 22 68 117 251
Kemper International 24 74 126 269
Kemper Contrarian Value 22 69 118 253
Kemper Small Cap Value 23 70 119 255
Kemper Small Cap Growth 22 66 114 245
Kemper Growth 21 65 111 240
Kemper Aggressive Growth 24 74 -- --
Kemper Technology Growth 24 74 -- --
Kemper Global Blue Chip 30 93 158 332
Kemper International Growth 26 79 136 288
and Income
Kemper-Dreman High 23 72 123 263
Return Equity
Kemper-Dreman Financial Services 24 75 129 275
KVS Focused Large Cap Growth 26 80 -- --
Scudder VLIF Global Discovery 32 98 166 347
Scudder VLIF Growth 20 62 107 230
and Income
Scudder VLIF International 25 77 132 281
Scudder VLIF Capital Growth 20 61 104 225
Janus Aspen Growth 21 66 113 243
Janus Aspen Growth and Income 27 83 142 301
Warburg Pincus Emerging Markets 29 88 150 316
Warburg Pincus Post-Venture Capital 28 86 146 308
The Dreyfus Socially Responsible 23 70 -- --
Growth Fund, Inc.
Dreyfus MidCap Stock 25 76 -- --
Alger American Leveraged AllCap 24 74 -- --
Alger American Balanced 24 73 -- --
</TABLE>
If you do not surrender your contract,
you would pay the following expenses
on a $1,000 investment, assuming
5% annual return on assets:
11
<PAGE> 16
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 Scudder Kemper Investments,
Inc., Janus Capital Corporation, Credit Suisse Asset Management, LLC (successor
to Warburg Pincus Asset Management, Inc.), The Dreyfus Corporation and Fred
Alger Management, 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.
(1)Money Market Subaccount #2 is not shown because it is available only for
dollar cost averaging that will deplete an Owner's subaccount value entirely
at least by the end of the first Contribution Year.
12
<PAGE> 17
CONDENSED FINANCIAL INFORMATION
The following condensed financial information is derived from the financial
statements of the Separate Account. The data should be read in conjunction with
the financial statements, related notes and other financial information included
in the Statement of Additional Information.
Selected data for accumulation units outstanding as of the year ended December
31, 1998:
<TABLE>
<CAPTION>
1998
ACCUMULATION UNIT VALUE AT BEGINNING OF PERIOD* ----
<S> <C>
Kemper Money Market Subaccount #1 10.003
Kemper Money Market Subaccount #2 10.004
Kemper Total Return Subaccount 9.983
Kemper High Yield Subaccount 10.003
Kemper Growth Subaccount 9.889
Kemper Government Securities Subaccount 10.012
Kemper International Subaccount 9.944
Kemper Small Cap Growth Subaccount** 9.867
Kemper Investment Grade Bond Subaccount*** 10.014
Kemper Contrarian Value Subaccount*** 10.029
Kemper Small Cap Value Subaccount*** 9.943
Kemper Value+Growth Subaccount*** 9.937
Kemper Horizon 20+ Subaccount*** 9.951
Kemper Horizon 10+ Subaccount*** 9.957
Kemper Horizon 5 Subaccount*** 9.974
Kemper Blue Chip Subaccount**** 9.964
Kemper Global Income Subaccount**** 10.009
Kemper Aggressive Growth Subaccount***** --
Kemper Technology Growth Subaccount***** --
Kemper Global Blue Chip Subaccount 9.989
Kemper International Growth and Income
Subaccount 9.964
Kemper-Dreman High Return Equity Subaccount 9.997
Kemper-Dreman Financial Services Subaccount 10.049
Scudder VLIF Global Discovery Subaccount 9.911
Scudder VLIF Growth and Income Subaccount 10.033
Scudder VLIF International Subaccount 9.972
Scudder VLIF Capital Growth Subaccount 9.985
Janus Aspen Growth Subaccount 9.912
Janus Aspen Growth and Income Subaccount 9.908
Warburg Pincus Emerging Markets Subaccount 9.755
Warburg Pincus Post-Venture Capital Subaccount 9.882
</TABLE>
13
<PAGE> 18
CONDENSED FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
1998
ACCUMULATION UNIT VALUE AT END OF PERIOD ----
<S> <C>
Kemper Money Market Subaccount #1 10.213
Kemper Money Market Subaccount #2 10.297
Kemper Total Return Subaccount 10.542
Kemper High Yield Subaccount 9.646
Kemper Growth Subaccount 10.007
Kemper Government Securities Subaccount 10.332
Kemper International Subaccount 9.429
Kemper Small Cap Growth Subaccount** 11.070
Kemper Investment Grade Bond
Subaccount*** 10.417
Kemper Contrarian Value Subaccount*** 10.712
Kemper Small Cap Value Subaccount*** 8.431
Kemper Value+Growth Subaccount*** 10.697
Kemper Horizon 20+ Subaccount*** 10.228
Kemper Horizon 10+ Subaccount*** 10.290
Kemper Horizon 5 Subaccount*** 10.354
Kemper Blue Chip Subaccount**** 10.386
Kemper Global Income Subaccount**** 10.755
Kemper Aggressive Growth Subaccount***** --
Kemper Technology Growth Subaccount***** --
Kemper Global Blue Chip Subaccount 10.103
Kemper International Growth and Income
Subaccount 9.130
Kemper-Dreman High Return Equity
Subaccount 10.491
Kemper-Dreman Financial Services
Subaccount 9.998
Scudder VLIF Global Discovery Subaccount 10.043
Scudder VLIF Growth and Income
Subaccount 9.651
Scudder VLIF International Subaccount 9.837
Scudder VLIF Capital Growth Subaccount 10.823
Janus Aspen Growth Subaccount 11.943
Janus Aspen Growth and Income Subaccount 12.038
Warburg Pincus Emerging Markets
Subaccount 7.994
Warburg Pincus Post-Venture Capital
Subaccount 9.720
</TABLE>
14
<PAGE> 19
CONDENSED FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
1998
NUMBER OF ACCUMULATION UNITS OUTSTANDING AT END OF PERIOD (000'S OMITTED) ----
<S> <C> <C> <C> <C> <C> <C>
Kemper Money Market Subaccount #1 82
Kemper Money Market Subaccount #2 21
Kemper Total Return Subaccount 123
Kemper High Yield Subaccount 361
Kemper Growth Subaccount 50
Kemper Government Securities Subaccount 77
Kemper International Subaccount 56
Kemper Small Cap Growth Subaccount** 106
Kemper Investment Grade Bond Subaccount*** 66
Kemper Contrarian Value Subaccount*** 110
Kemper Small Cap Value Subaccount*** 125
Kemper Value+Growth Subaccount*** 56
Kemper Horizon 20+ Subaccount*** 46
Kemper Horizon 10+ Subaccount*** 62
Kemper Horizon 5 Subaccount*** 22
Kemper Blue Chip Subaccount**** 125
Kemper Global Income Subaccount**** 7
Kemper Aggressive Growth Subaccount***** --
Kemper Technology Growth Subaccount***** --
Kemper Global Blue Chip Subaccount 29
Kemper International Growth and Income Subaccount 25
Kemper-Dreman High Return Equity Subaccount 518
Kemper-Dreman Financial Services Subaccount 121
Scudder VLIF Global Discovery Subaccount 74
Scudder VLIF Growth and Income Subaccount 175
Scudder VLIF International Subaccount 88
Scudder VLIF Capital Growth Subaccount 56
Janus Aspen Growth Subaccount 252
Janus Aspen Growth and Income Subaccount 173
Warburg Pincus Emerging Markets Subaccount 7
Warburg Pincus Post-Venture Capital Subaccount 9
</TABLE>
* Commencement of Offering on June 1, 1998.
** Commencement of Offering on May 2, 1994 at initial accumulation unit value
of 1.000.
*** Commencement of Offering on May 1, 1996 at initial accumulation unit value
of 1.000.
**** Commencement of Offering on May 1, 1997 at initial accumulation unit value
of 1.000.
***** Commencement of Offering on May 1, 1999 at initial accumulation unit value
of 1.000.
15
<PAGE> 20
KILICO, THE MVA OPTION,
THE SEPARATE ACCOUNT AND THE FUNDS
KEMPER INVESTORS LIFE INSURANCE COMPANY
We were organized under the laws of the State of Illinois in 1947 as a stock
life insurance company. Our offices are located at 1 Kemper Drive, Long Grove,
Illinois 60049. We offer annuity and life insurance products and are admitted to
do business in the District of Columbia and all states except New York. We are a
wholly-owned subsidiary of Kemper Corporation, a nonoperating holding company.
Kemper Corporation is a majority owned (71.67 percent) subsidiary of Zurich
Holding Company of America ("ZHCA"), which is a wholly-owned subsidiary of
Zurich Insurance Company ("Zurich"). Zurich is a wholly-owned subsidiary of
Zurich Financial Services ("ZFS"). ZFS was formed in the September, 1998 merger
of the Zurich Group with the financial services business of B.A.T. Industries.
ZFS is owned by Zurich Allied A.G. and Allied Zurich p.l.c., fifty-seven percent
and forty-three percent, respectively.
THE MVA OPTION
An Owner may allocate amounts in the Market Value Adjustment ("MVA") Option to
one or more Guarantee Periods with durations of one to ten years during the
Accumulation Period. At our discretion, We may offer additional Guarantee
Periods or limit, for new Contracts, the number of Guarantee Periods available
to three.
The amounts allocated to the MVA Option under the Contracts are invested under
the laws regulating our General Account. Assets supporting the amounts allocated
to Guarantee Periods are held in a "non-unitized" separate account. However, our
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 our guaranteed obligations. 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 we
may conduct.
State insurance laws concerning the nature and quality of investments regulate
our General Account investments and any non-unitized separate account
investments. 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.) Our affiliate, Scudder Kemper Investments, Inc.
("SKI"), manages our General Account.
We consider the return available on the instruments in which Contract proceeds
are invested when establishing Guaranteed Interest Rates. This return is only
one of many factors considered in establishing Guaranteed Interest
16
<PAGE> 21
Rates. (See "The Accumulation Period--4. Establishment of Guaranteed Interest
Rates.")
Our investment strategy for the non-unitized separate account is generally to
match Guarantee Period liabilities with assets, such as debt instruments. We
expect to invest in debt instruments such as:
- 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;
- 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;
- other debt instruments including 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 our management to have an
investment quality comparable to securities which may be otherwise
purchased; and
- options and futures transactions on fixed income securities.
Our invested assets portfolio at December 31, 1998 included approximately 82.7
percent in U.S. Treasuries, investment grade corporate, foreign and municipal
bonds, and commercial paper, 2.3 percent in below investment grade (high risk)
bonds, 3.9 percent in mortgage loans and other real estate-related investments
and 11.1 percent in all other investments. (See "Management's Discussion and
Analysis--INVESTMENTS.")
We are not obligated to invest the amounts allocated to the MVA Option according
to any particular strategy, except as state insurance laws may require. (See
"Management's Discussion and Analysis--INVESTMENTS.")
THE SEPARATE ACCOUNT
We established the KILICO Variable Annuity Separate Account on May 29, 1981
pursuant to Illinois law as the KILICO Money Market Separate Account. KILICO
Money Market Separate Account was initially registered with the Securities and
Exchange Commission ("SEC") as an open-end, diversified management investment
company. On November 2, 1989, contract owners approved a Reorganization under
which the Separate Account was restructured as a unit investment trust. The SEC
does not supervise the management, investment practices or policies of the
Separate Account or KILICO.
Benefits provided under the Contracts are our obligations. Although the assets
in the Separate Account are our property, they are held separately from our
other assets and are not chargeable with liabilities arising out of any other
business we may conduct. Income, capital gains and capital losses, whether or
17
<PAGE> 22
not realized, from the assets allocated to the Separate Account are credited to
or charged against the Separate Account without regard to the income, capital
gains and capital losses arising out of any other business we may conduct.
Thirty-seven Subaccounts of the Separate Account are currently available. Each
Subaccount invests exclusively in shares of one of the corresponding Portfolios.
We may add or delete Subaccounts in the future. Not all Subaccounts may be
available in all jurisdictions or under all Contracts.
The Separate Account purchases and redeems shares from the Funds at net asset
value. We redeem shares of the Funds as necessary to provide benefits, to deduct
Contract charges and to transfer assets from one Subaccount to another as
requested by Owners. All dividends and capital gains distributions received by
the Separate Account from a Portfolio are reinvested in that 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 following open-end, management
investment companies:
- Kemper Variable Series (formerly Investors Fund Series)
- Scudder Variable Life Investment Fund
- Janus Aspen Series
- Warburg Pincus Trust
- The Dreyfus Socially Responsible Growth Fund, Inc.
- Dreyfus Investment Portfolios
- The Alger American Fund
The Funds provide investment vehicles for variable life insurance and variable
annuity contracts and, in the case of Janus Aspen Series and Warburg Pincus
Trust, certain qualified retirement plans. Shares of the Funds are sold only to
insurance company separate accounts and qualified retirement plans. Shares of
the Funds may be sold to separate accounts of other insurance companies, whether
or not affiliated with us. 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 us, or for variable
life insurance separate accounts, variable annuity separate accounts and
qualified retirement plans to invest simultaneously in the Funds. Currently, we
do not foresee disadvantages to variable life insurance owners, variable annuity
owners or qualified retirement plans. The Funds monitor events for material
conflicts between owners and determine what action, if any, should be taken. In
addition, if we believe that a Fund's response to any of those events or
conflicts insufficiently protects Owners, we will take appropriate action.
18
<PAGE> 23
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.
The thirty-six Portfolios are summarized below:
KEMPER VARIABLE SERIES (FORMERLY INVESTORS FUND SERIES)
KEMPER MONEY MARKET PORTFOLIO seeks maximum current income to the extent
consistent with stability of principal. The Portfolio seeks to maintain a net
asset value of $1.00 per share.
KEMPER GOVERNMENT SECURITIES PORTFOLIO seeks high current return consistent with
preservation of capital.
KEMPER INVESTMENT GRADE BOND PORTFOLIO seeks high current income.
KEMPER GLOBAL INCOME PORTFOLIO seeks to provide high current income consistent
with prudent total return asset management.
KEMPER HORIZON 5 PORTFOLIO, designed for investors with approximately a 5 year
investment horizon, seeks income consistent with preservation of capital, with
growth of capital as a secondary objective.
KEMPER HIGH YIELD PORTFOLIO seeks to provide a high level of current income.
KEMPER HORIZON 10+ PORTFOLIO, designed for investors with approximately a 10+
year investment horizon, seeks a balance between growth of capital and income,
consistent with moderate risk.
KEMPER TOTAL RETURN PORTFOLIO seeks high total return, a combination of income
and capital appreciation.
KEMPER HORIZON 20+ PORTFOLIO, designed for investors with approximately a 20+
year investment horizon, seeks growth of capital, with income as a secondary
objective.
KEMPER INDEX 500 PORTFOLIO seeks to match, as closely as possible, before
expenses, the performance of the Standard & Poor's 500 Composite Stock Price
Index, which emphasizes stocks of large U.S. companies.*
- ---------------
* "Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500," and
"500" are trademarks of The McGraw-Hill Companies, Inc., and have been
licensed for use by Scudder Kemper Investments, Inc. The Kemper Index 500
Portfolio is not sponsored, endorsed, sold or promoted by Standard & Poor's,
and Standard & Poor's makes no representation regarding the advisability of
investing in the fund. Additional information may be found in the fund's
Statement of Additional Information.
19
<PAGE> 24
KEMPER VALUE+GROWTH PORTFOLIO seeks growth of capital. A secondary objective of
the Portfolio is the reduction of risk over a full market cycle compared to a
portfolio of only growth stocks or only value stocks.
KEMPER BLUE CHIP PORTFOLIO seeks growth of capital and of income.
KEMPER INTERNATIONAL PORTFOLIO seeks total return, a combination of capital
growth and income.
KEMPER CONTRARIAN VALUE PORTFOLIO seeks to achieve a high rate of total return.
KEMPER SMALL CAP VALUE PORTFOLIO seeks long-term capital appreciation.
KEMPER SMALL CAP GROWTH PORTFOLIO seeks maximum appreciation of investors'
capital.
KEMPER GROWTH PORTFOLIO seeks maximum appreciation of capital.
KEMPER AGGRESSIVE GROWTH PORTFOLIO seeks capital appreciation.
KEMPER TECHNOLOGY GROWTH PORTFOLIO seeks growth of capital.
KEMPER GLOBAL BLUE CHIP PORTFOLIO seeks long-term growth of capital.
KEMPER INTERNATIONAL GROWTH AND INCOME PORTFOLIO seeks long-term growth of
capital and current income.
KEMPER-DREMAN HIGH RETURN EQUITY PORTFOLIO seeks to achieve a high rate of total
return.
KEMPER-DREMAN FINANCIAL SERVICES PORTFOLIO seeks long-term capital appreciation.
KVS FOCUSED LARGE CAP GROWTH PORTFOLIO seeks growth through long-term capital
appreciation.
SCUDDER VARIABLE LIFE INVESTMENT FUND
SCUDDER VLIF GLOBAL DISCOVERY PORTFOLIO seeks above-average capital appreciation
over the long term by investing primarily in the equity securities of small
companies located throughout the world.
SCUDDER VLIF GROWTH AND INCOME PORTFOLIO seeks long-term growth of capital,
current income and growth of income from a portfolio consisting primarily of
common stocks and securities convertible into common stocks.
SCUDDER VLIF INTERNATIONAL PORTFOLIO seeks long-term growth of capital
principally from a diversified portfolio of foreign equity securities.
SCUDDER VLIF CAPITAL GROWTH PORTFOLIO seeks to maximize long-term capital growth
from a portfolio consisting primarily of equity securities.
JANUS ASPEN SERIES
JANUS ASPEN GROWTH PORTFOLIO seeks long-term growth of capital in a manner
consistent with the preservation of capital.
20
<PAGE> 25
JANUS ASPEN GROWTH AND INCOME PORTFOLIO seeks long-term capital growth and
current income.
WARBURG PINCUS TRUST
WARBURG PINCUS EMERGING MARKETS PORTFOLIO seeks long-term growth of capital by
investing in equity securities of emerging markets.
WARBURG PINCUS POST-VENTURE CAPITAL PORTFOLIO seeks long-term growth of capital
by investing primarily in equity securities of U.S. companies considered to be
in their post-venture-capital stage of development.
THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC.
The Fund's primary goal is to provide capital growth through investment in
common stocks of companies which not only meet traditional investment standards,
but also conduct their business in a manner that contributes to the enhancement
of the quality of life in America.
DREYFUS INVESTMENT PORTFOLIOS
DREYFUS MIDCAP STOCK seeks to provide investment results that are greater than
the total return performance of publicly traded common stocks of medium-size
domestic companies in the aggregate, as represented by the Standard & Poor's
MidCap 400(R) Index.
THE ALGER AMERICAN FUND
ALGER AMERICAN LEVERAGED ALLCAP PORTFOLIO seeks long-term capital appreciation.
ALGER AMERICAN BALANCED PORTFOLIO seeks current income and long-term capital
appreciation.
The Portfolios may not achieve their stated objective. More detailed
information, including a description of risks involved in investing in the
Portfolios is found in the Funds' prospectuses accompanying this Prospectus and
Statements of Additional Information, available from us upon request.
Scudder Kemper Investments, Inc. ("SKI") is the investment manager for the
twenty-four available Portfolios of Kemper Variable Series (formerly Investors
Fund Series) and the four available Portfolios of Scudder Variable Life
Investment Fund. Bankers Trust Company ("Bankers") is the sub-adviser for the
Kemper Index 500 Portfolio. Under the terms of the sub-advisory agreement with
SKI, Bankers will handle day-to-day investment and trading functions for the
Kemper Index 500 Portfolio. Scudder Investments (U.K.) Limited ("Scudder U.K."),
an affiliate of SKI, is the sub-adviser for the Kemper International Portfolio
and the Kemper Global Income Portfolio. Under the terms of the sub-advisory
agreement with SKI, Scudder U.K. renders investment advisory and management
services with regard to that portion of these Portfolios' assets as may be
allocated by SKI to Scudder U.K. from time to time for
21
<PAGE> 26
management, including services related to foreign securities, foreign currency
transactions and related investments. Dreman Value Management L.L.C. ("DVM")
serves as sub-adviser for the Kemper-Dreman High Return Equity and Kemper-Dreman
Financial Services Portfolios. Under the terms of the sub-advisory agreement
between SKI and DVM for each such Portfolio, DVM manages the day-to-day
investment and trading functions for each such Portfolio. Eagle Asset
Management, Inc. ("Eagle") is the sub-adviser for the KVS Focused Large Cap
Growth Portfolio. Under the terms of a sub-advisory agreement with SKI, Eagle
will handle day-to-day investment and trading functions for the KVS Focused
Large Cap Growth Portfolio under the guidance of SKI. Janus Capital Corporation
is the investment adviser for the two available Portfolios of the Janus Aspen
Series. Credit Suisse Asset Management, LLC (successor investment adviser to
Warburg Pincus Asset Management, Inc.) is the investment adviser for the two
available Portfolios of the Warburg Pincus Trust. The Dreyfus Corporation
("Dreyfus") is the investment adviser for The Dreyfus Socially Responsible
Growth Fund, Inc. and Dreyfus MidCap Stock. NCM Capital Management Group, Inc.
("NCM") serves as the sub-adviser for The Dreyfus Socially Responsible Growth
Fund, Inc. Fred Alger Management, Inc. ("Alger") serves as the investment
adviser for the Alger American Leveraged AllCap Portfolio and the Alger American
Balanced Portfolio. 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 VARIABLE SERIES (FORMERLY INVESTORS FUND SERIES)
For its services, SKI is paid a management fee based upon the average daily net
assets of each Portfolio, as follows: Kemper Money Market (.50 of 1%), Kemper
Government Securities (.55 of 1%), Kemper Investment Grade Bond (.60 of 1%),
Kemper Global Income (.75 of 1%), Kemper Horizon 5 (.60 of 1%), Kemper High
Yield (.60 of 1%), Kemper Horizon 10+ (.60 of 1%), Kemper Total Return (.55 of
1%), Kemper Horizon 20+ (.60 of 1%), Kemper Index 500 (.45% for the first $200
million, .42% for the next $550 million, .40% for the next $1.25 billion, .38%
for the next $3 billion and .35% for amounts over $5 billion), Kemper
Value+Growth (.75 of 1%), Kemper Blue Chip (.65 of 1%), Kemper International
(.75 of 1%), Kemper Contrarian Value (.75 of 1%), Kemper Small Cap Value (.75 of
1%), Kemper Small Cap Growth (.65 of 1%), Kemper Growth (.60 of 1%), Kemper
Global Blue Chip (1% for the first $250 million, .95% for the next $750 million
and .90% over $1 billion), Kemper International Growth and Income (1%),
Kemper-Dreman High Return Equity, Kemper-Dreman Financial Services, Kemper
Aggressive Growth and Kemper Technology Growth (.75% for the first $250 million,
.72% for the next $750 million, .70% for the next $1.5 billion, .68% for the
next $2.5 billion, .65% for the next $2.5 billion, .64% for the next $2.5
billion, .63% for the next
22
<PAGE> 27
$2.5 billion and .62% over $12.5 billion) and KVS Focused Large Cap (.95% for
the first $250 million, .925% for the next $250 million, .90% for the next $500
million, .875% for the next $1.5 billion and .85% over $2.5 billion). SKI pays
Bankers for its services as sub-adviser for the Kemper Index 500 Portfolio a
sub-advisory fee, calculated monthly as a percentage of the Portfolio's average
daily net assets, at the annual rate of .08% for the first $200 million, .05%
for the next $550 million and .025% over $750 million. The minimum annual fee is
set at $100,000; however, the minimum fee does not apply during the first year
of the Portfolio's operations. SKI pays Scudder U.K. for its services as
sub-adviser for the Kemper International Portfolio and the Kemper Global Income
Portfolio a sub-advisory fee, payable monthly, at an annual rate of .35 of 1%
and .30 of 1%, respectively, of the average daily net assets of such Portfolios.
SKI pays DVM for its services as sub-adviser for the Kemper-Dreman High Return
Equity and Kemper-Dreman Financial Services Portfolios a sub-advisory fee,
payable monthly, at the annual rate of .24% of the first $250 million of each
Portfolio's average daily net assets, .23% of the average daily net assets
between $250 million and $1 billion, .224% of average daily net assets between
$1 billion and $2.5 billion, .218% of average daily net assets between $2.5
billion and $5 billion, .208% of average daily net assets between $5 billion and
$7.5 billion, .205% of average daily net assets between $7.5 billion and $10
billion, .202% of average daily net assets between $10 billion and $12.5 billion
and .198% of each Portfolio's average daily net assets over $12 billion. SKI
pays Eagle for its services as sub-adviser for the KVS Focused Large Cap Growth
Portfolio a sub-advisory fee, calculated monthly as a percentage of the
Portfolio's average daily net assets, at the annual rate of .45% for the first
$50 million, 40% for the next $250 million and .30% over $300 million.
SCUDDER VARIABLE LIFE INVESTMENT FUND
For its advisory services to the Portfolios, SKI receives compensation monthly
at the following annual rate for each Portfolio:
<TABLE>
<CAPTION>
PERCENT OF THE AVERAGE
DAILY NET ASSET VALUES
PORTFOLIO OF EACH PORTFOLIO
--------- ----------------------
<S> <C>
Scudder VLIF Global Discovery....................... .975%
Scudder VLIF Growth and Income...................... .475%
Scudder VLIF International
First $500,000,000................................ .875%
Over $500,000,000................................. .725%
Scudder VLIF Capital Growth
First $500,000,000................................ .475%
Next $500,000,000................................. .450%
Over $1,000,000,000............................... .425%
</TABLE>
23
<PAGE> 28
================================================================================
JANUS ASPEN SERIES
Janus Capital Corporation receives a monthly advisory fee for the Janus Aspen
Growth Portfolio and Janus Aspen Growth and Income Portfolio based on the
following schedule (expressed as an annual rate):
<TABLE>
<CAPTION>
AVERAGE DAILY NET
ASSETS OF PORTFOLIO ANNUAL RATE
------------------- -----------
<S> <C>
First $300,000,000.......... .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.
WARBURG PINCUS TRUST
Credit Suisse Asset Management, LLC (successor investment adviser to Warburg
Pincus Asset Management, Inc.) receives a monthly advisory fee based upon the
average daily net assets of each Warburg Pincus Portfolio, as follows: Emerging
Markets 1.25% and Post-Venture Capital 1.25%.
THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC.
DREYFUS INVESTMENT PORTFOLIOS
Dreyfus receives a monthly advisory fee based upon the average daily net assets
of The Dreyfus Socially Responsible Growth Fund, Inc. and the Dreyfus MidCap
Stock Portfolio, as follows: .75% and .75%, respectively. Dreyfus pays NCM for
its services as sub-adviser for The Dreyfus Socially Responsible Growth Fund,
Inc. a sub-advisory fee, calculated monthly as a percentage of the Fund's
average daily net assets and payable monthly, at an annual rate of .10% for the
first $32 million, .15% for the next $118 million, .20% for the next $150
million and .25% over $300 million.
THE ALGER AMERICAN FUND
Alger receives a monthly advisory fee based upon the average daily net assets of
the Alger American Leveraged AllCap Portfolio and the Alger American Balanced
Portfolio, as follows: .85% and .75%, respectively.
CHANGE OF INVESTMENTS
We reserve the right to make additions to, deletions from, or substitutions for
the shares held by the Separate Account or that the Separate Account may
purchase. We may eliminate the shares of any of the Portfolios and to substitute
shares of another Portfolio or of another investment company, if the shares of a
Portfolio are no longer available for investment, or if in our judgment further
investment in any Portfolio becomes inappropriate in view of the purposes of the
Separate Account. We will not substitute any shares
24
<PAGE> 29
attributable to an Owner's interest in a Subaccount without prior notice and the
SEC's prior approval, if required. The Separate Account may purchase other
securities for other series or classes of policies, or may permit a conversion
between series or classes of policies on the basis of requests made by Owners.
We may establish additional subaccounts of the Separate Account, each of which
would invest in a new portfolio of the Funds, or in shares of another investment
company. New subaccounts may be established when, in our discretion, marketing
needs or investment conditions warrant. New subaccounts may be made available to
existing Owners as we determine. We may also eliminate or combine one or more
subaccounts, transfer assets, or substitute one subaccount for another
subaccount, if, in our discretion, marketing, tax, or investment conditions
warrant. We will notify all Owners of any such changes.
If we deem it 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 our other separate
accounts. To the extent permitted by law, we may transfer the assets of the
Separate Account to another separate account or to the General Account.
PERFORMANCE INFORMATION
The Separate Account may advertise several types of performance information for
the Subaccounts. All Subaccounts may advertise standardized "average annual
total return" and nonstandardized "total return." The Kemper High Yield
Subaccount, Kemper Government Securities Subaccount and Kemper Investment Grade
Bond Subaccount may also advertise "yield". The Kemper Money Market Subaccount
may advertise "yield" and "effective yield." Each of these figures is based upon
historical earnings and is not necessarily representative of a Subaccount's
future performance.
Standardized average annual total return and nonstandardized total return
calculations measure a Subaccount's net income plus the effect of any realized
or unrealized appreciation or depreciation of the Subaccount's underlying
investments. Standardized average annual total return and nonstandardized total
return will be quoted for periods of at least one year, three years, five years
and ten years, if applicable. In addition, we will show standardized average
annual total return for the life of the Subaccount, meaning the time the
underlying Portfolio has been held in the Subaccount. We will show
nonstandardized total return for the life of the Portfolio, meaning the time the
underlying Portfolio has been in existence. Standardized average annual total
return will be current to the most recent calendar quarter. Nonstandardized
total return will be current to the most recent calendar month. Standardized
average annual total return figures are annualized and, therefore, represent the
average annual percentage change in the value of a Subaccount investment over
the applicable period. Nonstandardized total return may include annualized and
nonannualized (cumulative) figures. Nonannualized figures represent the actual
percentage change over the applicable period.
25
<PAGE> 30
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 Kemper 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, compounded on a semi-annual basis. The effective yield for the
Kemper Money Market Subaccount is calculated similarly, but includes the effect
of assumed compounding calculated under rules prescribed by the SEC. The Kemper
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 fluctuate. Subaccount units are
redeemable by an Owner at Accumulation Unit value, which may be more or less
than original cost. The standardized performance figures reflect the deduction
of all expenses and fees, including a prorated portion of the Records
Maintenance Charge. Redemptions within the first seven years may be subject to a
Withdrawal Charge that ranges from 7% the first year to 0% after seven years.
Yield, effective yield and nonstandardized total return figures do not include
the effect of any Withdrawal Charge that may be imposed upon the redemption of
units. In addition, nonstandardized total return figures do not include the
effect of the Records Maintenance Charge. Thus yield, effective yield and
nonstandardized total return figures may be higher than if such charges were
deducted. Standardized average annual total return figures include the effect of
the applicable Withdrawal Charge that may be imposed at the end of the period.
The Subaccounts may be compared to relevant indices and performance data from
independent sources. 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, NATIONAL UNDERWRITER, SELLING LIFE INSURANCE,
BROKER WORLD, REGISTERED REPRESENTATIVE, INVESTMENT ADVISOR and VARDS.
Additional information concerning a Subaccount's performance and these indices
and independent sources is provided in the Statement of Additional Information.
FIXED ACCOUNT OPTION
Amounts allocated or transferred to the Fixed Account are part of our General
Account, supporting insurance and annuity obligations. Interests in the Fixed
Account are not registered under the Securities Act of 1933 ("1933 Act"), and
the Fixed Account is not registered as an investment company under the
Investment Company Act of 1940 ("1940 Act"). Accordingly, neither the Fixed
Account nor any interests therein generally are subject to the provisions of the
1933 or 1940 Acts. We have been advised that the staff of the SEC has not
reviewed the disclosures in this Prospectus relating to the Fixed Account.
Disclosures regarding the Fixed Account, however, may be subject to the
26
<PAGE> 31
general provisions of the federal securities laws relating to the accuracy and
completeness of statements made in prospectuses.
Under the Fixed Account Option, we pay a fixed interest rate for stated periods.
This Prospectus describes only the aspects of the Contract involving the
Separate Account, unless we refer to fixed accumulation and annuity elements.
We guarantee that payments allocated to the Fixed Account earn a minimum fixed
interest rate of 3%. At our discretion, we may credit interest in excess of 3%.
We reserve the right to change the rate of excess interest credited. We also
reserve the right to declare different rates of excess interest depending on
when amounts are allocated or transferred to the Fixed Account. As a result,
amounts at any designated time may be credited with a different rate of excess
interest than the rate previously credited to such amounts and to amounts
allocated or transferred at any other designated time.
THE CONTRACTS
A. GENERAL INFORMATION.
The minimum initial Purchase Payment is $1,000, and the minimum subsequent
payment is $500. The minimum subsequent payment is $100 if an Owner authorizes
us to draw on an account via check or electronic debit. Cumulative Purchase
Payments in excess of $1,000,000 require our prior approval. The Internal
Revenue Code may also limit the maximum annual amount of Purchase Payments. An
allocation to a Subaccount, the Fixed Account or a Guarantee Period must be at
least $500.
We 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.
An Owner may examine a Contract and return it for a refund during the "free
look" period. The length of the free look period depends upon the state in which
the Contract is issued. However, it will be at least 10 days from the date the
Owner receives the Contract. The amount of the refund depends on the state in
which the Contract is issued. Generally, it will be an amount at least equal to
the Separate Account Contract Value plus amounts allocated to the General
Account and the Guarantee Periods on the date we receive the returned Contract,
without any deduction for Withdrawal Charges or Records Maintenance Charges.
Some states require the return of the Purchase Payment. In addition, a special
free look period applies in some circumstances to Contracts issued as Individual
Retirement Annuities, Simplified Employee Pensions--IRAs or as Roth Individual
Retirement Annuities.
During the Accumulation Period, the Owner may assign the Contract or change a
Beneficiary at any time by signing our form. No assignment or Beneficiary change
is binding on us until we receive it. We assume no responsibility for the
validity of the assignment or Beneficiary change. An assignment will subject the
Owner to immediate tax liability and may subject the Owner to a 10% tax penalty.
(See "Tax Treatment of Withdrawals, Loans and Assignments.")
27
<PAGE> 32
Amounts payable during the Annuity Period may not be assigned or encumbered. In
addition, to the extent permitted by law, annuity payments are not subject to
levy, attachment or other judicial process for the payment of the payee's debts
or obligations.
The Owner designates the Beneficiary. If the Annuitant or Owner dies, and no
designated Beneficiary or contingent beneficiary is alive at that time, we will
pay the Annuitant's or Owner's estate.
Under a Qualified Plan Contract, the provisions of the applicable plan may
prohibit a change of Beneficiary. Generally, an interest in a Qualified Plan
Contract may not be assigned.
B. THE ACCUMULATION PERIOD.
1. APPLICATION OF PURCHASE PAYMENTS.
The Owner selects the allocation of Purchase Payments to the Subaccount(s),
Guarantee Periods, or Fixed Account. The amount of each Purchase Payment
allocated to a Subaccount is based on the value of an Accumulation Unit, as
computed after we receive the Purchase Payment. Generally, we determine the
value of an Accumulation Unit by 3:00 p.m. Central time on each day that the New
York Stock Exchange is open for trading. Purchase Payments allocated to a
Guarantee Period or to the Fixed Account begin earning interest one day after we
receive them. However, with respect to initial Purchase Payments, the amount is
credited only after we determine to issue the Contract, but no later than the
second day after we receive the Purchase Payment. After the initial purchase, we
determine the number of Accumulation Units credited by dividing the Purchase
Payment allocated to a Subaccount by the Subaccount's Accumulation Unit value,
as computed after we receive the Purchase Payment.
The number of Accumulation Units will not change due to investment experience.
Accumulation Unit value varies to reflect the investment experience of the
Subaccount and the assessment of charges against the Subaccount, other than the
Records Maintenance Charge and Guaranteed Retirement Income Benefit Charge. The
number of Accumulation Units is reduced when the Records Maintenance Charge and
Guaranteed Retirement Income Benefit Charge are assessed.
If we are not provided with information sufficient to establish a Contract or to
properly credit the initial Purchase Payment, we will promptly request the
necessary information. If the requested information is not furnished within five
(5) business days after we receive the initial Purchase Payment, or if we
determine that we cannot issue the Contract within the five (5) day period, we
will return the initial Purchase Payment to the Owner, unless the Owner consents
to our retaining the Purchase Payment until the application is completed.
We will issue a Contract without a signed application if:
- a dealer provides us with application information, electronically or in
writing
28
<PAGE> 33
- we receive the initial Purchase Payment and
- the Owner confirms in writing, after the Contract is delivered, that all
information in the Contract is correct.
2. ACCUMULATION UNIT VALUE.
Each Subaccount has an Accumulation Unit value. When Purchase Payments or other
amounts are allocated to a Subaccount, the number of units purchased is based on
the Subaccount's Accumulation Unit value at the end of the current Valuation
Period. 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 Valuation Period times the Accumulation
Unit value for the preceding Valuation Period. Each Valuation Period has a
single Accumulation Unit value which applies to each day in the Valuation
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 any Valuation Period is
determined by the following formula:
(1 / 2) - 3, where:
(1) is the net result of:
- the net asset value per share of the investment held in the
Subaccount determined at the end of the current Valuation Period;
plus
- 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
- a charge or credit for any taxes reserved for the current Valuation
Period which we determine have resulted from the investment
operations of the Subaccount;
(2) is the net asset value per share of the investment held in the
Subaccount determined at the end of the preceding Valuation Period;
(3) is the factor representing the mortality and expense risk and
administration charges.
3. GUARANTEE PERIODS OF THE MVA OPTION.
An Owner may allocate Purchase Payments to one or more Guarantee Periods with
durations of one to ten years. Each Guarantee Period has a Guaranteed Interest
Rate which will not change during the Guarantee Period. Interest is credited
daily at the effective annual rate.
29
<PAGE> 34
The following example illustrates how we credit Guarantee Period interest.
EXAMPLE OF GUARANTEED INTEREST RATE ACCUMULATION
<TABLE>
<S> <C>
Purchase Payment: $40,000
Guarantee 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 THAT NO WITHDRAWALS ARE MADE DURING THE FIVE-YEAR
PERIOD. IF THE OWNER MAKES WITHDRAWALS OR TRANSFERS DURING THIS PERIOD, MARKET
VALUE ADJUSTMENTS AND WITHDRAWAL CHARGES APPLY.
THE HYPOTHETICAL INTEREST RATE IS NOT INTENDED TO PREDICT FUTURE GUARANTEED
INTEREST RATES. ACTUAL GUARANTEED INTEREST RATES FOR ANY GUARANTEE PERIOD MAY BE
MORE OR LESS THAN THOSE SHOWN.
At the end of any Guarantee Period, we send written notice of the beginning of a
new Guarantee Period. A new Guarantee Period for the same duration starts unless
the Owner elects another Guarantee Period within thirty days after the end of
the terminating Guarantee Period. The Owner may choose a different Guarantee
Period by preauthorized telephone instructions or by giving us written notice.
An Owner should not select a new Guarantee Period extending beyond the Annuity
Date. Otherwise, the guarantee period amount available for annuitization is
subject to Market Value Adjustments and may be subject to Withdrawal Charges.
(See "Market Value Adjustment" and "Withdrawal Charge" below.)
The amount reinvested at the beginning of a new Guarantee Period is the
Guarantee Period Value for the Guarantee Period just ended. The Guaranteed
Interest Rate in effect when the new Guarantee Period begins applies for the
duration of the new Guarantee Period.
An Owner may call us at 1-800-621-5001 or write Kemper Investors Life Insurance
Company, Customer Service, at 1 Kemper Drive, Long Grove, Illinois 60049 for the
new Guaranteed Interest Rates.
4. ESTABLISHMENT OF GUARANTEED INTEREST RATES.
We declare the Guaranteed Interest Rates for each of the ten durations of
Guarantee Periods from time to time as market conditions dictate. Once
30
<PAGE> 35
established, rates are guaranteed for the respective Guarantee Periods. We
advise an Owner of the Guaranteed Interest Rate for a chosen Guarantee Period
when we receive a Purchase Payment, when a transfer is effectuated or when a
Guarantee Period renews. Withdrawals of Accumulated Guarantee Period Value are
subject to Withdrawal Charges and Records Maintenance Charges and may be subject
to a Market Value Adjustment. (See "Market Value Adjustment" below.)
We have no specific formula for establishing the Guaranteed Interest Rates. The
determination may be influenced by, but not necessarily correspond to, the
current interest rate environment. (See "The MVA Option".) We may also consider,
among other factors, the duration of a Guarantee Period, regulatory and tax
requirements, sales commissions and administrative expenses we bear, and general
economic trends.
WE MAKE THE FINAL DETERMINATION OF THE GUARANTEED INTEREST RATES TO BE DECLARED.
WE CANNOT PREDICT OR GUARANTEE THE LEVEL OF FUTURE GUARANTEED INTEREST RATES.
5. CONTRACT VALUE.
On any Valuation Date, Contract Value equals the total of:
- the number of Accumulation Units credited to each Subaccount times
- the value of a corresponding Accumulation Unit for each Subaccount plus
- the Owner's Accumulated Guarantee Period Value in the MVA Option plus
- the Owner's interest in the Fixed Account.
6. TRANSFER DURING ACCUMULATION PERIOD.
During the Accumulation Period, an Owner may transfer the Contract Value among
the Subaccounts, the Guarantee Periods and the Fixed Account subject to the
following provisions:
- the amount transferred must be at least $100 unless the total Contract
Value attributable to a Subaccount, Guarantee Period or Fixed Account is
transferred;
- the Contract Value remaining in a Subaccount, Guarantee Period or Fixed
Account must be at least $500 unless the total value is transferred;
- transfers may not be made from any Subaccount to the Fixed Account over
the six months following any transfer from the Fixed Account into one or
more Subaccounts;
- transfers from the Fixed Account may be made one time during the Contract
Year during the thirty days following an anniversary of a Contract Year.
We may charge a $25 fee for each transfer in excess of 12 transfers per calendar
year. However, transfers made pursuant to the Asset Allocation and Dollar Cost
Averaging programs do not count toward these 12 transfers. In addition,
transfers of Guarantee Period Value are subject to Market Value Adjustment
31
<PAGE> 36
unless the transfer is made within thirty days of the end of the Guarantee
Period. Because a transfer before the end of a Guarantee Period is subject to a
Market Value Adjustment, the amount transferred from the Guarantee Period may be
more or less than the requested dollar amount.
We make transfers pursuant to written or telephone instructions specifying in
detail the requested changes. Transfers involving a Subaccount are based upon
the Accumulation Unit values, as calculated after we receive transfer
instructions. We may suspend, modify or terminate the transfer provision. We
disclaim all liability if we follow in good faith instructions given in
accordance with our procedures, including requests for personal identifying
information, that are designed to limit unauthorized use of the privilege.
Therefore, an Owner bears the risk of loss in the event of a fraudulent
telephone transfer.
If an Owner authorizes a third party to transact transfers on the Owner's
behalf, we will reallocate the Contract Value pursuant to the authorized asset
allocation program. However, we do not offer or participate in any asset
allocation program and we take no responsibility for any third party asset
allocation program. We may suspend or cancel acceptance of a third party's
instructions at any time and may restrict the investment options available for
transfer under third party authorizations.
An Owner may elect to have transfers made automatically among the Subaccounts on
an annual, semiannual or quarterly basis so that Contract Value is reallocated
to match the percentage allocations in the Owner's predefined allocation
elections. Transfers under this program are not be subject to the $100 minimum
transfer limitation. An election to participate in the automatic asset
reallocation program must be in writing on our form and returned to us.
7. WITHDRAWAL DURING ACCUMULATION PERIOD.
The Owner may redeem some or all of the Contract Value minus previous
withdrawals, plus or minus any applicable Market Value Adjustment and minus any
Withdrawal Charge. Withdrawals will have tax consequences. (See "Federal Tax
Matters.") A withdrawal of the entire Contract Value is called a surrender.
Partial withdrawals and surrenders are subject to the following:
In any Contract Year, an Owner may withdraw or surrender the Contract, without
Withdrawal Charge, up to the greater of:
- the excess of Contract Value over total Purchase Payments subject to
Withdrawal Charges, minus prior withdrawals that were previously assessed
a Withdrawal Charge, and
- 10% of the Contract Value.
See "Contract Charges and Expenses -- Withdrawal Charge" for a discussion of
charges applicable to partial withdrawals and surrenders.
If Contract Value is allocated to more than one investment option, an Owner must
specify the source of the partial withdrawal. If an Owner does not specify
32
<PAGE> 37
the source, we redeem Accumulation Units on a pro rata basis from all investment
options in which the Owner has an interest. Accumulation Units attributable to
the earliest Contribution Years are redeemed first.
Partial withdrawals are subject to the following:
- Partial withdrawals are not permitted from the Fixed Account in the first
Contract Year.
- The minimum withdrawal is $100 (before any Market Value Adjustment), or
the Owner's entire interest in the investment option(s) from which
withdrawal is requested.
- The Owner must leave at least $500 in each investment option from which
the withdrawal is requested, unless the total value is withdrawn.
Election to withdraw shall be made in writing to us at Suite 102, 1290 Silas
Deane Highway, Wethersfield, CT 06109 and should be accompanied by the Contract
if surrender is requested. Withdrawal requests are processed only on days when
the New York Stock Exchange is open. The Withdrawal Value attributable to the
Subaccounts is determined on the basis of the Accumulation Unit values, as
calculated after we receive the request. The Withdrawal Value attributable to
the Subaccounts is paid within seven (7) days after we receive the request.
However, we may suspend withdrawals or delay payment:
- during any period when the New York Stock Exchange is closed
- when trading in a Portfolio is restricted or the SEC determines that an
emergency exists
- as the SEC by order may permit.
For withdrawal requests from the MVA Option and the Fixed Account, we may defer
any payment for up to six months, as permitted by state law. During the deferral
period, we will continue to credit interest at the current Guaranteed Interest
Rate for the same Guarantee Period.
Withdrawals are permitted from Contracts issued in connection with Section
403(b) Qualified Plans only under limited circumstances. (See "Federal Income
Taxes.")
A participant in the Texas Optional Retirement Program ("ORP") must obtain a
certificate of termination from the participant's employer before a Contract can
be redeemed. The Attorney General of Texas has ruled that participants in the
ORP may redeem their interest in a 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 similar
requirements for optional retirement programs, we will follow similar
procedures.
8. MARKET VALUE ADJUSTMENT.
Any withdrawal, transfer or annuitization of Guarantee Period Values, unless
effected during the "free look" period or within 30 days after a Guarantee
33
<PAGE> 38
Period ends, may be adjusted up or down by a Market Value Adjustment. The Market
Value Adjustment applies before deduction of a Withdrawal Charge.
The Market Value Adjustment reflects the relationship between (a) the currently
established interest rate ("Current Interest Rate") for a Guarantee Period equal
to the remaining length of the Guarantee Period, rounded to the next higher
number of complete years, and (b) the Guaranteed Interest Rate applicable to the
amount being withdrawn. Generally, if the Guaranteed Interest Rate is the same
or lower than the applicable Current Interest Rate, the Market Value Adjustment
reduces Market Adjusted Value and results in a lower payment. Thus, if interest
rates increase, the withdrawal could be less than the original Purchase Payment
or the original amount allocated to a Guarantee Period. Conversely, if the
Guaranteed Interest Rate is higher than the applicable Current Interest Rate,
the Market Value Adjustment increases Market Adjusted Value and results in a
higher payment.
The Market Value Adjustment (MVA) uses this formula:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(1 + I)
MVA = MPV X [ [ ------- ] (t/365) -1 ]
(1 + J)
</TABLE>
Where I is the Guaranteed Interest Rate being credited to the Guarantee
Period Value (MPV) subject to the Market Value Adjustment,
J is the Current Interest Rate we declare, as of the effective date of the
application of the Market Value Adjustment, for current allocations to a
Guarantee Period the length of which is equal to the balance of the
Guarantee Period for the Guarantee Period Value subject to the Market Value
Adjustment, rounded to the next higher number of complete years, and
t is the number of days remaining in the Guarantee Period.
For an illustration showing an upward and a downward adjustment, see Appendix A.
9. GUARANTEED DEATH BENEFIT.
We pay a death benefit to the Beneficiary if any of the following occurs during
the Accumulation Period:
- the Owner, or a joint owner, dies
- the Annuitant dies with no living contingent annuitant
- the contingent annuitant dies after the Annuitant
The amount of the death benefit depends on the age of the deceased Owner or
Annuitant when the death benefit becomes payable. If the deceased Owner or
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<PAGE> 39
Annuitant dies before age 91, we will pay the Beneficiary the greatest of the
following:
- Contract Value
- Purchase Payments minus previous withdrawals, accumulated at 5.00%
interest per year to the earlier of the deceased's age 80 or the date of
death, plus Purchase Payments minus all withdrawals from age 80 to the
date of death; and
- the greatest anniversary value before death
The greatest anniversary value equals:
- the Contract Values on each Contract anniversary prior to the deceased's
age 81, plus the dollar amount of any Purchase Payments made since that
anniversary, minus
- withdrawals since that anniversary.
We pay Contract Value to the Beneficiary if the Owner or Annuitant dies after
age 91. 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.
For Non-Qualified Plan Contracts, if the Beneficiary is the Owner's surviving
spouse, the surviving spouse may elect to be treated as the successor Owner of
the Contract with no requirement to begin Death Benefit distribution.
10. GUARANTEED RETIREMENT INCOME BENEFIT.
Guaranteed Retirement Income Benefit (GRIB) is an optional Contract benefit.
GRIB provides a minimum fixed annuity guaranteed lifetime income to the
Annuitant as described below. The Owner must elect GRIB on the initial Contract
application. GRIB may be discontinued after the seventh Contract anniversary by
written notice to us. Once discontinued, GRIB may not be elected again.
GRIB may be exercised only within thirty days after the seventh or later
Contract anniversary. In addition, GRIB must be exercised between the
Annuitant's 60th and 91st birthdays. Therefore, GRIB may not be appropriate for
Annuitants age 80 and older. If the Annuitant is younger than age 44 on the Date
of Issue, GRIB may be exercised after the Contract's 15th Anniversary.
GRIB payments are based on the greater of:
- the income provided by applying the GRIB base to the guaranteed annuity
factors; and
- the income provided by applying Contract Value to the current annuity
factors.
The GRIB base is the greatest of:
- Contract Value
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- Purchase Payments minus previous withdrawals, accumulated at 5.00%
interest per year to the earlier of the Annuitant's age 80 or the GRIB
exercise date plus Purchase Payments minus all withdrawals from age 80 to
the GRIB exercise date; and
- the greatest anniversary value before the exercise date
The greatest anniversary value equals:
- the highest of the Contract Values on each Contract anniversary prior to
the Annuitant's age 81, plus
- the dollar amount of any Purchase Payments made since that anniversary,
minus
- withdrawals since that anniversary.
The guaranteed annuity factors are based on the 1983a table projected using
projection scale G, with interest at 2.5% (the "Annuity 2000" table). However,
if GRIB is exercised on or after the 10th Contract anniversary, interest at
3.50% is assumed.
Because GRIB is based on conservative actuarial factors, the income guaranteed
may often be less than the income provided by applying Contract Value to current
annuity factors.
GRIB is paid for the life of a single Annuitant or the lifetimes of two
Annuitants. If paid for the life of a single Annuitant, GRIB is paid in the
amount determined above. If paid for the lifetimes of two Annuitants, GRIB is
paid in the amount determined above, but the age of the older Annuitant is used
to determine the GRIB base.
If the Owner elects GRIB payable for the life of a single Annuitant, the Owner
may elect a period certain of 5, 10, 15, or 20 years. If the Annuitant dies
before GRIB has been paid for the period elected, the remaining GRIB payments
are paid as they fall due to the Beneficiary, if the Beneficiary is a natural
person. If the Beneficiary is not a natural person, the remaining payments may
be commuted at a minimum 2.50% interest rate and paid in a lump sum.
If the Owner elects GRIB payable for the lifetimes of two Annuitants, the period
certain is 25 years. The full GRIB is payable as long as at least one of the two
Annuitants is alive, but for no less than 25 years. If both Annuitants die
before GRIB has been paid for 25 years, the remaining GRIB payments are paid as
they fall due to the Beneficiary, if the Beneficiary is a natural person. If the
Beneficiary is not a natural person, the remaining payments may be commuted at a
minimum 2.50% interest rate and paid in a lump sum.
GRIB payments are also available on a quarterly, semi-annual or annual basis. We
may make other annuity options available.
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<PAGE> 41
CONTRACT CHARGES AND EXPENSES
We deduct the following charges and expenses:
- mortality and expense risk
- administrative expenses
- Records Maintenance Charge
- Withdrawal Charge
- Guaranteed Retirement Income Benefit charge, if elected
Subject to certain expense limitations, investment management fees and other
Fund expenses are indirectly borne by the Owner.
A. CHARGES AGAINST THE SEPARATE ACCOUNT.
1. MORTALITY AND EXPENSE RISK CHARGE.
We assess each Subaccount a daily asset charge for mortality and expense risks
at a rate of 1.25% per annum. 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 us.
The mortality risk we assume arises from two contractual obligations. First, if
the Owner or Annuitant dies before age 91 and before the Annuity Date, we may,
in some cases, pay more than Contract Value. (See "Guaranteed Death Benefit",
page 29) Second, when Annuity Options involving life contingencies are selected,
we assume the risk that Annuitants will live beyond actuarial life expectancies.
We also assume an expense risk. Actual expenses of administering the Contracts
may exceed the amounts we recover from the Records Maintenance Charge or the
administrative cost portion of the daily asset charge.
2. ADMINISTRATIVE COSTS.
We assess each Subaccount a daily asset charge for administrative costs at a
rate of .15% per annum. This charge reimburses us for expenses incurred for
administering the Contracts. These expenses include Owner inquiries, changes in
allocations, Owner reports, Contract maintenance costs, and data processing
costs. The administrative charge covers the average anticipated administrative
expenses incurred while the Contracts are in force. There is not necessarily a
direct relationship between the amount of the charge and the administrative
costs of a particular Contract.
3. RECORDS MAINTENANCE CHARGE.
We deduct an annual Records Maintenance Charge of $30 during the Accumulation
Period. The charge is assessed:
- at the end of each Contract Year,
- on Contract surrender and
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<PAGE> 42
- upon annuitization.
However, We do not deduct the Records Maintenance Charge for Contracts with
Contract Value of at least $50,000 on the assessment date.
This charge reimburses us for the expenses of establishing and maintaining
Contract records. The Records Maintenance Charge reduces the net assets of each
Subaccount, Guarantee Period and the Fixed Account.
The Records Maintenance Charge is assessed equally among all investment options
in which the Owner has an interest.
4. WITHDRAWAL CHARGE.
We do not deduct a sales charge from any Purchase Payment. However, a Withdrawal
Charge covers Contract sales expenses, including commissions and other promotion
and acquisition expenses.
Each Contract Year, an Owner may withdraw or surrender the Contract, without
Withdrawal Charge, up to the greater of:
- the excess of Contract Value over total Purchase Payments subject to
Withdrawal Charges, minus prior withdrawals that were previously assessed
a Withdrawal Charge, and
- 10% of the Contract Value.
If the Owner withdraws a larger amount, the excess Purchase Payments withdrawn
are subject to a Withdrawal Charge. The Withdrawal Charge applies in the first
seven Contribution Years following each Purchase Payment as follows:
<TABLE>
<CAPTION>
CONTRIBUTION WITHDRAWAL
YEAR CHARGE
------------ ----------
<S> <C>
First.............................. 7%
Second............................ 6%
Third............................. 5%
Fourth............................ 5%
Fifth............................. 4%
Sixth............................. 3%
Seventh........................... 2%
Eighth and following.............. 0%
</TABLE>
Purchase Payments are deemed surrendered in the order in which they were
received.
When a withdrawal is requested, the Owner receives a check in the amount
requested. If a Withdrawal Charge applies, Contract Value is reduced by the
Withdrawal Charge, plus the dollar amount sent to the Owner.
Because Contribution Years are based on the date each Purchase Payment is made,
Owners may be subject to a Withdrawal Charge, even though the Contract may have
been issued many years earlier. (For additional details, see "Withdrawal During
Accumulation Period.")
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<PAGE> 43
Subject to certain exceptions and state approvals, withdrawal charges are not
assessed on withdrawals:
- after an Owner has been confined in a hospital or skilled health care
facility for at least thirty days and the Owner remains confined at the
time of the request;
- within thirty days following an Owner's discharge from a hospital or
skilled health care facility after a confinement of at least thirty days;
or
- if the Owner or Annuitant becomes disabled after the Contract is issued
and before age 65.
Restrictions and provisions related to the nursing care or hospitalization
disability waivers are described in Contract endorsements.
The Withdrawal Charge compensates us for Contract distribution expense.
Currently, we anticipate Withdrawal Charges will not fully cover distribution
expenses. Unrecovered distribution expenses may be recovered from our general
assets. Those assets may include proceeds from the mortality and expense risk
charge.
The Withdrawal Charge also applies at annuitization to amounts attributable to
Purchase Payments in their seventh Contribution Year or earlier. No Withdrawal
Charge applies upon annuitization if the Owner selects Annuity Options 2, 3 or 4
or if payments under Annuity Option 1 are scheduled to continue for at least
five years. See "The Annuity Period--Annuity Options" for a discussion of the
Annuity Options available.
We may reduce or eliminate the Withdrawal Charge if we anticipate that we will
incur lower sales expenses or perform fewer services because of economies due to
the size of a group, the average contribution per participant, or the use of
mass enrollment procedures. No Withdrawal Charge applies to Contracts sold to
officers, directors and employees of KILICO and Kemper Variable Series (formerly
Investors Fund Series) ("KVS"), KVS investment advisers and principal
underwriter or certain affiliated companies, or to any trust, pension,
profit-sharing or other benefit plan for such persons.
5. GUARANTEED RETIREMENT INCOME BENEFIT CHARGE.
The annual charge for GRIB is 0.25% of Contract Value. We deduct a pro rata
portion of the charge on each Contract Quarter anniversary. The quarterly charge
is deducted pro rata from the investment options in which the Owner has an
interest. We no longer charge for GRIB after the Annuitant's 91st birthday.
6. INVESTMENT MANAGEMENT FEES AND OTHER EXPENSES.
Each Portfolio's net asset value reflects the deduction of investment management
fees and certain general operating expenses. Subject to limitations, Owners
indirectly bear these fees and expenses. Investment management fees appear on
page 7. Further detail is provided in the attached prospectuses for the
Portfolios and the Funds' Statements of Additional Information.
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7. STATE PREMIUM TAXES.
Certain state and local governments impose a premium tax ranging from 0% to 3.5%
of Purchase Payments. If we pay state premium taxes, we may charge the amount
paid against Contract Value upon annuitization. See "Appendix--State Premium Tax
Chart" in the Statement of Additional Information.
8. EXCEPTIONS.
We may decrease the mortality and expense risk charge, the administration
charge, and the Records Maintenance Charge without notice. However, we guarantee
that they will not increase. We bear the risk that such charges will not cover
our costs. On the other hand, should such charges exceed our costs, we will not
refund any charges. Any profit is available for corporate purposes including,
among other things, payment of distribution expenses.
We may also offer reduced fees and charges, including but not limited to,
Records Maintenance Charge and mortality and expense risk and administrative
charges, for certain sales that may result in cost savings. We may also reduce
or waive fees and charges and/or credit additional amounts on Contracts issued
to:
- employees of ZFS
- employees and registered representatives (and their families) of broker-
dealers (or their affiliated financial institutions) that have entered
into selling group agreements with IBS.
Reductions in these fees and charges will not unfairly discriminate against any
Owner.
THE ANNUITY PERIOD
In addition to GRIB, Contracts may be annuitized under one of several Annuity
Options. Annuity payments begin on the Annuity Date and under the selected
Annuity Option. The Annuity Date must be at least one year after the Date of
Issue. Subject to state variation, the Annuity Date may not be deferred beyond
the later of the Annuitant's 91st birthday (100th birthday if the Contract is
part of a Charitable Remainder Trust) or ten (10) years after the Date of Issue.
However, annuitization is delayed beyond the Annuity Date if we are making
systematic withdrawals based on the Owner's life expectancy. In this case,
annuitization begins when life expectancy withdrawals are stopped.
1. ANNUITY PAYMENTS.
Annuity payments are based on:
- the annuity table specified in the Contract,
- the selected Annuity Option, and
- the investment performance of the selected Subaccount(s) (if variable
annuitization is elected).
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<PAGE> 45
Under variable annuitization, the Annuitant receives the value of a fixed number
of Annuity Units each month. An Annuity Unit's value reflects the investment
performance of the Subaccount(s) selected. The amount of each annuity payment
varies accordingly. Annuity payments may be subject to a Withdrawal Charge. (For
additional details, see "Withdrawal Charge.")
2. ANNUITY OPTIONS.
The Owner may elect one of the Contract's Annuity Options. The Owner may decide
at any time (subject to the provisions of any applicable retirement plan and
state variations) to begin annuity payments before the Annuitant's 91st birthday
(100th birthday if the Contract is part of a Charitable Remainder Trust) or
within ten (10) years after the Date of Issue, whichever is later. The Owner may
change the Annuity Option before the Annuity Date. If no other Annuity Option is
elected, monthly annuity payments are made in accordance with Option 3 below
with a ten (10) year period certain. Generally, annuity payments are made in
monthly installments. However, we may make a lump sum payment if the net
proceeds available to apply under an Annuity Option are less than $2,000. In
addition, if the first monthly payment is less than $25, we may change the
frequency of payments to quarterly, semiannual or annual intervals so that the
initial payment is at least $25.
The amount of periodic annuity payments may depend upon:
- the Annuity Option selected;
- the age and sex of the payee; and
- the investment experience of the selected Subaccount(s).
For example:
- if Option 1, income for a specified period, is selected, shorter
periods result in fewer payments with higher values.
- if Option 2, life income, is selected, it is likely that each payment
will be smaller than would result if income for a short period were
specified.
- if Option 3, life income with installments guaranteed, is selected,
each payment will probably be smaller than would result if the life
income option were selected.
- if Option 4, the joint and survivor annuity, is selected, each payment
is smaller than those measured by an individual life income option.
The age of the payee also influences the amount of periodic annuity payments
because an older payee is expected to have a shorter life span, resulting in
larger payments. The sex of the payee influences the amount of periodic payments
because females live longer than males, resulting in smaller payments. Finally,
if the Owner participates in a Subaccount with higher investment performance, it
is likely the Owner will receive a higher periodic payment.
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<PAGE> 46
If the Owner dies before the Annuity Date, available Annuity Options are
limited. Unless the Owner has imposed restrictions, the Annuity Options
available are:
- Option 2 or
- 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, unless a later date is prescribed
by federal regulation.
OPTION 1--INCOME FOR SPECIFIED PERIOD.
Option 1 provides an annuity payable monthly for a selected number of years
ranging from five to thirty. Upon the payee's death, if the Beneficiary is an
individual, we automatically continue payments to the Beneficiary for the
remainder of the period specified. If the Beneficiary is not an individual
(e.g., an estate or trust), we pay the discounted value of the remaining
payments in the specified period. Although there is no life contingency risk
associated with Option 1, we continue to deduct the daily asset charges for
mortality and expense risks and administrative costs.
Payees may elect to cancel all or part of the remaining payments due under
Option 1. We will then pay the discounted value of the remaining payments.
OPTION 2--LIFE INCOME.
Option 2 provides for an annuity over the lifetime of the payee. If Option 2 is
elected, annuity payments terminate automatically and immediately on the payee's
death 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.
Option 3 provides an annuity payable monthly during the payee's lifetime.
However, Option 3 also provides for the automatic continuation of payments for
the remainder of the specified period if the Beneficiary is an individual and
payments have been made for less than the specified period. The period specified
may be five, ten, fifteen or twenty years. If the Beneficiary is not an
individual, we pay the discounted value of the remaining payments in the
specified period.
OPTION 4--JOINT AND SURVIVOR ANNUITY.
Option 4 provides an annuity payable monthly while both payees are living. Upon
either payee's death, the monthly income payable continues over the life of the
surviving payee at a percentage specified when Option 4 is elected. Annuity
payments terminate automatically and immediately upon the surviving payee's
death without regard to the number or total amount of payments received.
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<PAGE> 47
3. ALLOCATION OF ANNUITY.
The Owner may elect payments on a fixed or variable basis, or a combination. Any
Fixed Account Contract Value or Guarantee Period Value is annuitized on a fixed
basis. Any Separate Account Contract Value is annuitized on a variable basis.
The MVA Option is not available during the Annuity Period. An Owner may exercise
the transfer privilege during the Accumulation Period. Transfers during the
Annuity Period are subject to certain limitations.
4. TRANSFER DURING ANNUITY PERIOD.
During the Annuity Period, the payee may, by written request, transfer
Subaccount Value from one Subaccount to another Subaccount or to the Fixed
Account, subject to the following limitations:
- Transfers to a Subaccount are prohibited during the first year of the
Annuity Period; subsequent transfers are limited to one per year.
- All interest in a Subaccount must be transferred.
- If we receive notice of transfer to a Subaccount more than seven (7) days
before an annuity payment date, the transfer is effective during the
Valuation Period after the date we receive the notice.
- If we receive notice of transfer to a Subaccount less than seven (7) days
before an annuity payment date, the transfer is effective during the
Valuation Period after the annuity payment date.
- Transfers to the Fixed Account are available only on an anniversary of
the first Annuity Date. We must receive notice at least thirty (30) days
prior to the anniversary.
A Subaccount's Annuity Unit value is determined at the end of the Valuation
Period preceding the effective date of the transfer. We may suspend, change or
terminate the transfer privilege at any time.
5. ANNUITY UNIT VALUE.
Annuity Unit value is determined independently for each Subaccount.
Annuity Unit value for any Valuation Period is:
- Annuity Unit value for the preceding Valuation Period times
- the net investment factor for the current Valuation Period times
- an interest factor which offsets the 2.5% per annum rate of investment
earnings assumed by the Contract's annuity tables.
The net investment factor for a Subaccount for any Valuation Period is:
- the Subaccount's Accumulation Unit value at the end of the current
Valuation Period, plus or minus the per share charge or credit for taxes
reserved; divided by
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<PAGE> 48
- the Subaccount's Accumulation Unit value at the end of the preceding
Valuation Period, plus or minus the per share charge or credit for taxes
reserved.
6. FIRST PERIODIC PAYMENT UNDER VARIABLE ANNUITY.
When annuity payments begin, the value of the Owner's Contract interest is:
- Accumulation Unit values at the end of the Valuation Period falling on
the 20th or 7th day of the month before the first annuity payment is due
times
- the number of Accumulation Units credited at the end of the Valuation
Period minus
- premium taxes and Withdrawal Charges
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.
A 2.5% per annum rate of investment earnings is assumed by the Contract's
annuity tables. If the actual net investment earnings rate exceeds 2.5% per
annum, payments increase accordingly. Conversely, if the actual rate is less
than 2.5% per annum, annuity payments decrease.
7. SUBSEQUENT PERIODIC PAYMENTS UNDER VARIABLE ANNUITY.
Subsequent annuity payments are determined by multiplying the number of Annuity
Units by the Annuity Unit value at the Valuation Period before each annuity
payment is due. The first annuity payment is divided by the Annuity Unit value
as of the Annuity Date to establish the number of Annuity Units representing
each annuity payment. This number does not change.
8. FIXED ANNUITY PAYMENTS.
Each Fixed Annuity payment is determined from tables we prepare. These tables
show the monthly payment for each $1,000 of Contract Value allocated to a Fixed
Annuity. Payment is based on the Contract Value at the date before the annuity
payment is due. Fixed Annuity payments do not change regardless of investment,
mortality or expense experience.
9. DEATH PROCEEDS.
If the payee dies after the Annuity Date while the Contract is in force, the
death proceeds, if any, depend upon the form of annuity payment in effect at the
time of death. (See "Annuity Options.")
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FEDERAL INCOME TAXES
A. INTRODUCTION
This discussion is not exhaustive and is not intended as tax advice. A qualified
tax adviser should always be consulted with regard to the application of the law
to individual circumstances. This discussion is based on the Internal Revenue
Code of 1986, as amended (the "Code"), Treasury Department regulations, and
interpretations existing on the date of this Prospectus. These authorities,
however, are subject to change by Congress, the Treasury Department, and
judicial decisions.
This discussion does not address state or local tax consequences associated with
buying a Contract. IN ADDITION, WE MAKE NO GUARANTEE REGARDING ANY TAX
TREATMENT--FEDERAL, STATE, OR LOCAL--OF ANY CONTRACT OR OF ANY TRANSACTION
INVOLVING A CONTRACT.
B. OUR TAX STATUS
We are taxed as a life insurance company and the operations of the Separate
Account are treated as a part of our total operations. The Separate Account is
not separately taxed as a "regulated investment company". Investment income and
capital gains of the Separate Account are not taxed to the extent they are
applied under a Contract. We do not anticipate that we will incur federal income
tax liability attributable to the income and gains of the Separate Account, and
therefore we do not intend to provide for these taxes. If we are taxed on
investment income or capital gains of the Separate Account, then we may impose a
charge against the Separate Account to provide for these taxes.
C. TAXATION OF ANNUITIES IN GENERAL
1. TAX DEFERRAL DURING ACCUMULATION PERIOD
Under the Code, except as described below, increases in the Contract Value of a
Non-Qualified Plan Contract are generally not taxable to the Owner or Annuitant
until received as annuity payments or otherwise distributed. However, certain
requirements must be satisfied for this general rule to apply, including:
- the Contract must be owned by an individual
- Separate Account investments must be "adequately diversified"
- We, rather than the Owner, must be considered the owner of Separate
Account assets for federal tax purposes, and
- annuity payments must appropriately amortize Purchase Payments and
Contract earnings.
NON-NATURAL OWNER. As a general rule, deferred annuity contracts held by
"non-natural persons", such as corporations, trusts or similar entities, are not
annuity contracts for federal income tax purposes. The investment income on
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<PAGE> 50
these contracts is taxed as ordinary income received or accrued by the non-
natural owner. There are exceptions to this general rule for non-natural owners.
Contracts are generally treated as held by a natural person if the nominal owner
is a trust or other entity holding the contract as an agent for a natural
person. However, this special exception does not apply to an employer who is the
nominal owner of a contract under a non-qualified deferred compensation plan for
its employees.
Additional exceptions to this rule include:
- contracts acquired by a decedent's estate
- certain Qualified Plan Contracts
- contracts purchased by employers at termination of certain qualified
plans
- contracts used with structured settlement agreements
- contracts purchased with a single premium when the annuity starting date
is no later than a year from contract purchase and substantially equal
periodic payments are made at least annually.
DIVERSIFICATION REQUIREMENTS. For a contract to be treated as an annuity for
federal income tax purposes, separate account investments must be "adequately
diversified". The Treasury Secretary issued regulations prescribing standards
for adequately diversifying separate account investments. If the Separate
Account failed to comply with these diversification standards, the Contract
would not be treated as an annuity contract for federal income tax purposes and
the Owner would generally be taxed on the difference between Contract Value and
Purchase Payments.
Although we do not control Fund investments, we expect the Fund will comply with
these regulations so that the Separate Account will be considered "adequately
diversified."
OWNERSHIP TREATMENT. In certain circumstances, a variable annuity contract owner
may be considered the owner of the assets of the separate account supporting the
contract. Then, income and gains from separate account assets are includible in
the owner's gross income. The IRS, in published rulings, stated that a variable
contract owner will be considered the owner of separate account assets if the
owner possesses the ability to exercise investment control over the assets. As
of the date of this Prospectus, no investor control guidance is available.
We may modify the Contract as necessary to attempt to prevent the Owner from
being considered the owner of the Separate Account assets.
DELAYED ANNUITY DATES. If the Annuity Date occurs (or is scheduled to occur)
when the Annuitant has reached an advanced age, E.G., past age 85, the Contract
might not be treated as an annuity for federal income tax purposes. In that
event, the income and gains under the Contract could be currently includible in
the Owner's income.
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The following discussion assumes that the Contract is treated as an annuity
contract for tax purposes and that we are treated as the owner of Separate
Account assets.
2. TAXATION OF PARTIAL AND FULL WITHDRAWALS
Partial withdrawals from a Non-Qualified Plan Contract are includible in income
if the withdrawal includes investment gain. Full withdrawals are also includible
in income if they exceed the "investment in the contract." Investment in the
contract equals the total of Purchase Payments minus amounts previously received
from the Contract.
Any assignment or pledge (or agreement to assign or pledge) of Contract Value,
is treated as a withdrawal. Investment in the contract is increased by the
amount includible in income with respect to such assignment or pledge. If an
individual transfers a Contract interest without adequate consideration to
someone other than the Owner's spouse (or to a former spouse incident to
divorce), the Owner is taxed on the difference between Contract Value and the
"investment in the contract." In this case, the transferee's investment in the
contract is increased to reflect the increase in the transferor's income.
The Contract's death benefit may exceed Purchase Payments or Contract Value. As
described in this Prospectus, we impose certain charges with respect to the
death benefit. It is possible that those charges (or some portion) could be
treated as a partial withdrawal.
There may be special income tax issues present in situations where the Owner and
the Annuitant are not the same person and are not married to one another. A tax
adviser should be consulted in those situations.
3. TAXATION OF ANNUITY PAYMENTS
Normally, the portion of each annuity payment taxable as income equals the
payment minus the exclusion amount. The exclusion amount for variable annuity
payments is the "investment in the contract" allocated to the variable annuity
option and adjusted for any period certain or refund feature, divided by the
number of payments expected to be made. The exclusion amount for fixed annuity
payments is the payment times the ratio of the investment in the contract
allocated to the fixed annuity option and adjusted for any period certain or
refund feature, to expected value of all annuity payments.
Once the total amount of the investment in the contract is excluded using these
ratios, annuity payments will be fully taxable. If annuity payments stop because
the Annuitant dies before the total amount of the investment in the contract is
recovered, the unrecovered amount generally is allowed as a deduction to the
Annuitant in the last taxable year.
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4. TAXATION OF DEATH BENEFITS
Amounts may be distributed upon the Owner's or Annuitant's death. Before the
Annuity Date, death benefits are includible in income and:
- if distributed in a lump sum are taxed like a full withdrawal, or
- if distributed under an annuity option are taxed like annuity payments.
After the Annuity Date, where a guaranteed period exists and the Annuitant dies
before the end of that period, payments made to the Beneficiary for the
remainder of that period are includible in income and:
- if received in a lump sum are includible in income if they exceed the
unrecovered investment, or
- if distributed in accordance with the selected annuity option are fully
excludable from income until the remaining investment in the contract is
deemed to be recovered.
Thereafter, all annuity payments are fully includible in income.
5. PENALTY TAX ON PREMATURE DISTRIBUTIONS
A 10% penalty tax applies to a taxable payment from a Non-Qualified Plan
Contract unless:
- received on or after the Owner reaches age 59 1/2,
- attributable to the Owner's disability,
- made to a Beneficiary after the Owner's death or, for non-natural Owners,
after the primary Annuitant's death,
- made as a series of substantially equal periodic payments (at least
annually) for the life (or life expectancy) of the Annuitant or for the
joint lives (or joint life expectancies) of the Annuitant and designated
Beneficiary,
- made under a Contract purchased with a single premium when the annuity
starting date is no later than a year from Contract purchase and
substantially equal periodic payments are made at least annually, or
- made with annuities used with structured settlement agreements.
6. AGGREGATION OF CONTRACTS
The taxable amount of an annuity payment or withdrawal from a Non-Qualified Plan
Contract is determined by combining some or all of the Non-Qualified Plan
Contracts owned by an individual. For example, if a person purchases a Contract
and also purchases an immediate annuity at approximately the same time, the IRS
may treat the two contracts as one contract. In addition, if a person purchases
two or more deferred annuity contracts from the same company (or its affiliates)
during any calendar year, these contracts are treated
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as one contract. The effects of this aggregation are not clear. However, it
could affect the taxable amount of an annuity payment or withdrawal and the
amount which might be subject to the 10% penalty tax.
7. LOSS OF INTEREST DEDUCTION WHERE CONTRACTS ARE HELD BY OR FOR THE BENEFIT OF
CERTAIN NON-NATURAL PERSONS
For Contracts issued after June 8, 1997 to a non-natural owner, otherwise
deductible interest may no longer be deductible by the owner. However, this
interest deduction disallowance does not affect Contracts generating taxable
income. Entities considering purchasing the Contract, or entities that will be
beneficiaries under a Contract, should consult a tax adviser.
D. QUALIFIED PLANS
The Contracts are also designed for use in connection with retirement plans
which receive favorable treatment under sections 401, 403, 408, 408A or 457 of
the Code ("Qualified Plans"). Such contracts are referred to as "Qualified
Contracts." Numerous special tax rules apply to the participants in Qualified
Plans and to Qualified Plan Contracts. We make no attempt in this Prospectus to
provide more than general information about use of the Contract with the various
types of Qualified Plans.
The tax rules applicable to Qualified Plans vary according to the type of plan
and the terms and conditions of the plan. For example, for both withdrawals and
annuity payments under certain Qualified Contracts, there may be no "investment
in the contract" and the total amount received may be taxable. Also, loans from
Qualified Contracts, where allowed, are subject to a variety of limitations,
including restrictions as to the amount that may be borrowed, the duration of
the loan, the number of allowable loans and the manner in which the loan must be
repaid. (Owners should always consult their tax advisers and retirement plan
fiduciaries prior to exercising their loan privileges.) Both the amount of the
contribution that may be made, and the tax deduction or exclusion that the Owner
may claim for such contribution, are limited under Qualified Plans. If this
Contract is used with a Qualified Plan, the Owner and Annuitant must be the same
individual. If a joint Annuitant is named, all distributions made while the
Annuitant is alive must be made to the Annuitant. Also, if a joint Annuitant is
named who is not the Annuitant's spouse, the annuity options which are available
may be limited, depending on the difference in their ages. Furthermore, the
length of any Guarantee Period may be limited in some circumstances to satisfy
certain minimum distribution requirements under the Code.
Under a Qualified Contract, rules specify the form of distribution and start
dates. An excise tax is imposed for failure to comply with the minimum
distribution requirements. This excise tax generally equals 50% of the amount by
which a minimum required distribution exceeds the actual distribution from the
Qualified Plan. In the case of "Individual Retirement Annuities" ("IRAs"),
distributions of minimum amounts (as specified in the tax law) must generally
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commence by April 1 of the calendar year following the calendar year in which
the owner attains age 70 1/2. In the case of certain other Qualified Plans,
distributions of such minimum amounts must generally commence by the later of
this date of April 1 of the calendar year following the calendar year in which
the employee retires.
A 10% penalty tax may apply to the taxable amount of payments from Qualified
Plan Contracts. For Individual Retirement Annuities, the penalty tax does not
apply to a payment:
- received after the Owner reaches age 55 and has separated from service,
- received after the Owner reaches age 59 1/2,
- received after the Owner's death or because of the Owner's disability, or
- made as a series of substantially equal periodic payments (at least
annually) for the life (or life expectancy) of the Owner or for the joint
lives (or joint life expectancies) of the Owner and designated
beneficiary.
In addition, the penalty tax does not apply to certain distributions taken after
December 31, 1997 used for qualified first time home purchases or for higher
education expenses. Special conditions must be met to qualify for these
exceptions. Owners wishing to take a distribution for these purposes should
consult their tax adviser. Other exceptions may apply.
Qualified Plan Contracts are amended to conform to plan requirements. However,
Owners, Annuitants, and Beneficiaries are cautioned that the rights of any
person to any benefits under Qualified Plans may be subject to the terms and
conditions of the plans themselves, regardless of the terms and conditions of
the Contract. In addition, we are not bound by terms and conditions of Qualified
Plans if they are inconsistent with the Contract.
1. QUALIFIED PLAN TYPES
We issue Contracts for the following types of Qualified Plans.
INDIVIDUAL RETIREMENT ANNUITIES. The Code permits eligible individuals to
contribute to an individual retirement annuity known as an "IRA." IRAs limit the
amounts contributed, the persons eligible and the time when distributions start.
Also, subject to direct rollover and mandatory withholding requirements,
distributions from other types of Qualified Plans may be "rolled over" on a tax-
deferred basis into an IRA. The Contract may not fund an "Education IRA."
SIMPLIFIED EMPLOYEE PENSIONS (SEP-IRAS). The Code allows employers to establish
simplified employee pension plans, using the employees' IRAs. Under these plans
the employer may make limited deductible contributions on behalf of the
employees to IRAs. Employers and employees intending to use the Contract in
connection with these plans should seek tax competent advice.
SIMPLE IRAS. The Code permits certain small employers to establish "SIMPLE
retirement accounts," including SIMPLE IRAs, for their employees. Under
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SIMPLE IRAs, certain deductible contributions are made by both employees and
employers. SIMPLE IRAs are subject to various requirements, including limits on
the amounts that may be contributed, the persons who may be eligible, and the
time when distributions may commence. As discussed above (see Individual
Retirement Annuities), there is some uncertainty regarding the proper
characterization of the Contract's death benefit for purposes of the tax rules
governing IRAs (which would include SIMPLE IRAs). Employers and employees
intending to use the Contract in connection with such plans should seed
competent advice.
ROTH IRAS. The Code permits contributions to an IRA known as a "Roth IRA." Roth
IRAs differ from other IRAs in that:
- Roth IRA contributions are never deductible,
- "qualified distributions" from a Roth IRA are excludable from income,
- different eligibility and mandatory distribution requirements apply,
- a rollover to a Roth IRA must be a "qualified rollover contribution,"
under the Code.
A rollover from an IRA to a Roth IRA is includible in gross income but the 10
percent penalty tax does not apply.
An IRA may be converted into a Roth IRA without taking a distribution. An
individual may convert by notifying the IRA issuer or trustee. The conversion of
an IRA to a Roth IRA is a special type of qualified rollover distribution.
Hence, the IRA participant must be eligible for a qualified rollover
distribution to convert an IRA to a Roth IRA. A conversion typically results in
the inclusion of some or all of the IRA value in gross income. Persons with
adjusted gross incomes in excess of $100,000 or who are married and file a
separate return are not eligible to make a qualified rollover contribution or a
transfer in a taxable year from a non-Roth IRA to a Roth IRA.
Any "qualified distribution" from a Roth IRA is excludible from gross income. A
"qualified distribution" is:
- a payment or distribution
-- made after the Owner attains age 59 1/2,
-- made after the Owner's death,
-- attributable to the Owner being disabled, or
-- made to a qualified first-time homebuyer.
- a payment or distribution made in a taxable year that is five years or
more after
-- the first taxable year for which a contribution was made to the
Owner's Roth IRA, or
-- the first taxable year for which rollover was made to the Owner's
Roth IRA. A non-qualified distribution from a Roth IRA is
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generally taxed like a distribution from an IRA. Distributions from a
Roth IRA need not commence at age 70 1/2.
CORPORATE AND SELF-EMPLOYED ("H.R. 10" AND "KEOGH") PENSION AND PROFIT-SHARING
PLANS. The Code permits corporate employers to establish various types of
tax-favored retirement plans for employees. The Self-Employed Individuals' Tax
Retirement Act of 1962, as amended, commonly referred to as "H.R. 10" or
"Keogh", permits self-employed individuals also to establish such tax-favored
retirement plans for themselves and their employees. Such retirement plans may
permit the purchase of the Contracts in order to provide benefits under the
plans. The Contract provides a death benefit that in certain circumstances may
exceed the greater of the Purchase Payments and the Contract Value. It is
possible that such death benefit could be characterized as an incidental death
benefit. There are limitations on the amount of incidental benefits that may be
provided under pension and profit sharing plans. In addition, the provision of
such benefits may result in current taxable income to participants. Employers
intending to use the Contract in connection with such plans should seek
competent advice.
TAX-SHELTERED ANNUITIES. Code Section 403(b) permits public school employees
and employees of certain types of charitable, educational and scientific
organizations to have their employers purchase annuity contracts for them and,
subject to certain limitations, to exclude the amount of purchase payments from
taxable gross income. These annuity contracts are commonly referred to as
"tax-sheltered annuities". Purchasers of the Contracts for such purposes should
seek competent advice as to eligibility, limitations on permissible amounts of
purchase payments and other tax consequences associated with the Contracts. In
particular, purchasers should consider that the Contract provides a death
benefit that in certain circumstances may exceed the greater of the Purchase
Payments and the Contract Value. It is possible that such death benefit could be
characterized as an incidental death benefit. If the death benefit were so
characterized, this could result in currently taxable income to purchasers. In
addition, there are limitations on the amount of incidental benefits that may be
provided under a tax-sheltered annuity. Even if the death benefit under the
Contract were characterized as an incidental death benefit, it is unlikely to
violate those limits unless the Contract Owner also purchases a life insurance
contract as part of his or her tax-sheltered annuity plan.
Tax-sheltered annuity contracts must contain restrictions on withdrawals of
- contributions made pursuant to a salary reduction agreement in years
beginning after December 31, 1988,
- earnings on those contributions, and
- earnings after December 31, 1988 on amounts attributable to salary
reduction contributions held as of December 31, 1998. These amounts can
be paid only if the employee has reached age 59 1/2, separated from
service, died, or becomes disabled, or in the case of hardship. Amounts
permitted to be distributed in the event of hardship are limited to
actual
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contributions; earnings thereon cannot be distributed on account of
hardship. Amounts subject to the withdrawal restrictions applicable to
section 403(b)(7) custodial accounts may be subject to more stringent
restrictions.
DEFERRED COMPENSATION PLANS OF STATE AND LOCAL GOVERNMENTS AND TAX-EXEMPT
ORGANIZATIONS. The Code permits employees of state and local governments and
tax-exempt organizations to defer a portion of their compensation without paying
current taxes. The employees must be participants in an eligible deferred
compensation plan. Generally, a Contract purchased by a state or local
government or a tax-exempt organization will not be treated as an annuity
contract for federal income tax purposes. Those who intend to use the Contracts
in connection with such plans should seek competent advice.
2. DIRECT ROLLOVERS
If the Contract is used in connection with a retirement plan that is qualified
under sections 401(a), 403(a), or 403(b) of the Code, any "eligible rollover
distribution" from the Contract will be subject to "direct rollover" and
mandatory withholding requirements. An eligible rollover distribution generally
is any taxable distribution from such a qualified retirement plan, excluding
certain amounts such as
- minimum distributions required under section 401(a)(9) of the Code, and
- certain distributions for life, life expectancy, or for 10 years or more
which are part of a "series of substantially equal periodic payments."
Under these requirements, federal income tax equal to 20% of the eligible
rollover distribution will be withheld from the amount of the distribution.
Unlike withholding on certain other amounts distributed from the Contract,
discussed below, the Owner cannot elect out of withholding with respect to an
eligible rollover distribution. However, this 20% withholding will not apply if,
instead of receiving the eligible rollover distribution, the distributee elects
to have it directly transferred to certain Qualified Plans. Prior to receiving
an eligible rollover distribution, a notice will be provided explaining
generally the direct rollover and mandatory withholding requirements and how to
avoid the 20% withholding by electing a direct rollover.
E. FEDERAL INCOME TAX WITHHOLDING
We withhold and send to the U.S. Government a part of the taxable portion of
each distribution unless the payee notifies us before distribution of an
available election not to have any amounts withheld. In certain circumstances,
we may be required to withhold tax. The withholding rates for the taxable
portion of periodic annuity payments are the same as the withholding rates for
wage payments. In addition, the withholding rate for the taxable portion of non-
periodic payments (including withdrawals prior to the maturity date and
conversions of, or rollovers from, non-Roth IRAs to Roth IRAs) is 10%. The
withholding rate for eligible rollover distributions is 20%.
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DISTRIBUTION OF CONTRACTS
The Contracts are sold by licensed insurance agents in those states where the
Contract may be lawfully sold. The agents are also registered representatives of
registered broker-dealers who are members of the National Association of
Securities Dealers, Inc. Sales commissions may vary, but are not expected to
exceed 6.25% of Purchase Payments. In addition to commissions, we may pay
additional promotional incentives, in the form of cash or other compensation, to
selling broker-dealers. These incentives may be offered to certain licensed
broker-dealers that sell or are expected to sell certain minimum amounts during
specified time periods. The Contracts are distributed through the principal
underwriter for the Separate Account:
Investors Brokerage Services, Inc. ("IBS")
1 Kemper Drive
Long Grove, Illinois, 60049
IBS is our wholly-owned subsidiary. IBS enters into selling group agreements
with affiliated and unaffiliated broker-dealers. All of the investment options
are not available to all Owners. The investment options are available only under
Contracts that are sold or serviced by broker-dealers having a selling group
agreement with IBS authorizing the sale of Contracts with the investment options
specified in this Prospectus. Other distributors may sell and service contracts
with different investment options.
VOTING RIGHTS
Proxy materials in connection with any Fund shareholder meeting are delivered to
each Owner with Subaccount interests invested in the Fund as of the record date.
Proxy materials include a voting instruction form. We vote all Fund shares
proportionately in accordance with instructions received from Owners. We will
also vote any Fund shares attributed to amounts we have accumulated in the
Subaccounts in the same proportion that Owners vote. A Fund is not required to
hold annual shareholders' meetings. Funds hold special meetings as required or
deemed desirable for such purposes as electing trustees, changing fundamental
policies or approving an investment advisory agreement.
Owners have voting rights in a Portfolio based upon the Owner's proportionate
interest in the corresponding Subaccount as measured by units. Owners have
voting rights before surrender, the Annuity Date or the death of the Annuitant.
Thereafter, the payee entitled to receive Variable Annuity payments has voting
rights. During the Annuity Period, Annuitants' voting rights decrease as Annuity
Units decrease.
REPORTS TO CONTRACT OWNERS AND INQUIRIES
After each Contract anniversary, we send Owners a statement showing amounts
credited to each Subaccount and to the Fixed Account Option. In addition, Owners
transferring amounts among the investment options or making additional payments
receive written confirmation of these transactions. We will also
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send a current statement upon Owner request. Owners are also sent annual and
semi-annual reports for the Portfolios that correspond to the Subaccounts in
which the Owner invests and a list of the securities held by that Portfolio. In
addition, we calculate for an Owner the portion of a total amount that must be
invested in a selected Guarantee Period so that the portion grows to equal the
original total amount at the expiration of the Guarantee Period.
An Owner may direct inquiries to the selling agent or may call 1-800-621-5001 or
write to Kemper Investors Life Insurance Company, Customer Service, 1 Kemper
Drive, Long Grove, Illinois 60049.
DOLLAR COST AVERAGING
Under our Dollar Cost Averaging program, a predesignated portion of Subaccount
Value is automatically transferred monthly, quarterly, semiannually or annually
for a specified duration to other Subaccounts, Guarantee Periods and the Fixed
Account. The Dollar Cost Averaging program is available only during the
Accumulation Period. An Owner may also elect transfers from the Fixed Account on
a monthly or quarterly basis for a minimum duration of one year. An Owner may
enroll any time by completing our Dollar Cost Averaging form. Transfers are made
on the second Tuesday of the month. We must receive the enrollment form at least
five (5) business days before the transfer date.
An Owner participating in the Dollar Cost Averaging program may allocate all or
a portion of the initial Purchase Payment to the Kemper Money Market Subaccount
#2. This is the only Subaccount with no deduction for the 1.40% charge for
mortality and expense risks and administrative costs. The Owner must transfer
all Subaccount Value out of Kemper Money Market Subaccount #2 within one year
from the initial Purchase Payment. If an Owner terminates Dollar Cost Averaging
or does not deplete all Subaccount Value in Kemper Money Market Subaccount #2
within one year, we automatically transfer any remaining Subaccount Value to
Kemper Money Market Subaccount #1.
The minimum transfer amount is $100 per Subaccount, Guarantee Period or Fixed
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 times the duration selected.
Dollar Cost Averaging ends if:
- the number of designated monthly transfers has been completed
- Contract Value in the transferring account is insufficient to complete
the next transfer; the remaining amount is transferred
- we receive the Owner's written termination at least five (5) business
days before the next transfer date
- the Contract is surrendered or annuitized.
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If the Fixed Account balance is at least $10,000, an Owner may elect automatic
calendar quarter transfers of interest accrued in the Fixed Account to one or
more of the Subaccounts or Guarantee Periods. An Owner may enroll in this
program any time by completing our Dollar Cost Averaging form. Transfers are
made within five business days of the end of the calendar quarter. We must
receive the enrollment form at least ten (10) days before the end of the
calendar quarter.
Dollar Cost Averaging is not available during the Annuity Period.
SYSTEMATIC WITHDRAWAL PLAN
We offer a Systematic Withdrawal Plan ("SWP") allowing Owners to pre-authorize
periodic withdrawals during the Accumulation Period. Owners instruct us to
withdraw selected amounts, or amounts based on the Owner's life expectancy, from
the Fixed Account, or from any of the Subaccounts or Guarantee Periods on a
monthly, quarterly, semi-annual or annual basis. The SWP is available to Owners
who request a minimum $100 periodic payment. A market value adjustment applies
to any withdrawals under the SWP from a Guarantee Period, unless effected within
30 days after the Guarantee Period ends. SWP withdrawals from the Fixed Account
are not available in the first Contract Year and are limited to the amount not
subject to Withdrawal Charges. If the amounts distributed under the SWP from the
Subaccounts or Guarantee Periods exceed the free withdrawal amount, the
Withdrawal Charge is applied on any amounts exceeding the free withdrawal
amount. WITHDRAWALS TAKEN UNDER THE SWP MAY BE SUBJECT TO THE 10% TAX PENALTY ON
EARLY WITHDRAWALS AND TO INCOME TAXES AND WITHHOLDING. Owners interested in SWP
may obtain an application and information concerning this program and its
restrictions from us or their agent. We give thirty days' notice if we amend the
SWP. The SWP may be terminated at any time by the Owner or us.
EXPERTS
The consolidated balance sheets of KILICO as of December 31, 1998 and 1997 and
the related consolidated statements of operations, comprehensive income,
stockholder's equity, and cash flows for the years ended December 31, 1998 and
1997 have been included herein and in the registration statement in reliance
upon the report of PricewaterhouseCoopers LLP, independent public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing. The consolidated statements of operations,
comprehensive income, stockholder's equity, and cash flows of KILICO and
subsidiaries for the period from January 4, 1996 to December 31, 1996 and the
financial statement schedules as of December 31, 1996, have been included herein
and in the registration statement in reliance upon the report of KPMG LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
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LEGAL MATTERS
Legal matters with respect to our organization, our authority to issue annuity
contracts and the validity of the Contract have been passed upon by Frank
Julian, our Associate General Counsel. Jorden Burt Boros Cicchetti Berenson &
Johnson, Washington, D.C., has advised us on certain legal matters concerning
federal securities laws applicable to the issue and sale of the Contracts.
SPECIAL CONSIDERATIONS
We reserve the right to amend the Contract to meet the requirements of federal
or state laws or regulations. We will notify the Owner in writing of these
amendments.
An Owner's rights under a Contract may be assigned as provided by law. An
assignment will not be binding upon us until we receive a written copy of the
assignment. The Owner is solely responsible for the validity or effect of any
assignment. The Owner, therefore, should consult a qualified tax adviser
regarding the tax consequences, as an assignment may be a taxable event.
AVAILABLE INFORMATION
We are subject to the informational requirements of the Securities Exchange Act
of 1934 and file reports and other information with the SEC. These reports and
other information can be inspected and copied at the SEC's public reference
facilities at Room 1024, 450 Fifth Street, N.W., Washington, D.C. and 500 West
Madison, Suite 1400, Northwestern Atrium Center, Chicago, Illinois. Copies also
can be obtained from the SEC's Public Reference Section at 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates.
We have filed registration statements (the "Registration Statements") relating
to the Contracts with the SEC under the Securities Act of 1933. This Prospectus
has been filed as part of the Registration Statements and does not contain all
of the information set forth in the Registration Statements. These Registration
Statements contain further information about us and the Contracts. The
Registration Statements may be inspected and copied, and copies can be obtained
at prescribed rates, as mentioned above.
BUSINESS
CORPORATE STRUCTURE
KEMPER INVESTORS LIFE INSURANCE COMPANY ("KILICO"), founded in 1947, is
incorporated under the insurance laws of the State of Illinois. We are licensed
in the District of Columbia and all states except New York. We are a
wholly-owned subsidiary of Kemper Corporation ("Kemper"), a nonoperating holding
company.
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CORPORATE CONTROL EVENTS
Effective January 4, 1996, Zurich Insurance Company ("Zurich"), Insurance
Partners, L.P. ("IP") and Insurance Partners Offshore (Bermuda), L.P. (together
with IP, "Insurance Partners") owned 80 percent and 20 percent, respectively, of
Kemper and therefore KILICO. On February 27, 1998, Zurich acquired Insurance
Partner's remaining 20 percent interest for cash. As a result of this
transaction, Kemper and KILICO became wholly-owned subsidiaries of Zurich.
Effective September 7, 1998, the businesses of Zurich merged with the financial
services business of B.A.T. Industries forming Zurich Financial Services
("ZFS"). ZFS is owned by Zurich Allied AG and Allied Zurich p.l.c., fifty-seven
percent and forty-three percent, respectively. Zurich Allied AG, representing
the financial interest of the former Zurich Group, is listed on the Swiss Market
Index, replacing Zurich. Allied Zurich p.l.c., representing the financial
interest of B.A.T. Industries, is included in the FTSE-100 Share Index in
London.
The acquisition of KILICO on January 4, 1996, was accounted for using the
purchase method of accounting. Our consolidated financial statements prior to
January 4, 1996, were prepared on a historical cost basis and have been labeled
as "preacquisition" where appropriate in this Prospectus. Our included
consolidated financial statements have been prepared in conformity with
generally accepted accounting principles.
We originally began to amortize goodwill resulting from the acquisition on a
straight-line basis over twenty-five years. However, in the fourth quarter of
1997, we changed our amortization period to twenty years. The change in
amortization periods was made to conform to Zurich's accounting practices and
policies. The change resulted in an increase in goodwill amortization of $5.1
million in 1997.
STRATEGIC INITIATIVES
Our management, operations and strategic directions are integrated with those of
another Kemper subsidiary, Federal Kemper Life Assurance Company ("FKLA"). The
integration streamlined management, controlled costs, improved profitability,
increased operating efficiencies and productivity, and helped to expand both
companies' distribution capabilities. 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.
Over the last several years, we increased the competitiveness of our variable
annuity products by adding multiple variable subaccount investment options and
investment managers to existing variable annuity products. In 1996, we
introduced a registered flexible individual variable life insurance product. In
1997, we introduced a non-registered individual and group variable bank-owned
life insurance contract ("BOLI") and a series of individual variable life
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insurance contracts. In 1998, we introduced a new registered individual variable
annuity product with 29 variable subaccount investment options and various
investment managers.
NARRATIVE DESCRIPTION OF BUSINESS
We offer both individual fixed-rate (general account) and individual and group
variable (separate account) annuity contracts, as well as individual term life,
universal life and individual and group variable life insurance products through
various distribution channels. We 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
our products. Our sales mainly consist of deposits received on certain long
duration annuity and variable life insurance contracts as well as reinsurance
premiums assumed from FKLA beginning in 1996.
Our fixed and variable annuities generally have surrender charges that are a
specified percentage of policy values and decline as the policy ages. General
account annuity and interest-sensitive life policies are guaranteed to
accumulate at specified interest rates but allow for periodic crediting rate
changes.
Over the last several years, in part reflecting the current interest rate
environment, we have increased our emphasis on marketing our existing and new
separate account products. Unlike the fixed-rate annuity business where we
manage spread revenue, such variable products pose minimal investment risk for
us, as policyholders direct their premium to one or more subaccounts that invest
in underlying investment funds. We, in turn, receive administrative fee revenue
on such variable products which compensates us for providing death benefits
potentially in excess of cash surrender values. In addition, on variable life
insurance contracts, cost of insurance charges compensate us for providing death
benefit coverage substantially in excess of surrender values.
As a result of this strategy, our separate account assets and related sales of
our variable annuity and life products have increased as follows (in millions):
<TABLE>
<CAPTION>
DECEMBER 31
------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Separate account assets................. $7,099.2 $5,122.0 $2,127.2
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Variable annuity sales.................. $ 300.4 $ 259.8 $ 254.6
Variable life sales..................... 1,523.0 2,708.6 .2
-------- -------- --------
Total separate account sales.......... $1,823.4 $2,968.4 $ 254.8
======== ======== ========
</TABLE>
In 1996, we added several new subaccounts and new investment managers as
investment portfolio choices for certain purchasers of the Kemper Advantage III
variable annuity product. During mid-1998, we introduced Destinations, a
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registered individual variable annuity product. Destinations offers 29 variable
subaccount investment options with various investment managers, ten guarantee
period accounts and a fixed account, dollar cost averaging and a guaranteed
retirement income benefit option.
During late 1996, we introduced Power V, a registered flexible premium variable
life insurance product. During mid-1997, we also introduced variable BOLI, a
group variable life insurance contract that is primarily marketed to banks and
other large corporate entities. Also in 1997, we issued a series of
non-registered variable individual universal life insurance contracts that are
marketed primarily to high net worth individuals. Significant fluctuations in
our sales of the variable life products are due mainly to the nature of the BOLI
product -- high dollar volume per sale, low frequency of sales--and the
uncertainty surrounding BOLI's tax advantaged status since the release of the
Clinton Administration's Fiscal Year 1998 Budget, continuing with the release of
the 1999 Budget.
Investors Brokerage Services, Inc. ("IBS"), our wholly-owned subsidiary, is the
principal underwriter and distributor of the variable annuity and variable life
products. Another Zurich affiliate is the principal underwriter and distributor
for the BOLI and high net worth products.
Current crediting rates, a conservative investment strategy and the interest
rate environment have impacted our general account annuity sales over the last
several years. our general account fixed annuity sales were as follows (in
millions):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
General account fixed annuity sales.......... $179.9 $145.7 $140.6
====== ====== ======
</TABLE>
Strong stock and bond markets during 1996 and most of 1997, which influenced
potential buyers of fixed annuity products to purchase variable annuity
products, caused sales of general account annuities to increase only slightly in
1997, compared with 1996. Sales of general account annuities increased in 1998,
compared with 1997, as certain investors opted for fixed crediting rates rather
than other investment alternatives available during a period of market
uncertainty, primarily in the second half of 1998.
During 1998 and 1997, we assumed $21.6 million and $21.1 million, respectively,
of term life insurance premiums from FKLA. Excluding the amounts assumed from
FKLA, our total term life sales, including new and renewal premiums, net of
reinsurance ceded, amounted to $846 thousand in 1998, compared with $1.1 million
in 1997 and $565 thousand in 1996.
FEDERAL INCOME TAX DEVELOPMENTS
In early 1999, the Clinton Administration's Fiscal Year 1999 Budget ("Budget")
was released and contained certain proposals to change the taxation of BOLI. It
is currently unknown whether or not such proposals will
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<PAGE> 65
be accepted, amended or omitted in the final 1999 Budget approved by Congress.
If the current Budget proposals are accepted, BOLI contracts may no longer be
tax advantaged products and therefore less attractive to those customers who
purchase them in recognition of their favorable tax attributes. Additionally,
sales of these products during 1999 may also be negatively impacted until the
likelihood of the current proposals being enacted into law has been determined.
YEAR 2000 COMPLIANCE
(YEAR 2000 READINESS DISCLOSURE)
Many existing computer programs were originally designed without considering the
impact of the year 2000 and currently use only two digits to identify the year
in the date field. This issue affects nearly all companies and organizations and
could cause computer applications and systems to fail or create erroneous
results for any transaction with a date of January 1, 2000, or later.
Many companies must undertake major projects to address the year 2000 issue.
Each company's costs and uncertainties will depend on a number of factors,
including its software and hardware, and the nature of the industry. Companies
must also coordinate with other entities with which they electronically
interact, including suppliers, customers, creditors and other financial services
institutions.
If a company does not successfully address its year 2000 issues, it could face
material adverse consequences in the form of lawsuits against the company, lost
business, erroneous results and substantial operating problems after January 1,
2000.
We have taken substantial steps over the last several years to ensure that our
critical systems will be compliant for the year 2000. Such steps have included
the replacement of older systems with new systems which are already compliant.
We have also determined that new systems developed to support new product
introductions in 1997, 1998 and beyond are already year 2000 compliant. Data
processing expenses related solely to bringing our systems in compliance with
the year 2000 amounted to $550 thousand for the first nine months of 1999. We
anticipate that it will cost an additional $108 thousand to bring all remaining
systems into compliance.
Our policy administration systems have been completely renovated to be year 2000
compliant, and have been tested and placed back into production as of June 30,
1999. All of our ancillary systems confirmed to be year 2000 compliant were in
production at September 30, 1999. Testing procedures have confirmed the
performance, functionality, and integration of converted or replaced platforms,
applications, databases, utilities, and interfaces in an operational
environment. Our testing and verification for year 2000 compliance has
encompassed the following:
- mainframe computing systems,
- mainframe hardware and systems software,
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<PAGE> 66
- PC/LAN computing systems,
- PC/LAN hardware and systems software,
- end-user computing systems,
- interfaces to and from third parties, and
- other miscellaneous electronic non-information systems.
We have also taken steps to determine whether all other entities with which we
electronically interact, including suppliers and other financial services
institutions, are year 2000 compliant.
If we do not successfully address our year 2000 issues, we could face material
adverse consequences from lawsuits, lost business, erroneous results and
substantial operating problems after January 1, 2000. Although we fully expect
to be year 2000 compliant by the close of 1999, we have developed contingency
plans to handle the most reasonably likely worst case scenarios. The contingency
plans were completed in the third quarter of 1999 and testing of those plans
will continue throughout the fourth quarter of 1999.
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. Currently, twelve IRIS ratios are
calculated. The primary purpose of the ratios is to provide an "early warning"
of any negative developments. The NAIC reports a company's ratios to state
regulators who may then contact the company if three or more ratios fall outside
the NAIC's "usual ranges".
Based on statutory financial data as of December 31, 1998, we had two ratios
outside the usual ranges, the change in reserving ratio and the change in
premium ratio. Our change in reserving ratio reflected the level of interest-
sensitive life surrenders and withdrawals during 1998, as well as the effects of
a reinsurance agreement with FKLA. Our change in premium ratio reflected the
$1.2 billion decrease in BOLI premiums received during 1998, compared with 1997.
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 our IRIS ratios for 1998 or earlier years.
RISK-BASED CAPITAL, ASSET ADEQUACY AND CODIFICATION
Under Illinois' asset adequacy and risk-based capital rules, state regulators
may mandate remedial action for inadequately reserved or inadequately
capitalized companies. The asset adequacy rules are designed to assure that
assets supporting reserves are adequate to cover liabilities under a variety of
economic scenarios. The focus of risk-based 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. We have capital
levels
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<PAGE> 67
substantially exceeding any that would mandate action under the risk-based
capital rules and is in compliance with applicable asset adequacy rules.
In March 1998, the NAIC approved the codification of statutory accounting
principles. Codification is effective January 1, 2001; however, our domiciliary
state of Illinois has yet to adopt codification. In any event, we have not
quantified the impact that codification will have on our statutory financial
position or results of operations.
RESERVES AND REINSURANCE
The following table provides a breakdown of our reserves for future policy
benefits by product type (in millions):
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31
1998 1997
----------- -----------
<S> <C> <C>
General account annuities................ $2,864 $3,137
Interest-sensitive life insurance and
other.................................. 688 709
Term life reserves....................... 9 10
Ceded future policy benefits............. 345 383
------ ------
Total.......................... $3,906 $4,239
====== ======
</TABLE>
Ceded future policy benefits shown above reflect coinsurance (indemnity
reinsurance) transactions where we insured liabilities of approximately $516
million in 1992 and $416 million in 1991 with our affiliate Fidelity Life
Association, A Mutual Legal Reserve Company ("FLA"). FLA shares directors,
management, operations and employees with FKLA pursuant to an administrative and
management services agreement. FLA produces policies not produced by FKLA or
KILICO as well as other policies similar to certain FKLA policies. At December
31, 1998 and 1997, our reinsurance reserve credit from FLA related to these
coinsurance transactions totaled approximately $344.8 million and $382.6
million, respectively. Utilizing FKLA's employees, We are the servicing company
for this coinsured business and we are reimbursed by FLA for the related
servicing expenses.
During December 1997, We entered into a funds withheld reinsurance agreement
with a Zurich affiliated company, ZC Life Reinsurance Limited ("ZC Life"),
formerly EPICENTRE Reinsurance (Bermuda) Limited. Under the terms of this
agreement, we ceded, on a yearly renewable term basis, ninety percent of the net
amount at risk (death benefit payable to the insured less the insured's separate
account cash surrender value) related to variable BOLI, which is held in our
separate accounts. During 1998, we modified the reinsurance agreement to
increase the reinsurance from ninety percent to one hundred percent. During 1998
and 1997, we issued $6.9 billion (face amount) and $59.3 billion (face amount),
respectively, of new BOLI business and ceded $11.1 billion (face amount) and
$51.5 billion (face amount), respectively, to ZC Life under the terms of the
treaty. During 1998 and 1997, we also ceded $175.5 million and $24.3 million,
respectively, of separate account fees (cost of insurance charges) to ZC Life.
We have also withheld approximately
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<PAGE> 68
$170.9 million and $23.4 million of the funds due to ZC Life under the terms of
the reinsurance agreement as a component of benefits and funds payable in the
accompanying consolidated balance sheets in this Prospectus as of December 31,
1998 and 1997, respectively.
We have a large and growing funds withheld account ("FWA") supporting reserve
credits on reinsurance ceded on the BOLI product. Amendments to the reinsurance
contracts during 1998 changed the methodology used to determine increases to the
FWA. A substantial portion of the FWA is now marked-to-market based upon the
Total Return of the Governmental Bond Division of the KILICO Variable Series I
Separate Account. During 1998, we recorded a $2.5 million increase to the FWA
related to this mark-to-market. In November 1998, to properly match revenue and
expenses, we placed assets supporting the FWA in a segmented portion of its
General Account. This portfolio is classified as "trading" under Statement of
Financial Accounting Standards No. 115 ("FAS 115"). FAS 115 mandates that assets
held in a trading account be valued at fair value, with changes in fair value
flowing through the income statement as realized capital gains and losses.
During 1998, KILICO recorded a realized capital gain of $2.8 million upon
transfer of these assets from "available for sale" to the trading portfolio as
required by FAS 115. In addition, KILICO recorded realized capital losses of
$151 thousand related to the changes in fair value of this portfolio during
1998. The fair value of this portfolio was $101.8 million at December 31, 1998,
and the amortized cost was $99.1 million. We periodically purchase assets into
this segmented portfolio to support changes in the FWA.
During 1996, KILICO assumed on a yearly renewable term basis approximately $14.4
billion (face amount) of term life insurance from FKLA. As a result of this
transaction, we also recorded reserves in 1998 and 1997 of approximately $8.5
million and $7.9 million, respectively.
COMPETITION
We are in a highly competitive business. We compete 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. With our emphasis on annuity
products, we also compete 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.
Our 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.
To address our competition, we have adopted certain business strategies. These
include:
- systematic review of investment risk and our capital position
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<PAGE> 69
- continued focus on existing and new variable annuity and variable life
insurance 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
EMPLOYEES
At December 31, 1998, we used the services of approximately 861 employees of
FKLA, which are also shared with FLA and Zurich Life Insurance Company of
America ("ZLICA"). On January 5, 1996, KILICO, FKLA, FLA and ZLICA began to
operate under the trade name Zurich Kemper Life. On July 1, 1996, Kemper
acquired 100 percent of the issued and outstanding common stock of ZLICA from
Zurich.
REGULATION
We are generally subject to regulation and supervision by the insurance
departments of Illinois and other jurisdictions where we are 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, policy forms
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, certain of our variable life insurance and annuity products, and
the related separate accounts, are subject to regulation by the Securities and
Exchange Commission (the "SEC").
We believe we are in compliance in all material respects with all applicable
regulations.
INVESTMENTS
A changing marketplace has affected the life insurance industry. To accommodate
customers' increased preference for safety over higher yields, we have
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<PAGE> 70
systematically reduced our investment risk and strengthened our 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. For securities, portfolio management is
handled by an affiliated company, Scudder Kemper Investments, Inc. ("SKI") and
its subsidiaries and affiliates. Our real estate-related investments are handled
by a majority-owned Kemper real estate subsidiary. Investment policy is directed
by KILICO's board of directors. Our 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.
FORWARD-LOOKING STATEMENTS
All statements, trend analyses and other information contained in this
Prospectus and elsewhere (such as in our filings with the SEC, press releases,
presentations by KILICO or its management or oral statements) about markets for
our products and trends in our operations or financial results, as well as other
statements including words such as "anticipate," "believe," "plan," "estimate,"
"expect," "intend," and other similar expressions, constitute forward-looking
statements under the Private Securities Litigation Reform Act of 1995. These
forward-looking statements are subject to known and unknown risks, uncertainties
and other factors which may cause actual results to be materially different from
those contemplated by the forward-looking statements. These factors include,
among other things:
(i) general economic conditions and other factors, including prevailing
interest rate levels and stock market performance, which may affect our
ability to sell our products, the market value of our investments and the
lapse rate and profitability of KILICO's contracts
(ii) our ability to achieve anticipated levels of operational efficiencies
through certain cost-saving initiatives
(iii) customer response to new products, distribution channels and marketing
initiatives
(iv) mortality, morbidity, and other factors which may affect the profitability
of our insurance products
(v) changes in the federal income tax laws and regulations which may affect the
relative tax advantages of some of our products
(vi) increasing competition which could affect the sale of our products
(vii) regulatory changes or actions, including those relating to regulation of
financial services affecting (among other things) bank sales and
underwriting of insurance products, regulations of the sale and
underwriting and pricing of insurance products, and
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(viii) the risk factors or uncertainties listed from time to time in our filings
with the SEC
PROPERTIES
We primarily share 84,270 sq. ft. of office space leased by FKLA from Lumbermens
Mutual Casualty Company, a former affiliate, ("Lumbermens"), located in Long
Grove, Illinois. We also share 74,000 sq. ft. of office space leased by FKLA and
ZLICA from Zurich American Insurance Company, an affiliate, located in
Schaumburg, Illinois.
LEGAL PROCEEDINGS
KILICO has been named as defendant in certain lawsuits incidental to our
insurance business. Based upon the advice of legal counsel, our management
believes that the resolution of these various lawsuits will not result in any
material adverse effect on KILICO's consolidated financial position.
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<PAGE> 72
SELECTED FINANCIAL DATA
The following table sets forth selected financial information for KILICO for the
five years ended December 31, 1998, and for the opening balance sheet as of the
acquisition date, January 4, 1996. This 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>
PREACQUISITION
-----------------------
DECEMBER 31
DECEMBER 31 DECEMBER 31 DECEMBER 31 JANUARY 4 -----------------------
1998 1997 1996 1996(2) 1995 1994
----------- ----------- ----------- --------- ---- ----
<S> <C> <C> <C> <C> <C> <C>
TOTAL REVENUE........................ $ 419.7 $ 425.5 $ 356.2 $ -- $ 68.1(1) $ 330.5
========= ========= ======== ======== ======== ========
NET INCOME EXCLUDING REALIZED
INVESTMENT RESULTS................. $ 31.4 $ 31.9 $ 25.6 $ -- $ 74.2 $ 61.9
========= ========= ======== ======== ======== ========
NET INCOME (LOSS).................... $ 65.1 $ 38.7 $ 34.4 $ -- $ (133.0)(1) $ 26.4
========= ========= ======== ======== ======== ========
FINANCIAL SUMMARY
Total separate account assets........ $ 7,099.2 $ 5,122.0 $2,127.2 $1,761.1 $1,761.1 $1,508.0
========= ========= ======== ======== ======== ========
Total assets......................... $12,239.7 $10,589.7 $7,717.9 $7,682.7 $7,581.7 $7,537.1
========= ========= ======== ======== ======== ========
Future policy benefits............... $ 3,561.6 $ 3,856.9 $4,256.5 $4,585.1 $4,573.2 $4,843.7
========= ========= ======== ======== ======== ========
Stockholder's equity................. $ 853.9 $ 865.6 $ 751.0 $ 745.6 $ 605.9 $ 434.0
========= ========= ======== ======== ======== ========
</TABLE>
- ---------------
(1) Real estate-related investment losses adversely impacted total revenue and
net income (loss) for 1995. These losses reflect a change in KILICO's
strategy with respect to its real estate-related investments resulting from
the January 4, 1996 acquisition of Kemper by the Zurich-led investor group.
(2) The consolidated information presented as of the acquisition on January 4,
1996 is accounted for using the purchase method of accounting.
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<PAGE> 73
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
As discussed in the note captioned "Summary of Significant Accounting Policies"
in the notes to the consolidated financial statements, Kemper, and therefore
KILICO, were acquired on January 4, 1996, by an investor group led by Zurich. In
connection with the acquisition, KILICO's assets and liabilities were marked to
their respective fair values as of the acquisition date in conformity with the
purchase accounting method required under generally accepted accounting
principles.
RESULTS OF OPERATIONS
KILICO recorded net income of $65.1 million in 1998, compared with net income of
$38.7 million in 1997 and $34.4 million in 1996. The increase in net income in
1998, compared with 1997, was due to a significant increase in net realized
capital gains and a decrease in goodwill amortization, offset by a slight
decline in operating earnings before amortization of goodwill.
The following table reflects the components of net income:
NET INCOME
(in millions)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Operating earnings before amortization of
goodwill.................................. $ 44.1 $ 47.2 $ 35.8
Amortization of goodwill.................. (12.7) (15.3) (10.2)
Net realized investment gains, net of
tax..................................... 33.7 6.8 8.8
------ ------ ------
Net income...................... $ 65.1 $ 38.7 $ 34.4
====== ====== ======
</TABLE>
The following table reflects the major components of realized investment results
included in net income above.
REALIZED INVESTMENT RESULTS, AFTER TAX
(in millions)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Real estate-related gains................. $ 26.9 $ 12.8 $ 11.4
Fixed maturity write-downs................ (2.0) (2.8) (.9)
Other gains (losses), net................. 8.8 (3.2) (1.7)
------ ------ ------
Total........................... $ 33.7 $ 6.8 $ 8.8
====== ====== ======
</TABLE>
The real estate-related gains over the last three years, reflect our adoption of
Zurich's strategy for disposition of real estate-related investments. This
strategy to reduce exposure to real estate-related investments, as well as
improving real estate market conditions in most areas of the country, generated
the increasing
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<PAGE> 74
real estate-related gains during the last three years. Fixed maturity
write-downs in 1998 and 1997 primarily reflect other-than-temporary declines in
value of certain U.S. dollar denominated fixed maturity investments which have
significant exposure to countries in Southeast Asia, as well as other U.S.
dollar denominated securities that had other-than-temporary declines in value in
1998. Other realized investment gains and losses for 1998, 1997 and 1996 relate
primarily to the sale of fixed maturity investments, as well as gains from
equity securities in 1998. The losses generated in 1997 and 1996 arose primarily
from the sale of fixed maturity investments, consisting of lower yielding U.S.
Treasury bonds, collateralized mortgage obligations and corporate bonds, related
to ongoing repositionings of our fixed maturity investment portfolio. The
proceeds from the repositionings, together with cash and short-term investments,
were reinvested into higher yielding corporate bonds and asset-backed securities
in 1997 and 1996.
Operating earnings before the amortization of goodwill decreased to $44.1
million in 1998, compared with $47.2 million in 1997. Operating earnings
decreased in 1998 before the amortization of goodwill, compared with 1997,
primarily due to:
- a decrease in separate account fees and charges
- an increase in commissions and operating expenses
- an increase in the amortization of insurance acquisition costs, offset by
- a decrease in taxes, licenses and fees
- an increase in the deferral of insurance acquisition costs, and
- a decrease in the amortization of the value of business acquired
Operating earnings before the amortization of goodwill increased to $47.2
million in 1997, compared with $35.8 million in 1996, primarily due to:
- an increase in spread revenue (investment income earned less interest
credited)
- an increase in separate account fees and charges
- an increase in premium income
- an increase in the deferral of insurance acquisition costs, offset by
- an increase in claims incurred and other policyholder benefits
- an increase in taxes, licenses and fees, and
- an increase in commissions and operating expenses
Investment income and interest credited declined in 1998, compared with 1997 and
1996, as a result of a decrease in both total invested assets and liabilities
for future policy benefits to policyholders. Such decreases were the result of
surrender and withdrawal activity over the last three years. Investment income
also decreased in 1998, compared with 1997, due to reinvestment of 1998 fixed
maturity sales proceeds at lower yields than in 1997 and higher amortization of
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bond premium. This amortization was due to an increase in certain collateralized
mortgage obligation prepayments due to the low interest rate environment in
1998.
Investment income was also reduced over the last three years reflecting purchase
accounting adjustments related to the amortization of premiums on fixed maturity
investments. Under purchase accounting, the fair value of KILICO's fixed
maturity investments as of January 4, 1996 became KILICO's new cost basis in the
investments. The difference between the new cost basis and original par is then
amortized against investment income over the remaining effective lives of the
fixed maturity investments. As a result of the interest rate environment as of
January 4, 1996, the market value of KILICO's fixed maturity investments was
approximately $133.9 million greater than original par. Premium amortization
decreased investment income by approximately $14.4 million in 1998, compared
with $15.3 million in 1997 and $22.7 million in 1996.
Investment income was also negatively impacted during 1996 by a higher level of
cash and short-term investments held in the first quarter of 1996. The increase
in cash and short-term investments in the first quarter of 1996 was caused in
part by the cash proceeds received from bulk sales of real estate-related
investments in late December 1995.
Investment income was negatively impacted by dividends paid to Kemper in 1998.
Investment income was positively impacted in 1997 and 1996 from the benefits of
capital contributions to KILICO and from the above-mentioned repositionings of
Our investment portfolio.
The following table reflects KILICO's sales.
SALES
(in millions)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Annuities:
General account........................ $ 179.9 $ 145.7 $140.6
Separate account....................... 300.4 259.8 254.6
-------- -------- ------
Total annuities..................... 480.3 405.5 395.2
-------- -------- ------
Life Insurance:
Separate account bank-owned variable
universal life ("BOLI")............. 1,501.0 2,700.0 --
Separate account variable universal
life................................ 22.0 8.6 .2
Term life.............................. 22.4 22.2 7.8
Interest-sensitive life................ .2 -- .6
-------- -------- ------
Total life.......................... 1,545.6 2,730.8 8.6
-------- -------- ------
Total sales............... $2,025.9 $3,136.3 $403.8
======== ======== ======
</TABLE>
Sales of annuity products consist of total deposits received. General account
annuity sales increased in 1998, compared with 1997, as certain investors opted
for fixed crediting rates rather than other investment alternatives available
during
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a period of market uncertainty, primarily in the second half of 1998. The slight
increase in 1997 general account (fixed annuity) sales, compared with 1996,
reflected the low interest rate environment and the strong equity market during
1997.
The increase in separate account (variable sales) in 1998, compared with 1997
and 1996, was in part due to:
- the addition of new separate account investment fund options
- the addition of new investment fund managers
- a strong overall underlying stock and bond market, and
- a new variable annuity product introduced during 1998
Sales of variable annuities increase administrative fees earned. In addition,
they pose minimal investment risk for KILICO, as policyholders direct their
premium to one or more subaccounts that invest in underlying investment funds
which invest in stocks and bonds. We believe that the increase in our financial
strength and performance ratings in January 1996, together with our association
with Zurich, will continue to assist in our future sales efforts.
In 1997, we introduced several non-registered variable universal life insurance
contracts, BOLI and a series of individual universal life insurance contracts.
Sales of these separate account variable products, like variable annuities, pose
minimal investment risk for KILICO as policyholders also direct their premium to
one or more subaccounts that invest in underlying investment funds which invest
in stocks and bonds. We receive premium tax and DAC tax expense loads from
certain contract holders, as well as administrative fees and cost of insurance
charges. These fees and charges compensate us for providing life insurance
coverage to the contractholders in excess of their cash surrender values. Face
amount of new variable universal life insurance business issued amounted to $7.7
billion in 1998, compared with $59.6 billion in 1997. The decrease in face
amount issued in 1998, compared to 1997 is due to a significant portion of
renewal premiums in 1998 and higher funded policies issued in 1998, compared to
those issued in 1997.
In early 1999, the Clinton Administration's Fiscal Year 1999 Budget ("Budget")
was released and contained certain proposals to change the taxation of BOLI. It
is currently unknown whether or not such proposals will be accepted, amended or
omitted in the final 1999 Budget approved by Congress. If the current Budget
proposals are accepted, BOLI contracts may no longer be tax advantaged products
and therefore no longer attractive to those customers who purchase them because
of their favorable tax attributes. Sales of these products during 1999 may be
negatively impacted until the likelihood of the current proposals being enacted
into law has been determined.
In 1998 and 1997, KILICO assumed $21.6 million and $21.1 million, respectively,
of term life insurance premiums from FKLA. Excluding the amounts assumed from
FKLA, KILICO's total term life sales, including new and renewal premiums,
amounted to $846 thousand in 1998, compared with $1.1 million in
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1997 and $565 thousand in 1996. The face amounts of new term business issued
during 1998, 1997 and 1996 totaled approximately $276 million, $278 million and
$187 million, respectively.
Included in separate account fees and charges are administrative fees received
from Our separate account products of $38.3 million in 1998, compared with $31.0
million and $25.3 million in 1997 and 1996, respectively. Administrative fee
revenue increased in each of the last three years due to growth in average
separate account assets.
Also included in separate account fees and charges in 1998 and 1997 are cost of
insurance ("COI") charges related to variable universal life insurance,
primarily BOLI, of $167.6 million and $27.6 million, respectively. Of these COI
charges, $175.5 million and $24.3 million of such fees were ceded in 1998 and
1997, respectively, to a Zurich affiliated company, ZC Life Reinsurance Limited
("ZC Life"), formerly EPICENTER Reinsurance (Bermuda) Limited. In 1998, KILICO
ceded in excess of 100 percent of the COI charges received due to changes to the
reinsurance agreement with ZC Life. Separate account fees and charges in 1998
and 1997 also include BOLI-related premium tax expense loads of $29.1 million
and $51.1 million, respectively.
Other income includes surrender charge revenue of $4.0 million in 1998, compared
with $5.2 million and $5.4 million in 1997 and 1996, respectively. The decrease
in surrender charge revenue in 1998, compared with 1997, primarily reflects a
decrease in total general account and separate account policyholder surrenders
and withdrawals. The slight decrease in surrender charge revenue in 1997,
compared with 1996, reflects that 46 percent of KILICO's fixed and variable
annuity liabilities, excluding BOLI, at December 31, 1997 are subject to minimal
(5 percent or less) or no surrender charges, compared with 57 percent in 1996.
This decrease in surrender charge revenue in 1997 was offset somewhat by an
increase in total general account and separate account policyholder surrenders
and withdrawals.
POLICYHOLDER SURRENDERS, WITHDRAWALS AND DEATH BENEFITS
(in millions)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
General account................... $645.5 $703.1 $652.0
Separate account.................. 260.9 236.2 196.7
------ ------ ------
Total........................ $906.4 $939.3 $848.7
====== ====== ======
</TABLE>
Reflecting the current interest rate environment and other competitive market
factors, we adjust our crediting rates on interest-sensitive products over time
in order to manage spread revenue and policyholder surrender and withdrawal
activity. We can also improve spread revenue over time by increasing investment
income. The current interest rate environment during 1997 and 1998, has
mitigated at present, competitive pressures to increase existing renewal
crediting rates.
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<PAGE> 78
General account surrenders, withdrawals and death benefits decreased $57.6
million in 1998, compared with 1997. This decrease primarily reflects a decrease
in surrenders and withdrawals due to uncertainty with alternative investment
options because of market instability during the second half of 1998.
Taxes, licenses and fees decreased $22.3 million in 1998 to $30.3 million,
reflecting the decrease in premium taxes on BOLI. Excluding the taxes due on
BOLI, for which we received a corresponding expense load in separate account
fees and other charges, taxes, licenses and fees amounted to $1.5 million,
compared with $1.5 million in 1997 and $2.2 million in 1996.
Commission expense was higher in 1998, compared with both 1997 and 1996, due to
an increase in total sales, excluding BOLI.
Operating expenses increased in 1998 and 1997, compared with 1996, as a result
of:
- restaffing after the completion of the acquisition and for new business
initiatives
- an increase in various outside consulting fees
- an increase in printing and stationary expenses for sales materials, and
- an increase in data processing expenses
Data processing expenses increased to $12.9 million in 1998, compared with $10.8
million in 1997 and $4.1 million in 1996, primarily due to:
- infrastructure improvements related to new product development
- new systems implemented and put into production
- system conversion projects
- development of a data warehouse, and
- costs related to bringing our systems in compliance with the year 2000
Data processing expenses related to bringing our systems in compliance with the
year 2000 amounted to $1.3 million in 1998. We currently anticipate that it will
cost an additional $662 thousand to bring all remaining systems in compliance.
Operating earnings were positively impacted by the deferral of insurance
acquisition costs in 1998, compared with 1997 and 1996. The deferral of
insurance acquisition costs increased in 1998, compared with both 1997 and 1996.
This reflects an increase in commissions expense and operating expenses related
directly to the increase in production of new business.
Operating earnings were negatively impacted by the amortization of insurance
acquisition costs in 1998 and 1997, compared with 1996, with the most dramatic
increase occurring in 1998. The increase in amortization of insurance
acquisition costs in 1998, compared with 1997, was primarily due to the
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<PAGE> 79
increase in production of new business in 1998, as well as increased profits in
1998. These increases tend to accelerate amortization. Deferred insurance
acquisition costs, and their related amortization, for policies sold prior to
January 4, 1996 have been replaced under purchase accounting by the value of
business acquired. The value of business acquired reflects the present value of
the right to receive future cash flows from insurance contracts existing at the
date of acquisition. The amortization of the value of business acquired is
calculated assuming an interest rate equal to the liability or contract rate on
the value of the business acquired. Deferred insurance acquisition costs are
established on all new policies sold after January 4, 1996.
The amortization of the value of business acquired decreased in 1998, compared
with 1997, as a result of:
- a significant increase in separate account assets, which increases
estimated future gross profits and shifts amortization to later years
- a decreasing block of business previously acquired, resulting in less
amortization as gross profits on this business decrease, offset by
- a significant increase in realized capital gains which tend to accelerate
the amortization of the value of business acquired as the gains tend to
decrease our projected future estimated gross profits
The difference between the cost of acquiring KILICO and the net fair value of
KILICO's assets and liabilities as of January 4, 1996 was recorded as goodwill.
During 1996, we began to amortize goodwill on a straight-line basis over
twenty-five years. In December of 1997, we changed our amortization period to
twenty years in order to conform to Zurich's accounting practices and policies.
As a result of the change in amortization periods, we recorded an increase in
amortization expense of $5.1 million during 1997.
INVESTMENTS
Our principal investment strategy is to maintain a balanced, well-diversified
portfolio supporting the insurance contracts written. We make shifts in our
investment portfolio depending on, among other factors:
- its evaluation of risk and return in various markets
- consistency with our business strategy and investment guidelines approved
by the board of directors
- the interest rate environment
- liability durations, and
- changes in market and business conditions
75
<PAGE> 80
INVESTED ASSETS AND CASH
(in millions)
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31
1998 1997
--------------- ---------------
<S> <C> <C> <C> <C>
Cash and short-term
investments...................... $ 72 1.7% $ 260 5.8%
Fixed maturities:
Investment-grade:
NAIC(1) Class 1............. 2,663 63.7 3,004 67.1
NAIC(1) Class 2............. 724 17.3 651 14.5
Below investment grade:
Performing.................. 96 2.3 14 .3
Nonperforming............... -- -- -- --
Trading account securities....... 102 2.4 -- --
Joint venture mortgage loans..... 66 1.6 73 1.6
Third-party mortgage loans....... 76 1.8 103 2.3
Other real estate-related
investments.................... 22 .5 44 1.0
Policy loans..................... 271 6.5 282 6.3
Equity securities................ 67 1.6 25 .6
Other............................ 24 .6 21 .5
------ ----- ------ -----
Total(2)............... $4,183 100.0% $4,477 100.0%
====== ===== ====== =====
</TABLE>
- ---------------
(1) National Association of Insurance Commissioners ("NAIC").
-- Class 1 = A- and above
-- Class 2 = BBB- through BBB+
(2) See the note captioned "Financial Instruments--Off-Balance-Sheet Risk" in
the notes to the consolidated financial statements.
FIXED MATURITIES
We are carrying our fixed maturity investment portfolio, which we consider
available for sale, at estimated fair value. The aggregate unrealized
appreciation or depreciation is recorded as a component of accumulated other
comprehensive income, net of any applicable income tax expense. The aggregate
unrealized appreciation (depreciation) on fixed maturities at December 31, 1998
and 1997 was $61.3 million and $24.6 million, respectively. 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, 1998, investment-grade fixed maturities and cash and short-term
investments accounted for 82.7 percent of our invested assets and cash, compared
with 87.4 percent at December 31, 1997. Approximately 53.4 percent of our NAIC
Class 1 bonds were rated AAA or equivalent at year-end 1998, compared with 54.0
percent at December 31, 1997.
Approximately 28.0 percent of our investment-grade fixed maturities at December
31, 1998 were mortgage-backed securities, down from 35.1 percent at December 31,
1997, due to sales and paydowns during 1998. These investments consist primarily
of marketable mortgage pass-through securities issued by the
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<PAGE> 81
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. We have not made any investments in interest-only or
other similarly volatile tranches of mortgage-backed securities. Our mortgage-
backed investments are generally of AAA credit quality, and the markets for
these investments have been and are expected to remain liquid. We plan to
continue to reduce our holding of these investments over time.
As a result of the previously discussed repositionings of our fixed maturity
portfolio, approximately 15.4 percent and 10.8 percent of our investment-grade
fixed maturities at December 31, 1998 and 1997, respectively, consisted of
corporate asset-backed securities. The majority of our investments in asset-
backed securities were backed by home equity loans (21.9%), auto loans (8.2%),
manufactured housing loans (14.8%), equipment loans (5.2%), and commercial
mortgage backed securities ("CMBs") (22.1%).
Future investment income from mortgage-backed securities and other asset-backed
securities may be affected by the timing of principal payments and the yields on
reinvestment alternatives available at the time of such payments. As a result of
purchase accounting adjustments to fixed maturities, most of our mortgage-backed
securities are carried at a premium over par. Prepayment activity resulting from
a decline in interest rates on such securities purchased at a premium would
accelerate the amortization of the premiums. Accelerated amortization would
result in reductions of investment income related to such securities.
At December 31, 1998 and 1997 We had unamortized premiums and discounts related
to mortgage-backed and asset-backed securities as follows (in millions):
<TABLE>
<CAPTION>
DECEMBER 31
-------------
1998 1997
----- -----
<S> <C> <C>
Unamortized premiums.................................. $15.8 $19.6
===== =====
Unamortized discounts................................. $ 4.6 $ 5.2
===== =====
</TABLE>
Amortization of the discount or premium from mortgage-backed and asset-backed
securities is recognized using a level effective yield method. This method
considers the estimated timing and amount of prepayments of the underlying loans
and is adjusted to reflect differences between the prepayments originally
anticipated and the actual prepayments received and currently anticipated. To
the extent that the estimated lives of these securities change as a result of
changes in prepayment rates, the adjustment is also included in net investment
income.
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<PAGE> 82
The table below provides information about our mortgage-backed and asset-backed
securities that are sensitive to changes in interest rates. The expected
maturity dates have been calculated on a security by security basis using
prepayment assumptions obtained from a survey conducted by a securities
information service. These assumptions are consistent with the current interest
rate and economic environment.
<TABLE>
<CAPTION>
CARRYING FAIR VALUE
VALUE AT EXPECTED MATURITY DATE AT
DECEMBER 31, ---------------------------------------------------- DECEMBER 31,
(IN MILLIONS) 1998 1999 2000 2001 2002 2003 THEREAFTER TOTAL 1998
------------- ------------ ---- ---- ---- ---- ---- ---------- ----- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed Maturities:
Mortgage-backed bonds........ $ 946.7 $137.2 $85.7 $48.3 $47.7 $149.6 $478.2 $ 946.7 $ 946.7
Average yield.............. 6.45% 6.46% 6.42% 6.43% 6.42% 6.42% 6.42% 6.45% 6.45%
Asset-backed bonds........... $ 407.4 $ 17.9 $36.1 $49.8 $36.1 $ 31.9 $235.6 $ 407.4 $ 407.4
Average yield.............. 6.67% 6.73% 6.75% 6.82% 6.90% 6.90% 6.95% 6.67% 6.67%
CMBs......................... $ 115.5 $ 1.3 $ 1.2 $ 1.4 $ 1.5 $ 12.3 $ 97.8 $ 115.5 $ 115.5
Average yield.............. 6.25% 6.28% 6.28% 6.28% 6.28% 6.28% 6.28% 6.25% 6.25%
-------- -------- --------
$1,469.6 $1,469.6 $1,469.6
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
CARRYING FAIR VALUE
VALUE AT EXPECTED MATURITY DATE AT
DECEMBER 31, ----------------------------------------------------- DECEMBER 31,
(IN MILLIONS) 1997 1998 1999 2000 2001 2002 THEREAFTER TOTAL 1997
------------- ------------ ---- ---- ---- ---- ---- ---------- ----- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed Maturities:
Mortgage-backed bonds....... $1,283.6 $219.1 $232.5 $145.1 $92.2 $64.5 $530.2 $1,283.6 $1,283.6
Average yield............. 6.58% 6.60% 6.61% 6.64% 6.64% 6.63% 6.67% 6.58% 6.58%
Asset-backed bonds.......... $ 353.0 $ 18.9 $ 16.9 $ 30.8 $35.5 $47.2 $203.7 $ 353.0 $ 353.0
Average yield............. 6.81% 6.85% 7.04% 7.05% 7.15% 7.13% 7.20% 6.81% 6.81%
CMBs........................ $ 42.2 $ 0.3 $ 0.4 $ 0.4 $ 0.4 $ 8.0 $ 32.7 $ 42.2 $ 42.2
Average yield............. 6.64% 6.64% 6.64% 6.64% 6.64% 6.63% 6.63% 6.64% 6.64%
-------- -------- --------
$1,678.8 $1,678.8 $1,678.8
======== ======== ========
</TABLE>
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<PAGE> 83
The current weighted average maturity of the mortgage-backed and asset-backed
securities at December 31, 1998, is 4.0 years. A 200 basis point increase in
interest rates would extend the weighted average maturity by approximately .65
of a year, while a 200 basis point decrease in interest rates would decrease the
weighted average maturity by approximately 1.45 years.
The weighted average maturity of the mortgage-backed and asset-backed securities
at December 31, 1997, was 3.8 years. A 200 basis point increase in interest
rates would have extended the weighted average maturity by approximately 1.0
year, while a 200 basis point decrease in interest rates would have decreased
the weighted average maturity by approximately 1.3 years.
As of December 31, 1998, we had $29.9 million of U.S. dollar denominated fixed
maturity investments, after write-downs for other-than-temporary declines in
value, which have significant exposure to countries in Southeast Asia.
Approximately $3.5 million of these securities were from Korea, $17.6 million
were from Hong Kong, China, $2.9 million were from South Korea and the remainder
were from a United Kingdom bank with most of its loans issued to countries in
Southeast Asia. Write-downs on these securities, which were considered to be
other-than-temporary, as of December 31, 1998 and 1997 amounted to $1.1 million
and $3.1 million, respectively. There can be no assurance that the current
estimate for other-than-temporary declines in value for such securities will
prove accurate over time due to changing economic conditions in Southeast Asia.
Below investment-grade securities holdings (NAIC classes 3 through 6),
representing securities of 40 issuers at December 31, 1998, totaled 2.3 percent
of cash and invested assets at December 31, 1998 and .3 percent at December 31,
1997. 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. Our strategy of limiting
exposure to below investment-grade securities 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.
REAL ESTATE-RELATED INVESTMENTS
The $164.4 million real estate-related portfolio we hold consists of joint
venture and third-party mortgage loans and other real estate-related
investments. The real estate-related portfolio constituted 3.9 percent of cash
and invested assets at December 31, 1998, compared with $220.0 million, or 4.9
percent, at December 31, 1997. The decrease in real estate-related investments
during 1998 was primarily due to asset sales and a net increase of $16.1 million
in real estate-related reserves during 1998.
As reflected in the "Real estate portfolio" table below, we have continued to
fund both existing projects and legal commitments. The future legal commitments
were $64.4 million at December 31, 1998. This amount represented a net decrease
of $10.9 million since December 31, 1997, primarily due to sales in
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<PAGE> 84
1998. As of December 31, 1998, we expect to fund approximately $.2 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. We do not currently expect to fund
these commitments. The total legal commitments, along with estimated working
capital requirements, are considered in our evaluation of reserves and
write-downs.
Excluding the $1.2 million of net equity investments in joint ventures, Our
real estate loans totaled $163.2 million at December 31, 1998, after reserves
and write-downs. Of this amount, $131.3 million are on accrual status with a
weighted average interest rate of approximately 8.79 percent. Of these accrual
loans:
- 17.0 percent have terms requiring current periodic payments of their full
contractual interest
- 46.1 percent require only partial payments or payments to the extent of
borrowers' cash flow, and
- 36.9 percent defer all interest to maturity
The equity investments in real estate at December 31, 1998 consisted of our
other equity investments in joint ventures. These equity investments include our
share of periodic operating results. As an equity owner or affiliate of an
equity owner, we have the ability to fund, and historically have elected to
fund, operating requirements of certain joint ventures.
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<PAGE> 85
REAL ESTATE PORTFOLIO
(in millions)
<TABLE>
<CAPTION>
OTHER REAL ESTATE-RELATED
MORTGAGE LOANS INVESTMENTS
---------------- ------------------------------------
JOINT THIRD- OTHER REAL ESTATE EQUITY
VENTURE PARTY LOANS(2) OWNED INVESTMENTS TOTAL
------- ------ -------- ----------- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1997..................... $ 72.7 $103.0 $ 21.1 $ 4.0 $ 19.2 $220.0(1)
Additions (deductions):
Fundings................. 13.1 -- -- .2 -- 13.3
Interest added to
principal.............. 6.3 2.8 -- -- -- 9.1
Sales/paydowns/distributions.. (11.8) (30.1) (.3) (6.6) (27.0) (75.8)
Operating gain........... -- -- -- -- .2 .2
Transfers................ -- -- -- (.7) -- (.7)
Net realized investments
gains (losses)......... (3.0) 32.4 .4 3.1 8.5 41.4(4)
Other transactions,
net.................... (11.5) (31.6) (.3) -- .3 (43.1)(4)
------ ------ ------ ----- ------ ------
Balance at December 31,
1998................... $ 65.8 $76.5 $ 20.9 $ 0 $ 1.2 $164.4(3)
====== ====== ====== ===== ====== ======
</TABLE>
- ---------------
(1) Net of $9.2 million reserve and write-downs. Excludes $9.5 million of real
estate-related accrued interest.
(2) The other real estate loans were notes receivable evidencing financing,
primarily to joint ventures. These loans were issued by KILICO generally to
provide financing for Kemper's or KILICO's joint ventures for various
purposes.
(3) Net of $25.3 million reserve and write-downs. Excludes $8.7 million of real
estate-related accrued interest.
(4) Included in this amount is $37.0 million of contingent interest payments
related to a 1995 real estate sale. These payments were recorded as
realized investment gains and then deducted from other transactions because
they did not affect the carrying value.
REAL ESTATE CONCENTRATIONS AND OUTLOOK
Our real estate portfolio is distributed by geographic location and property
type. However, we have concentration exposures in certain states and in certain
types of properties. In addition to these exposures, we also have exposures to
certain real estate developers and partnerships.
As a result of our ongoing strategy to reduce our exposure to real
estate-related investments, as of December 31, 1998, we had three remaining
properties which account for approximately 87.2 percent of our $164.4 million
real estate-related portfolio.
The largest of these investments at December 31, 1998 amounted to $64.5 million
and consisted of second mortgages on nine hotel properties and two office
buildings. Patrick M. Nesbitt or his affiliates, a third-party real estate
developer, have ownership interests in these properties. These hotels and office
buildings are geographically dispersed and the current market values of the
underlying
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<PAGE> 86
properties substantially exceed the balances due on our mortgages. These loans
are on accrual status.
Our loans to a master limited partnership (the "MLP") between subsidiaries of
Kemper and subsidiaries of Lumbermens, amounted to $51.6 million at December 31,
1998. The MLP's underlying investment primarily consists of a water development
project located in California's Sacramento River Valley. This project is
currently in the final stages of a permit process with various Federal and
California State agencies which will determine the long-term economic viability
of the project. Loans to the MLP are on accrual status.
The remaining significant real estate-related investment amounted to $27.3
million at December 31, 1998 and consisted of various zoned and unzoned
residential and commercial lots located in Hawaii. Due to certain negative
zoning restriction developments in January 1997 and a continuing economic slump
in Hawaii, we have placed these real estate-related investments on nonaccrual
status as of December 31, 1996. We are currently pursuing the zoning of all
remaining unzoned properties, as well as pursuing steps to sell all remaining
zoned properties. However, due to the state of Hawaii's economy, which has
lagged behind the economic expansion of most of the rest of the United States,
we anticipate that it could be several additional years until we completely
dispose of all investments in Hawaii.
We evaluate our real estate-related investments (including accrued interest)
using an estimate of the investments observable market price, net of estimated
selling costs. Because our real estate review process includes estimates
involving changing economic conditions and other factors, there can be no
assurance that current estimates will prove accurate over time. Our real
estate-related investments are expected to continue to decline further through
future sales. Our net income could be materially reduced in future periods if:
- real estate market conditions worsen in areas where our portfolio is
located
- Kemper's and KILICO's plans with respect to certain projects change, or
- necessary construction or zoning permits are not obtained
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<PAGE> 87
The following table is a summary of our 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 DECEMBER 31
1998 1997
----------- -----------
<S> <C> <C>
Potential problem loans(1)............... $ -- $ --
Past due loans(2)........................ -- --
Nonaccrual loans (primarily Hawaiian
properties)(3)......................... 37.4 47.4
Real estate owned........................ -- 4.0
----- -----
Total.......................... $37.4 $51.4
===== =====
</TABLE>
- ---------------
(1) These are real estate-related investments where KILICO, based on known
information, has serious doubts about the borrowers' abilities to comply
with present repayment terms and which we anticipate may go into nonaccrual,
past due or restructured status.
(2) Interest more than 90 days past due but not on nonaccrual status.
(3) We do not accrue interest on real estate-related investments when we judge
that the likelihood of interest collection is doubtful. Loans on nonaccrual
status after reserves and write-downs amounted to $31.8 million and $41.8
million at December 31, 1998 and December 31, 1997, respectively.
NET INVESTMENT INCOME
Our pre-tax net investment income totaled $273.5 million in 1998, compared with
$296.2 million in 1997 and $299.7 million in 1996. This includes our 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 which are on nonaccrual status. As previously
discussed, our net investment income in 1998 and 1997, compared with 1996, has
been negatively impacted by purchase accounting adjustments.
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<PAGE> 88
Our 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
------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Fixed maturities......................... $.3 $.5 $ .7
Real estate-related investments.......... 3.2 3.9 .5
---- ---- ----
Total............................. $3.5 $4.4 $1.2
==== ==== ====
Basis points............................. 8 10 3
==== ==== ====
</TABLE>
Foregone investment income from the nonaccrual of real estate-related
investments is net of our share of interest expense on these loans excluded from
our share of joint venture operating results. Any increase in nonperforming
securities, and either worsening or stagnant real estate conditions, would
increase the expected adverse effect on our future investment income and
realized investment results.
REALIZED INVESTMENT RESULTS
Net income reflects after-tax realized investment gains of $33.7 million, $6.8
million and $8.8 million in 1998, 1997 and 1996, respectively. Included in the
after-tax realized investment gains are trading account security gains of $1.7
million in 1998. As previously discussed, we segregated a portion of our General
Account investment portfolio in 1998 into a "trading" account under Statement of
Financial Accounting Standards No. 115 ("FAS 115"). FAS 115 mandates that assets
held in a trading account be valued at fair value, with changes in fair value
flowing through the income statement as realized capital gains and losses.
Unrealized gains and losses on fixed maturity investments which are available
for sale are not reflected in KILICO's net income. These changes in unrealized
value are recorded as a component of accumulated other comprehensive income, net
of any applicable income taxes. If and to the extent a fixed maturity investment
suffers an other-than-temporary decline in value, however, the security is
written down to net realizable value, and the write-down adversely impacts net
income.
We regularly monitor our investment portfolio and as part of this process
reviews our assets for possible impairments of carrying value. Because the
review process includes estimates involving changing economic conditions and
other factors, there can be no assurance that current estimates will prove
accurate over time.
A valuation allowance has been established to reduce the deferred tax asset for
investment losses to the amount that, based upon available evidence, is in
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<PAGE> 89
management's judgment more likely than not to be realized. The valuation
allowance is evaluated as of each balance sheet date.
INTEREST RATES
Interest rates remained relatively stable during 1996 and 1997, before declining
in 1998. The Federal Reserve Board lowered rates 3 times during the second half
of 1998, resulting in a steeper yield curve due to the lower short-term interest
rates.
When maturing or sold investments are reinvested at lower yields in a low
interest rate environment, we can adjust our 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. This can result in
narrower spreads.
A rising interest rate environment can increase net investment income as well as
contribute to both realized and unrealized fixed maturity investment losses. A
declining interest rate environment can decrease net investment income as well
as contribute to both realized and unrealized fixed maturity investment gains.
Also, lower renewal crediting rates on annuities, compared with competitors'
higher new money crediting rates, have influenced certain annuity holders to
seek alternative products. We mitigate this risk somewhat by charging surrender
fees, which decrease over time, when annuity holders withdraw funds prior to
maturity on certain annuity products. Approximately 46 percent of KILICO's fixed
and variable annuity liabilities as of December 31, 1998, however, were no
longer subject to significant surrender fees.
LIQUIDITY AND CAPITAL RESOURCES
We carefully monitor 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 our
liquidity are deposits for fixed annuities, premium income, investment income,
separate account fees, other operating revenue and cash provided from maturing
or sold investments.
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 our claims-paying ability or
financial strength ratings could result in our products being less attractive to
consumers. Any reductions in our parent's ratings could also adversely impact
our 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.
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<PAGE> 90
Each rating is subject to revision or withdrawal at any time by the assigning
organization and should be evaluated independently of any other rating.
STOCKHOLDER'S EQUITY
Stockholder's equity totaled $853.9 million at December 31, 1998, compared with
$865.6 million at December 31, 1997, and $751.0 million at December 31, 1996.
The 1998 decrease in stockholder's equity was primarily due to dividends of
$95.0 million paid to Kemper during 1998. This decrease was offset by 1998 net
income of $65.1 million and an increase of $20.3 million in accumulated other
comprehensive income. The increase in accumulated other comprehensive income was
primarily related to the change in unrealized appreciation related to our fixed
maturity investment portfolio due to falling interest rates during 1998. The
1997 increase in stockholder's equity was primarily due to net income of $38.7
million, a $45.0 million capital contribution and an increase in accumulated
other comprehensive income related to the change in unrealized appreciation of
$60.1 million related to our fixed maturity investment portfolio. These
increases were offset by a dividend of $29.2 million to Kemper.
EMERGING ISSUE
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. This statement is effective for fiscal years
beginning after June 15, 2000. Full implementation of SFAS No. 133 is expected
in December 1999. The impact of implementation is not expected to be material to
KILICO.
86
<PAGE> 91
KILICO'S DIRECTORS AND EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
NAME AND AGE
POSITION WITH KILICO OTHER BUSINESS EXPERIENCE
YEAR OF ELECTION DURING PAST 5 YEARS OR MORE
-------------------- ---------------------------
<S> <C>
Gale K. Caruso (42) President and Chief Executive Officer
President and Chief Executive Officer of Federal Kemper Life Assurance
since June 1999. Director since July Company (FKLA), Fidelity Life
1999. Association (FLA), Zurich Life
Insurance Company of America (ZLICA)
and Zurich Direct, Incorporated (ZD)
since June 1999. Director of FKLA,
FLA and ZLICA since July 1999.
Chairman, President and Chief
Executive Officer of Scudder Canada
Investor Services, Ltd. from 1995 to
June 1999. Managing Director of
Scudder Kemper Investments, Inc. from
July 1986 to June 1999.
John B. Scott (55) Chairman of the Board of FKLA, FLA,
Chairman of the Board since June ZLICA and ZD since June 1999. Chief
1999. Director since 1992. Executive Officer, President and
Director of FKLA and FLA from 1988 to
June 1999. Chief Executive Officer,
President and Director of ZLICA and
ZD from March 1996 to June 1999.
Chairman of the Board and Director of
Investors Brokerage Services, Inc.
(IBS) and Investors Brokerage
Services Insurance Agency, Inc.
(IBSIA) since 1993. Chairman of the
Board of FKLA and FLA from April 1988
to January 1996. Chairman of the
Board of KILICO from February 1992 to
January 1996. Executive Vice
President and Director of Kemper
Corporation (Kemper) since January
1994 and March 1996, respectively.
Executive Vice President of Kemper
Financial Companies, Inc. from
January 1994 to January 1996 and
Director from 1992 to January 1996.
</TABLE>
87
<PAGE> 92
<TABLE>
<CAPTION>
NAME AND AGE
POSITION WITH KILICO OTHER BUSINESS EXPERIENCE
YEAR OF ELECTION DURING PAST 5 YEARS OR MORE
-------------------- ---------------------------
<S> <C>
Eliane C. Frye (52) Executive Vice President of FKLA and
Executive Vice President since 1995. FLA since 1995. Executive Vice
Director since May 1998. President of ZLICA and ZD since March
1996. Director of FLA since December
1997. Director of FKLA and ZLICA
since May 1998. Director of ZD from
March 1996 to March 1997. Director of
IBS and IBSIA since 1995. Senior Vice
President of KILICO, FKLA and FLA
from 1993 to 1995. Vice President of
FKLA and FLA from 1988 to 1993.
Frederick L. Blackmon (47) Senior Vice President and Chief
Senior Vice President and Chief Financial Officer of FKLA since
Financial Officer since December December 1995. Senior Vice President
1995. and Chief Financial Officer of FLA
since January 1996. Senior Vice
President and Chief Financial Officer
of ZLICA since March 1996. Senior
Vice President and Chief Financial
Officer of ZD since March 1996.
Director of FLA since May 1998.
Director of ZD from March 1996 to
March 1997. Treasurer and Chief
Financial Officer of Kemper since
January 1996. Chief Financial Officer
of Alexander Hamilton Life Insurance
Company from April 1989 to November
1995.
Russell M. Bostick (42) Senior Vice President and Chief
Senior Vice President and Chief Information Officer of FKLA, FLA,
Information Officer since March 1999. ZLICA and ZD since March 1999. Vice
President and Chief Information
Officer of FKLA, FLA, KILICO, ZLICA
and ZD from April 1998 to March 1999.
Chief Technology Officer of Corporate
Software and Technology from June
1997 to April 1998. Vice President of
CNA Insurance Companies from January
1995 to June 1997. Assistant Vice
President of CNA Insurance Companies
from February 1994 to January 1995.
</TABLE>
88
<PAGE> 93
<TABLE>
<CAPTION>
NAME AND AGE
POSITION WITH KILICO OTHER BUSINESS EXPERIENCE
YEAR OF ELECTION DURING PAST 5 YEARS OR MORE
-------------------- ---------------------------
<S> <C>
James C. Harkensee (41) Senior Vice President of FKLA and FLA
Senior Vice President since January since January 1996. Senior Vice
1996. President of ZLICA since 1995. Senior
Vice President of ZD since 1995.
Director of ZD from April 1993 to
March 1997 and since March 1998. Vice
President of ZLICA from 1992 to 1995.
Chief Actuary of ZLICA from 1991 to
1994. Assistant Vice President of
ZLICA from 1990 to 1992. Vice
President of ZD from 1994 to 1995.
James E. Hohmann (43) Senior Vice President of FKLA since
Senior Vice President since December December 1995. Chief Actuary of FKLA
1995. Director since May 1998. and KILICO from December 1995 to
January 1999. Senior Vice President
of FLA since January 1996. Chief
Actuary of FLA from January 1996 to
January 1999. Senior Vice President
of ZLICA and ZD since March 1996.
Chief Actuary of ZLICA and ZD from
March 1996 to January 1999. Director
of FLA since June 1997. Director of
FKLA and ZLICA since May 1998.
Director of ZD from March 1996 to
March 1997. Managing Principal
(Partner) of Tillinghast-Towers
Perrin from January 1991 to December
1995. Consultant/Principal (Partner)
of Tillinghast-Towers Perrin from
November 1986 to January 1991.
Edward K. Loughridge (44) Senior Vice President and Corporate
Senior Vice President and Corporate Development Officer of FKLA and FLA
Development Officer since January since January 1996. Senior Vice
1996. President and Corporate Development
Officer for ZLICA and ZD since March
1996. Senior Vice President of Human
Resources of Zurich-American
Insurance Group from February 1992 to
March 1996.
</TABLE>
89
<PAGE> 94
<TABLE>
<CAPTION>
NAME AND AGE
POSITION WITH KILICO OTHER BUSINESS EXPERIENCE
YEAR OF ELECTION DURING PAST 5 YEARS OR MORE
-------------------- ---------------------------
<S> <C>
Debra P. Rezabek (43) Senior Vice President of FKLA and FLA
Senior Vice President since 1996. since March 1996. Corporate Secretary
General Counsel since 1992. Corporate of FKLA and FLA since January 1996.
Secretary since January 1996. Director of FLA since May 1998. Vice
President of KILICO, FKLA and FLA
since 1995. General Counsel and
Director of Government Affairs of
FKLA and FLA since 1992 and of KILICO
since 1993. Senior Vice President,
General Counsel and Corporate
Secretary of ZLICA since March 1996.
Senior Vice President, General
Counsel and Corporate Secretary of ZD
since March 1996. Director of ZD from
March 1996 to March 1997. Secretary
of IBS and IBSIA since 1993. Director
of IBS and IBSIA from 1993 to 1996.
Assistant General Counsel of FKLA and
FLA from 1988 to 1992. General
Counsel and Assistant Secretary of
KILICO, FKLA and FLA from 1992 to
1996. Assistant Secretary of Kemper
since January 1996.
Edward L. Robbins (59) Senior Vice President and Chief
Senior Vice President and Chief Actuary of FKLA, FLA, ZLICA and ZD
Actuary since March 1999. since March 1999. Principal of KPMG
Peat Marwick LLP from May 1984 to
January 1999.
Kenneth M. Sapp (54) Senior Vice President of FKLA, FLA
Senior Vice President since January and ZLICA since January 1998.
1998. Director of IBS since May 1998.
Director of IBSIA since September
1998. Vice President--Aetna Life
Brokerage of Aetna Life & Annuity
Company from February 1992 to January
1998.
George Vlaisavljevich (56) Senior Vice President of FKLA, FLA
Senior Vice President since October and ZLICA since October 1996. Senior
1996. Vice President of ZD since March
1997. Director of IBS and IBSIA since
October 1996. Executive Vice
President of The Copeland Companies
from April 1983 to September 1996.
</TABLE>
90
<PAGE> 95
<TABLE>
<CAPTION>
NAME AND AGE
POSITION WITH KILICO OTHER BUSINESS EXPERIENCE
YEAR OF ELECTION DURING PAST 5 YEARS OR MORE
-------------------- ---------------------------
<S> <C>
William H. Bolinder (56) Chairman of the Board of FKLA, FLA
Director since January 1996. and KILICO from January 1996 to June
1999. Director of FKLA and FLA since
January 1996. Chairman of the Board
of ZLICA and ZD from March 1995 to
June 1999. Director of ZLICA and ZD
since March 1995. Chairman of the
Board and Director of Kemper since
January 1996. Director of SKI since
January 1996. Vice Chairman of SKI
from January 1996 to 1998. Member of
the Group Executive Board of Zurich
Financial Services Group since 1998.
Member of the Corporate Executive
Board of Zurich Insurance Group from
October 1994 to 1998. Chairman of
Zurich American Insurance Company
since 1998. Chairman of the Board of
American Guarantee and Liability
Insurance Company, Zurich American
Insurance Company of Illinois,
American Zurich Insurance Company and
Steadfast Insurance Company since
1995. Chief Executive Officer of
American Guarantee and Liability
Insurance Company, Zurich American
Insurance Company of Illinois and
American Zurich Insurance Company
from 1986 to June 1995. President of
Zurich Holding Company of America
since 1986. Manager of Zurich
Insurance Company, U.S. Branch from
1986 to 1998. Underwriter for Zurich
American Lloyds since 1986.
David A. Bowers (53) Director of FKLA and ZLICA since May
Director since May 1997. 1997. Director of FLA since June
1997. Executive Vice President,
Corporate Secretary and General
Counsel of Zurich U.S. since August
1985. Vice President, General Counsel
and Secretary of Kemper since January
1996.
</TABLE>
91
<PAGE> 96
<TABLE>
<CAPTION>
NAME AND AGE
POSITION WITH KILICO OTHER BUSINESS EXPERIENCE
YEAR OF ELECTION DURING PAST 5 YEARS OR MORE
-------------------- ---------------------------
<S> <C>
Gunther Gose (54) Director of FKLA, FLA and ZLICA since
Director since November 1998. November 1998. Chief Financial
Officer and Member of the Group
Executive Board of Zurich Financial
Services since October 1998. Member
of the Corporate Executive Board of
Zurich Insurance Group from April
1990 to October 1998.
</TABLE>
92
<PAGE> 97
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
<TABLE>
<S> <C> <C> <C> <C> <C>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
-----------------------------------------------------------
LONG TERM
OTHER INCENTIVE
ANNUAL PLAN
NAME AND COMPENSATION PAYOUTS
PRINCIPAL POSITION YEAR SALARY ($) BONUS ($)(2) ($)(3) ($)(2)
- ----------------------------------------------------------------------------------------------------------------------
John B. Scott................................... 1998 $171,000 $137,670 $ -- $219,375
Chief Executive Officer(1) 1997 171,000 112,100 -- 239,400
1996 212,500 94,000 -- 212,500
Eliane C. Frye.................................. 1998 107,160 64,860 -- 89,300
Executive Vice President(1) 1997 98,040 47,515 -- 91,590
1996 105,000 41,750 -- 69,750
Frederick L. Blackmon........................... 1998 94,160 63,800 -- 78,540
Senior Vice President and Chief Financial 1997 96,300 54,225 -- 112,500
Officer(1) 1996 100,583 47,000 27,924 71,250
George Vlaisavljevich........................... 1998 260,000 146,000 -- 216,600
Senior Vice President(1)........................ 1997 252,500 146,000 39,922 243,000
James E. Hohmann................................ 1998 88,400 71,175 -- 79,560
Senior Vice President and 1997 79,333 45,500 -- 80,150
Chief Actuary(1) 1996 113,333 -- -- --
<S> <C>
-----------------------------
ALL OTHER
NAME AND COMPENSATION
PRINCIPAL POSITION ($)(4)(5)(6)
- -----------------------------------------------------------------------------------------------------------------
John B. Scott................................... $ 42,465
Chief Executive Officer(1) 34,148
142,498
Eliane C. Frye.................................. 23,864
Executive Vice President(1) 18,886
58,520
Frederick L. Blackmon........................... 22,077
Senior Vice President and Chief Financial 19,543
Officer(1) 11,226
George Vlaisavljevich........................... 60,899
Senior Vice President(1)........................ 9,165
James E. Hohmann................................ 21,938
Senior Vice President and 17,643
Chief Actuary(1) 11,333
</TABLE>
- ---------------
(1) Also served in same positions for FKLA, ZLICA 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.
93
<PAGE> 98
(2) Annual bonuses are paid pursuant to annual incentive plans.
(3) The amounts disclosed in this column include:
(a) Amounts paid as non-preferential dividend equivalents on shares of
restricted stock and phantom stock units.
(b) The cash value of shares of Kemper common stock when awarded under the
Kemper Anniversary Award Plan. Employees were awarded shares on an
increasing scale beginning with their 10th year of employment and every 5
years thereafter, with a pro rata award at retirement.
(c) The taxable benefit from personal use of an employer-provided automobile
and certain estate planning services facilitated for executives.
(d) Relocation expense reimbursements of $21,437 in 1996 for Mr. Blackmon
and $24,498 for Mr. Vlaisavljevich in 1997.
(4) 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.
(5) Pursuant to the Conseco Merger Agreement, which was an agreement that was
subsequently terminated as the result of a failed merger attempt by Conseco,
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
94
<PAGE> 99
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 entitled 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 stock units awarded to the named executive officers subject to
vesting on December 31, 1996, were Mr. Scott 12,600 phantom units and Ms.
Frye 1,680 phantom units. 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. Mr. Scott and Ms. Frye received
allocated cash out payments of $430,272, and $80,317, respectively, in 1996.
(6) 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.
95
<PAGE> 100
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. Please read the Statement of Additional
Information in conjunction with this Prospectus.
FINANCIAL STATEMENTS
Our included financial statements should be considered primarily as bearing on
our ability to meet our obligations under the Contracts. The Contracts are not
entitled to participate in earnings, dividends or surplus of KILICO.
CHANGE OF ACCOUNTANTS
On September 12, 1997, KILICO appointed the accounting firm of
PricewaterhouseCoopers LLP ("PricewaterhouseCoopers"), formerly Coopers &
Lybrand, L.L.P., as independent accountants for the year ended December 31, 1997
to replace KPMG LLP effective with such appointment. Our Board of Directors
approved the selection of PricewaterhouseCoopers as the new independent
accountants. Management had not consulted with PricewaterhouseCoopers on any
accounting, auditing or reporting matter, prior to that time.
During the fiscal year ended December 31, 1996, there were no disagreements with
KPMG LLP on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure or any reportable events.
KPMG LLP's report on the financial statements for 1996 contained no adverse
opinion or disclaimer of opinion and was not qualified or modified as to
uncertainty, audit scope or accounting principles.
There were no disagreements with PricewaterhouseCoopers on accounting or
financial disclosures for the years ended December 31, 1998 or 1997.
96
<PAGE> 101
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors and Stockholder of
Kemper Investors Life Insurance Company:
In our opinion, the accompanying consolidated balance sheets as of December 31,
1998 and 1997 and the related consolidated statements of operations,
comprehensive income, stockholder's equity and cash flows present fairly, in all
material respects, the financial position of Kemper Investors Life Insurance
Company and subsidiaries (the "Company") at December 31, 1998 and 1997, and the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles. In addition, in our
opinion, the financial statement schedules listed in the accompanying index
present fairly, in all material respects, the information set forth therein when
read in conjunction with the related consolidated financial statements. These
financial statements and financial statement schedules are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedules based on our audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above. The financial
statements of the Company for the period from January 4, 1996 to December 31,
1996 were audited by other independent accountants whose report, dated March 21,
1997, expressed an unqualified opinion on those statements.
PricewaterhouseCoopers LLP
Chicago, Illinois
March 12, 1999
97
<PAGE> 102
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors and Stockholder
Kemper Investors Life Insurance Company:
We have audited the accompanying consolidated statements of operations,
comprehensive income, stockholder's equity, and cash flows of Kemper Investors
Life Insurance Company and subsidiaries for the period from January 4, 1996 to
December 31, 1996. In connection with our audit of the consolidated financial
statements, we also have audited the financial statement schedules as of
December 31, 1996 as listed in the accompanying index. These financial statement
schedules are incorporated by reference to a previously filed Form 10-K. These
consolidated financial statements and the financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and schedules based on our
audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the aforementioned consolidated financial statements present
fairly, in all material respects, the results of operations and the cash flows
of Kemper Investors Life Insurance Company and subsidiaries for the period from
January 4, 1996 to December 31, 1996, in conformity with generally accepted
accounting principles. Also, in our opinion, the aforementioned supplementary
financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.
KPMG LLP
Chicago, Illinois
March 21, 1997
98
<PAGE> 103
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Fixed maturities, available for sale, at fair
value (amortized cost: December 31, 1998,
$3,421,535; December 31, 1997, $3,644,075)... $3,482,820 $ 3,668,643
Trading account securities at fair value
(amortized cost: December 31, 1998,
$99,095)..................................... 101,781 --
Short-term investments......................... 58,334 236,057
Joint venture mortgage loans................... 65,806 72,663
Third-party mortgage loans..................... 76,520 102,974
Other real estate-related investments.......... 22,049 44,409
Policy loans................................... 271,540 282,439
Equity securities.............................. 66,854 24,839
Other invested assets.......................... 23,645 20,820
----------- -----------
Total investments..................... 4,169,349 4,452,844
Cash........................................... 13,486 23,868
Accrued investment income...................... 124,213 117,789
Goodwill....................................... 216,651 229,393
Value of business acquired..................... 118,850 138,482
Deferred insurance acquisition costs........... 91,543 59,459
Deferred income taxes.......................... 35,059 39,993
Reinsurance recoverable........................ 344,837 382,609
Receivable on sales of securities.............. 3,500 20,076
Other assets and receivables................... 23,029 3,187
Assets held in separate accounts............... 7,099,204 5,121,950
----------- -----------
Total assets.......................... $12,239,721 $10,589,650
=========== ===========
LIABILITIES
Future policy benefits......................... $3,906,391 $ 4,239,480
Benefits and funds payable..................... 318,369 150,524
Other accounts payable and liabilities......... 61,898 212,133
Liabilities related to separate accounts....... 7,099,204 5,121,950
----------- -----------
Total liabilities..................... 11,385,862 9,724,087
----------- -----------
Commitments and contingent liabilities
STOCKHOLDER'S EQUITY
Capital stock--$10 par value,
authorized 300,000 shares; outstanding
250,000 shares............................... 2,500 2,500
Additional paid-in capital..................... 804,347 806,538
Accumulated other comprehensive income......... 32,975 12,637
Retained earnings.............................. 14,037 43,888
----------- -----------
Total stockholder's equity............ 853,859 865,563
----------- -----------
Total liabilities and stockholder's
equity.............................. $12,239,721 $10,589,650
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
99
<PAGE> 104
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
REVENUE
Net investment income................. $273,512 $296,195 $299,688
Realized investment gains............. 51,868 10,546 13,602
Premium income........................ 22,346 22,239 7,822
Separate account fees and charges..... 61,982 85,413 25,309
Other income.......................... 10,031 11,087 9,786
-------- -------- --------
Total revenue............... 419,739 425,480 356,207
-------- -------- --------
BENEFITS AND EXPENSES
Interest credited to policyholders.... 176,906 199,782 223,094
Claims incurred and other policyholder
benefits............................ 28,029 28,372 14,255
Taxes, licenses and fees.............. 30,292 52,608 2,173
Commissions........................... 39,046 32,602 25,962
Operating expenses.................... 44,575 36,837 24,678
Deferral of insurance acquisition
costs............................... (46,565) (38,177) (27,820)
Amortization of insurance acquisition
costs............................... 12,082 3,204 2,316
Amortization of value of
business acquired................... 17,677 24,948 21,530
Amortization of goodwill.............. 12,744 15,295 10,195
-------- -------- --------
Total benefits and
expenses.................. 314,786 355,471 296,383
-------- -------- --------
Income before income tax expense...... 104,953 70,009 59,824
Income tax expense.................... 39,804 31,292 25,403
-------- -------- --------
Net income.................. $ 65,149 $ 38,717 $ 34,421
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
100
<PAGE> 105
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
NET INCOME............................... $ 65,149 $ 38,717 $ 34,421
-------- -------- --------
OTHER COMPREHENSIVE INCOME (LOSS), BEFORE
TAX:
Unrealized holding gains (losses) on
investments arising during period:
Unrealized holdings gains (losses) on
investments....................... 25,372 60,802 (84,036)
Adjustment to value of business
acquired.......................... (9,332) (28,562) 16,735
Adjustment to deferred insurance
acquisition costs................. (2,862) (2,680) 1,307
-------- -------- --------
Total unrealized holding gains
(losses) on investments
arising during period......... 13,178 29,560 (65,994)
-------- -------- --------
Less reclassification adjustments for
items included in net income:
Adjustment for (gains) losses
included in realized investment
gains............................. 6,794 (9,016) 3,963
Adjustment for amortization of
premium on fixed maturities
included in net investment
income............................ (17,064) (17,866) (26,036)
Adjustment for (gains) losses
included in amortization of value
of business acquired.............. (7,378) (2,353) (4,212)
Adjustment for (gains) losses
included in amortization of
insurance acquisition costs....... (463) (355) --
-------- -------- --------
Total reclassification
adjustments for items included
in net income................. (18,111) (29,590) (26,285)
-------- -------- --------
Other comprehensive income (loss), before
related income tax expense (benefit)... 31,289 59,150 (39,709)
Related income tax expense (benefit)..... 10,952 (985) 7,789
-------- -------- --------
Other comprehensive income
(loss), net of tax............ 20,337 60,135 (47,498)
-------- -------- --------
Comprehensive income (loss)..... $ 85,486 $ 98,852 $(13,077)
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
101
<PAGE> 106
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(in thousands)
<TABLE>
<CAPTION>
DECEMBER 31
------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CAPITAL STOCK, beginning and end of
period.............................. $ 2,500 $ 2,500 $ 2,500
-------- -------- --------
ADDITIONAL PAID-IN CAPITAL,
beginning of period............... 806,538 761,538 743,104
Capital contributions from parent... 4,261 45,000 18,434
Adjustment to prior period capital
contribution from parent.......... (6,452) -- --
-------- -------- --------
End of period............. 804,347 806,538 761,538
-------- -------- --------
ACCUMULATED OTHER COMPREHENSIVE
INCOME (LOSS), beginning of
period............................ 12,637 (47,498) --
Other comprehensive income (loss),
net of tax........................ 20,338 60,135 (47,498)
-------- -------- --------
End of period............. 32,975 12,637 (47,498)
-------- -------- --------
RETAINED EARNINGS, beginning of
period............................ 43,888 34,421 --
Net income.......................... 65,149 38,717 34,421
Dividends to parent................. (95,000) (29,250) --
-------- -------- --------
End of period............. 14,037 43,888 34,421
-------- -------- --------
Total stockholder's
equity.................. $853,859 $865,563 $750,961
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
102
<PAGE> 107
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income..................................... $ 65,149 $ 38,717 $ 34,421
Reconcilement of net income to net cash
provided:
Realized investment gains.................... (51,868) (10,546) (13,602)
Net change in trading account securities..... (6,727) -- --
Interest credited and other charges.......... 173,958 198,206 230,298
Deferred insurance acquisition costs......... (34,483) (34,973) (25,504)
Amortization of value of business acquired... 17,677 24,948 21,530
Amortization of goodwill..................... 12,744 15,295 10,195
Amortization of discount and premium on
investments................................ 17,353 17,866 25,743
Deferred income taxes........................ (12,469) (99,370) (897)
Net change in current federal income taxes... (73,162) 97,386 108,806
Benefits and premium taxes due related to
separate account bank-owned life
insurance.................................. 123,884 180,546 --
Other, net................................... (41,477) 17,168 (22,283)
----------- --------- -----------
Net cash provided from operating
activities............................. 190,579 445,243 368,707
----------- --------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash from investments sold or matured:
Fixed maturities held to maturity............ 491,699 229,208 264,383
Fixed maturities sold prior to maturity...... 882,596 633,872 891,995
Equity securities............................ 107,598 -- --
Mortgage loans, policy loans and other
invested assets............................ 180,316 131,866 168,727
Cost of investments purchased or loans
originated:
Fixed maturities............................. (1,319,119) (606,028) (1,369,091)
Equity securities............................ (83,303) -- --
Mortgage loans, policy loans and other
invested assets............................ (66,331) (76,350) (119,044)
Short-term investments, net.................... 177,723 (164,361) 300,819
Net change in receivable and payable for
securities transactions...................... (677) 29,746 (31,667)
Net change in other assets..................... -- 244 115
----------- --------- -----------
Net cash provided by investing
activities............................. 370,502 178,197 106,237
----------- --------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Policyholder account balances:
Deposits..................................... 180,124 145,687 141,159
Withdrawals.................................. (649,400) (745,510) (700,084)
Capital contributions from parent.............. 4,261 45,000 18,434
Dividends to parent............................ (95,000) (29,250) --
Other.......................................... (11,448) (18,275) 42,512
----------- --------- -----------
Net cash used in financing activities.... (571,463) (602,348) (497,979)
----------- --------- -----------
Net increase (decrease) in cash...... (10,382) 21,092 (23,035)
CASH, beginning of period........................ 23,868 2,776 25,811
----------- --------- -----------
CASH, end of period.............................. $ 13,486 $ 23,868 $ 2,776
=========== ========= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
103
<PAGE> 108
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Kemper Investors Life Insurance Company and subsidiaries (the "Company") issues
fixed and variable annuity products, variable life, term life and interest-
sensitive life insurance products marketed primarily through a network of
financial institutions, securities brokerage firms, insurance agents and
financial planners. The Company is licensed in the District of Columbia and all
states except New York. The Company is a wholly-owned subsidiary of Kemper
Corporation ("Kemper"). Effective January 4, 1996, Zurich Insurance Company
("Zurich"), Insurance Partners, L.P. ("IP") and Insurance Partners Offshore
(Bermuda), L.P. (together with IP, "Insurance Partners") owned 80 percent and 20
percent, respectively, of Kemper and therefore the Company. On February 27,
1998, Zurich acquired Insurance Partner's remaining 20 percent interest for
cash. As a result of this transaction, Kemper and the Company became
wholly-owned subsidiaries of Zurich.
Effective September 7, 1998, the businesses of Zurich merged with the financial
services business of B.A.T. Industries forming Zurich Financial Services
("ZFS"). ZFS is owned by Zurich Allied AG and Allied Zurich p.l.c., fifty-seven
percent and forty-three percent, respectively. Zurich Allied AG, representing
the financial interest of the former Zurich Group, is listed on the Swiss Market
Index, replacing Zurich. Allied Zurich p.l.c., representing the financial
interest of B.A.T. Industries, is included in the FTSE-100 Share Index in
London.
The financial statements include the accounts of the Company on a consolidated
basis. All significant intercompany balances and transactions have been
eliminated. Certain reclassifications have been made to the 1997 and 1996
consolidated financial statements in order for them to conform to the 1998
presentation.
BASIS OF ACCOUNTING
The acquisition of the Company on January 4, 1996, was accounted for using the
purchase method of accounting. The consolidated financial statements of the
Company prior to January 4, 1996, were prepared on a historical cost basis in
accordance with generally accepted accounting principles. The accompanying
consolidated financial statements of the Company as of and for the years ended
December 31, 1996, 1997 and 1998, have been prepared in conformity with
generally accepted accounting principles.
104
<PAGE> 109
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
could affect the reported amounts of assets and liabilities as well as the
disclosure of contingent assets or liabilities at the date of the financial
statements. As a result, actual results reported as revenue and expenses could
differ from the estimates reported in the accompanying financial statements. As
further discussed in the accompanying notes to the consolidated financial
statements, significant estimates and assumptions affect deferred insurance
acquisition costs, the value of business acquired, provisions for real estate-
related losses and reserves, other-than-temporary declines in values for fixed
maturities, the valuation allowance for deferred income taxes and the
calculation of fair value disclosures for certain financial instruments.
GOODWILL
The Company reviews goodwill to determine if events or changes in circumstances
may have affected the recoverability of the outstanding goodwill as of each
reporting period. In the event that the Company determines that goodwill is not
recoverable, it would amortize such amounts as additional goodwill expense in
the accompanying financial statements. As of December 31, 1998, the Company
believes that no such adjustment is necessary.
The Company began to amortize goodwill during 1996 on a straight-line basis over
twenty-five years. In December of 1997, the Company changed its amortization
period to twenty years in order to conform to Zurich's accounting practices and
policies. As a result of the change in amortization periods, the Company
recorded an increase in goodwill amortization expense of $5.1 million during
1997.
VALUE OF BUSINESS ACQUIRED
The value of business acquired reflects the estimated fair value of the
Company's life insurance business in force and represents the portion of the
cost to acquire the Company that is allocated to the value of the right to
receive future cash flows from insurance contracts existing at the date of
acquisition. Such value is the present value of the actuarially determined
projected cash flows for the acquired policies.
The value of the business acquired is amortized over the estimated contract life
of the business acquired in relation to the present value of estimated gross
profits using current assumptions based on an interest rate equal to the
liability
105
<PAGE> 110
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
or contract rate on the value of business acquired. The estimated amortization
and accretion of interest for the value of business acquired for each of the
years through December 31, 2003 are as follows:
<TABLE>
<CAPTION>
PROJECTED
(IN THOUSANDS) BEGINNING ACCRETION OF ENDING
YEAR ENDED DECEMBER 31 BALANCE AMORTIZATION INTEREST BALANCE
---------------------- --------- ------------ ------------ ---------
<S> <C> <C> <C> <C>
1996 (actual)........... $190,222 $(31,427) $9,897 $168,692
1997 (actual)........... 168,692 (34,906) 9,958 143,744
1998 (actual)........... 143,744 (26,807) 9,129 126,066
1999.................... 126,066 (24,926) 7,741 108,881
2000.................... 108,881 (22,649) 6,619 92,851
2001.................... 92,851 (20,736) 5,577 77,692
2002.................... 77,692 (17,096) 4,695 65,291
2003.................... 65,291 (15,504) 3,948 53,735
</TABLE>
The projected ending balance of the value of business acquired will be further
adjusted to reflect the impact of unrealized gains or losses on fixed maturities
held as available for sale in the investment portfolio. Such adjustments are not
recorded in the Company's net income but rather are recorded as a credit or
charge to accumulated other comprehensive income, net of income tax. As of
December 31, 1998 and 1997, this adjustment decreased the value of business
acquired by $7.2 million and $5.3 million, respectively, and accumulated other
comprehensive income by approximately $4.7 million and $3.4 million,
respectively.
LIFE INSURANCE REVENUE AND EXPENSES
Revenue for annuities, variable life insurance and interest-sensitive life
insurance products consists of investment income, and policy charges such as
mortality, expense and surrender charges and expense loads for premium taxes on
certain contracts. Expenses consist of benefits and interest credited to
contracts, policy maintenance costs and amortization of deferred insurance
acquisition costs.
Premiums for term life policies are reported as earned when due. Profits for
such policies are recognized over the duration of the insurance policies by
matching benefits and expenses to premium income.
106
<PAGE> 111
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED INSURANCE ACQUISITION COSTS
The costs of acquiring new business, principally commission expense and certain
policy issuance and underwriting expenses, have been deferred to the extent they
are recoverable from estimated future gross profits on the related contracts and
policies. The deferred insurance acquisition costs for annuities, separate
account business and interest-sensitive life insurance products are being
amortized over the estimated contract life in relation to the present value of
estimated gross profits. Deferred insurance acquisition costs related to such
interest-sensitive products also reflect the estimated impact of unrealized
gains or losses on fixed maturities held as available for sale in the investment
portfolio, through a credit or charge to accumulated other comprehensive income,
net of income tax. The deferred insurance acquisition costs for term-life
insurance products are being amortized over the premium paying period of the
policies.
FUTURE POLICY BENEFITS
Liabilities for future policy benefits related to annuities and
interest-sensitive life contracts reflect net premiums received plus interest
credited during the contract accumulation period and the present value of future
payments for contracts that have annuitized. Current interest rates credited
during the contract accumulation period range from 3.0 percent to 7.5 percent.
Future minimum guaranteed interest rates vary from 3.0 percent to 4.0 percent.
For contracts that have annuitized, interest rates used in determining the
present value of future payments range principally from 2.5 percent to 12.0
percent.
Liabilities for future term life policy benefits have been computed principally
by a net level premium method. Anticipated rates of mortality are based on the
1975-1980 Select and Ultimate Table modified by Company experience, including
withdrawals. Estimated future investment yields are a level 6.8 percent.
GUARANTY FUND ASSESSMENTS
The Company is liable for guaranty fund assessments related to certain
unaffiliated insurance companies that have become insolvent during the years
1998 and prior. The Company's financial statements include provisions for all
known assessments that are expected to be levied against the Company as well as
an estimate of amounts (net of estimated future premium tax recoveries) that the
Company believes it will be assessed in the future for which the life insurance
industry has estimated the cost to cover losses to policyholders.
107
<PAGE> 112
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVESTED ASSETS AND RELATED INCOME
Investments in fixed maturities and equity securities are carried at fair value.
Short-term investments are carried at cost, which approximates fair value.
The amortized cost of fixed maturities is adjusted for amortization of premiums
and accretion of discounts to maturity, or in the case of mortgage-backed and
asset-backed securities, over the estimated life of the security. Such
amortization is included in net investment income. Amortization of the discount
or premium from mortgage-backed and asset-backed securities is recognized using
a level effective yield method which considers the estimated timing and amount
of prepayments of the underlying loans and is adjusted to reflect differences
which arise between the prepayments originally anticipated and the actual
prepayments received and currently anticipated. To the extent that the estimated
lives of such securities change as a result of changes in prepayment rates, the
adjustment is also included in net investment income. The Company does not
accrue interest income on fixed maturities deemed to be impaired on an
other-than-temporary basis, or on mortgage loans and other real estate loans
where the likelihood of collection of interest is doubtful.
Mortgage loans are carried at their unpaid balance, net of unamortized discount
and any applicable reserves or write-downs. Other real estate-related
investments, net of any applicable reserves and write-downs, include: (1) notes
receivable from real estate ventures; (2) investments in real estate ventures,
adjusted for the equity in the operating income or loss of such ventures, and
(3) real estate owned at December 31, 1997, carried at fair value. Real estate
reserves are established when declines in collateral values, estimated in light
of current economic conditions, indicate a likelihood of loss.
Investments in policy loans and other invested assets, consisting primarily of
venture capital investments and a leveraged lease, are carried primarily at
cost.
Realized gains or losses on sales of investments, determined on the basis of
identifiable cost on the disposition of the respective investment, recognition
of other-than-temporary declines in value and changes in real estate-related
reserves and write-downs are included in revenue. Net unrealized gains or losses
on revaluation of investments are credited or charged to accumulated other
comprehensive income. Such unrealized gains are recorded net of deferred income
tax expense, while unrealized losses are not tax benefitted.
108
<PAGE> 113
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SEPARATE ACCOUNT BUSINESS
The assets and liabilities of the separate accounts represent segregated funds
administered and invested by the Company for purposes of funding variable
annuity and variable life insurance contracts for the exclusive benefit of
variable annuity and variable life insurance contract holders. The Company
receives administrative fees from the separate account and retains varying
amounts of withdrawal charges to cover expenses in the event of early
withdrawals by contract holders. The assets and liabilities of the separate
accounts are carried at fair value.
INCOME TAX
For the period January 1 through January 4, 1996, the Company's federal income
tax return was consolidated with Kemper and Kemper's other wholly-owned life
insurance subsidiary, Federal Kemper Life Assurance Company ("FKLA"). The Boards
of Directors of Kemper, KILICO and FKLA, adopted a written plan that provided
that federal income taxes would be paid to or recovered from Kemper on the basis
of each company's taxable income or loss as shown on its respective federal
income tax return. In the event of a federal income tax credit which is greater
than the amount recoverable from the other life insurance company or from the
Internal Revenue Service, the funds available would be apportioned among the
life companies entitled to a recovery on the basis of the relationship of each
company's tax credit to the total of all of the life insurance companies in a
deficit position. For the period January 5 through December 31, 1996, and
subsequent years, the Company has filed a separate federal income tax return.
Deferred taxes are provided on the temporary differences between the tax and
financial statement basis of assets and liabilities.
(2) CASH FLOW INFORMATION
The Company defines cash as cash in banks and money market accounts. The Company
paid federal income taxes of $126.0 million, $29.0 million and $28.1 million
directly to the United States Treasury Department during 1998, 1997 and 1996
respectively.
(3) INVESTED ASSETS AND RELATED INCOME
The Company is carrying its fixed maturity investment portfolio at estimated
fair value as fixed maturities are considered available for sale. The carrying
109
<PAGE> 114
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) INVESTED ASSETS AND RELATED INCOME (CONTINUED)
value of fixed maturities compared with amortized cost, adjusted for other-
than-temporary declines in value, were as follows:
<TABLE>
<CAPTION>
ESTIMATED UNREALIZED
CARRYING AMORTIZED --------------------
VALUE COST GAINS LOSSES
(in thousands) -------- --------- ----- ------
<S> <C> <C> <C> <C>
DECEMBER 31, 1998
U.S. treasury securities and
obligations of U.S.
government agencies and
authorities.................. $ 7,951 $ 7,879 $ 81 $ (9)
Obligations of states and
political subdivisions,
special revenue and
nonguaranteed................ 27,039 26,768 362 (91)
Debt securities issued by
foreign governments.......... 69,357 67,239 2,266 (148)
Corporate securities........... 1,908,850 1,866,372 46,664 (4,186)
Mortgage and asset-backed
securities................... 1,469,623 1,453,277 19,063 (2,717)
---------- ---------- ------- --------
Total fixed
maturities............ $3,482,820 $3,421,535 $68,436 $ (7,151)
========== ========== ======= ========
DECEMBER 31, 1997
U.S. treasury securities and
obligations of U.S.
government agencies and
authorities.................. $ 6,258 $ 6,298 $ 4 $ (44)
Obligations of states and
political subdivisions,
special revenue and
nonguaranteed................ 29,330 29,308 160 (138)
Debt securities issued by
foreign governments.......... 92,563 92,722 188 (347)
Corporate securities........... 1,861,655 1,846,588 24,733 (9,666)
Mortgage and asset-backed
securities................... 1,678,837 1,669,159 10,035 (357)
---------- ---------- ------- --------
Total fixed
maturities............ $3,668,643 $3,644,075 $35,120 $(10,552)
========== ========== ======= ========
</TABLE>
The carrying value and amortized cost of fixed maturity investments, by
contractual maturity at December 31, 1998, are shown below. Actual maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties and
110
<PAGE> 115
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) INVESTED ASSETS AND RELATED INCOME (CONTINUED)
because mortgage-backed and asset-backed securities provide for periodic
payments throughout their life.
<TABLE>
<CAPTION>
CARRYING AMORTIZED
VALUE COST
(in thousands) -------- ---------
<S> <C> <C>
One year or less............................. $ 44,816 $ 44,745
Over one year through five years............. 814,646 802,147
Over five years through ten years............ 891,767 866,613
Over ten years............................... 261,968 254,753
Securities not due at a single maturity date,
primarily mortgage and asset-backed
securities(1).............................. 1,469,623 1,453,277
---------- ----------
Total fixed maturities................ $3,482,820 $3,421,535
========== ==========
</TABLE>
- ---------------
(1) Weighted average maturity of 4.0 years.
Proceeds from sales of investments in fixed maturities prior to maturity were
$882.6 million, $633.9 million and $892.0 million during 1998, 1997 and 1996,
respectively. Gross gains of $10.1 million, $3.1 million and $9.9 million and
gross losses of $8.0 million, $13.7 million and $16.2 million were realized on
sales and write-downs of fixed maturities in 1998, 1997 and 1996, respectively.
At December 31, 1998, the Company had 12 separate asset-backed securities
included in fixed maturity investments from trusts formed to collateralize
assets underwritten by Green Tree Financial Corporation, which in aggregate
amounted to $97.7 million. No other individual investments exceeded ten percent
of stockholder's equity at December 31, 1998.
At December 31, 1998, securities carried at approximately $6.4 million were on
deposit with governmental agencies as required by law.
Upon default or indication of potential default by an issuer of fixed maturity
securities, the issue(s) of such issuer would be placed on nonaccrual status
and, since declines in fair value would no longer be considered by the Company
to be temporary, would be analyzed for possible write-down. Any such issue would
be written down to its net realizable value during the fiscal quarter in which
the impairment was determined to have become other than temporary. Thereafter,
each issue on nonaccrual status is regularly reviewed, and additional
write-downs may be taken in light of later developments.
The Company's computation of net realizable value involves judgments and
estimates, so such value should be used with care. Such value determination
111
<PAGE> 116
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) INVESTED ASSETS AND RELATED INCOME (CONTINUED)
considers such factors as the existence and value of any collateral security;
the capital structure of the issuer; the level of actual and expected market
interest rates; where the issue ranks in comparison with other debt of the
issuer; the economic and competitive environment of the issuer and its business;
the Company's view on the likelihood of success of any proposed issuer
restructuring plan; and the timing, type and amount of any restructured
securities that the Company anticipates it will receive.
The Company's $164.4 million real estate portfolio at December 31, 1998 consists
of joint venture and third-party mortgage loans and other real estate-related
investments. At December 31, 1998 and 1997, total impaired real estate-related
loans were as follows:
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31
1998 1997
(in millions) ----------- -----------
<S> <C> <C>
Impaired loans without reserves--gross....... $ 83.9 $39.3
Impaired loans with reserves--gross.......... 21.5 2.2
------ -----
Total gross impaired loans............ 105.4 41.5
Reserves related to impaired loans........... (18.5) (2.1)
------ -----
Net impaired loans.................... $ 86.9 $39.4
====== =====
</TABLE>
Impaired loans without reserves include loans in which the deficit in equity
investments in real estate-related investments is considered in determining
reserves and write-downs. The Company had an average balance of $54.6 million
and $45.2 million in impaired loans for 1998 and 1997, respectively. Cash
payments received on impaired loans are generally applied to reduce the
outstanding loan balance.
At December 31, 1998 and 1997, loans on nonaccrual status, before reserves and
write-downs, amounted to $37.4 million and $47.4 million, respectively. The
Company's nonaccrual loans are generally included in impaired loans.
112
<PAGE> 117
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) INVESTED ASSETS AND RELATED INCOME (CONTINUED)
The sources of net investment income were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
(in thousands) ---- ---- ----
<S> <C> <C> <C>
Interest and dividends on fixed
maturities......................... $232,707 $250,170 $250,683
Dividends on equity securities..... 2,143 2,123 646
Income from short-term
investments...................... 5,391 4,128 9,130
Income from mortgage loans......... 14,964 16,283 20,257
Income from policy loans........... 21,096 20,549 20,700
Income from other real
estate-related investments....... 352 6,631 4,917
Income from other loans and
investments...................... 2,223 2,045 2,480
-------- -------- --------
Total investment income..... 278,876 301,929 308,813
Investment expense................. (5,364) (5,734) (9,125)
-------- -------- --------
Net investment income....... $273,512 $296,195 $299,688
======== ======== ========
</TABLE>
Net realized investment gains (losses) for the years ended December 31, 1998,
1997 and 1996, were as follows:
<TABLE>
<CAPTION>
REALIZED GAINS (LOSSES)
-------------------------------------
1998 1997 1996
(in thousands) ---- ---- ----
<S> <C> <C> <C>
Real estate-related.............. $ 41,362 $ 19,758 $17,462
Fixed maturities................. 2,158 (10,656) (6,344)
Trading account securities--gross
gains on transfer.............. 3,254 -- --
Trading account securities--gross
losses on transfer............. (417) -- --
Trading account
securities--holding losses..... (151) -- --
Equity securities................ 5,496 914 --
Other............................ 166 530 2,484
-------- -------- -------
Realized investment gains
before income tax expense... 51,868 10,546 13,602
Income tax expense............... (18,154) (3,691) (4,761)
-------- -------- -------
Net realized investment
gains....................... $ 33,714 $ 6,855 $ 8,841
======== ======== =======
</TABLE>
113
<PAGE> 118
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) INVESTED ASSETS AND RELATED INCOME (CONTINUED)
Unrealized gains (losses) are computed below as follows: fixed maturities--the
difference between fair value and amortized cost, adjusted for other-than-
temporary declines in value; equity and other securities--the difference between
fair value and cost. The change in net unrealized investment gains (losses) by
class of investment for the years ended December 31, 1998, 1997 and 1996 were as
follows:
<TABLE>
<CAPTION>
CHANGE IN UNREALIZED GAINS (LOSSES)
-----------------------------------------
DECEMBER 31 DECEMBER 31 DECEMBER 31
1998 1997 1996
(in thousands) ----------- ----------- -----------
<S> <C> <C> <C>
Fixed maturities............ $36,717 $ 87,787 $(63,219)
Equity and other
securities................ (1,074) (103) 1,256
Adjustment to deferred
insurance acquisition
costs..................... (2,399) (2,325) 1,307
Adjustment to value of
business acquired......... (1,954) (26,209) 20,947
------- -------- --------
Unrealized gain (loss)
before income tax
expense (benefit)...... 31,290 59,150 (39,709)
Income tax expense
(benefit)................. 10,952 (985) 7,789
------- -------- --------
Net unrealized gain
(loss) on
investments....... $20,338 $ 60,135 $(47,498)
======= ======== ========
</TABLE>
(4) UNCONSOLIDATED INVESTEES
At December 31, 1998 and 1997 the Company, along with other Kemper subsidiaries,
directly held partnership interests in a number of real estate joint ventures.
The Company's direct and indirect real estate joint venture investments are
accounted for utilizing the equity method, with the Company recording its share
of the operating results of the respective partnerships. The Company, as an
equity owner, has the ability to fund, and historically has elected to fund,
operating requirements of certain of the joint ventures. Consolidation
accounting methods are not utilized as the Company, in most instances, does not
own more than 50 percent in the aggregate, and in any event, major decisions of
the partnership must be made jointly by all partners.
As of December 31, 1998 and 1997, the Company's net equity investment in
unconsolidated investees amounted to $1.2 million and $19.3 million,
respectively. The Company's share of net income related to such unconsoli-
114
<PAGE> 119
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(4) UNCONSOLIDATED INVESTEES (CONTINUED)
dated investees amounted to $241 thousand, $835 thousand and $223 thousand in
1998, 1997 and 1996, respectively.
(5) CONCENTRATION OF CREDIT RISK
The Company generally strives to maintain a diversified invested asset
portfolio; however, certain concentrations of credit risk exist in mortgage and
asset-backed securities and real estate.
Approximately 28.0 percent of the Company's investment-grade fixed maturities at
December 31, 1998 were mortgage-backed securities, down from 35.1 percent at
December 31, 1997, due to sales and paydowns during 1998. These investments
consist primarily of marketable mortgage pass-through securities issued by the
Government National Mortgage Association, the Federal National Mortgage
Association or the Federal Home Loan Mortgage Corporation and other
investment-grade securities collateralized by mortgage pass-through securities
issued by these entities. The Company has not made any investments in
interest-only or other similarly volatile tranches of mortgage-backed
securities. The Company's mortgage-backed investments are generally AAA credit
quality.
Approximately 15.4 percent and 10.8 percent of the Company's investment-grade
fixed maturities at December 31, 1998 and 1997, respectively, consisted of
corporate asset-backed securities. The majority of the Company's investments in
asset-backed securities were backed by home equity loans (21.9%), auto loans
(8.2%), manufactured housing loans (14.8%), equipment loans (5.2%), and
commercial mortgage backed securities (22.1%).
The Company's real estate portfolio is distributed by geographic location and
property type. The geographic distribution of a majority of the real estate
portfolio as of December 31, 1998 was as follows: California (31.5%), Hawaii
(16.2%), Washington (9.9%) and Colorado (9.4%). The property type distribution
of a majority of the real estate portfolio as of December 31, 1998 was as
follows: hotels (39.9%), land (30.9%) and residential (15.5%).
Undeveloped land represented approximately 30.9 percent of the Company's real
estate portfolio at December 31, 1998. To maximize the value of certain land and
other projects, additional development has been proceeding or has been planned.
Such development of existing projects would continue to require funding, either
from the Company or third parties. In the present real estate markets,
third-party financing can require credit enhancing arrangements (e.g., standby
financing arrangements and loan commitments) from the Company. The values of
development projects are dependent on a number of factors,
115
<PAGE> 120
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) CONCENTRATION OF CREDIT RISK (CONTINUED)
including Kemper's and the Company's plans with respect thereto, obtaining
necessary construction and zoning permits and market demand for the permitted
use of the property. There can be no assurance that such permits will be
obtained as planned or at all, nor that such expenditures will occur as
scheduled, nor that Kemper's and the Company's plans with respect to such
projects may not change substantially.
Approximately half of the Company's real estate mortgage loans are on properties
or projects where the Company, Kemper, or their affiliates have taken ownership
positions in joint ventures with a small number of partners.
At December 31, 1998, loans to and investments in joint ventures in which
Patrick M. Nesbitt or his affiliates ("Nesbitt"), a third-party real estate
developer, have ownership interests constituted approximately $64.5 million, or
39.3 percent, of the Company's real estate portfolio. The Nesbitt ventures
consist of nine hotel properties and two office buildings. At December 31, 1998,
the Company did not have any Nesbitt-related off-balance-sheet legal funding
commitments outstanding.
At December 31, 1998, loans to a master limited partnership (the "MLP") between
subsidiaries of Kemper and subsidiaries of Lumbermens Mutual Casualty Company
("Lumbermens"), a former affiliate, constituted approximately $51.6 million, or
31.4 percent, of the Company's real estate portfolio. Kemper's interest is 75
percent at December 31, 1998. At December 31, 1998, MLP-related commitments
accounted for approximately $6.1 million of the Company's off-balance-sheet
legal commitments.
The remaining significant real estate-related investments amounted to $27.3
million at December 31, 1998 and consisted of various zoned and unzoned
residential and commercial lots located in Hawaii. Due to certain negative
zoning restriction developments in January 1997 and a continuing economic slump
in Hawaii, the Company has placed these real estate-related investments on
nonaccrual status as of December 31, 1996. The Company is currently pursuing the
zoning of all remaining unzoned properties, as well as pursuing steps to sell
all remaining zoned properties. However, due to the state of Hawaii's economy,
which has lagged behind the economic expansion of most of the rest of the United
States, the Company anticipates that it could be several additional years until
the Company completely disposes of all of its investments in Hawaii.
At December 31, 1998, the Company no longer had any outstanding loans or
investments in projects with the Prime Group, Inc. or its affiliates, as all
such investments have been sold. However, the Company continues to have Prime
116
<PAGE> 121
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) CONCENTRATION OF CREDIT RISK (CONTINUED)
Group-related commitments, which accounted for $25.7 million of the Company's
off-balance-sheet legal commitments at December 31, 1998.
(6) INCOME TAXES
Income tax expense (benefit) was as follows for the years ended December 31,
1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
(in thousands) ---- ---- ----
<S> <C> <C> <C>
Current............................... $ 52,274 $130,662 $26,300
Deferred.............................. (12,470) (99,370) (897)
-------- -------- -------
Total....................... $ 39,804 $ 31,292 $25,403
======== ======== =======
</TABLE>
Additionally, the deferred income tax expense (benefit) related to items
included in other comprehensive income was as follows for the years ended
December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
(in thousands) ---- ---- ----
<S> <C> <C> <C>
Unrealized gains and losses on
investments............................... $12,475 $ 9,002 $ --
Value of business acquired................ (684) (9,173) 7,331
Deferred insurance acquisition costs...... (840) (814) 457
------- ------- ------
Total........................... $10,952 $ (985) $7,789
======= ======= ======
</TABLE>
117
<PAGE> 122
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) INCOME TAXES (CONTINUED)
The actual income tax expense for 1998, 1997 and 1996 differed from the
"expected" tax expense for those years as displayed below. "Expected" tax
expense was computed by applying the U.S. federal corporate tax rate of 35
percent in 1998, 1997, and 1996 to income before income tax expense.
<TABLE>
<CAPTION>
1998 1997 1996
(in thousands) ---- ---- ----
<S> <C> <C> <C>
Computed expected tax expense........... $36,734 $24,503 $20,938
Difference between "expected" and actual
tax expense:
State taxes........................... (434) 1,801 913
Amortization of goodwill.............. 4,460 5,353 3,568
Dividend received deduction........... (540) -- --
Foreign tax credit.................... (250) (278) --
Other, net............................ (166) (87) (16)
------- ------- -------
Total actual tax expense...... $39,804 $31,292 $25,403
======= ======= =======
</TABLE>
Deferred tax assets and liabilities are generally determined based on the
difference between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. The Company only records deferred tax
assets if future realization of the tax benefit is more likely than not, with a
valuation allowance recorded for the portion that is not likely to be realized.
The valuation allowance is subject to future adjustments based upon, among other
items, the Company's estimates of future operating earnings and capital gains.
The Company has established a valuation allowance to reduce the deferred federal
tax asset related to real estate and other investments to the amount that, based
upon available evidence, is, in management's judgment, more likely than not, to
be realized. Any reversals of the valuation allowance are contingent upon the
recognition of future capital gains in the Company's federal income tax return
or a change in circumstances which causes the recognition of the benefits to
become more likely than not. The change in the valuation allowance is related
solely to the change in the net deferred federal tax asset or liability from
unrealized gains or losses on investments.
118
<PAGE> 123
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant portions
of the Company's net deferred federal tax assets or liabilities were as follows:
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31 DECEMBER 31
1998 1997 1996
(in thousands) ----------- ----------- -----------
<S> <C> <C> <C>
Deferred federal tax assets:
Deferred insurance acquisition
costs........................ $ 86,332 $ 75,522 $ 4,520
Unrealized losses on
investments.................. -- -- 16,624
Life policy reserves........... 27,240 43,337 46,452
Unearned revenue............... 42,598 37,243 --
Real estate-related............ 13,944 13,400 20,642
Other investment-related....... 5,770 3,298 5,409
Other.......................... 4,923 4,371 3,639
-------- -------- --------
Total deferred federal tax
assets.................... 180,807 177,171 97,286
Valuation allowance............ (15,201) (15,201) (31,825)
-------- -------- --------
Total deferred federal tax
assets after valuation
allowance................. 165,606 161,970 65,461
-------- -------- --------
Deferred federal tax liabilities:
Value of business acquired..... 41,598 48,469 66,373
Deferred insurance acquisition
costs........................ 32,040 20,811 9,384
Depreciation and
amortization................. 19,111 20,201 15,473
Other investment-related....... 14,337 18,774 28,855
Unrealized gains on
investments.................. 21,477 9,002 --
Other.......................... 1,984 4,720 5,738
-------- -------- --------
Total deferred federal tax
liabilities............... 130,547 121,977 125,823
-------- -------- --------
Net deferred federal tax assets
(liabilities).................. $ 35,059 $ 39,993 $(60,362)
======== ======== ========
</TABLE>
The net deferred tax assets relate primarily to unearned revenue and the tax on
deferred insurance acquisition costs ("DAC Tax") associated with $1.5 billion
and $2.7 billion of new and renewal sales in 1998 and 1997, respectively from a
non-registered individual and group variable bank-owned life insurance contract
("BOLI"). Management believes that it is more likely than not that the results
of future operations will generate sufficient taxable income over the ten year
amortization period of the unearned revenue and DAC Tax to realize such deferred
tax assets.
119
<PAGE> 124
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) INCOME TAXES (CONTINUED)
The tax returns through the year 1993 have been examined by the Internal Revenue
Service ("IRS"). Changes proposed are not material to the Company's financial
position. The tax returns for the years 1994 through 1996 are currently under
examination by the IRS.
(7) RELATED-PARTY TRANSACTIONS
The Company received capital contributions from Kemper of $4.3 million, $45.0
million and $18.4 million during 1998, 1997 and 1996, respectively. The Company
paid cash dividends of $95.0 million and $29.3 million to Kemper during 1998 and
1997, respectively. The Company did not pay any cash dividends to Kemper during
1996.
The Company has loans to joint ventures, consisting primarily of mortgage loans
on real estate, in which the Company and/or one of its affiliates has an
ownership interest. At December 31, 1998 and 1997, joint venture mortgage loans
totaled $65.8 million and $72.7 million, respectively, and during 1998, 1997 and
1996, the Company earned interest income on these joint venture loans of $6.8
million, $7.5 million and $9.5 million, respectively.
All of the Company's personnel are employees of Federal Kemper Life Assurance
Company ("FKLA"), an affiliated company. The Company is allocated expenses for
the utilization of FKLA employees and facilities, the investment management
services of Scudder Kemper Investments, Inc. ("SKI") an affiliated company, and
the information systems of Kemper Service Company ("KSvC"), an SKI subsidiary,
based on the Company's share of administrative, legal, marketing, investment
management, information systems and operation and support services. During 1998,
1997 and 1996, expenses allocated to the Company from SKI and KSvC amounted to
$43 thousand, $114 thousand and $1.7 million, respectively. The Company also
paid to SKI investment management fees of $3.1 million, $3.5 million and $3.6
million during 1998, 1997 and 1996, respectively. In addition, expenses
allocated to the Company from FKLA during 1998, 1997 and 1996 amounted to $35.5
million, $30.0 million and $10.5 million, respectively. The Company also paid to
Kemper real estate subsidiaries $1.5 million, $2.2 million and $1.8 million in
1998, 1997 and 1996, respectively, related to the management of the Company's
real estate portfolio.
(8) REINSURANCE
In the ordinary course of business, the Company enters into reinsurance
agreements to diversify risk and limit its overall financial exposure to certain
blocks of fixed-rate annuities and to individual death claims. The Company
120
<PAGE> 125
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(8) REINSURANCE (CONTINUED)
generally cedes 100 percent of the related annuity liabilities under the terms
of the reinsurance agreements. Although these reinsurance agreements
contractually obligate the reinsurers to reimburse the Company, they do not
discharge the Company from its primary liabilities and obligations to
policyholders. As such, these amounts paid or deemed to have been paid are
recorded on the Company's consolidated balance sheet as reinsurance recoverables
and ceded future policy benefits.
As of December 31, 1998 and 1997, the reinsurance recoverable related to
fixed-rate annuity liabilities ceded to an affiliate amounted to $344.8 million
and $382.6 million, respectively.
In December 1996, the Company assumed on a yearly renewable term basis
approximately $14.4 billion (face amount) of term life insurance from FKLA. As a
result of this transaction, the Company recorded premiums and reserves of
approximately $7.3 million. The difference between the cash transferred, which
represents the statutory reserves of the business assumed, and the reserves
recorded under generally accepted accounting principles ("GAAP"), of
approximately $18.4 million, was deemed to be a capital contribution from Kemper
and was recorded as additional paid-in-capital during 1996. As of the date of
this transaction, no deferred tax impact was recorded on the difference between
the statutory and GAAP reserves. This deferred tax impact of $6.5 million was
recorded in 1998 as a reduction to the original capital contribution. Premiums
assumed during 1998 under the terms of the treaty amounted to $21.6 million and
the face amount which remained outstanding at December 31, 1998 amounted to
$11.7 billion.
Effective January 1, 1997, the Company ceded 90 percent of all new term life
insurance premiums to outside reinsurers. Term life reserves ceded to outside
reinsurers on the Company's direct business amounted to approximately $293
thousand and $139 thousand as of December 31, 1998 and 1997, respectively.
During December 1997, the Company entered into a funds withheld reinsurance
agreement with a Zurich affiliated company, ZC Life Reinsurance Limited ("ZC
Life"), formerly EPICENTRE Reinsurance (Bermuda) Limited. Under the terms of
this agreement, the Company ceded, on a yearly renewable term basis, ninety
percent of the net amount at risk (death benefit payable to the insured less the
insured's separate account cash surrender value) related to the new BOLI product
developed in 1997, which is held in the Company's separate accounts. During
1997, the Company issued $59.3 billion (face amount) of new BOLI business and
ceded $51.1 billion (face amount) to ZC Life under the terms of the treaty.
During 1997, the Company also ceded $24.3 million of
121
<PAGE> 126
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(8) REINSURANCE (CONTINUED)
separate account fees (cost of insurance charges) to ZC Life. The Company has
also withheld approximately $23.4 million of such funds due to ZC Life under the
terms of the reinsurance agreement as a component of benefits and funds payable
in the accompanying consolidated balance sheet as of December 31, 1997.
During 1998, the Company modified the reinsurance agreement to increase the
reinsurance from ninety percent to one hundred percent. During 1998, the Company
issued $6.9 billion (face amount) of new BOLI business and ceded $11.1 billion
(face amount) to ZC Life under the terms of the modified treaty. During 1998,
the Company also ceded $175.5 million of separate account fees (cost of
insurance charges) to ZC Life. The Company has also withheld approximately
$170.9 million of such funds due to ZC Life under the terms of the reinsurance
agreement as a component of benefits and funds payable in the accompanying
consolidated balance sheet as of December 31, 1998.
KILICO has a large and growing funds withheld account ("FWA") supporting reserve
credits on reinsurance ceded on the BOLI product. Amendments to the reinsurance
contracts during 1998 changed the methodology used to determine increases to the
FWA. A substantial portion of the FWA is now marked-to-market based upon the
Total Return of the Governmental Bond Division of the KILICO Variable Series I
Separate Account. During 1998, the Company recorded a $2.5 million increase to
the FWA related to this mark-to-market. To properly match revenue and expenses,
the Company has placed assets supporting the FWA in a segmented portion of its
General Account. This portfolio is classified as "trading" under Statement of
Financial Accounting Standards No. 115 ("FAS 115"). FAS 115 mandates that assets
held in a trading account be valued at fair value, with changes in fair value
flowing through the income statement as realized capital gains and losses.
During 1998, the Company recorded a realized capital gain of $2.8 million upon
transfer of these assets from "available for sale" to the trading portfolio as
required by FAS 115. In addition, the Company recorded realized capital losses
of $151 thousand related to the changes in fair value of this portfolio during
1998. The fair value of this portfolio was $101.8 million at December 31, 1998,
and the amortized cost was $99.1 million. The Company periodically purchases
assets into this segmented portfolio to support changes in the FWA.
(9) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
FKLA sponsors a welfare plan that provides medical and life insurance benefits
to its retired and active employees and the Company is allocated a portion of
122
<PAGE> 127
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (CONTINUED)
the costs of providing such benefits. The Company is self insured with respect
to medical benefits, and the plan is not funded except with respect to certain
disability-related medical claims. The medical plan provides for medical
insurance benefits at retirement, with eligibility based upon age and the
participant's number of years of participation attained at retirement. The plan
is contributory for pre-Medicare retirees, and will be contributory for all
retiree coverage for most current employees, with contributions generally
adjusted annually. Postretirement life insurance benefits are noncontributory
and are limited to $10,000 per participant.
The allocated accumulated postretirement benefit obligation accrued by the
Company amounted to $2.0 million and $1.9 million at December 31, 1998 and 1997,
respectively.
The discount rate used in determining the allocated postretirement benefit
obligation was 7.0 percent and 7.25 percent for 1998 and 1997, respectively. The
assumed health care trend rate used was based on projected experience for 1998,
8.0 percent for 1999, gradually declining to 6.4 percent by the year 2003 and
gradually declining thereafter.
A one percentage point increase in the assumed health care cost trend rate for
each year would increase the accumulated postretirement benefit obligation as of
December 31, 1998 and 1997 by $312 thousand and $242 thousand, respectively.
(10) COMMITMENTS AND CONTINGENT LIABILITIES
The Company is involved in various legal actions for which it establishes
liabilities where appropriate. In the opinion of the Company's management, based
upon the advice of legal counsel, the resolution of such litigation is not
expected to have a material adverse effect on the consolidated financial
statements.
Although neither the Company nor its joint venture projects have been identified
as a "potentially responsible party" under Federal environmental guidelines,
inherent in the ownership of, or lending to, real estate projects is the
possibility that environmental pollution conditions may exist on or near or
relate to properties owned or previously owned on properties securing loans.
Where the Company has presently identified remediation costs, they have been
taken into account in determining the cash flows and resulting valuations of the
related real estate assets. Based on the Company's receipt and review of
environmental reports on most of the projects in which it is involved, the
Company believes its environmental exposure would be immaterial to its
123
<PAGE> 128
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(10) COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
consolidated results of operations. However, the Company may be required in the
future to take actions to remedy environmental exposures, and there can be no
assurance that material environmental exposures will not develop or be
identified in the future. The amount of future environmental costs is impossible
to estimate due to, among other factors, the unknown magnitude of possible
exposures, the unknown timing and extent of corrective actions that may be
required, the determination of the Company's liability in proportion to others
and the extent such costs may be covered by insurance or various environmental
indemnification agreements.
(11) FINANCIAL INSTRUMENTS--OFF-BALANCE-SHEET RISK
At December 31, 1998, the Company had future legal loan commitments and stand-by
financing agreements totaling $64.4 million to support the financing needs of
various real estate investments. To the extent these arrangements are called
upon, amounts loaned would be collateralized by assets of the joint ventures,
including first mortgage liens on the real estate. The Company's criteria in
making these arrangements are the same as for its mortgage loans and other real
estate investments. These commitments are included in the Company's analysis of
real estate-related reserves and write-downs. The fair values of loan
commitments and standby financing agreements are estimated in conjunction with
and using the same methodology as the fair value estimates of mortgage loans and
other real estate-related investments.
(12) FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates are made at specific points in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from offering
for sale at one time the Company's entire holdings of a particular financial
instrument. A significant portion of the Company's financial instruments are
carried at fair value. Fair value estimates for financial instruments not
carried at fair value are generally determined using discounted cash flow models
and assumptions that are based on judgments regarding current and future
economic conditions and the risk characteristics of the investments. Although
fair value estimates are calculated using assumptions that management believes
are appropriate, changes in assumptions could significantly affect the estimates
and such estimates should be used with care.
Fair value estimates are determined for existing on- and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and certain liabilities that are not
124
<PAGE> 129
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(12) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
considered financial instruments. Accordingly, the aggregate fair value
estimates presented do not represent the underlying value of the Company. For
example, the Company's subsidiaries are not considered financial instruments,
and their value has not been incorporated into the fair value estimates. In
addition, tax ramifications related to the realization of unrealized gains and
losses can have a significant effect on fair value estimates and have not been
considered in any of the estimates.
The following methods and assumptions were used by the Company in estimating the
fair value of its financial instruments:
FIXED MATURITIES AND EQUITY SECURITIES: Fair values were determined by using
market quotations, or independent pricing services that use prices provided by
market makers or estimates of fair values obtained from yield data relating to
instruments or securities with similar characteristics, or fair value as
determined in good faith by the Company's portfolio manager, SKI.
CASH AND SHORT-TERM INVESTMENTS: The carrying amounts reported in the
consolidated balance sheets for these instruments approximate fair values.
MORTGAGE LOANS AND OTHER REAL ESTATE-RELATED INVESTMENTS: Fair values were
estimated based upon the investments observable market price, net of estimated
costs to sell. The estimates of fair value should be used with care given the
inherent difficulty in estimating the fair value of real estate due to the lack
of a liquid quotable market.
OTHER LOANS AND INVESTMENTS: The carrying amounts reported in the consolidated
balance sheets for these instruments approximate fair values. The fair values of
policy loans were estimated by discounting the expected future cash flows using
an interest rate charged on policy loans for similar policies currently being
issued.
LIFE POLICY BENEFITS: Fair values of the life policy benefits regarding
investment contracts (primarily deferred annuities) and universal life contracts
were estimated by discounting gross benefit payments, net of contractual
premiums, using the average crediting rate currently being offered in the
marketplace for similar contracts with maturities consistent with those
remaining for the contracts being valued. The Company had projected its future
average crediting rate in 1998 and 1997 to be 4.75 percent and 5.25 percent,
respectively, while the assumed average market crediting rate was 5.0 percent
and 6.0 percent in 1998 and 1997, respectively.
125
<PAGE> 130
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(12) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The carrying values and estimated fair values of the Company's financial
instruments at December 31, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------------- -----------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
(in thousands) -------- ----- -------- -----
<S> <C> <C> <C> <C>
Financial instruments
recorded as assets:
Fixed maturities......... $3,482,820 $3,482,820 $3,668,643 $3,668,643
Trading account
securities............. 101,781 101,781 -- --
Cash and short-term
investments............ 71,820 71,820 259,925 259,925
Mortgage loans and other
real estate-related
assets................. 164,375 164,375 220,046 220,046
Policy loans............. 271,540 271,540 282,439 282,439
Equity securities........ 66,854 66,854 24,839 24,839
Other invested assets.... 23,645 27,620 20,820 24,404
Financial instruments
recorded as liabilities:
Life policy benefits,
excluding term life
reserves............... 3,551,050 3,657,510 3,846,023 4,050,852
Funds withheld account... 170,920 170,920 23,420 23,420
</TABLE>
(13) STOCKHOLDER'S EQUITY--RETAINED EARNINGS
The maximum amount of dividends which can be paid by insurance companies
domiciled in the State of Illinois to shareholders without prior approval of
regulatory authorities is restricted. The maximum amount of dividends which can
be paid by the Company without prior approval in 1999 is $64.9 million. The
Company paid cash dividends of $95.0 million and $29.3 million to Kemper during
1998 and 1997, respectively. The Company paid no cash dividends in 1996.
The Company's net income and capital and surplus as determined in accordance
with statutory accounting principles were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
(in thousands) ---- ---- ----
<S> <C> <C> <C>
Net income......................... $ 64,871 $ 58,372 $ 37,287
======== ======== ========
Statutory capital and surplus...... $455,213 $476,924 $411,837
======== ======== ========
</TABLE>
126
<PAGE> 131
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(14) UNAUDITED INTERIM FINANCIAL INFORMATION
The following table sets forth the Company's unaudited quarterly financial
information:
(in thousands)
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------------- -------- ------- ------------ -----------
<S> <C> <C> <C> <C>
1998 OPERATING SUMMARY
Net investment income............ $70,551 $68,467 $ 66,892 $ 67,602
Realized investment gains........ 1,854 15,673 8,951 25,390
Premium income................... 5,203 5,941 5,278 5,924
Separate account fees and other
income......................... 20,418 19,922 17,631 14,042
------- ------- -------- --------
Total revenue............. 98,026 110,003 98,752 112,958
------- ------- -------- --------
Interest credited and benefits to
policyholders.................. 57,930 57,939 54,251 34,815
Commissions, taxes, licenses and
fees........................... 13,885 13,922 12,282 29,251
Operating expenses............... 10,094 12,157 10,528 11,794
Net deferral of insurance
acquisition costs.............. (7,973) (11,983) (9,669) (4,858)
Amortization of value of business
acquired....................... 4,427 7,121 6,359 (230)
Amortization of goodwill......... 3,186 3,186 3,186 3,186
------- ------- -------- --------
Total benefits and
expenses................ 81,549 82,342 76,937 73,958
------- ------- -------- --------
Income before income tax
expense........................ 16,477 27,661 21,815 39,000
Income tax expense............... 7,247 11,774 8,828 11,955
------- ------- -------- --------
Net income................ $ 9,230 $15,887 $ 12,987 $ 27,045
======= ======= ======== ========
1997 OPERATING SUMMARY
Net investment income............ $74,249 $74,050 $ 72,950 $ 74,946
Realized investment gains
(losses)....................... 889 8,161 (3,032) 4,528
Premium income................... 5,008 4,121 3,938 9,172
Separate account fees and other
income......................... 8,909 12,961 12,215 62,415(1)
------- ------- -------- --------
Total revenue............. 89,055 99,293 86,071 151,061
------- ------- -------- --------
Interest credited and benefits to
policyholders.................. 57,859 56,643 57,965 55,687
Commissions, taxes, licenses and
fees........................... 8,023 9,475 8,389 59,323(1)
Operating expenses............... 7,175 8,780 10,014 10,868
Net deferral of insurance
acquisition costs.............. (7,216) (6,877) (7,471) (13,409)
Amortization of value of business
acquired....................... 4,821 6,991 6,743 6,393
Amortization of goodwill......... 2,547 2,552 2,549 7,647(2)
------- ------- -------- --------
Total benefits and
expenses................ 73,209 77,564 78,189 126,509
------- ------- -------- --------
Income before income tax
expense........................ 15,846 21,729 7,882 24,552
Income tax expense............... 5,678 8,723 3,778 13,113
------- ------- -------- --------
Net income................ $10,168 $13,006 $ 4,104 $ 11,439
======= ======= ======== ========
</TABLE>
127
<PAGE> 132
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ---------------
Notes:
(1) Reflects premium tax expense loads received and premium taxes incurred of
$49.1 million related to new BOLI sales of $2.6 billion in the fourth
quarter of 1997.
(2) Reflects the effect of the change in amortization of goodwill from 25 to 20
years.
(15) OPERATING SEGMENTS AND RELATED INFORMATION
In June 1997, the FASB issued SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION. SFAS No. 131 establishes standards for how
to report information about operating segments. It also establishes standards
for related disclosures about products and services, geographic areas and major
customers. The Company adopted SFAS No. 131 as of December 31, 1998 and the
impact of implementation did not affect the Company's consolidated financial
position, results of operations or cash flows. In the initial year of adoption,
SFAS No. 131 requires comparative information for earlier years to be restated,
unless impracticable to do so.
In connection with the acquisition by Zurich, the Company, FKLA, ZLICA, and
Fidelity Life Association ("FLA"), a Mutual Legal Reserve Company, owned by its
policyholders, began to operate under the trade name Zurich Kemper Life. For
purposes of this operating segment disclosure, Zurich Kemper Life will also
include the operations of Zurich Direct, Inc., an affiliated direct marketing
life insurance agency and excludes FLA, as it is owned by its policyholders.
Zurich Kemper Life is segregated by Strategic Business Unit ("SBU"). The SBU
concept employed by ZFS has each SBU concentrate on a specific customer market.
The SBU is the focal point of Zurich Kemper Life, because it is at the SBU level
that Zurich Kemper Life can clearly identify customer segments and then work to
understand and satisfy the needs of each customer. The contributions of Zurich
Kemper Life's SBU's to consolidated revenues, operating results and certain
balance sheet data pertaining thereto, are shown in the following tables on the
basis of generally accepted accounting principles. Zurich Kemper Life's SBU's
were formed in 1996, subsequent to the acquisition by Zurich, however, financial
information was not produced by SBU until 1997. Therefore, Zurich Kemper Life
has not provided segment information for 1996, as it would be impracticable to
do so.
Zurich Kemper Life is segregated into the Agency, Financial, Group Retirement
and Direct SBU's. The SBU's are not managed at the legal entity level, but
rather at the Zurich Kemper Life level. Zurich Kemper Life's SBU's cross legal
entity
128
<PAGE> 133
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
lines, as certain similar products are sold by more than one legal entity. The
vast majority of the Company's business is derived from the Financial and Group
Retirement SBU's.
Each SBU's revenue is derived from geographically dispersed areas as Zurich
Kemper Life is licensed in the District of Columbia and all states except New
York. During 1998 and 1997, Zurich Kemper Life did not derive net revenue from
one customer that exceeded 10 percent of the total revenue of Zurich Kemper
Life.
The principal products and markets of Zurich Kemper Life's SBU's are as follows:
AGENCY: The Agency SBU develops low cost term and universal life insurance, as
well as fixed annuities, to market through independent agencies and national
marketing organizations.
FINANCIAL: The Financial SBU focuses on a wide range of products that provide
for the accumulation, distribution and transfer of wealth and primarily includes
variable and fixed annuities, variable universal life and bank-owned life
insurance. These products are distributed to consumers through financial
intermediaries such as banks, brokerage firms and independent financial
planners.
GROUP RETIREMENT: The Group Retirement SBU has a sharp focus on its target
customer. This SBU markets variable annuities to K-12 schoolteachers,
administrators, and healthcare workers, along with college professors and
certain employees of selected non-profit organizations. This target market is
eligible for what the IRS designates as retirement-oriented savings or
investment plans that qualify for special tax treatment.
DIRECT: The Direct SBU is a direct marketer of basic, low-cost term life
insurance through various marketing media.
129
<PAGE> 134
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Summarized financial information for ZKL's SBU's are as follows:
As of and for the period ending December 31, 1998:
(in thousands)
<TABLE>
<CAPTION>
GROUP
AGENCY FINANCIAL RETIREMENT DIRECT TOTAL
INCOME STATEMENT ------ --------- ---------- ------ -----
<S> <C> <C> <C> <C> <C>
REVENUE
Premium income...... $ 160,067 $ 56 $ -- $ 5,583 $ 165,706
Net investment
income............ 141,171 180,721 100,695 271 422,858
Realized investment
gains............. 20,335 33,691 15,659 30 69,715
Fees and other
income............ 80,831 40,421 31,074 23,581 175,907
---------- ---------- ---------- -------- -----------
Total revenue... 402,404 254,889 147,428 29,465 834,186
---------- ---------- ---------- -------- -----------
BENEFITS AND EXPENSES
Policyholder
benefits.......... 243,793 117,742 73,844 2,110 437,489
Intangible asset
amortization...... 58,390 15,669 15,703 -- 89,762
Net deferral of
insurance
acquisition
costs............. (55,569) (9,444) (22,964) (22,765) (110,742)
Commissions and
taxes, licenses
and fees.......... 29,539 43,919 22,227 11,707 107,392
Operating
expenses.......... 61,659 24,924 20,279 35,593 142,455
---------- ---------- ---------- -------- -----------
Total benefits
and
expenses..... 337,812 192,810 109,089 26,645 666,356
---------- ---------- ---------- -------- -----------
Income before income
tax expense......... 64,592 62,079 38,339 2,820 167,830
Income tax expense.... 26,774 24,340 14,794 1,001 66,909
---------- ---------- ---------- -------- -----------
Net income...... $ 37,818 $ 37,739 $ 23,545 $ 1,819 $ 100,921
========== ========== ========== ======== ===========
BALANCE SHEET
Total assets........ $3,194,530 $8,232,927 $4,172,828 $ 46,254 $15,646,539
========== ========== ========== ======== ===========
</TABLE>
130
<PAGE> 135
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
REVENUE NET INCOME ASSETS
------- ---------- ------
<S> <C> <C> <C>
Total revenue, net income and assets,
respectively, from above:............. $834,186 $100,921 $15,646,539
-------- -------- -----------
Less:
Revenue, net income and assets of
FKLA............................. 336,841 35,953 2,986,381
Revenue, net loss and assets
of ZLICA......................... 54,058 (1,066) 416,115
Revenue, net income and assets
Zurich Direct.................... 23,548 885 4,322
-------- -------- -----------
Totals per the Company's
consolidated financial
statements....................... $419,739 $ 65,149 $12,239,721
======== ======== ===========
</TABLE>
As of and for the period ending December 31, 1997:
(in thousands)
<TABLE>
<CAPTION>
GROUP
AGENCY FINANCIAL RETIREMENT DIRECT TOTAL
INCOME STATEMENT ------ --------- ---------- ------ -----
<S> <C> <C> <C> <C> <C>
REVENUE
Premium income........... $ 167,439 $ -- $ -- $ 4,249 $ 171,688
Net investment income.... 155,885 212,767 91,664 455 460,771
Realized investment
gains.................. 2,503 7,744 2,692 50 12,989
Fees and other income.... 78,668 73,823 23,663 8,007 184,161
---------- ---------- ---------- ------- -----------
Total revenue........ 404,495 294,334 118,019 12,761 829,609
---------- ---------- ---------- ------- -----------
BENEFITS AND EXPENSES
Policyholder benefits.... 247,878 153,327 60,061 2,234 463,500
Intangible asset
amortization........... 58,534 25,593 15,589 -- 99,716
Net deferral of insurance
acquisition costs...... (50,328) (18,222) (13,033) (5,242) (86,825)
Commissions and taxes,
licenses and fees...... 39,477 66,552 16,668 3,518 126,215
Operating expenses....... 55,859 20,282 14,320 19,472 109,933
---------- ---------- ---------- ------- -----------
Total benefits and
expenses........... 361,420 247,532 93,605 19,982 712,539
---------- ---------- ---------- ------- -----------
Income (loss) before income
tax expense (benefit).... 53,075 46,802 24,414 (7,221) 117,070
Income tax expense
(benefit)................ 25,554 21,144 10,545 (2,528) 54,715
---------- ---------- ---------- ------- -----------
Net income (loss).... $ 27,521 $ 25,658 $ 13,869 $(4,693) $ 62,355
========== ========== ========== ======= ===========
BALANCE SHEET
Total assets............. $2,877,854 $7,416,791 $3,759,173 $41,669 $14,095,487
========== ========== ========== ======= ===========
</TABLE>
131
<PAGE> 136
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
REVENUE NET INCOME ASSETS
------- ---------- ------
<S> <C> <C> <C>
Total revenue, net income and
assets, respectively, from
above:............................. $829,609 $62,355 $14,095,487
Less:
Revenue, net income and assets of
FKLA.......................... 338,854 24,740 3,105,396
Revenue, net income and assets of
ZLICA......................... 57,233 2,193 398,786
Revenue, net loss and assets of
Zurich Direct................. 8,042 (3,295) 1,655
-------- ------- -----------
Totals per the Company's
consolidated financial
statements............... $425,480 $38,717 $10,589,650
======== ======= ===========
</TABLE>
132
<PAGE> 137
APPENDIX A
ILLUSTRATION OF A MARKET VALUE ADJUSTMENT
Purchase Payment: $40,000
Guarantee 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 Guarantee Period Value for this $40,000 Purchase Payment is $51,051.26 at
the end of the five-year Guarantee Period. After one year, when the withdrawals
occur in these examples, the Guarantee Period Value is $42,000.00. It is also
assumed, for the purposes of these examples, that no prior partial withdrawals
or transfers have occurred.
The Market Value Adjustment will be based on the rate KILICO is then crediting
(at the time of the withdrawal) on new Certificates with the same Guarantee
Period as the time remaining in your Guarantee Period rounded to the next higher
number of complete years. One year after the Purchase Payment there would have
been four years remaining in your Guarantee Period. These examples also show the
Withdrawal Charge (if any) which would be calculated separately after the Market
Value Adjustment.
EXAMPLE OF A DOWNWARD MARKET VALUE ADJUSTMENT
A downward Market Value Adjustment results from a full or partial withdrawal
that occurs when interest rates have increased. Assume interest rates have
increased one year after the Purchase Payment and KILICO is then crediting 6.5%
for a four-year Guarantee Period. Upon a full withdrawal, the market value
adjustment factor would be:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
-.0551589* = [ (1 + .05) ] (4) -1
----------
(1 + .065)
</TABLE>
The Market Value Adjustment is a reduction of $2,316.67 from the Guarantee
Period Value:
- 2,316.67 = -.0551589 X 42,000.00
- ---------------
* Actual calculation utilizes 10 decimal places.
133
<PAGE> 138
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 Guarantee 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
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 Guarantee Period. Upon a
full withdrawal, the market value adjustment factor would be:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
+.0390198 = [ (1 + .05) ] (4) -1
----------
(1 + .04)
</TABLE>
The Market Value Adjustment is an increase of $1638.83 to the Guarantee 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
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<PAGE> 139
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 Guarantee 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 Guarantee Period.
135
<PAGE> 140
APPENDIX B
KEMPER INVESTORS LIFE INSURANCE COMPANY DEFERRED FIXED AND VARIABLE ANNUITY IRA,
ROTH IRA AND SIMPLE IRA DISCLOSURE STATEMENT
This Disclosure Statement describes the statutory and regulatory provisions
applicable to the operation of Individual Retirement Annuities (IRAs), Roth
Individual Retirement Annuities (Roth IRAs) and Simple Individual Retirement
Annuities (SIMPLE IRAs). Internal Revenue Service regulations require that this
be given to each person desiring to establish an IRA, Roth IRA or a SIMPLE IRA.
Further information can be obtained from Kemper Investors Life Insurance Company
and from any district office of the Internal Revenue Service.
A. REVOCATION
Within 7 days of the date you signed your enrollment application, you may revoke
the Contract 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
This Contract is intended to meet the requirements of Section 408(b) of the
Internal Revenue Code (Code), Section 408A of the Code for use as a Roth IRA, or
of Section 408(p) of the Code for use as a SIMPLE IRA, whichever is applicable.
The Contract has not been approved as to form for use as an IRA, Roth IRA or a
SIMPLE IRA by the Internal Revenue Service. Such approval by the Internal
Revenue Service is a determination only as to form of the Contract, and does not
represent a determination on the merits of the Contract.
1. The amount in your IRA, Roth IRA, and SIMPLE IRA, whichever is applicable,
must be fully vested at all times and the entire interest of the owner must be
nonforfeitable.
2. The Contract must be nontransferable by the owner.
3. The Contract must have flexible premiums.
4. For IRAs and SIMPLE IRAs, you must start receiving distributions on or before
April 1 of the year following the year in which you reach age 70 1/2 (the
required beginning date)(see "Required Distributions"). However, section
401(a)(9)(A) of the Code (relating to minimum distributions required to commence
at age 70 1/2), and the incidental death benefit requirements of section 401(a)
of the Code, do not apply to Roth IRAs.
If you die before your entire interest in your Contract is distributed, unless
otherwise permitted under applicable law, any remaining interest in the Contract
must be distributed to your beneficiary by December 31 of the calendar year
containing the fifth anniversary of your death; except that: (1) if the
136
<PAGE> 141
interest is payable to an individual who is your designated beneficiary (within
the meaning of section 401(a)(9) of the Code), the designated beneficiary may
elect to receive the entire interest over his or her life, or over a period
certain not extending beyond his or her life expectancy, commencing on or before
December 31 of the calendar year immediately following the calendar year in
which you die; and (2) if the designated beneficiary is your spouse, the
Contract will be treated as his or her own IRA, or, where applicable, Roth IRA.
5. Except in the case of a rollover contribution or a direct transfer (see
"Rollovers and Direct Transfers"), or a contribution made in accordance with the
terms of a Simplified Employee Pension (SEP), (1) all contributions to an IRA,
including a Roth IRA, must be cash contributions which do not exceed $2,000 for
any taxable year, and (2) all contributions to a SIMPLE IRA must be cash
contributions, including matching or nonelective employer contributions (see
"SIMPLE IRAs"), which do not exceed $6,000 for any year (as adjusted for
inflation).
6. The Contract must be for the exclusive benefit of you and your beneficiaries.
C. ROLLOVERS AND DIRECT TRANSFERS FOR IRAS AND
SIMPLE IRAS
1. A rollover is a tax-free transfer from one retirement program to another that
you cannot deduct on your tax return. There are two kinds of tax-free rollover
payments under an IRA. 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. Tax-free rollovers can be made from a SIMPLE
IRA to another SIMPLE IRA or to a SIMPLE Individual Retirement Account under
section 408(p) of the Code. An individual can make a tax-free rollover to an IRA
from a SIMPLE IRA after a two-year period has expired since the individual first
participated in a SIMPLE plan.
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 or SIMPLE
IRA.
3. A rollover distribution may be made to you only once a year. The one-year
period begins on the date you receive the rollover distribution, not on the date
you roll it over (reinvest it).
4. A direct transfer to an IRA 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 used as an IRA 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. All or part of
the premium for this Contract used as a SIMPLE IRA may be paid from a rollover
from a SIMPLE IRA or SIMPLE Individual Retirement Account or, to the extent
permitted by law, from a direct transfer from a SIMPLE IRA or SIMPLE Individual
Retirement Account.
137
<PAGE> 142
6. Beginning January 1, 1993, a distribution that is eligible for rollover
treatment from a qualified employee benefit plan or tax-sheltered annuity will
be subject to twenty percent (20%) withholding by the Internal Revenue Service
even if you roll the distribution over within the 60-day rollover period. One
way to avoid this withholding is to make the distribution as a direct transfer
to the IRA trustee or insurance company.
D. CONTRIBUTION LIMITS AND ALLOWANCE OF DEDUCTION
FOR IRAS
1. In general, the amount you can contribute each year to an IRA is the lesser
of $2,000 or your taxable compensation for the year. If you have more than one
IRA, the limit applies to the total contributions made to your own IRAs for the
year. Generally, if you work the amount that you earn is compensation. Wages,
salaries, tips, professional fees, bonuses and other amounts you receive for
providing personal services are compensation. If you own and operate your own
business as a sole proprietor, your net earnings reduced by your deductible
contributions on your behalf to self-employed retirement plans is compensation.
If you are an active partner in a partnership and provide services to the
partnership, your share of partnership income reduced by deductible
contributions made on your behalf to qualified retirement plans is compensation.
All taxable alimony and separate maintenance payments received under a decree of
divorce or separate maintenance is compensation.
2. Beginning in 1997, in the case of a married couple filing a joint return, up
to $2,000 can be contributed to each spouse's IRA, even if one spouse has little
or no compensation. This means that the total combined contributions that can be
made to both IRAs can be as much as $4,000 for the year. Previously, if one
spouse had no compensation or elected to be treated as having no compensation,
the total combined contributions to both IRAs could no be more than $2,250.
3. Also beginning in 1997, in the case of a married couple with unequal
compensation who file a joint return, the limit on the deductible contributions
to the IRA of the spouse with less compensation is the smaller of:
a. $2,000, or
b. The total compensation of both spouses, reduced by any deduction allowed
for contributions to IRAs of the spouse with more compensation.
The deduction for contributions to both spouses' IRAs may be further limited if
either spouse is covered by an employer retirement plan.
4. Beginning in 1998, even if your spouse is covered by an employer retirement
plan, you may be able to deduct your contributions to an IRA if you are not
covered by an employer plan. The deduction is limited to $2,000 and it must be
reduced if your adjusted gross income on a joint return is more than $150,000
but less than $160,000. Your deduction is eliminated if your income on a joint
return is $160,000 or more.
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<PAGE> 143
5. 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 a 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.
6. 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.
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. SIMPLE IRAS
1. A SIMPLE IRA must be established with your employer using a qualified salary
reduction agreement.
2. You may elect to have your employer contribute to your SIMPLE IRA, under a
qualified salary reduction agreement, an amount (expressed as a percentage of
your compensation) not to exceed $6,000 (as adjusted for inflation) for the
year. In addition to these employee elective contributions, your employer is
required to make each year either (1) a matching contribution equal to up to 3
percent, and not less than 1 percent, of your SIMPLE IRA contribution for the
year, or (2) a nonelective contribution equal to 2 percent of your compensation
for the year (up to $150,000 of compensation, as adjusted for inflation). No
other contributions may be made to a SIMPLE IRA.
3. Employee elective contributions and employer contributions (i.e., matching
contributions and nonelective contributions) to your SIMPLE IRA are excluded
from your gross income.
4. To the extent an individual with a SIMPLE IRA is no longer participating in a
SIMPLE plan (e.g., the individual has terminated employment), and two years has
passed since the individual first participated in the plan, the individual may
treat the SIMPLE IRA as an IRA.
G. TAX STATUS OF THE CONTRACT AND DISTRIBUTIONS FOR IRAS AND SIMPLE IRAS
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.
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<PAGE> 144
3. Distributions under your IRA are non-taxable to the extent they represent a
return of non-deductible contributions (if any). 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.
H. REQUIRED DISTRIBUTIONS FOR IRAS AND SIMPLE IRAS
You must start receiving minimum distributions required under the Contract and
Section 401(a)(9) of the Code from your IRA and SIMPLE IRA starting with the
year you reach age 70 1/2 (your 70 1/2 year). Ordinarily, the required minimum
distribution for a particular year must be received by December 31 of that year.
However, you may delay the required minimum distribution for the year you reach
age 70 1/2 until April 1 of the following year (i.e., the required beginning
date).
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.
The applicable life expectancy is your remaining life expectancy or the
remaining joint life and last survivor expectancy of you and your designated
beneficiary. Life expectancies are determined using the expected return multiple
tables shown in IRS Publication 590 "Individual Retirement Arrangements." To
obtain a free copy of IRS Publication 590 and other IRS forms, phone the IRS
toll free at 1-800-729-3676 or write the IRS Forms Distribution Center for your
area as shown in your income tax return instructions.
If you have more than one IRA, you must determine the required minimum
distribution separately for each IRA; however, you can take the actual
distributions of these amounts from any one or more of your IRAs.
If the actual distribution from your Contract is less than the minimum amount
that should be distributed in accordance with the minimum distribution
requirements mentioned above, the difference generally is an excess
accumulation. There is a 50% excise tax on any excess accumulations. If the
excess accumulation is due to reasonable error, and you have taken (or are
taking) steps to remedy the insufficient distribution, you can request that this
50% excise tax be excused by filing with your tax return an IRS Form 5329,
together with a letter of explanation and the excise tax payment.
I. ROTH IRAS
1. If your contract is a special type of individual retirement plan known as a
Roth IRA, it will be administered in accordance with the requirements of section
408A of the Code. (Except as otherwise indicated, references herein to
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<PAGE> 145
an "IRA" are to an "individual retirement plan," within the meaning of section
7701(a)(37) of the Code, other than a Roth IRA.) Roth IRAs are treated the same
as other IRAs, except as described here. However, the provisions of the Code
governing Roth IRAs may be modified by pending legislation. We will notify you
of any such changes.
2. The IRS is not presently accepting submissions for opinion letters approving
annuities as Roth IRAs, but will issue in the future procedures for requesting
such opinion letters. We will apply for approval as soon as possible after the
IRS issues its procedures on this matter. Such approval will be a determination
only as to the form of the annuity, and will not represent a determination of
the merits of the annuity.
3. If your Contract is a Roth IRA, we will send you a Roth IRA endorsement to be
attached to, and to amend, your contract after we obtain approval of the
endorsement from the IRS and your state insurance department. The Company
reserves the right to amend the contract as necessary or advisable from time to
time to comply with future changes in the Internal Revenue Code, regulations or
other requirements imposed by the IRS to obtain or maintain its approval of the
annuity as a Roth IRA.
4. Earnings in your Roth IRA are not taxed until they are distributed to you,
and will not be taxed if they are paid as a "qualified distribution," as
described to you in section L, below.
J. ELIGIBILITY AND CONTRIBUTIONS FOR ROTH IRAS
1. Generally, you are eligible to establish or make a contribution to your Roth
IRA on or after January 1, 1998, only if you meet certain income limits. No
deduction is allowed for contributions to your Roth IRA. Contributions to your
Roth IRA may be made even after you attain age 70 1/2.
2. The aggregate amount of contributions for any taxable year to all IRAs,
including all Roth IRAs, maintained for your benefit (the "contribution limit")
generally is the lesser of $2,000 and 100% of your compensation for the taxable
year. However, if you file a joint return and receive less compensation for the
taxable year than your spouse, the contribution limit for the taxable year is
the lesser of $2,000 and the sum of (1) your compensation for the taxable year,
and (2) your spouse's compensation for the taxable year reduced by any
deductible contributions to an IRA of your spouse, and by any contributions to a
Roth IRA for your spouse, for the taxable year.
The contribution limit for any taxable year is reduced (but not below zero) by
the amount which bears the same ratio to such amount as:
(a) the excess of (i) your adjusted gross income for the taxable year, over
(ii) the "applicable dollar amount," bears to
(b) $15,000 (or $10,000 if you are married).
For this purpose, "adjusted gross income" is determined in accordance with
section 219(g)(3) of the Code and (1) excludes any amount included in gross
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<PAGE> 146
income as a result of any rollover from, transfer from, or conversion of an IRA
to a Roth IRA, and (2) is reduced by any deductible IRA contribution. In
addition, the "applicable dollar amount" is equal to $150,000 for a married
individual filing a joint return, $0 for a married individual filing a separate
return, and $95,000 for any other individual.
A "qualified rollover contribution" (discussed in section K, below), and a non-
taxable transfer from another Roth IRA, are not taken into account for purposes
of determining the contribution limit.
K. ROLLOVERS, TRANSFERS AND CONVERSIONS TO ROTH IRAS
1. Rollovers And Transfers--A rollover may be made to a Roth IRA only if it is a
"qualified rollover contribution." A "qualified rollover contribution" is a
rollover to a Roth IRA from another Roth IRA or from an IRA, but only if such
rollover contribution also meets the rollover requirements for IRAs under
section 408(d)(3). In addition, a transfer may be made to a Roth IRA directly
from another Roth IRA or from an IRA.
You may not make a qualified rollover contribution or transfer in a taxable year
from an IRA to a Roth IRA if (a) your adjusted gross income for the taxable year
exceeds $100,000 or (b) you are married and file a separate return.
The rollover requirements of section 408(d)(3) are complex and should be
carefully considered before you make a rollover. One of the requirements is that
the amount received be paid into another IRA (or Roth IRA) within 60 days after
receipt of the distribution. In addition, a rollover contribution from a Roth
IRA may be made by you only once a year. The one-year period begins on the date
you receive the Roth IRA distribution, not on the date you roll it over
(reinvest it) into another Roth IRA. If you withdraw assets from a Roth IRA, you
may roll over part of the withdrawal tax free into another Roth IRA and keep the
rest of it. A portion of the amount you keep may be included in your gross
income.
2. Taxation of Rollovers And Transfers to Roth IRAs--A qualified rollover
contribution or transfer from a Roth IRA maintained for your benefit to another
Roth IRA maintained for your benefit which meets the rollover requirements for
IRAs under section 408(d)(3) is tax-free.
In the case of a qualified rollover contribution or a transfer from an IRA
maintained for your benefit to a Roth IRA maintained for your benefit, any
portion of the amount rolled over or transferred which would be includible in
your gross income were it not part of a qualified rollover contribution or a
nontaxable transfer will be includible in your gross income. However, section
72(t) of the Code (relating to the 10 percent penalty tax on premature
distributions) will not apply. If such a rollover or transfer occurs before
January 1, 1999, any portion of the amount rolled over or transferred which is
required to be included in gross income will be so included ratably over the 4-
taxable year period beginning with the taxable year in which the rollover or
transfer is made.
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Pending legislation may modify these rules retroactively to January 1, 1998.
3. Transfers of Excess IRA Contributions to Roth IRAs--If, before the due date
of your federal income tax return for any taxable year (not including
extensions), you transfer, from an IRA, contributions for such taxable year (and
earnings thereon) to a Roth IRA, such amounts will not be includible in gross
income to the extent that no deduction was allowed with respect to such amount.
4. Taxation of Conversions of IRAs to Roth IRAs--All or part of amounts in an
IRA maintained for your benefit may be converted into a Roth IRA maintained for
your benefit. The conversion of an IRA to a Roth IRA is treated as special type
of qualified rollover contribution. Hence, you must be eligible to make a
qualified rollover contribution in order to convert an IRA to a Roth IRA. A
conversion typically will result in the inclusion of some or all of your IRA's
value in gross income, as described above.
A conversion of an IRA to a Roth IRA can be made without taking an actual
distribution from your IRA. For example, an individual may make a conversion by
notifying the IRA issuer or trustee, whichever is applicable.
UNDER SOME CIRCUMSTANCES, IT MIGHT NOT BE ADVISABLE TO ROLLOVER, TRANSFER, OR
CONVERT ALL OR PART OF AN IRA TO A ROTH IRA. WHETHER YOU SHOULD DO SO WILL
DEPEND ON YOUR PARTICULAR FACTS AND CIRCUMSTANCES, INCLUDING, BUT NOT LIMITED
TO, SUCH FACTORS AS WHETHER YOU QUALIFY TO MAKE SUCH A ROLLOVER, TRANSFER, OR
CONVERSION, YOUR FINANCIAL SITUATION, AGE, CURRENT AND FUTURE INCOME NEEDS,
YEARS TO RETIREMENT, CURRENT AND FUTURE TAX RATES, YOUR ABILITY AND DESIRE TO
PAY CURRENT INCOME TAXES WITH RESPECT TO AMOUNTS ROLLED OVER, TRANSFERRED, OR
CONVERTED, AND WHETHER SUCH TAXES MIGHT NEED TO BE PAID WITH WITHDRAWALS FROM
YOUR ROTH IRA (SEE DISCUSSION BELOW OF "NONQUALIFIED DISTRIBUTIONS"). YOU SHOULD
CONSULT A QUALIFIED TAX ADVISOR BEFORE ROLLING OVER, TRANSFERRING, OR CONVERTING
ALL OR PART OF AN IRA TO A ROTH IRA.
5. Separate Roth IRAs--Due to the complexity of, and proposed changes to, the
tax law, it may be advantageous to maintain amounts rolled over, transferred, or
converted from an IRA in separate Roth IRAs from those containing regular Roth
IRA contributions. For the same reason, you should consider maintaining a
separate Roth IRA for each amount rolled over, transferred, or converted from an
IRA. These considerations should be balanced against the additional costs you
may incur from maintaining multiple Roth IRAs. You should consult your tax
advisor if you intend to contribute rollover, transfer, or conversion amounts to
your Policy, or if you intend to roll over or transfer amounts from your Policy
to another Roth IRA maintained for your benefit.
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<PAGE> 148
L. INCOME TAX CONSEQUENCES OF ROTH IRAS
1. Qualified Distributions--Any "qualified distribution" from a Roth IRA is
excludible from gross income. A "qualified distribution" is a payment or
distribution which satisfies two requirements. First, the payment or
distribution must be (a) made after you attain 59 1/2, (b) made after your
death, (c) attributable to your being disabled, or (d) a "qualified special
purpose distribution" (I.E., a qualified first-time homebuyer distribution under
section 72(t)(2)(F) of the Code). Second, the payment or distribution must be
made in a taxable year that is at least five years after (1) the first taxable
year for which a contribution was made to any Roth IRA established for you, or
(2) in the case of a rollover from, or a conversion of, an IRA to a Roth IRA,
the taxable year in which the rollover or conversion was made if the payment or
distribution is allocable (as determined in the manner set forth in guidance
issued by the IRS) to the rollover contribution or conversion (or to income
allocable thereto).
2. Nonqualified Distributions--A distribution from a Roth IRA which is not a
qualified distribution is taxed under section 72 (relating to annuities), except
that such distribution is treated as made first from contributions to the Roth
IRA to the extent that such distribution, when added to all previous
distributions from the Roth IRA, does not exceed the aggregate amount of
contributions to the Roth IRA. For purposes of determining the amount taxed, (a)
all Roth IRAs established for you will be treated as one contract, (b) all
distributions during any taxable year from Roth IRAs established for you will be
treated as one distribution, and (c) the value of the contract, income on the
contract, and investment in the contract, if applicable, will be computed as of
the close of the calendar year in which the taxable year begins.
An additional tax of 10% is imposed on nonqualified distributions (including
amounts deemed distributed as the result of a prohibited loan or use of your
Roth IRA as security for a loan) made before the benefited individual has
attained age 59 1/2, unless one of the exceptions discussed in Section N
applies.
M. TAX ON EXCESS CONTRIBUTIONS
1. You must pay a 6% excise tax each year on excess contributions that remain in
your Contract. Generally, an excess contribution is the amount contributed to
your Contract that is more than you can contribute. 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 Contract 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. You must include in your gross income the
income earned on the excess contribution.
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<PAGE> 149
N. TAX ON PREMATURE DISTRIBUTIONS
There is an additional tax on premature distributions from your IRA, Roth IRA,
or SIMPLE IRA, equal to 10% of the amount of the premature distribution that you
must include in your gross income. For premature distributions from a SIMPLE IRA
made within the first 2 years you participate in a SIMPLE plan, the additional
tax is equal to 25% of the amount of the premature distribution that must be
included in gross income. Premature distributions are generally amounts you
withdraw 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 distribution which is made on or after your death, or on account of you
being disabled within the meaning of section 72(m)(7) of the Code;
3. To a distribution which is part of a series of substantially equal periodic
payments (made at least annually) over your life or your life expectancy or the
joint life or joint life expectancy of you and your beneficiary; or
4. To a distribution which is used for qualified first-time homebuyer expenses,
qualified higher education expenses, certain medical expenses, or by an
unemployed individual to pay health insurance premiums.
O. EXCISE TAX REPORTING
Use Form 5329, Additional Taxes Attributable to Qualified Retirement Plans
(Including IRAs), Annuities, and Modified Endowment Contracts, to report the
excise taxes on excess contributions, premature distributions, and excess
accumulations. If you do not owe any IRA, SIMPLE IRA or Roth IRA excise taxes,
you do not need Form 5329. Further information can be obtained from any district
office of the Internal Revenue Service.
P. BORROWING
If you borrow money against your Contract or use it as security for a loan, the
Contract will lose its classification as an IRA, Roth IRA, or SIMPLE IRA,
whichever is applicable, and you must include in gross income the fair market
value of the Contract as of the first day of your tax year. In addition, you may
be subject to the tax on premature distributions described above. (Note: This
Contract does not allow borrowings against it, nor may it be assigned or pledged
as collateral for a loan.)
Q. REPORTING
We will provide you with any reports required by the Internal Revenue Service.
R. ESTATE TAX
Generally, the value of your IRA, including your Roth IRA, is included in your
gross estate for federal estate tax purposes.
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S. FINANCIAL DISCLOSURE
1. If contributions to the Contract are made by other than rollover
contributions and direct transfers, the following information based on the
charts shown on the next pages, 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 *
- --------------------------------------------------------------------------
<S> <C> <C> <C>
1 60
- --------------------------------------------------------------------------
2 65
- --------------------------------------------------------------------------
3 70
- --------------------------------------------------------------------------
4
- --------------------------------------------------------------------------
5
- --------------------------------------------------------------------------
</TABLE>
* Includes applicable withdrawal charges as described in Item O below.
2. If contributions to the Contract are made by rollover contributions and/or
direct transfers, the following information, based on the charts shown on the
next page, 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 *
- --------------------------------------------------------------------------
<S> <C> <C> <C>
1 60
- --------------------------------------------------------------------------
2 65
- --------------------------------------------------------------------------
3 70
- --------------------------------------------------------------------------
4
- --------------------------------------------------------------------------
5
- --------------------------------------------------------------------------
</TABLE>
* Includes applicable withdrawal charges as described in Item O below.
T. 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 1.40% per annum. If you elected the Guaranteed Retirement Income
Benefit option, an additional charge of .25% of the
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<PAGE> 151
Contract Value will be assessed against the Separate Account, Fixed Account and
Guarantee Periods on a pro-rata basis.
2. An annual records maintenance charge of $30.00 will be assessed ratably each
quarter against the Separate Account, Fixed Account and Guarantee Periods.
3. Withdrawal (early annuitization) charges will be assessed based on the years
elapsed since the purchase payments (in a given contract year) were received by
KILICO; under 1 year, 7%; over 1 to 2 years, 6%; over 2 to 3 years, 5%; over 3
to 4 years, 5%; over 4 to 5 years, 4%; over 5 to 6 years, 3%; over 6 to 7 years,
2%; over 7 years 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.
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<PAGE> 152
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 $ 937.00 14 $16,798.32 27 $40,421.63 40 $ 75,113.26
2 1,913.00 15 18,310.91 28 42,642.92 41 78,375.30
3 2,928.90 16 19,868.88 29 44,930.85 42 81,735.20
4 3,976.63 17 21,473.59 30 47,287.42 43 85,195.89
5 5,066.14 18 23,126.44 31 49,714.68 44 88,760.41
6 6,198.41 19 24,828.87 32 52,214.76 45 92,431.86
7 7,374.46 20 26,582.37 33 54,789.84 46 96,213.46
8 8,604.34 21 28,388.49 34 57,442.18 47 100,108.50
9 9,871.11 22 30,248.78 35 60,174.08 48 104,120.40
10 11,175.88 23 32,164.88 36 62,987.94 49 108,252.65
11 12,519.80 24 34,138.47 37 65,886.22 50 112,508.87
12 13,904.03 25 36,171.26 38 68,871.45
13 15,329.79 26 38,265.04 39 71,946.23
</TABLE>
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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 $ 937 14 $1,000 27 $1,000 40 $1,000
2 946 15 1,000 28 1,000 41 1,000
3 955 16 1,000 29 1,000 42 1,000
4 955 17 1,000 30 1,000 43 1,000
5 964 18 1,000 31 1,000 44 1,000
6 973 19 1,000 32 1,000 45 1,000
7 982 20 1,000 33 1,000 46 1,000
8 1,000 21 1,000 34 1,000 47 1,000
9 1,000 22 1,000 35 1,000 48 1,000
10 1,000 23 1,000 36 1,000 49 1,000
11 1,000 24 1,000 37 1,000 50 1,000
12 1,000 25 1,000 38 1,000
13 1,000 26 1,000 39 1,000
</TABLE>
* Includes applicable withdrawal charges.
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<PAGE> 154
This prospectus does not constitute an offer to sell or a
solicitation of an offer to buy securities in any state,
to any person to whom it is not lawful to make such
an offer in such state.
This booklet includes the prospectuses for the
underlying Portfolios.
KEMPER DESTINATIONS IS DISTRIBUTED BY
INVESTORS BROKERAGE SERVICES, INC.
[KEMPER ANNUITIES LOGO]
Long-term investing in a short-term world(SM)
[RECYCLED PAPER LOGO]
Printed on recycled paper. DEST-1 (11/1/99)
