<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 16, 2000
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
KEMPER INVESTORS LIFE INSURANCE COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
Illinois 36-3050975
------------------------- ---------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1 Kemper Drive
Long Grove, Illinois 60049
(847) 550-5500 6312
- ----------------------------------------------- -----------------------------------------------
(Address, including zip code, and telephone (Primary Standard Industrial
number, Classification Code Number)
including area code, of registrant's principal
executive offices)
Debra P. Rezabek, Esq.
Kemper Investors Life Insurance Company
1 Kemper Drive
Long Grove, Illinois 60049
(847) 969-3506
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(Name, address, including zip code, and telephone number,
including area code, of agent for service)
COPIES TO:
Frank J. Julian, Esq. Joan E. Boros, Esq.
Kemper Investors Life Insurance Company Jorden Burt Boros
1 Kemper Drive Cicchetti Berenson & Johnson
Long Grove, Illinois 60049 1025 Thomas Jefferson Street, N.W.
Suite 400E
Washington, D.C. 20007
</TABLE>
------------------
Approximate date of commencement of proposed sale to the public: as soon as
practicable, after this Registration Statement becomes effective.
If any of the Securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [X]
------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
PROPOSED PROPOSED
MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO OFFERING AGGREGATE REGISTRATION
TO BE REGISTERED BE REGISTERED PRICE PER UNIT OFFERING PRICE FEE
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
* * $50,000,000* $13,200.00
Market Value Adjusted Deferred Annuity
Contracts and Participating Interests
therein......................................
====================================================================================================================
</TABLE>
* The maximum aggregate offering price is estimated solely for the purpose of
determining the registration fee. The amount being registered and the proposed
maximum offering price per unit is not applicable in that these contracts are
not issued in predetermined amounts or units.
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<PAGE> 2
KEMPER INVESTORS LIFE INSURANCE COMPANY
CROSS REFERENCE SHEET
PURSUANT TO REGULATION S-K, ITEM 501(B)
<TABLE>
<CAPTION>
FORM S-1
ITEM NO. FORM S-1 CAPTION CAPTION IN PROSPECTUS
- -------- ---------------- ---------------------
<C> <S> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus..... Facing Page and Outside Front Cover Page of
Prospectus.
2. Inside Front and Outside Back Cover Pages
of Prospectus.............................. Table of Contents.
3. Summary Information, Risk Factors and Ratio
of Earnings to Fixed Charges............... Summary; Not Applicable as to Ratio of
Earnings to Fixed Charges.
4. Use of Proceeds............................ KILICO, The MVA Option, The Separate
Account and The Funds--The MVA Option;
Business--Investments.
5. Determination of Offering Price............ Not Applicable.
6. Dilution................................... Not Applicable.
7. Selling of Security Holders................ Not Applicable.
8. Plan of Distribution....................... Distribution of Contracts and Certificates
9. Description of Securities to be
Registered................................. Summary; The Contracts and Certificates;
The Accumulation Period; Contract and
Certificate Charges and Expenses.
10. Interests of Named Experts and Counsel..... Experts; Legal Matters.
11. Information with Respect to the
Registrant................................. Federal Tax Matters; Business; Management's
Discussion and Analysis of Financial
Condition and Results of Operations; Legal
Proceedings; Financial Statements of Kemper
Investors Life Insurance Company and
Subsidiaries.
12. Disclosure of Commission Position of
Indemnification For Securities Act
Liabilities................................ Part II, Item 17.
</TABLE>
<PAGE> 3
PROSPECTUS FOR
KEMPER INVESTORS LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
INDIVIDUAL AND GROUP VARIABLE AND MARKET VALUE
ADJUSTED DEFERRED ANNUITY CONTRACTS
- --------------------------------------------------------------------------------
ZURICH PREFERRED
ISSUED BY
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
AND
KEMPER INVESTORS LIFE INSURANCE COMPANY
This prospectus describes Variable 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 or as nonqualified annuities. 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 those issued on an individual or group basis.
Unless otherwise noted, or the context requires, all references to
"Certificates" includes "Contracts".
You may allocate purchase payments to one or more of the variable options, or
the fixed option subject to a market value adjustment. The Contract currently
offers twenty-seven investment options, each of which is a Subaccount of KILICO
Variable Annuity Separate Account. Currently, you may choose among the following
Portfolios:
KEMPER VARIABLE SERIES
- Kemper Money Market
- Kemper Technology Growth
- Kemper Total Return
- Kemper High Yield
- Kemper Growth
- Kemper Government Securities
- Kemper Small Cap Growth
- Kemper Investment Grade Bond
SCUDDER VARIABLE LIFE INVESTMENT FUND ("VLIF") (CLASS A SHARES)
- Scudder VLIF Capital Growth
- Scudder VLIF International
- Scudder VLIF Bond
THE ALGER AMERICAN FUND
- Alger American Growth
- Alger American Small Capitalization
- Alger American MidCap Growth
JANUS ASPEN SERIES
- Janus Aspen Growth
- Janus Aspen Aggressive Growth
- Janus Aspen Worldwide Growth
- Janus Aspen Balanced
FIDELITY VARIABLE INSURANCE PRODUCTS FUND ("VIP")
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II ("VIP II")
- Fidelity VIP Equity-Income
- Fidelity VIP Growth
- Fidelity VIP II Index 500
- Fidelity VIP II Contrafund
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC. ("VP")
- American Century VP Income & Growth
- American Century VP Value
J.P. MORGAN SERIES TRUST II
- J.P. Morgan Small Company
WARBURG PINCUS TRUST
- Warburg Pincus Emerging Markets
THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC.
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 (888) 477-9700.
A table of contents for the SAI appears on page 67. 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 March 16, 2000.
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.
<PAGE> 4
TABLE OF CONTENTS
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- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DEFINITIONS................................................. 1
SUMMARY..................................................... 3
SUMMARY OF EXPENSES......................................... 5
CONDENSED FINANCIAL INFORMATION............................. 8
KILICO, THE MVA OPTION, THE SEPARATE ACCOUNT AND THE
FUNDS..................................................... 9
THE CONTRACTS AND CERTIFICATES.............................. 15
THE ACCUMULATION PERIOD..................................... 16
CONTRACT AND CERTIFICATE CHARGES AND EXPENSES............... 22
THE ANNUITY PERIOD.......................................... 24
FEDERAL INCOME TAXES........................................ 28
DISTRIBUTION OF CONTRACTS AND CERTIFICATES.................. 35
VOTING RIGHTS............................................... 35
REPORTS TO CONTRACT OWNERS AND INQUIRIES.................... 35
DOLLAR COST AVERAGING....................................... 36
SYSTEMATIC WITHDRAWAL PLAN.................................. 36
EXPERTS..................................................... 36
LEGAL MATTERS............................................... 37
SPECIAL CONSIDERATIONS...................................... 37
AVAILABLE INFORMATION....................................... 37
BUSINESS.................................................... 38
PROPERTIES.................................................. 44
LEGAL PROCEEDINGS........................................... 44
SELECTED FINANCIAL DATA..................................... 45
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 46
KILICO'S DIRECTORS AND EXECUTIVE OFFICERS................... 61
EXECUTIVE COMPENSATION...................................... 64
TABLE OF CONTENTS--STATEMENT OF ADDITIONAL INFORMATION...... 66
FINANCIAL STATEMENTS........................................ 66
CHANGE OF ACCOUNTANTS....................................... 66
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS....................
FINANCIAL STATEMENTS OF KEMPER INVESTORS LIFE INSURANCE
COMPANY AND SUBSIDIARIES.................................. 67
APPENDIX A ILLUSTRATION OF A MARKET VALUE ADJUSTMENT........ 68
APPENDIX B KEMPER INVESTORS LIFE INSURANCE COMPANY DEFERRED
FIXED AND VARIABLE ANNUITY IRA, ROTH IRA AND SIMPLE IRA
DISCLOSURE STATEMENT...................................... 71
</TABLE>
<PAGE> 5
DEFINITIONS
The following terms as used in this Prospectus have the indicated meanings:
ACCUMULATED GUARANTEE PERIOD VALUE--The sum of your Guarantee Period
Values.
ACCUMULATION PERIOD--The period between the Date of Issue of a Contract and
the Annuity Date when you make premium payments to us.
ACCUMULATION UNIT--A unit of measurement used to determine the value of
each Subaccount during the Accumulation Period.
ALLOCATION OPTION--The twenty-seven (27) Subaccounts and the MVA Option
available under the Certificate for allocation of Purchase Payments, or
transfers of Certificate Value during the Accumulation Period.
ANNUITANT--The person designated to receive or who is actually receiving
annuity payments. Life annuity payments involving life contingencies depend
upon the annuitant.
ANNUITY DATE--The date on which annuity payments from us to the annuitant
start.
ANNUITY OPTION--One of several forms in which annuity payments can be made.
ANNUITY PERIOD--The period starting on the Annuity Date when we make
annuity payments to the annuitant.
ANNUITY UNIT--A unit of measurement used to determine the amount of
Variable Annuity payments.
BENEFICIARY--The person you designate to receive any benefits under a
Contract upon your death or upon the Annuitant's death prior to the Annuity
Period.
CERTIFICATE--An individual certificate of participation we issue to each
Owner in a group as evidence of his or her rights and benefits under the
Contract or an individual contract we issue to an Owner.
CODE--The Internal Revenue Code of 1986, as amended.
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 and Market Value Adjusted Deferred Annuity Contract
offered on an individual or group basis. Contracts issued on a group basis
are represented by a Certificate.
CONTRACT VALUE--The sum of the values of the your Accumulated Guarantee
Period Value and Separate Account Value during the Accumulation Period.
CONTRACT YEAR--Period between anniversaries of the Date of Issue of a
Contract.
DATE OF ISSUE--The date on which the first Contract Year commences.
DEBT--The principal of any outstanding loan plus any accrued interest.
Requests for loans must be made in writing to us.
FIXED ANNUITY--An annuity where we guarantee the amount of each annuity
payment.
FUND--Kemper Variable Series, Scudder Variable Life Investment Fund, The
Alger American Fund, Janus Aspen Series, Fidelity Variable Insurance
Products Fund, Fidelity Variable Insurance Products Fund II, American
Century Variable Portfolios, Inc., J.P. Morgan Series Trust II, Warburg
Pincus Trust and The Dreyfus Socially Responsible Growth Fund, Inc.,
including any Portfolios thereunder.
GENERAL ACCOUNT--All our assets other than those allocated to any legally
segregated separate account.
GUARANTEED INTEREST RATE--The rate of interest we set for a given Guarantee
Period.
GUARANTEE PERIOD--The period of time for which a Guaranteed Interest Rate
of an MVA Option is guaranteed. You may elect MVA Options having Guarantee
Periods of from one to ten years.
1
<PAGE> 6
GUARANTEE PERIOD VALUE--The sum of:
- your Purchase Payments allocated to an MVA Option or amounts you transfer
to an MVA Option; plus
- interest credited; minus
- your withdrawals and transfers; plus or minus
- any applicable Market Value Adjustment previously made.
IBS--Investors Brokerage Services, Inc., whose corporate headquarters is at
1 Kemper Drive, Long Grove, Illinois 60049.
MARKET ADJUSTED VALUE--A Guarantee Period Value adjusted by the market
value adjustment formula.
MARKET VALUE ADJUSTMENT--An adjustment of values under a Guarantee Period
in accordance with the market value adjustment formula. 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.
MVA OPTION--A fixed account accumulation option to which payments may be
allocated or contract value transferred.
NON-QUALIFIED CONTRACT--A Contract issued in connection with a retirement
plan which does not receive favorable tax treatment under Section 401, 403,
408, 408A or 457 of the Internal Revenue Code.
OWNER ("YOU, YOUR, YOURS")--The person designated in the Contract or
Certificate as having the privileges of ownership defined in the Contract.
PURCHASE PAYMENTS--Amounts paid to us by you or on your behalf.
QUALIFIED CONTRACT--A Contract issued in connection with a retirement plan
which receives favorable tax treatment under Section 401, 403, 408, 408A or
457 of the Internal Revenue Code.
SEPARATE ACCOUNT--The KILICO Variable Annuity Separate Account.
SEPARATE ACCOUNT VALUE--The sum of your Subaccount Values.
SKI--Scudder Kemper Investments, Inc., whose Corporate Headquarters is at
345 Park Avenue, New York, New York 10154-0010.
SUBACCOUNTS--The twenty-seven subdivisions of the Separate Account, the
assets of which consist solely of shares of the corresponding portfolios of
the Funds.
SUBACCOUNT VALUE--The value of your allocations to a Subaccount.
VALUATION DATE--Each day when a Subaccount is valued. Subaccounts are
normally valued every day the New York Stock Exchange is open for trading.
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) you specify.
2
<PAGE> 7
SUMMARY
The Contracts provide for investment on a tax-deferred basis and annuity
benefits. Both Non-Qualified and Qualified Contracts are described in this
Prospectus.
The minimum initial Purchase Payment is $25,000 and, subject to certain
exceptions, the minimum subsequent payment is $100.
Variable accumulations and benefits are provided by crediting Purchase Payments
to one or more Subaccounts that you select. Each Subaccount invests in a
corresponding Portfolio of one of the Funds. (See "The Funds," page 11.)
Contract Value allocated to the Separate Account varies with the investment
experience of the selected Subaccount(s).
The MVA Options provide fixed-rate accumulations, each for a specified Guarantee
Period. MVA Options are only available during the Accumulation Period. You may
allocate amounts to one or more MVA Options. We may offer additional MVA Options
with different Guarantee Periods at our discretion. For new Contracts, we may
limit to 3 the number of MVA Options available. We credit a Guaranteed Interest
Rate daily to amounts allocated to an MVA Option. Each Guaranteed Interest Rate
is set at our discretion, but once set is guaranteed not to change for the
duration of the Guarantee Period. At the end of a Guarantee Period, your money
will be transferred to the money market subaccount unless you timely elect
another MVA Option.
Transfers between Subaccounts are permitted before and after annuitization,
subject to limitations. A transfer from a Guarantee Period is subject to a
Market Value Adjustment.
The minimum withdrawal amount is $500 for the Subaccounts and $5,000 for the MVA
Options. A minimum $5,000 of unloaned Contract Value must remain after a
withdrawal. If less than $5,000 remains after partial withdrawal, we will
terminate the Contract. If a partial withdrawal is made in connection with a
1035 exchange, direct transfer, or direct rollover, a $5,000 Contract Value must
also remain in the Contract after the transfer. If this withdrawal request would
reduce the Contract Value to less than $5,000, and you have not terminated your
Contract, your partial withdrawal request will be limited so that the Contract
Value remaining will be $5,000. No transfer, rollover, or 1035 exchange is
permitted if there is an outstanding loan on your Contract.
Withdrawals will have tax consequences, including income tax and in some
circumstances an additional 10% penalty tax. Withdrawals are permitted from
Contracts issued with Section 403(b) Qualified Plans only under limited
circumstances. (See "Federal Income Taxes," page 28.)
A Market Value Adjustment also applies to any withdrawal (except during the
"free look" period), transfer, purchase of an annuity option. The Market Value
Adjustment does not apply to the death benefit. The Market Value Adjustment is
applied to the amount being withdrawn. (See "The Contracts," page 15.)
Contract charges include:
- mortality and expense risk charges,
- administrative expenses,
- records maintenance charge, and
- applicable premium taxes.
3
<PAGE> 8
(See "Charges Against the Separate Account," page 22.) In addition, the funds
pay their investment advisers varying fees for investment advise and also incur
other operational expenses. (See the Funds' prospectuses for such information.)
Dollar Cost Averaging (see page 36) and Automatic Asset Rebalancing (see p. 22)
are available to you.
The Contract may be purchased as an Individual Retirement Annuity, Simplified
Employee Pension--IRA, Traditional and Roth Individual Retirement Annuity, tax
sheltered annuity, and as a nonqualified annuity. (See "Taxation of Annuities in
General," page 28 and "Qualified Plans," page 29.)
You 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 you
receive the Contract. (See "The Contracts," page 15.) 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.
4
<PAGE> 9
SUMMARY OF EXPENSES
CONTRACT OWNER TRANSACTION EXPENSES
<TABLE>
<S> <C> <C>
Sales Load Imposed on Purchases (as a percentage of purchase payments)................................................ None
Contingent Deferred Sales Load (as a percentage of amount surrendered)
Surrender Fees (in addition to Withdrawal Charge)(1).................................................................. None
Exchange Fee.......................................................................................................... None
Records Maintenance Charge (for amounts over $25,000, $15, and over $50,000, 0)(2).................................... $30
</TABLE>
[TO BE UPDATED BY AMENDMENT]
<TABLE>
<CAPTION>
SEPARATE ACCOUNT ANNUAL EXPENSES
(as a percentage of average daily
account value)
<S> <C>
Mortality and Expense Risk.... 1.00%
Administration................ .25%*
Account Fees and Expenses..... 0%
Total Separate Account
Annual Expenses............. 1.25%
</TABLE>
FUND ANNUAL EXPENSES
(as percentage of each Portfolio's average net assets for
the period ended December 31, 1998)
<TABLE>
<CAPTION>
KEMPER KEMPER KEMPER KEMPER KEMPER
MONEY TECHNOLOGY TOTAL KEMPER KEMPER GOVERNMENT SMALL CAP
MARKET(2) GROWTH(3) RETURN HIGH YIELD GROWTH SECURITIES GROWTH
--------- ---------- ------ ---------- ------ ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Management
Fees... .50% .55% .60% .60% .55% .65%
Other
Expenses... .04 .05 .05 .05 .11 .05
--- --- --- --- --- --- ---
Total
Portfolio
Annual
Expenses... .54% .60% .65% .65% .66% .70%
=== === === === === === ===
<CAPTION>
KEMPER SCUDDER
INVESTMENT VLIF SCUDDER SCUDDER
GRADE CAPITAL VLIF VLIF
BOND GROWTH INTERNATIONAL BOND
---------- ------- ------------- -------
<S> <C> <C> <C> <C>
Management
Fees... .60% .47% .87% .47%
Other
Expenses... .07 .04 .18 .09
--- --- ---- ---
Total
Portfolio
Annual
Expenses... .67% .51% 1.05% .56%
=== === ==== ===
</TABLE>
<TABLE>
<CAPTION>
AMERICAN
SCUDDER CENTURY WARBURG DREYFUS
VLIF SCUDDER SCUDDER VP AMERICAN J.P. MORGAN PINCUS SOCIALLY
CAPITAL VLIF VLIF INCOME & CENTURY VP SMALL EMERGING RESPONSIBLE
GROWTH INTERNATIONAL BOND GROWTH VALUE COMPANY(7) MARKETS GROWTH
------- ------------- ------- -------- ---------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Management
Fees... .47% .87% .47% .70% 1.00% .60% .75%
Other
Expenses... .04 .18 .09 .00 .00 .55 .05
--- ---- --- --- ---- ---- --- ---
Total
Portfolio
Annual
Expenses... .51% 1.05% .56% .70% 1.00% 1.15% .80%
=== ==== === === ==== ==== === ===
</TABLE>
<TABLE>
<CAPTION>
JANUS JANUS FIDELITY ALGER
JANUS ASPEN ASPEN JANUS VIP ALGER AMERICAN
ASPEN AGGRESSIVE WORLDWIDE ASPEN EQUITY AMERICAN SMALL
GROWTH(4) GROWTH(4) GROWTH(4) BALANCED(4) INCOME(5) GROWTH CAPITALIZATION
--------- ---------- --------- ----------- --------- -------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Management
Fees... .65% .72% .65% .72% .49% .75% .85%
Other
Expenses... .03 .03 .07 .02 .08 .04 .04
--- --- --- --- --- --- ---
Total
Portfolio
Annual
Expenses.. .68% .75% .72% .74% .57% .79% .89%
=== === === === === === ===
<CAPTION>
ALGER FIDELITY FIDELITY
AMERICAN FIDELITY VIP II VIP II
MIDCAP VIP INDEX CONTRA-
GROWTH GROWTH(5) 500(6) FUND(5)
-------- --------- -------- --------
<S> <C> <C> <C> <C>
Management
Fees... .59% .24% .59%
Other
Expenses... .07 .04 .07
---- ---- ---- ----
Total
Portfolio
Annual
Expenses.. .66% .28% .66%
==== ==== ==== ====
</TABLE>
*We reserve the right to increase the administrative fee up to a maximum of
.45%. You will be provided 3 months notice before any such increase.
5
<PAGE> 10
EXAMPLE
<TABLE>
<CAPTION>
SUBACCOUNT 1 YEAR 3 YEARS 5 YEARS 10 YEARS
---------- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C>
If you surrender your Contract, you
would pay the following expenses on a
$1,000 investment, assuming 5% annual
return on assets:
Kemper Money Market $19 $ 58 $ 99 $215
Kemper Technology Growth
Kemper Total Return 19 60 102 221
Kemper High Yield 20 61 105 227
Kemper Growth 20 61 105 227
Kemper Government Securities 20 61 105 228
Kemper Small Cap Growth 20 63 108 232
Kemper Investment Grade Bond 20 62 106 229
Scudder VLIF Capital Growth
Scudder VLIF International
Scudder VLIF Bond
Alger American Growth
Alger American MidCap Growth
Alger American Small
Capitalization
Janus Aspen Growth
Janus Aspen Aggressive Growth
Janus Aspen Worldwide Growth
Janus Aspen Balanced
Fidelity VIP Equity-Income
Fidelity VIP Growth
Fidelity VIP II Index 500
Fidelity VIP II Contrafund
American Century VP Income &
Growth
American Century VP Value
J.P. Morgan Small Company
Warburg Pincus Energy Markets
Dreyfus Socially Responsible
Growth
</TABLE>
6
<PAGE> 11
The purpose of the preceding table is to assist you in understanding the various
costs and expenses that an Owner in a Subaccount will bear directly or
indirectly. The table reflects expenses of both the Separate Account and the
Fund but not the MVA Option. See "Contract and Certificate Charges and Expenses"
and "The MVA Option" for more information regarding the various costs and
expenses. THE EXAMPLE SHOULD NOT BE CONSIDERED TO BE A REPRESENTATION OF PAST OR
FUTURE EXPENSES AND DOES NOT INCLUDE THE DEDUCTION OF STATE PREMIUM TAXES, WHICH
MAY BE ASSESSED BEFORE OR UPON ANNUITIZATION. ACTUAL EXPENSES MAY BE GREATER OR
LESS THAN THOSE SHOWN. The example assumes a 5% annual rate of return pursuant
to requirements of the Securities and Exchange Commission. This hypothetical
rate of return is not intended to be representative of past or future
performance of any Subaccount. The Records Maintenance Charge is a single
charge, it is not a separate charge for each Subaccount. In addition, the effect
of the Records Maintenance Charge has been reflected by applying the percentage
derived by dividing the total amounts of annual Records Maintenance Charge
collected by the total net assets of all the Subaccounts in the Separate
Account.
(1) Surrenders and other withdrawals from the MVA Option are subject to a Market
Value Adjustment. The Market Value Adjustment may increase or reduce the
Guarantee Period Value.
(2) Under certain circumstances the annual Records Maintenance Charge may be
reduced or waived. The annual Records Maintenance Charge will be waived for
Contracts with a Contract Value exceeding $50,000 on the date of assessment.
(3) Pursuant to their respective agreements with Kemper Variable Series, the
investment manager and the accounting agent have agreed, for the one year
period commencing on the date of this Prospectus, to limit their respective
fees and to reimburse other operating expenses, in a manner communicated to
the Board of the Fund, to the extent necessary to limit total operating
expenses of the Kemper Technology Growth Portfolio of Kemper Variable Series
to the level set forth in the table above. Without taking into effect this
expense cap, for the Technology Growth Portfolio of Kemper Variable Series;
management fees are estimated to be .75%; Other Expenses are estimated to be
.29%; and total operating expenses are estimated to be 1.04%.
(4) The expense figures shown are net of certain fee waivers or reductions from
Janus Capital Corporation. Without such waivers, the Management Fee, 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 Janus Aspen Growth and Janus Aspen Aggressive Growth
Portfolios; .67%, .07% and .74% for the Janus Aspen Worldwide Growth
Portfolio; and .72%, .02% and .74% for the Janus Aspen Balanced Portfolio.
See the prospectus and Statement of Additional Information of Janus Aspen
Series for a description of these waivers.
(5) A portion of the brokerage commissions that certain funds pay was used to
reduce fund expenses. In addition, certain funds, or FMR on behalf of
certain funds, have entered into arrangements with their custodian whereby
credits realized as a result of uninvested cash balances were used to reduce
custodian expenses. Including these reductions, the total operating expenses
presented in the table would have been .57 for the Fidelity VIP Equity
Income Fund, .66 for the Fidelity VIP Growth Fund and the Fidelity VIP II
ContraFund.
(6) FMR agreed to reimburse a portion of the Fidelity VIP II Index 500
Portfolio's expenses during this period. Without this reimbursement, the
Management Fee, Other Expenses and Total Portfolio Annual Expenses for the
Portfolio for the fiscal year ended December 31, 1998 would have been .24%,
.11% and .35%, respectively, on an annualized basis.
(7) Reflects an agreement by Morgan Guaranty Trust Company of New York to
reimburse the Portfolio to the extent expenses exceed 1.15%. Absent fee
waiver and expense reimbursement, total operating expenses would have been
3.43%.
7
<PAGE> 12
[CONDENSED FINANCIAL INFORMATION TO BE FILED BY AMENDMENT]
8
<PAGE> 13
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
You 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. The MVA Option is not available in all states. At our
discretion, we may offer additional Guarantee Periods.
The amounts allocated to the MVA Option under the Contracts are invested under
the state insurance 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 you do 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 Rates. (See
"The Accumulation Period-- 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;
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<PAGE> 14
- 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 General Account at December 31, 1999 included approximately percent in
U.S. Treasuries, investment grade corporate, foreign and municipal bonds, and
commercial paper, percent in below investment grade (high risk) bonds,
percent in mortgage loans and other real estate-related investments and
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
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.
Twenty-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.
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 you
request. 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.
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<PAGE> 15
THE FUNDS
The Separate Account invests in shares of the following open-end management
investment companies:
- Kemper Variable Series
- Scudder Variable Life Investment Fund
- The Alger American Fund
- Janus Aspen Series
- Fidelity Variable Insurance Products Fund
- Fidelity Variable Insurance Products Fund II
- American Century Variable Portfolios, Inc.
- J.P. Morgan Series Trust II
- Warburg Pincus Trust
- The Dreyfus Socially Responsible Growth Fund, Inc.
The Funds provide investment vehicles for variable life insurance and variable
annuity contracts. 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 the Funds' responses to any of those events
insufficiently protects Owners, we will take appropriate action.
The Funds 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 twenty-seven Portfolios are summarized below:
KEMPER VARIABLE SERIES
KEMPER MONEY MARKET PORTFOLIO seeks maximum current income to the extent
consistent with stability of principal from a portfolio of high quality money
market instruments. The Portfolio seeks to maintain a net asset value of $1.00
per share but there is no assurance that the Portfolio will be able to do so.
KEMPER TECHNOLOGY GROWTH PORTFOLIO seeks growth of capital.
KEMPER TOTAL RETURN PORTFOLIO seeks a high total return, a combination of income
and capital appreciation, consistent with reasonable risk.
KEMPER HIGH YIELD PORTFOLIO seeks to provide a high level of current income.
KEMPER GROWTH PORTFOLIO seeks maximum appreciation of capital through
diversification of investment securities having potential for capital
appreciation.
KEMPER GOVERNMENT SECURITIES PORTFOLIO seeks high current return consistent with
preservation of capital.
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<PAGE> 16
KEMPER SMALL CAP GROWTH PORTFOLIO seeks maximum appreciation of investors'
capital.
KEMPER INVESTMENT GRADE BOND PORTFOLIO seeks high current income.
SCUDDER VARIABLE LIFE INVESTMENT FUND (CLASS A SHARES)
SCUDDER VLIF CAPITAL GROWTH PORTFOLIO seeks to maximize long-term capital growth
from a portfolio consisting primarily of equity securities.
SCUDDER VLIF INTERNATIONAL PORTFOLIO seeks long-term growth of capital
principally from a diversified portfolio of foreign equity securities.
SCUDDER VLIF BOND PORTFOLIO seeks high income from a high quality portfolio of
bonds.
THE ALGER AMERICAN FUND
ALGER AMERICAN GROWTH PORTFOLIO seeks long-term capital appreciation.
ALGER AMERICAN SMALL CAPITALIZATION PORTFOLIO seeks long-term capital
appreciation.
ALGER AMERICAN MIDCAP GROWTH PORTFOLIO seeks long-term capital appreciation.
JANUS ASPEN SERIES
JANUS ASPEN GROWTH PORTFOLIO seeks long-term growth of capital in a manner
consistent with the preservation of capital
JANUS ASPEN AGGRESSIVE GROWTH PORTFOLIO seeks long-term growth of capital.
JANUS ASPEN WORLDWIDE GROWTH PORTFOLIO seeks long-term growth of capital in a
manner consistent with the preservation of capital.
JANUS ASPEN BALANCED PORTFOLIO seeks long-term capital growth, consistent with
preservation of capital and balanced by current income.
FIDELITY VARIABLE INSURANCE PRODUCTS FUND
FIDELITY VIP EQUITY-INCOME PORTFOLIO seeks reasonable income. The fund will also
consider the potential for capital appreciation. The fund seeks a yield which
exceeds the composite yield on the securities comprising the S&P 500.
FIDELITY VIP GROWTH PORTFOLIO seeks capital appreciation.
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II
FIDELITY VIP II INDEX 500 PORTFOLIO seeks investment results that correspond to
the total return of common stocks publicly traded in the United States, as
represented by the S&P 500.
FIDELITY VIP II CONTRAFUND PORTFOLIO seeks long-term capital appreciation.
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
AMERICAN CENTURY VP INCOME & GROWTH PORTFOLIO seeks dividend growth, current
income and capital appreciation.
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<PAGE> 17
AMERICAN CENTURY VP VALUE PORTFOLIO seeks long-term capital growth.
J.P. MORGAN SERIES TRUST II
J.P. MORGAN SMALL COMPANY PORTFOLIO seeks to provide a high total return from a
portfolio of small company stocks.
WARBURG PINCUS TRUST
WARBURG PINCUS EMERGING MARKETS PORTFOLIO seeks long-term growth of capital by
investing in equity securities of emerging markets.
THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC.
This 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.
The Portfolios may not achieve their stated objectives. More detailed
information, including a description of risks involved in investing in the
Portfolios, is found in the Funds' prospectuses accompanying this Prospectus,
and Statements of Additional Information available from us upon request.
Scudder Kemper Investments, Inc. ("SKI"), our affiliate, serves as investment
manager for each of the Kemper Variable Series and the available Scudder
Variable Life Investment Fund Portfolios. Fred Alger Management, Inc. serves as
the investment adviser for the available portfolios of The Alger American Fund.
Janus Capital Corporation is the investment adviser for the four available
Portfolios of the Janus Aspen Series. Fidelity Management & Research Company
("FMR") is the investment adviser for the available Portfolios of the Fidelity
Variable Insurance Products Fund and Fidelity Variable Insurance Products Fund
II. Bankers Trust Company, a wholly-owned subsidiary of Bankers Trust New York
Corporation, serves as the sub-adviser to the Fidelity VIP II Index 500
Portfolio. American Century Investment Management, Inc. is the investment
adviser for the two available portfolios of the American Century Variable
Portfolios, Inc. J.P. Morgan Investment Management, Inc. is the investment
adviser for the J.P. Morgan Small Company Portfolio. Credit Suisse Asset
Management, LLC (successor investment adviser to Warburg Pincus Asset
Management, Inc.) is the investment adviser for the Warburg Pincus Emerging
Markets Portfolio. The Dreyfus Corporation serves as the investment adviser, and
NCM Capital Management Group, Inc. is the sub-adviser, for The Dreyfus Socially
Responsible Growth Fund, Inc. The investment advisers are paid fees for their
services by the Funds they manage. We may receive compensation from 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.
CHANGE OF INVESTMENTS
We reserve the right to make additions to, deletions from, or substitutions for
the shares held by the Separate Account or that the Separate Account may
purchase. We reserve the right to eliminate the shares of any of the Portfolios
and to substitute shares of another Portfolio or of another investment company,
if the shares of a Portfolio are no longer available for investment, or if in
our judgment further investment in any Portfolio becomes inappropriate in view
of the purposes of the Separate Account. We will not substitute any shares
attributable to any shares held by 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
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<PAGE> 18
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 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 marketing, tax,
or investment conditions warrant. We will notify all Owners of these changes.
If we deem it to be in the best interests of persons having voting rights under
the Contract, the Separate Account may be:
- operated as a management company under the Investment Company Act of 1940
("1940 Act");
- deregistered under that Act in the event such registration is no longer
required; or
- 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 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 and 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 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.
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.
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<PAGE> 19
The Subaccounts' performance figures and Accumulation Unit values fluctuate. The
performance figures reflect the deduction of all expenses and fees, including a
prorated portion of the Records Maintenance Charge.
The Subaccounts may be compared to relevant indices and performance data from
independent sources, including the Dow Jones Industrial Average, the Standard &
Poor's 500 Stock Index, the Consumer Price Index, the CDA Certificate of Deposit
Index, the Salomon Brothers High Grade Corporate Bond Index, the Lehman Brothers
Government/Corporate Bond Index, the Merrill Lynch Government/Corporate Master
Index, the Lehman Brothers Long Government/Corporate Bond Index, the Lehman
Brothers Government/Corporate 1-3 Year Bond Index, the Standard & Poor's Midcap
400 Index, the NASDAQ Composite Index, the Russell 2000 Index and the Morgan
Stanley Capital International Europe, Australia, Far East Index. Please note the
differences and similarities between the investments which a Subaccount may
purchase and the investments measured by the indexes which are described below.
In particular, the comparative information with regard to the indexes will not
reflect the deduction of any Contract charges or portfolio expenses. In
addition, certificates of deposit may offer fixed or variable yields and
principal is guaranteed and may be insured. The Subaccounts are not insured and
the value of their units will fluctuate.
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.
THE CONTRACTS AND CERTIFICATES
A. GENERAL INFORMATION.
The minimum initial Purchase Payment is $25,000 and the minimum subsequent
payment is $100. Purchase Payments in excess of $1,000,000 require our prior
approval.
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.
You 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 you
receive 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 the amounts of purchase payments in the
Guarantee Periods on the date we receive the returned Contract, without any
deduction for 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, change a Beneficiary at any time by signing our
form. No Beneficiary change is binding on us until we receive it. We assume no
responsibility for the validity of a Beneficiary change.
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Amounts payable during the Annuity Period may not be assigned. 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.
You designate the Beneficiary. If you or the Annuitant dies, and no designated
Beneficiary or contingent beneficiary is alive at that time, we will pay you or
the Annuitant's estate.
Under a Qualified Contract, the provisions of the applicable plan may prohibit a
change of Beneficiary. Generally, an interest in a Qualified Contract may not be
assigned.
THE ACCUMULATION PERIOD
A. APPLICATION OF PURCHASE PAYMENTS.
You allocate your Purchase Payments to the Subaccount(s) or MVA Option(s). 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 an MVA Option 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. 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. The number of Accumulation Units and Guarantee
Period Value is reduced when the Records Maintenance Charge is 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 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 you, unless you consent to our retaining the
Purchase Payment until the application is completed.
B. 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 credited 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 canceled 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.
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The investment experience factor of a Subaccount for any Valuation Period is
determined by the following formula:
(a / b) - c, where:
(a) 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;
(b) is the net asset value per share of the investment held in the
Subaccount determined at the end of the preceding Valuation Period;
(c) is the factor representing the mortality and expense risk and
administration charges.
C. GUARANTEE PERIODS OF THE MVA OPTION.
You may allocate Purchase Payments or transfer Contract Value to one or more
Guarantee Periods with durations of one to ten years. Each MVA Option has a
Guaranteed Interest Rate which will not change during the Guarantee Period.
Interest is credited daily at the effective annual rate. The minimum Purchase
Payment is $5,000 per MVA Option per allocation.
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 YOU MAKE WITHDRAWALS OR TRANSFERS DURING THIS PERIOD, MARKET VALUE
ADJUSTMENTS 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.
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We send written notice 30 days before the beginning of a new Guarantee Period.
If you do not elect a new Guarantee Period, the MVA assets will be transferred
automatically to the Kemper Money Market Subaccount on the Guarantee Period
maturity date. You may choose a different Guarantee Period by preauthorized
telephone instructions or by giving us written notice. (See "Market Value
Adjustment" 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.
You may call us at 1-888-477-9700 or write to Kemper Investors Life Insurance
Company, Customer Service, 1 Kemper Drive, Long Grove, Illinois 60049 for the
new Guaranteed Interest Rates.
D. 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
established, rates are guaranteed for the respective Guarantee Periods. We
advise you of the Guaranteed Interest Rate for a chosen Guarantee Period when we
receive a Purchase Payment, when a transfer is made or when a Guarantee Period
renews. Withdrawals of Accumulated Guarantee Period Value are 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.
E. 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
- Accumulated Guarantee Period Value.
F. TRANSFER DURING ACCUMULATION PERIOD.
During the Accumulation Period, you may transfer your Contract Value among the
Subaccounts and the Guarantee Periods, subject to the following provisions:
- the Contract Value transferred into or out of the Guarantee Periods must
be at least $5,000, unless the entire Guarantee Period Value is
transferred;
- we reserve the right to charge $25 for each transfer (that is not part of
the Automatic Asset Rebalancing, see p. 22) when there are more than 12
transfers in a Contract Year.
In addition, transfers of Guarantee Period Value before the Guarantee Period end
date are subject to Market Value Adjustment. Because a transfer before the end
of a Guarantee Period is subject to a Market
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<PAGE> 23
Value Adjustment, the amount transferred from the Guarantee Period may be more
or less than the requested dollar amount.
If you authorize a third party to transact transfers on your behalf as a part of
an advisory service, we will reallocate the Contract Value pursuant to an
authorized program. However, we do not currently offer or participate in any
advisory service program and we take no responsibility for any third party
advisory service 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.
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 good faith instructions given in accordance
with our procedures, including requests for personal identifying information,
that are designed to limit unauthorized use of the privilege. Therefore, you
bear the risk of loss in the event of a fraudulent telephone transfer.
G. PARTIAL WITHDRAWALS DURING ACCUMULATION PERIOD.
You may redeem some or all of the Contract Value minus previous withdrawals,
plus or minus any applicable Market Value Adjustment. Withdrawals will have tax
consequences. (See "Federal Tax Matters.") A withdrawal of the entire Contract
Value is called a surrender.
Partial withdrawals are subject to the following:
In any Contract Year, you may make a partial withdrawal, subject to the
following:
- the partial withdrawal from the Subaccounts must be at least $500,
- the minimum withdrawal from the MVA Accounts must be at least $5,000
(before any Market Value Adjustment),
- at least $5,000 of Contract Value less Debt must remain in the Contract
after the withdrawal,
- if there is an outstanding loan the greater of $5,000 or 20% of Contract
Value must be retained in the contract
- transfers, rollovers, and exchanges are not permitted if there is an
outstanding loan.
If Contract Value is allocated to more than one investment option, you must
specify the source of the partial withdrawal. If you do not specify the source,
we cancel Accumulation Units on a pro rata basis from all investment options in
which you have an interest.
Election to withdraw shall be made in writing to Kemper Investors Life Insurance
Company, Customer Service, 1 Kemper Drive, Long Grove, Illinois 60049 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 on
the Accumulation Unit values, as calculated after we receive the request. The
Withdrawal Value attributable to
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the Subaccounts is paid within 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, or
- as the SEC by order may permit.
For withdrawal requests from the MVA Option, 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.
H. MARKET VALUE ADJUSTMENT.
Any withdrawal, transfer or annuitization of Guarantee Period Values, unless
effected on the Guarantee Period end date or during the "free look" period, may
be adjusted up or down by a Market Value Adjustment.
The Market Value Adjustment reflects the relationship between
- 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
- 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 = GPV X [ [ -------------- ] (t/365) -1 ]
(1 + J + .005)
</TABLE>
Where:
I is the Guaranteed Interest Rate being credited to the Guarantee Period
Value (GPV) subject to the Market Value Adjustment,
J is the Current Interest Rate 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 Amount subject to the Market
Value Adjustment, rounded to the next higher number of complete years, and
t is the number of days remaining in the Guarantee Period.
The .005 Market Value Adjustment factor can be changed in the future, at our
discretion on newly issued Contracts.
For an illustration showing an upward and a downward adjustment, see Appendix A.
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I. DEATH BENEFIT.
If you (or the Annuitant) die during the Accumulation Period, prior to attaining
age 75, the beneficiary will be paid the greater of:
- the Contract Value less Debt, or
- the total amount of Purchase Payments, minus both Debt and the aggregate
dollar amount of all previous partial withdrawals.
If you (or the Annuitant) die at age 75 or later, the death benefit is the
Contract Value minus Debt.
You or the 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 Contracts, if you are not the Annuitant and you die before the
Annuitant, the death benefit will be paid to your designated Beneficiary. The
available Annuity Options are limited by the Code, as described under "Annuity
Options". The death benefit is determined as stated above, except your age at
death is used in determining the amount payable. If the Beneficiary is your
surviving spouse, the surviving spouse may elect to be treated as the successor
Owner of the Contract and is not required to begin death benefit distribution.
The issue age of the deceased Owner applies in computing the death benefit,
payable at the death of a spouse who has elected to be treated as the successor
Owner.
J. LOANS.
The Owner of a Contract issued as a tax sheltered annuity under Section 403(b)
of the Code or with a qualified plan under Code Section 401 may request a loan
(if permitted by the ERISA Qualified Plan) any time during the accumulation
period. Loans are made from the general account. In general, under the Code
loans may not exceed 50% of the Contract Value. If the Contract Value is at
least $20,000 or the Contract is part of an ERISA qualified plan, the maximum
loan amount is the lesser of:
- 50% of the Contract Value, or
- $50,000 reduced by the highest loan balance over the prior 12 months.
If the Contract Value is less than $20,000 and is not part of an ERISA qualified
plan, the maximum loan amount is the lesser of:
- $10,000, or
- 80% of the Contract Value, less Debt.
The minimum loan is $1,000.
For non-ERISA loans, the loan interest rate is 5.5% per year. For loans issued
under ERISA plans, the loan interest rate will vary based on current rates.
Interest that is not paid when due is added to the loan and will bear interest
at the same rate as the loan. While the loan is outstanding, the portion of the
General Account Contract Value that equals the debt will earn interest at a rate
2.5% less than the loan rate.
Loans must be repaid in substantially equal quarterly payments within 5 years.
Loans used to purchase your principal residence must be repaid within 15 years.
If a loan payment is not made when due, interest will continue to accrue. On
403(b) Contracts, to the extent permitted by law, the amount of the missed
payment will be deducted from your Contract and paid to us. Any loan payment
which is not made when due, plus interest, will be treated as a distribution of
the
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entire remaining loan balance and will be taxable to the borrower, and may be
subject to early withdrawal tax penalty.
If there is an outstanding loan balance when the Contract is surrendered or
annuitized, or when a death benefit is paid, the amount payable will be reduced
by the amount of the loan outstanding plus accrued interest. Any loans made
under a Contract will be subject to Code requirements, our administrative
procedures as reflected under our loan agreements, and, if applicable, ERISA.
K. AUTOMATIC ASSET REBALANCING.
You may elect Automatic Asset Rebalancing on a monthly, quarterly, semi-annual
or annual basis. Funds held under the DCA or MVA options are not eligible for
this option.
CONTRACT AND CERTIFICATE CHARGES AND EXPENSES
We deduct the following charges and expenses:
- mortality and expense risk charge,
- administrative expenses,
- Records Maintenance Charge, and
- applicable premium taxes.
Subject to certain expense limitations, you indirectly bear investment
management fees and other Fund expenses.
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 1.00% 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 we incur.
The mortality risk we assume arises from two contractual obligations. First, if
you or the Annuitant die before you attain age 75, we may, in some cases, pay
more than Contract Value. (See "Death Benefit", page 18) 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 .25% per annum. We reserve the right to increase this charge to a
maximum of .45 per annum. If we increase this charge we will give you 3 months
advance notice. These charges reimburse us for expenses incurred for
administering the Contracts. These expenses include your inquiries, changes in
allocations, reports to you, 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 the particular Contract.
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B. RECORDS MAINTENANCE CHARGE.
We will assess an annual Records Maintenance Charge (assessed ratably each
quarter) during the Accumulation Period against each Contract which has
participated in one or more of the Subaccounts during the calendar year whether
or not any Purchase Payments have been made during the year. The Records
Maintenance Charge is:
- $7.50 quarterly for Contracts with Contract Value under $25,000.
- $3.75 quarterly for Contracts with Contract Value between $25,000 and
$50,000.
- No Records Maintenance Charge for Contracts with Contract Value over
$50,000.
The Record Maintenance Charge is not assessed during the Annuity Period.
The Records Maintenance Charge is to reimburse us for expenses incurred in
establishing and maintaining the records relating to a Contract's participation
in the Separate Account. The Records Maintenance Charge will be assessed at the
end of each calendar quarter and will constitute a reduction in the net assets
of each Subaccount.
At any time the Records Maintenance Charge is assessed, the applicable charge
will be assessed ratably against each Subaccount in which the Contract is
participating and a number of Accumulation Units sufficient to equal the proper
portion of the charge will be redeemed from such Subaccount, or from the
Guarantee Periods if necessary to meet the assessment.
C. WITHDRAWAL CHARGE.
There is no withdrawal charge.
D. INVESTMENT MANAGEMENT FEES AND OTHER EXPENSES.
Each Portfolio's net asset value reflects the deduction of investment management
fees and general operating expenses. Subject to limitations, you indirectly bear
these fees and expenses. Investment management fees appear on page 5. Further
detail is provided in the attached prospectuses for the Portfolios and the
Funds' Statements of Additional Information.
E. 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, unless the tax was previously
assessed. See "Appendix B--State Premium Tax Chart" in the Statement of
Additional Information. It is our current practice under this Contract to pay
premium tax directly and not charge you. This practice is subject to change
without notice.
F. REDUCTION OR ELIMINATION OF CERTAIN CHARGES.
Contracts may be available for purchase in certain group or sponsored
arrangements that qualify for reductions or eliminations of certain charges, the
time periods in which such charges apply, or both. Group arrangements include
those in which a trustee, an employer or an association purchases Contracts
covering a group of individuals. Sponsored arrangements include those in which
an employer or association allows us to offer Contracts to its employees or
members on an individual basis.
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In certain circumstances, the risk of adverse mortality and expense experience
for Contracts purchased in certain group or sponsored arrangements may be
reduced. Then, the daily asset charge for mortality and expense costs may
likewise be reduced. The daily asset charge for administrative costs and the
Records Maintenance Charge may also be reduced or eliminated if we anticipate
lower administrative expenses. In certain other circumstances, sales expenses in
certain group or sponsored arrangements may be reduced or eliminated.
In determining whether a group or sponsored arrangement qualifies for reduced or
eliminated charges, we will consider:
- the size and type of group to which sales are to be made and
administrative services provided, and the persistency expected from the
group;
- the total amount of Purchase Payments to be received and the method in
which they will be remitted;
- any prior or existing relationship with us;
- the level of commission paid to selling broker-dealers;
- the purpose for which the Contract is being purchased, and whether that
purchase makes it likely that sales costs and administrative expenses
will be reduced; and
- the frequency of projected surrenders or distributions.
We make any reductions or eliminations according to objective guidelines in
effect when an application for a Contract is approved. We may change these
guidelines from time to time. Any variation in the charges will reflect
differences in costs or services and will be offered uniformly to all members of
the group or sponsored arrangement. In no event will a charge reduction or
elimination be permitted if it is unfairly discriminatory to any person or
prohibited by law.
We may also decrease the mortality and expense risk charge, the administration
charge, and the Records Maintenance Charge without notice. However, beyond what
is disclosed above, 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. Reductions in these
fees and charges will not unfairly discriminate against any Owner.
THE ANNUITY PERIOD
Contracts may be annuitized under one of several Annuity Options, which are
available either on a fixed or variable basis. We make annuity payments
beginning on the Annuity Date under the Annuity Option you select.
1. ANNUITY PAYMENTS.
Annuity payments are based on:
- the annuity table specified in the Contract,
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- the selected Annuity Option, and
- the investment performance of the selected Subaccount(s) (if variable
annuitization is elected).
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.
2. ANNUITY OPTIONS.
You may elect one of the Contract's Annuity Options. You may decide at any time
(subject to the provisions of any applicable retirement plan and state
variations) to begin annuity payments. You may change the Annuity Option before
the Annuity Date. 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 $5,000. In addition, if the first monthly
payment is less than $50 we may change the frequency of payments to quarterly,
semiannual or annual intervals so that the initial payment is at least $50.
The amount of periodic annuity payments may depend upon:
- the Annuity Option you select;
- the age of the payee;
- the investment experience of the selected Subaccount(s); and
- the interest rates at the time of annuitization.
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. Finally, if you participate in a Subaccount with higher
investment performance, it is likely you will receive a higher periodic payment.
If the Beneficiary is not an individual, the entire interest must be distributed
within 5 years of your death. The Death Benefit distribution must begin no later
than one year from your death, unless a later date is prescribed by federal
regulation.
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For Non-Qualified Contracts, if you die before the Annuity Date, available
Annuity Options are limited. 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 your death).
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.
3. ALLOCATION OF ANNUITY.
You may elect payments on a fixed or variable basis, or a combination. Any
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. You may exercise the transfer privilege
during the Accumulation Period. Transfers during the Annuity Period are subject
to certain limitations. We reserve the right to restrict the number of options
in the Annuity Period.
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4. TRANSFER DURING ANNUITY PERIOD.
During the Annuity Period, the payee may, by written request, transfer
Subaccount Value from one Subaccount to another Subaccount, 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 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 7 days before
an annuity payment date, the transfer is effective during the Valuation
Period after the annuity payment date.
- Transfers to the General Account are available only on an anniversary of
the first Annuity Date. We must receive notice at least 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
- 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 your 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.
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.
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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 benefit, if any, depends upon the form of annuity payment in effect at the
time of death. (See "Annuity Options.")
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 "Code", Treasury
Department regulations, and interpretations existing on the date of this
Prospectus. These authorities, however, are subject to change by Congress, the
Treasury Department, and the courts.
This discussion does not address state or local tax consequences 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.
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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 Contract are generally not taxable to you or the 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 you, 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
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 Contracts,
- contracts purchased by employers at termination of certain qualified
plans,
- contracts used with structured settlement agreements, and
- 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. In those circumstances, 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 you from being
considered the owner of the Separate Account assets.
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DELAYED ANNUITY DATES. If the Annuity Date occurs (or is scheduled to occur)
when you have reached an advanced age, E.G., past age 95, 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 your
income.
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 FROM NONQUALIFIED CONTRACTS
Partial withdrawals from a Non-Qualified Contract are includible in income if
contract value before the withdrawal exceeds the "investment in the contract."
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 you
transfer a contract interest without adequate consideration to someone other
than the owner's spouse (or to a former spouse incident to divorce), is taxable
on the difference between the 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 your income.
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.
4. TAXATION OF DEATH BENEFITS
Amounts may be distributed upon your or the 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.
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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 Contract
unless:
- received on or after you reach age 59 1/2,
- attributable to your disability,
- made to a Beneficiary after your 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 your life (or life expectancy) or for the joint lives (or
joint life expectancies) of you and your 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
Contract is determined by combining some or all of the Non-Qualified Contracts
you own. For example, if you purchase a Contract and also purchase an immediate
annuity at approximately the same time, the IRS may treat the two contracts as
one contract. In addition, if you purchase two or more deferred annuity
contracts from the same company (or its affiliates) during any calendar year,
these contracts are treated 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.
D. QUALIFIED PLANS
Qualified Contracts are used with retirement plans which receive favorable tax
treatment as Individual Retirement Annuities, Simplified Employee
Pensions--IRAs, Roth Individual Retirement Annuities, tax sheltered annuities,
and certain deferred compensation plans ("qualified plans"). Numerous special
tax rules apply to qualified plans and to Qualified Contracts. Therefore, we
make no attempt to provide more than general information about use of Qualified
Contracts.
The tax rules applicable to qualified plans vary according to the type, 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. Both the amount of the
permitted contribution, and the corresponding deduction or exclusion, are
limited under qualified plans. In Qualified Contracts, the Owner and Annuitant
generally are the same individual. Also, if the joint Annuitant is not the
Annuitant's spouse, the annuity options may be limited, depending on the
difference in their ages.
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<PAGE> 36
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
commencement dates. An excise tax is imposed for failure to comply with minimum
distribution requirements. This excise tax generally equals 50% of the amount by
which a minimum required distribution exceeds the actual distribution. In the
case of Individual Retirement Annuities, distributions of minimum amounts must
generally begin by April 1 of the calendar year following the calendar year in
which the owner attains age 70 1/2.
A 10% penalty tax may apply to the taxable amount of payments from Qualified
Contracts. For Individual Retirement Annuities, the penalty tax does not apply
to a payment:
- received after you reach age 59 1/2,
- received after your death or because of your disability, or
- made as a series of substantially equal periodic payments (at least
annually) for your life (or life expectancy) or for the joint lives (or
joint life expectancies) of you and your designated Beneficiary
Qualified 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." The Code
limits 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 competent tax advice.
SIMPLE IRAS. The Code permits certain small employers to establish "SIMPLE
retirement accounts," including SIMPLE IRAs, for their employees. Under 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 with such plans should seek competent advice.
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<PAGE> 37
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.
For a rollover from a non-Roth IRA to a Roth IRA, amounts which would have been
includible in gross income but for the qualified rollover contribution are
includible in gross income, without application of the 10 percent penalty tax.
An IRA may be converted into a Roth IRA without taking a distribution. You 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, you 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 you reach age 59 1/2,
-- made after your death,
-- because of your disability, 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 your Roth
IRA, or
-- the first taxable year for which rollover was made to your Roth IRA. A
non-qualified distribution from a Roth IRA is generally taxed like a
distribution from an IRA. Distributions from a Roth IRA need not start
at age 70 1/2.
TAX-SHELTERED ANNUITIES. Section 403(b) of the Code permits public school
employees and employees of certain types of charitable, educational and
scientific organizations specified in section 501(c)(3) of the Code to have
their employers purchase annuity contracts for them and, subject to certain
limitations, to exclude the amount of purchase payments from gross income for
tax purposes. These annuity contracts are commonly referred to as "tax-sheltered
annuities". If you purchase a Contract for such purposes, you should seek
competent advice as to eligibility, limitations on permissible amounts of
purchase payments and other tax consequences associated with the Contracts.
Tax-sheltered annuity Contracts must contain restrictions on withdrawals of (i)
contributions made pursuant to a salary reduction agreement in years beginning
after December 31, 1988, (ii) earnings on those contributions, and (iii)
earnings after December 31, 1988 on amounts attributable to salary reduction
contributions held as of December 31, 1988. These amounts can be paid only if
the employee has reached age 59 1/2, separated from service, died, or becomes
disabled (within the meaning of the tax law), or in the case of hardship (within
the meaning of the tax law). Amounts permitted to be distributed in the event of
hardship are limited to actual 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
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<PAGE> 38
subject to more stringent restrictions. (These limitations on withdrawals do not
apply to the extent we are directed to transfer some or all of the Contract
Value to the issuer of another tax-sheltered annuity or into a section 403(b)(7)
custodial account.) Additional restrictions may be imposed by the plan sponsor.
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 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 (i) minimum distributions required under section 401(a)(9) of the Code,
and (ii) 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, you 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, you elect 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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<PAGE> 39
DISTRIBUTION OF CONTRACTS AND CERTIFICATES
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
Each quarter, we send you a statement showing amounts credited to each
Subaccount and to the Guarantee Period Value. In addition, if you transfer
amounts among the investment options or make additional unscheduled payments,
you will receive written confirmation of these transactions. We will also send a
current statement upon your request. We also send you annual and semi-annual
reports for the Portfolios that correspond to the Subaccounts in which you
invest and a list of the securities held by that Portfolio.
You will have access to Contract information through the Interactive Voice
Response System (IVR) at (888) 477-9700. You will also be able to access your
account information from our website at www.zurichkemper.com.
You may also direct inquiries to the selling agent or may call 1-888-477-9700 or
write to Kemper Investors Life Insurance Company, Customer Service, 1 Kemper
Drive, Long Grove, Illinois 60049.
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<PAGE> 40
DOLLAR COST AVERAGING
DOLLAR COST AVERAGING FOR THE KEMPER MONEY MARKET AND KEMPER GOVERNMENT
SECURITIES SUBACCOUNTS
Under our Dollar Cost Averaging program ("DCA"), you designate a portion of the
Kemper Money Market or Kemper Government Securities Subaccount Value to be
transferred on a monthly or quarterly basis to the other Subaccounts. The DCA
program is available only during the Accumulation Period. DCA to the MVA Options
are not permitted. In the event of a partial annuitization, DCA is only allowed
in the non-annuitized portion of the contract.
The first DCA will occur on the requested beginning date. If the requested
beginning date is a non-business day, the first DCA will occur on the first
business day prior to the requested beginning date. If you do not provide a
requested beginning date, the first DCA will occur on the first business day
following receipt of your request. We will delay the beginning date if
information is missing from your request or if your request is deemed not in
good order. Subsequent DCA transfers will occur, every one or three months, on
the same day of the month as the initial DCA transfer. If a subsequent DCA
transfer is scheduled for a non-business day, the transfer will take place on
the business day prior to the scheduled DCA transfer date.
DOLLAR COST AVERAGING FROM OUR GENERAL ACCOUNT
Deposits and transfers into our general account will be automatically
transferred to the subaccounts on a monthly frequency over a period no greater
than seven (7) months from the date of the initial transfer or deposit to the
General Account. All assets transferred or deposited to the General Account will
be transferred from the General Account by the end of the seven (7) month
period. The first DCA transfer will occur one month following the date of the
initial deposit or transfer to the DCA account. Subsequent DCA transfers will
occur on the same day of the month as the initial DCA transfer. If a subsequent
DCA transfer is scheduled for a non-business day, the transfer will take place
on the business day prior to the scheduled DCA transfer date.
We reserve the right to offer additional DCA periods at any time. All additional
DCA periods will be offered for a limited period of time and may be changed,
revoked or canceled at any time for future deposits or transfers.
SYSTEMATIC WITHDRAWAL PLAN
We offer a Systematic Withdrawal Plan ("SWP") allowing you to pre-authorize
periodic withdrawals during the Accumulation Period. You instruct us to withdraw
selected amounts from the Subaccounts or Guarantee Periods on a monthly,
quarterly, semi-annual or annual basis. SWP is not available from the MVA
accounts or under the DCA Program. WITHDRAWALS TAKEN UNDER THE SWP MAY BE
SUBJECT TO THE 10% TAX PENALTY ON EARLY WITHDRAWALS AND TO INCOME TAXES AND MAY
BE SUBJECT TO 20% WITHHOLDING. If you are interested in SWP, you may obtain an
application and information concerning this program and its restrictions from us
or your agent. We give thirty days' notice if we amend the SWP. The SWP may be
terminated at any time by the you or us.
EXPERTS
[TO BE UPDATED BY AMENDMENT]
The consolidated balance sheets of KILICO as of December 31, 1999, 1998 and 1997
and the related consolidated statements of operations, comprehensive income,
stockholder's equity, and cash flows for the
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<PAGE> 41
years ended December 31, 1999, 1998 and 1997 have been included herein and in
the registration statement in reliance upon the report of PricewaterhouseCoopers
LLP, independent public accountants, appearing elsewhere herein, and upon the
authority of said firm as experts in accounting and auditing.
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 Debra P.
Rezabek, our Senior Vice President, General Counsel and Corporate Secretary.
Jorden Burt Boros Cicchetti Berenson & Johnson, LLP, Washington, D.C., has
advised us on certain legal matters concerning federal securities laws
applicable to the issue and sale of 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 you in writing of these amendments.
Your 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.
You are solely responsible for the validity or effect of any assignment. You,
therefore, should consult a qualified tax advisor 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 and the
Investment Company Act of 1940. 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.
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<PAGE> 42
BUSINESS
[TO BE UPDATED BY AMENDMENT]
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.
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
insurance contracts. In 1998, We introduced a new
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<PAGE> 43
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
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-
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<PAGE> 44
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.
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
40
<PAGE> 45
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 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 $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.
41
<PAGE> 46
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, We 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, We 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, We 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 its capital position
- 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
42
<PAGE> 47
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 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
systematically reduced Our investment risk and strengthened Our capital
position.
Our 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
our 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 Our 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
43
<PAGE> 48
(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
(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.
44
<PAGE> 49
SELECTED FINANCIAL DATA
[TO BE UPDATED BY AMENDMENT]
The following table sets forth selected financial information for KILICO for the
five years ended December 31, 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.
45
<PAGE> 50
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
[TO BE UPDATED BY AMENDMENT]
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........................ 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 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
46
<PAGE> 51
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
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
47
<PAGE> 52
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 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
48
<PAGE> 53
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 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 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.
49
<PAGE> 54
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.
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
50
<PAGE> 55
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 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
51
<PAGE> 56
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 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
52
<PAGE> 57
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.
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>
53
<PAGE> 58
<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>
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.
54
<PAGE> 59
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 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
55
<PAGE> 60
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.
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
56
<PAGE> 61
geographically dispersed and the current market values of the underlying
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 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
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.
57
<PAGE> 62
(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.
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.
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<PAGE> 63
We regularly monitor Our investment portfolio and as part of this process review
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
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.
Each rating is subject to revision or withdrawal at any time by the assigning
organization and should be evaluated independently of any other rating.
59
<PAGE> 64
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, 1999. Full implementation of SFAS No. 133 is expected
in December 1999. The impact of implementation is not expected to be material to
KILICO.
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<PAGE> 65
KILICO'S DIRECTORS AND EXECUTIVE OFFICERS
[TO BE UPDATED BY AMENDMENT]
<TABLE>
<CAPTION>
NAME AND AGE
POSITION WITH KILICO
YEAR OF ELECTION OTHER BUSINESS EXPERIENCE DURING PAST 5 YEARS OR MORE
-------------------- -----------------------------------------------------
<S> <C>
John B. Scott (54) Chief Executive Officer, President and Director of Federal
Chief Executive Officer since Kemper Life Assurance Company (FKLA) and Fidelity Life
February 1992. President since Association (FLA) since 1988. Chief Executive Officer,
November 1993. Director since 1992. President and Director of Zurich Life Insurance Company of
America (ZLICA) and Zurich Direct, Inc. (ZD) since March
1996. 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.
Eliane C. Frye (51) Executive Vice President of FKLA and FLA since 1995.
Executive Vice President since 1995. Executive Vice President of ZLICA and ZD since March 1996.
Director since May 1998. Director of FLA since December 1997. Director of FKLA and
ZLICA since May 1998. Director of ZD from March 1996 to
March 1997. Director of IBS and IBSIA since 1995. Senior
Vice President of KILICO, FKLA and FLA from 1993 to 1995.
Vice President of FKLA and FLA from 1988 to 1993.
Frederick L. Blackmon (47) Senior Vice President and Chief Financial Officer of FKLA
Senior Vice President and Chief since December 1995. Senior Vice President and Chief
Financial Officer since December Financial Officer of FLA since January 1996. Senior Vice
1995. President and Chief Financial Officer of ZLICA 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.
James C. Harkensee (40) Senior Vice President of FKLA and FLA since January 1996.
Senior Vice President since January Senior Vice President of ZLICA since 1995. Senior Vice
1996. 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.
</TABLE>
61
<PAGE> 66
<TABLE>
<CAPTION>
NAME AND AGE
POSITION WITH KILICO
YEAR OF ELECTION OTHER BUSINESS EXPERIENCE DURING PAST 5 YEARS OR MORE
-------------------- -----------------------------------------------------
<S> <C>
James E. Hohmann (43) Senior Vice President of FKLA since December 1995. Chief
Senior Vice President since December Actuary of FKLA and KILICO from December 1995 to January
1995. Director since May 1998. 1999. Senior Vice President of FLA since January 1996. Chief
Actuary of FLA from January 1996 to January 1999. Senior
Vice President of ZLICA and ZD since March 1996. Chief
Actuary of ZLICA and ZD from March 1996 to January 1999.
Director of FLA since June 1997. Director of FKLA and ZLICA
since May 1998. Director of ZD from March 1996 to March
1997. Managing Principal (Partner) of Tillinghast-Towers
Perrin from January 1991 to December 1995.
Consultant/Principal (Partner) of Tillinghast-Towers Perrin
from November 1986 to January 1991.
Edward K. Loughridge (44) Senior Vice President and Corporate Development Officer of
Senior Vice President and Corporate FKLA and FLA since January 1996. Senior Vice President and
Development Officer since January Corporate Development Officer for ZLICA and ZD since March
1996. 1996. Senior Vice President of Human Resources of
Zurich-American Insurance Group from February 1992 to March
1996.
Debra P. Rezabek (43) Senior Vice President of FKLA and FLA since March 1996.
Senior Vice President since 1996. Corporate Secretary of FKLA and FLA since January 1996.
General Counsel since 1992. Corporate Director of FLA since May 1998. Vice President of KILICO,
Secretary since January 1996. FKLA and FLA since 1995. General Counsel and Director of
Government Affairs of FKLA and FLA since 1992 and of KILICO
since 1993. Senior Vice President, General Counsel and
Corporate Secretary of ZLICA 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.
Kenneth M. Sapp (53) Senior Vice President of FKLA, FLA and ZLICA since January
Senior Vice President since January 1998. Director of IBS since May 1998. Director of IBSIA
1998. 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 and ZLICA since October
Senior Vice President since October 1996. Senior Vice President of ZD since March 1997. Director
1996. of IBS and IBSIA since October 1996. Executive Vice
President of The Copeland Companies from April 1983 to
September 1996.
Loren J. Alter (60) Director of FKLA, FLA and Scudder Kemper Investments, Inc.
Director since January 1996. (SKI) since January 1996. Director of ZLICA since May 1979.
Executive Vice President and Chief Financial Officer of
Zurich U.S. since 1979. President, Chief Executive Officer
and Director of Kemper since January 1996.
</TABLE>
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<PAGE> 67
<TABLE>
<CAPTION>
NAME AND AGE
POSITION WITH KILICO
YEAR OF ELECTION OTHER BUSINESS EXPERIENCE DURING PAST 5 YEARS OR MORE
-------------------- -----------------------------------------------------
<S> <C>
William H. Bolinder (55) Chairman of the Board and Director of FKLA and FLA since
Chairman of the Board and Director January 1996. Chairman of the Board of ZLICA and ZD since
since January 1996. 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 (52) Director of FKLA and ZLICA since May 1997. Director of FLA
Director since May 1997. since June 1997. Executive Vice President, Corporate
Secretary and General Counsel of Zurich U.S. since August
1985. Vice President, General Counsel and Secretary of
Kemper since January 1996.
Gunther Gose (54) Director of FKLA, FLA and ZLICA since November 1998. Chief
Director since November 1998. Financial Officer and Member of the Group Executive Board of
Zurich Financial Services since October 1998. Member of the
Corporate Executive Board of Zurich Insurance Group from
April 1990 to October 1998.
</TABLE>
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<PAGE> 68
EXECUTIVE COMPENSATION
[TO BE UPDATED BY AMENDMENT]
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------------------------------------------
OTHER LONG TERM
ANNUAL INCENTIVE PLAN ALL OTHER
NAME AND COMPENSATION PAYOUTS COMPENSATION
PRINCIPAL POSITION YEAR SALARY ($) BONUS ($)(2) ($)(3) ($)(2) ($)(4)(5)(6)
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
John B. Scott.............. 1998 $171,000 $137,670 $-- $219,375 $ 42,465
Chief Executive Officer(1) 1997 171,000 112,100 -- 239,400 34,148
1996 212,500 94,000 -- 212,500 142,498
Eliane C. Frye............. 1998 107,160 64,860 -- 89,300 23,864
Executive Vice President(1) 1997 98,040 47,515 -- 91,590 18,886
1996 105,000 41,750 -- 69,750 58,520
Frederick L. Blackmon...... 1998 94,160 63,800 -- 78,540 22,077
Senior Vice President and 1997 96,300 54,225 -- 112,500 19,543
Chief Financial
Officer(1) 1996 100,583 47,000 27,924 71,250 11,226
George Vlaisavljevich...... 1998 260,000 146,000 -- 216,600 60,899
Senior Vice President(1) 1997 252,500 146,000 39,922 243,000 9,165
James E. Hohmann........... 1998 88,400 71,175 -- 79,560 21,938
Senior Vice President and 1997 79,333 45,500 -- 80,150 17,643
Chief Actuary(1) 1996 113,333 -- -- -- 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.
(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.
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<PAGE> 69
(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 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.
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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; Report of Independent Public Accountants;
Financial Statements of the Separate Account; Appendix A Table of Historical
Hypothetical Accumulation Unit Values and Performance Information; and Appendix
B State Premium Tax Chart. The Statement of Additional Information should be
read in conjunction with this Prospectus.
FINANCIAL STATEMENTS
The financial statements of KILICO that are included in this Prospectus should
be considered primarily as bearing on our ability to meet our obligations under
the Certificates. The Certificates are not entitled to participate in our
earnings, dividends or surplus.
CHANGE OF ACCOUNTANTS
On September 12, 1997, we 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.
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<PAGE> 71
[FINANCIAL STATEMENTS TO BE FILED BY AMENDMENT]
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APPENDIX A
ILLUSTRATION OF A MARKET VALUE ADJUSTMENT
<TABLE>
<S> <C>
Purchase Payment: $40,000
Guarantee Period: 5 Years
Guaranteed Interest Rate: 5% Annual Effective Rate
</TABLE>
The following examples illustrate how the Market Value Adjustment and the
Withdrawal Charge may affect the values of a Certificate upon a withdrawal. The
5% assumed Guaranteed Interest Rate is the rate required to be used in the
"Summary of Expenses." In these examples, the withdrawal occurs one year after
the Date of Issue. The Market Value Adjustment operates in a similar manner for
transfers. No Withdrawal Charge applies to transfers.
The Guarantee Period Value for this $40,000 Purchase Payment is $51,051.26 at
the end of the five-year Guarantee Period. After one year, when the withdrawals
occur in these examples, the Guarantee Period Value is $42,000.00. It is also
assumed, for the purposes of these examples, that no prior partial withdrawals
or transfers have occurred.
The Market Value Adjustment will be based on the rate we are 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 we are then crediting 6.5% for
a four-year Guarantee Period. Upon a full withdrawal, the market value
adjustment factor would be:
<TABLE>
<C> <C> <S> <C> <C> <C> <C>
(1 + .05) 4
-.0726961* = [ ----------------- ] -1
(1 + .065 + .005)
</TABLE>
The Market Value Adjustment is a reduction of $3,053.24 from the Guarantee
Period Value:
-3,053.24 = -.0726961 X 42,000.00
The Market Adjusted Value would be:
$38,946.76 = $42,000.00 - $3,053.24
A Withdrawal Charge of 6% would be assessed against the Market Adjusted Value in
excess of the amount available as a free withdrawal. In this case, there are no
prior withdrawals, so 15% of the Market Adjusted Value is not subject to a
Withdrawal Charge. The Withdrawal Charge is thus:
$1,986.29 = $38,946.76 X .85 X .06
Thus, the amount payable on a full withdrawal would be:
$36,960.48 = $38,946.76 - $1,986.29
- ---------------
* Actual calculation utilizes 10 decimal places.
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If instead of a full withdrawal, 50% of the Guarantee Period Value was withdrawn
(partial withdrawal of 50%), the Market Value Adjustment would be 50% of that of
the full withdrawal:
-$1,526.62 = -.0726961 X $21,000.00
The Market Adjusted Value would be:
$19,473.38 = $21,000.00 - $1,526.62
The Withdrawal Charge of 6% would apply to the Market Adjusted Value being
withdrawn, less 15% of the full Market Adjusted Value as there are no prior
withdrawals:
$819.68 = ($19,473.38 - .15 X $38,946.76) X .06
Thus, the amount payable on this partial withdrawal would be:
$18,653.70 = $19,473.38 - $819.68
EXAMPLE OF AN UPWARD MARKET VALUE ADJUSTMENT
An upward Market Value Adjustment results from a withdrawal that occurs when
interest rates have decreased. Assume interest rates have decreased one year
later and we are then crediting 4% for a four-year Guarantee Period. Upon a full
withdrawal, the market value adjustment factor would be:
<TABLE>
<C> <C> <S> <C> <C> <C> <C>
(1 + .05) 4
+.0192766 = [ ---------------- ] -1
(1 + .04 + .005)
</TABLE>
The Market Value Adjustment is an increase of $809.62 to the Guarantee Period
Value:
$809.62 = $42,000.00 X .0192766
The Market Adjusted Value would be:
$42,809.62 = $42,000.00 + $809.62
A Withdrawal Charge of 6% would apply to the Market Adjusted Value being
withdrawn, less 15% of the full Market Adjusted Value, as there were no prior
withdrawals:
$2,183.29 = $42,809.62 X .85 X .06
Thus, the amount payable on withdrawal would be:
$40,626.33 = $42,809.62 - $2,183.29
If instead of a full withdrawal, 50% of the Guarantee Period Value was withdrawn
(partial withdrawal of 50%), the Market Value Adjustment would be:
$404.81 = $21,000.00 X .0192766
The Market Adjusted Value of $21,000.00 would be:
$21,404.81 = $21,000.00 + $404.81
The Withdrawal Charge of 6% would apply to the Market Adjusted Value being
withdrawn, less 15% of the full Market Adjusted Value as there are no prior
withdrawals:
$899.00 = ($21,404.81 - .1 X $42,809.62) X .06
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Thus, the amount payable on this partial withdrawal would be:
$20,505.81 = $21,404.81 - $899.00
Actual Market Value Adjustment may have a greater or lesser impact than that
shown in the Examples, depending on the actual change in interest crediting
rates and the timing of the withdrawal or transfer in relation to the time
remaining in the Guarantee Period.
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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 Certificate 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 Certificate 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 Certificate 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 Certificate, and does
not represent a determination on the merits of the Certificate.
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 Certificate must be nontransferable by the owner.
3. The Certificate 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 Certificate is distributed,
unless otherwise permitted under applicable law, any remaining interest in the
Certificate 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 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 Certificate will be treated as his or her own IRA, or, where
applicable, Roth IRA.
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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 Certificate 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 Certificate 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.
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.
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<PAGE> 77
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 not 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.
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.
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<PAGE> 78
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.
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 Certificate
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 Certificate 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
Roth IRA, it will be administered in accordance with the requirements of section
408A of the Code. (Except as otherwise indicated, references herein to an "IRA"
are to an "individual retirement plan," within the meaning of section
7701(a)(37) of the
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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 Certificate 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. We reserve 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
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
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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 generally not apply unless the amounts rolled over or
transferred are withdrawn within the five-year period beginning with the taxable
year in which such contribution was made.
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 a 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
76
<PAGE> 81
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.
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 Certificate. Generally, an excess contribution is the amount contributed to
your Certificate 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 Certificate 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.
77
<PAGE> 82
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 high education expenses, certain medical expenses, or by an unemployed
individual to pay health insurance premiums.
O. IRA 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, Roth IRA or SIMPLE 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 Certificate or use it as security for a loan,
the Certificate 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
Certificate 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.
78
<PAGE> 83
S. FINANCIAL DISCLOSURE FOR THE SEPARATE ACCOUNT (VARIABLE ACCOUNT)
AND MVA OPTION.
1. If on the enrollment application you indicated an allocation to a Subaccount,
this Certificate will be assessed a daily charge of an amount which will equal
an aggregate of 1.25% per annum.
2. An annual records maintenance charge of $30.00 will be assessed against the
Separate Account Value each Certificate Year. If no values are in the
Subaccounts, the charge will be assessed against Guarantee Period Value.
3. Withdrawal and early annuitization charges will be assessed based on the
Certificate Years elapsed since the Certificate was issued as described in the
prospectus under the heading "Withdrawal Charge."
Withdrawals, transfers and early annuitizations of Guarantee Period Value may be
subject to a Market Value Adjustment as described in the prospectus under the
heading "Market Value Adjustment."
4. The method used to compute and allocate the annual earnings is contained in
the prospectus under the heading "Accumulation Unit Value" for Separate Account
Value and under the headings "Guarantee Periods of the MVA Option" and
"Establishment of Guaranteed Interest Rates" for Guarantee Period Value.
5. The growth in value of your Certificate is neither guaranteed nor projected
but is based on the investment experience of the Subaccounts or rates of
interest as declared by Kemper Investors Life Insurance Company.
79
<PAGE> 84
STATEMENT OF ADDITIONAL INFORMATION
MARCH 16, 2000
- --------------------------------------------------------------------------------
INDIVIDUAL AND GROUP VARIABLE AND MARKET VALUE ADJUSTED
DEFERRED ANNUITY CONTRACTS
- --------------------------------------------------------------------------------
ZURICH PREFERRED
ISSUED BY
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
AND
KEMPER INVESTORS LIFE INSURANCE COMPANY
HOME OFFICE: 1 KEMPER DRIVE, LONG GROVE, ILLINOIS 60049 (847) 550-5500
This Statement of Additional Information is not a prospectus. This Statement of
Additional Information should be read in conjunction with the Prospectus of the
Separate Account dated , 2000. The Prospectus may be obtained from Kemper
Investors Life Insurance Company by writing or calling the address or telephone
number listed above.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Services to the Separate Account............................ B-1
Performance Information of Subaccounts...................... B-1
State Regulation............................................ B-4
Experts..................................................... B-4
Financial Statements........................................ B-4
Report of Independent Public Accountants....................
Financial Statements of the Separate Account................
Appendix A Table of Historical Hypothetical Accumulation
Unit Values and Performance Information................... B-6
Appendix B State Premium Tax Chart.......................... B-13
</TABLE>
<PAGE> 85
SERVICES TO THE SEPARATE ACCOUNT
[TO BE UPDATED BY AMENDMENT]
Kemper Investors Life Insurance Company ("KILICO") maintains the books and
records of the KILICO Variable Annuity Separate Account (the "Separate
Account"). KILICO holds the assets of the Separate Account. The assets are kept
segregated and held separate and apart from the general funds of KILICO. KILICO
maintains records of all purchases and redemptions of shares of each Portfolio
of the Kemper Investors Fund (the "Fund") by each of the Subaccounts. All
expenses incurred in the operations of the Separate Account, except the charge
for mortality and expense risk and administrative expenses, and records
maintenance charge (as described in the Prospectus) are borne by KILICO.
The independent auditors for the Separate Account are PricewaterhouseCoopers
LLP, Chicago, Illinois, for the years ended December 31, 1999 and 1998. The firm
performed the annual audit of the financial statements of the Separate Account
and KILICO for the years ended December 31, 1999 and 1998.
The Certificates are sold by licensed insurance agents, where the Certificates
may be lawfully sold, who are registered representatives of broker-dealers which
are registered under the Securities Exchange Act of 1934 and are members of the
National Association of Securities Dealers, Inc. The Certificates are
distributed through the principal underwriter for the Separate Account,
Investors Brokerage Services, Inc., a subsidiary of KILICO, which enters into
selling group agreements with the affiliated and unaffiliated broker-dealers.
Subject to the provisions of the Contracts, units of the Subaccounts under the
Contract are offered on a continuous basis.
KILICO pays commissions to the seller which may vary but are not anticipated to
exceed in the aggregate an amount equal to six percent (6%) of Purchase
Payments. During 1998, 1997 and 1996, KILICO incurred gross commissions payable
of approximately $ , $4.2 and $5.6 million, respectively, to licensed
insurance agents.
PERFORMANCE INFORMATION OF SUBACCOUNTS
[TO BE UPDATED BY AMENDMENT]
As described in the Prospectus, a Subaccount's historical performance may be
shown in the form of standardized "average annual total return" and
nonstandardized "total return" calculations in the case of all Subaccounts;
"yield" information may be provided in the case of the Kemper High Yield
Subaccount, Kemper Investment Grade Bond Subaccount, Kemper Government
Securities Subaccount, and Kemper Global Income Subaccount; and "yield" and
"effective yield" information may be provided in the case of the Kemper Money
Market Subaccount #1 and Kemper Money Market Subaccount #2 (collectively, the
"Kemper Money Market Subaccounts"). These various measures of performance are
described below.
A Subaccount's standardized average annual total return quotation is computed in
accordance with a standard method prescribed by rules of the Securities and
Exchange Commission. The standardized average annual total return for a
Subaccount for a specific period is found by first taking a hypothetical $1,000
investment in each of the Subaccount's units on the first day of the period at
the maximum offering price, which is the Accumulation Unit value per unit
("initial investment") and computing the ending redeemable value ("redeemable
value") of that investment at the end of the period. The redeemable value
reflects the effect of the applicable Withdrawal Charge that may be imposed at
the end of the period as well as all other recurring charges and fees applicable
under the Certificate to all Certificate Owner accounts. Premium taxes are not
included in the term charges. The redeemable value is then divided by the
initial investment and this quotient is taken to the Nth root (N represents the
number of years in the period) and 1 is subtracted from
B-1
<PAGE> 86
the result, which is then expressed as a percentage. Standardized average annual
total return figures are annualized and, therefore, represent the average annual
percentage change in the value of a Subaccount over the applicable period.
No standard formula has been prescribed for calculating total return
performance. Nonstandardized total return performance for a specific period is
calculated by first taking an investment (assumed to be $40,000 below) in each
Subaccount's units on the first day of the period at the maximum offering price,
which is the Accumulation Unit Value per unit ("initial investment") and
computing the ending value ("ending value") of that investment at the end of the
period. The ending value does not include the effect of the applicable
Withdrawal Charge that may be imposed at the end of the period, and thus may be
higher than if such charge were deducted. Premium taxes are not included in the
term charges. The nonstandardized total return percentage is then determined by
subtracting the initial investment from the ending value and dividing the
remainder by the initial investment and expressing the result as a percentage.
An assumed investment of $40,000 was chosen because that approximates the size
of a typical account. The account size used affects the performance figure
because the Records Maintenance Charge is a fixed per account charge. Both
annualized and nonannualized (cumulative) nonstandardized total return figures
may be provided. Annualized nonstandardized total return figures represent the
average annual percentage change in the value of a Subaccount over the
applicable period while nonannualized (cumulative) figures represent the actual
percentage change over the applicable period.
Standardized average annual total return quotations will be current to the last
day of the calendar quarter and nonstandardized total return quotations will be
current to the last day of the calendar month preceding the date on which an
advertisement is submitted for publication. Standardized average annual total
return will cover periods of one, three, five and ten years, if applicable, and
a period covering the time the underlying Portfolio has been held in a
Subaccount (life of Subaccount). Nonstandardized total return will cover periods
of one, three, five and ten years, if applicable, and a period covering the time
the underlying Portfolio held in a Subaccount has been in existence (life of
Portfolio). For those underlying Portfolios which have not been held as
Subaccounts within the Separate Account for one of the quoted periods, the
nonstandardized total return quotations will show the investment performance
such underlying Portfolios would have achieved (reduced by the applicable
charges) had they been held as Subaccounts within the Separate Account for the
period quoted.
Performance information will be shown for periods from April 6, 1982 (inception)
for the Kemper Money Market Subaccount, Kemper Total Return Subaccount and
Kemper High Yield Subaccount, and for periods from December 9, 1983 (inception)
for the Kemper Growth Subaccount. This performance information is stated to
reflect that the Separate Account was reorganized on November 3, 1989 as a unit
investment trust with Subaccounts investing in corresponding Portfolios of the
Fund. In addition, on that date the Kemper Government Securities Subaccount was
added to the Separate Account to invest in the Fund's Government Securities
Portfolio. For the Kemper Government Securities Subaccount, performance figures
will reflect investment experience as if the Kemper Government Securities
Subaccount had been available under the Contracts since September 3, 1987, the
inception date of the Kemper Government Securities Portfolio.
The yield for the Kemper High Yield Subaccount, the Kemper Investment Grade Bond
Subaccount, and the Kemper Government Securities Subaccount, and the Kemper
Global Income Subaccount is computed in accordance with a standard method
prescribed by rules of the Securities and Exchange Commission. The yields for
the Kemper High Yield Subaccount, the Kemper Government Securities Subaccount,
the Kemper Investment Grade Bond Subaccount and the Kemper Global Income
Subaccount, based upon the one month period ended March 31, 2000 were %,
%, % and %, respectively. The yield quotation is computed by
dividing the net investment income per unit earned during the specified one
B-2
<PAGE> 87
month or 30-day period by the accumulation unit values on the last day of the
period, according to the following formula that assumes a semi-annual
reinvestment of income:
<TABLE>
<S> <C> <C>
a - b
-------
YIELD = 2[( +1)(6) - 1]
cd
</TABLE>
a = net dividends and interest earned during the period by the Fund attributable
to the Subaccount
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of Accumulation Units outstanding during the period
d = the Accumulation Unit value per unit on the last day of the period
The yield of each Subaccount reflects the deduction of all recurring fees and
charges applicable to each Subaccount, but does not reflect the deduction of
withdrawal charges or premium taxes.
The Kemper Money Market Subaccounts' yields are computed in accordance with a
standard method prescribed by rules of the Securities and Exchange Commission.
Under that method, the current yield quotation is based on a seven-day period
and computed as follows: the net change in the Accumulation Unit Value during
the period is divided by the Accumulation Unit Value at the beginning of the
period ("base period return") and the result is divided by 7 and multiplied by
365 and the current yield figure carried to the nearest one-hundredth of one
percent. Realized capital gains or losses and unrealized appreciation or
depreciation of the Account's portfolio are not included in the calculation. The
yield for the seven-day period ended March 31, 2000 was % for the Kemper
Money Market Subaccount #1 and % for Kemper Money Market Subaccount #2. The
average portfolio maturity was 14 days.
The Kemper Money Market Subaccounts' effective yields are determined by taking
the base period return (computed as described above) and calculating the effect
of assumed compounding. The formula for the effective yield is: (base period
return +1) (365) / (7) - 1. The effective yield for the seven-day period ended
March 31, 2000 was % for the Kemper Money Market Subaccount #1 and %
for Kemper Money Market Subaccount #2.
In computing yield, the Separate Account follows certain standard accounting
practices specified by Securities and Exchange Commission rules. These practices
are not necessarily consistent with the accounting practices that the Separate
Account uses in the preparation of its annual and semi-annual financial
statements.
A Subaccount's performance quotations are based upon historical earnings and are
not necessarily representative of future performance. The Subaccount's units are
sold at Accumulation Unit value. Performance figures and Accumulation Unit value
will fluctuate. Factors affecting a Subaccount's performance include general
market conditions, operating expenses and investment management. Units of a
Subaccount are redeemable at Accumulation Unit value, which may be more or less
than original cost. The performance figures include the deduction of all
expenses and fees, including a prorated portion of the Records Maintenance
Charge. Redemptions within the first six years after purchase may be subject to
a Withdrawal Charge that ranges from 6% the first year to 0% after six years.
Yield, effective yield and nonstandardized total return do not reflect the
effect of the Withdrawal Charge or premium taxes that may be imposed upon the
redemption of units. Standardized average annual total return reflects the
effect of the applicable Withdrawal Charge (but not premium tax) that may be
imposed at the end of the period in question.
B-3
<PAGE> 88
The Subaccounts may also provide comparative information on an annualized or
nonannualized (cumulative) basis with regard to various indexes described in the
Prospectus. In addition, the Subaccounts may provide performance analysis
rankings of Lipper Analytical Services, Inc., the VARDS Report, MORNINGSTAR,
INC., Ibbotson Associates or Micropal. 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.
The tables in Appendix A include standardized average annual total return and
nonstandardized total return quotations for various periods as of December 31,
1999.
STATE REGULATION
KILICO is subject to the laws of Illinois governing insurance companies and to
regulation by the Illinois Department of Insurance. An annual statement in a
prescribed form is filed with the Illinois Department of Insurance each year.
KILICO's books and accounts are subject to review by the Department of Insurance
at all times, and a full examination of its operations is conducted
periodically. Such regulation does not, however, involve any supervision of
management or investment practices or policies. In addition, KILICO is subject
to regulation under the insurance laws of other jurisdictions in which it may
operate.
EXPERTS
[TO BE UPDATED BY AMENDMENT]
The statements of assets and liabilities and contract owners' equity of the
Separate Account as of December 31, 1999 and the related statement of operations
for the year then ended and the statements of changes in contract owners' equity
for the years ended December 31, 1999 and 1998 have been included herein 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.
FINANCIAL STATEMENTS
This Statement of Additional Information contains financial statements for the
Separate Account which reflect assets attributable to the Certificates and also
reflect assets attributable to other variable annuity contracts offered by
KILICO through the Separate Account.
B-4
<PAGE> 89
[FINANCIAL STATEMENTS TO BE FILED BY AMENDMENT]
B-5
<PAGE> 90
APPENDIX A
[TO BE UPDATED BY AMENDMENT]
TABLE OF HISTORICAL HYPOTHETICAL* ACCUMULATION UNIT VALUES
AND PERFORMANCE INFORMATION
The historical accumulation unit values are for the life of the Separate Account
in its present organization as a unit investment trust and in its prior
organization as several managed separate accounts based on current deductions
and charges applicable to the Certificates. The Certificates were first offered
January 6, 1992. Values may have varied had assets actually been allocated to
the Separate Account under the Certificates.
HISTORICAL HYPOTHETICAL ACCUMULATION UNIT VALUES
<TABLE>
<CAPTION>
KEMPER MONEY MARKET
SUBACCOUNT #1
- ---------------------------------------
UNIT
DATE VALUES
- -------- --------
<S> <C> <C>
04/06/82 ................... .521904
12/31/82 ................... .561706
12/31/83 ................... .605415
12/31/84 ................... .661060
12/31/85 ................... .705934
12/31/86 ................... .743260
12/31/87 ................... .782353
12/31/88 ................... .830274
12/31/89 ................... .894703
12/31/90 ................... .955536
12/31/91 ................... .999459
12/31/92 ................... 1.021027
12/31/93 ................... 1.037409
12/31/94 ................... 1.065127
12/31/95 ................... 1.111573
12/31/96 ................... 1.153353
12/31/97 ................... 1.199008
12/31/98 ................... 1.245376
12/31/99 ...................
</TABLE>
<TABLE>
<CAPTION>
KEMPER MONEY MARKET
SUBACCOUNT #2
- ---------------------------------------
UNIT
DATE VALUES
- -------- --------
<S> <C> <C>
04/06/82 ................... .488861
12/31/82 ................... .526477
12/31/83 ................... .569164
12/31/84 ................... .623384
12/31/85 ................... .669150
12/31/86 ................... .709261
12/31/87 ................... .752167
12/31/88 ................... .804725
12/31/89 ................... .874829
12/31/90 ................... .944037
12/31/91 ................... .999255
12/31/92 ................... 1.033619
12/31/93 ................... 1.063332
12/31/94 ................... 1.105349
12/31/95 ................... 1.167919
12/31/96 ................... 1.227089
12/31/97 ................... 1.291613
12/31/98 ................... 1.358323
12/31/99 ...................
</TABLE>
<TABLE>
<CAPTION>
KEMPER TOTAL RETURN
SUBACCOUNT
- ---------------------------------------
UNIT
DATE VALUES
- -------- --------
<S> <C> <C>
04/14/82 ................... .271127
12/31/82 ................... .334579
12/31/83 ................... .388564
12/31/84 ................... .364932
12/31/85 ................... .462836
12/31/86 ................... .526008
12/31/87 ................... .522732
12/31/88 ................... .578123
12/31/89 ................... .707717
12/31/90 ................... .734077
12/31/91 ................... .997337
12/31/92 ................... 1.001657
12/31/93 ................... 1.109293
12/31/94 ................... .991561
12/31/95 ................... 1.233678
12/31/96 ................... 1.422563
12/31/97 ................... 1.685450
12/31/98 ................... 1.916699
12/31/99 ...................
</TABLE>
<TABLE>
<CAPTION>
KEMPER HIGH YIELD
SUBACCOUNT
- ---------------------------------------
UNIT
DATE VALUES
- -------- --------
<S> <C> <C>
04/14/82 ................... .309713
12/31/82 ................... .382894
12/31/83 ................... .433711
12/31/84 ................... .482077
12/31/85 ................... .579127
12/31/86 ................... .673071
12/31/87 ................... .703823
12/31/88 ................... .805071
12/31/89 ................... .784945
12/31/90 ................... .655406
12/31/91 ................... .982658
12/31/92 ................... 1.142847
12/31/93 ................... 1.354484
12/31/94 ................... 1.307729
12/31/95 ................... 1.516342
12/31/96 ................... 1.707976
12/31/97 ................... 1.882768
12/31/98 ................... 1.886520
12/31/99 ...................
</TABLE>
<TABLE>
<CAPTION>
KEMPER GROWTH
SUBACCOUNT
- ---------------------------------------
UNIT
DATE VALUES
- -------- --------
<S> <C> <C>
12/13/83 ................... .336632
12/31/83 ................... .346384
12/31/84 ................... .378954
12/31/85 ................... .468051
12/31/86 ................... .504874
12/31/87 ................... .507011
12/31/88 ................... .502672
12/31/89 ................... .636443
12/31/90 ................... .632214
12/31/91 ................... .995577
12/31/92 ................... 1.018405
12/31/93 ................... 1.152836
12/31/94 ................... 1.092975
12/31/95 ................... 1.435510
12/31/96 ................... 1.724222
12/31/97 ................... 2.066379
12/31/98 ................... 2.349101
12/31/99 ...................
</TABLE>
<TABLE>
<CAPTION>
KEMPER GOVERNMENT SECURITIES
SUBACCOUNT
- ---------------------------------------
UNIT
DATE VALUES
- -------- --------
<S> <C> <C>
07/13/87 ................... .700085
12/31/87 ................... .710087
12/31/88 ................... .723278
12/31/89 ................... .811610
12/31/90 ................... .881949
12/31/91 ................... 1.004106
12/31/92 ................... 1.050227
12/31/93 ................... 1.104499
12/31/94 ................... 1.060977
12/31/95 ................... 1.246817
12/31/96 ................... 1.262885
12/31/97 ................... 1.358996
12/31/98 ................... 1.436583
12/31/99 ...................
</TABLE>
B-6
<PAGE> 91
<TABLE>
<CAPTION>
KEMPER INTERNATIONAL SUBACCOUNT
- -----------------------------------------------------------
UNIT
DATE VALUES
- -------- --------
<S> <C> <C>
12/31/92 ....................................... .980721
12/31/93 ....................................... 1.286576
12/31/94 ....................................... 1.225134
12/31/95 ....................................... 1.365361
12/31/96 ....................................... 1.570689
12/31/97 ....................................... 1.698099
12/31/98 ....................................... 1.845192
12/31/99 .......................................
</TABLE>
<TABLE>
<CAPTION>
KEMPER SMALL CAP GROWTH SUBACCOUNT
- -----------------------------------------------------------
UNIT
DATE VALUES
- -------- --------
<S> <C> <C>
12/31/94 ....................................... 1.030937
12/31/95 ....................................... 1.324483
12/31/96 ....................................... 1.674797
12/31/97 ....................................... 2.219929
12/31/98 ....................................... 2.595291
12/31/99 .......................................
</TABLE>
<TABLE>
<CAPTION>
KEMPER
INVESTMENT GRADE
BOND SUBACCOUNT
- ---------------------------------------
UNIT
DATE VALUES
- -------- --------
<S> <C> <C>
12/31/96 ................... 1.027174
12/31/97 ................... 1.106151
12/31/98 ................... 1.179189
12/31/99 ...................
</TABLE>
<TABLE>
<CAPTION>
KEMPER CONTRARIAN VALUE
SUBACCOUNT
- ---------------------------------------
UNIT
DATE VALUES
- -------- --------
<S> <C> <C>
12/31/96 ................... 1.163902
12/31/97 ................... 1.498831
12/31/98 ................... 1.765483
12/31/99 ...................
</TABLE>
<TABLE>
<CAPTION>
KEMPER
SMALL CAP VALUE
SUBACCOUNT
- ---------------------------------------
UNIT
DATE VALUES
- -------- --------
<S> <C> <C>
12/31/96 ................... 1.010142
12/31/97 ................... 1.214542
12/31/98 ................... 1.064601
12/31/99 ...................
</TABLE>
<TABLE>
<CAPTION>
KEMPER
VALUE+GROWTH
SUBACCOUNT
- ---------------------------------------
UNIT
DATE VALUES
- -------- --------
<S> <C> <C>
12/31/96 ................... 1.136559
12/31/97 ................... 1.408420
12/31/98 ................... 1.671674
12/31/99 ...................
</TABLE>
<TABLE>
<CAPTION>
KEMPER
HORIZON 20+
SUBACCOUNT
- ---------------------------------------
UNIT
DATE VALUES
- -------- --------
<S> <C> <C>
12/31/96 ................... 1.144182
12/31/97 ................... 1.361426
12/31/98 ................... 1.519935
12/31/99 ...................
</TABLE>
<TABLE>
<CAPTION>
KEMPER
HORIZON 10+
SUBACCOUNT
- ---------------------------------------
UNIT
DATE VALUES
- -------- --------
<S> <C> <C>
12/31/96 ................... 1.104505
12/31/97 ................... 1.273820
12/31/98 ................... 1.400638
12/31/99 ...................
</TABLE>
<TABLE>
<CAPTION>
KEMPER
HORIZON 5 SUBACCOUNT
- ---------------------------------------
UNIT
DATE VALUES
- -------- --------
<S> <C> <C>
12/31/96 ................... 1.086828
12/31/97 ................... 1.209733
12/31/98 ................... 1.311331
12/31/99 ...................
</TABLE>
<TABLE>
<CAPTION>
KEMPER
BLUE CHIP SUBACCOUNT
- ---------------------------------------
UNIT
DATE VALUES
- -------- --------
<S> <C> <C>
12/31/97 ................... 1.106221
12/31/98 ................... 1.243830
12/31/99 ...................
</TABLE>
<TABLE>
<CAPTION>
KEMPER
GLOBAL INCOME SUBACCOUNT
- ---------------------------------------
UNIT
DATE VALUES
- -------- --------
<S> <C> <C>
12/31/97 ................... 1.020218
12/31/98 ................... 1.118307
12/31/99 ...................
</TABLE>
- ---------------
* As of January 6, 1992 the accumulation unit values are based on actual
performance.
B-7
<PAGE> 92
PERFORMANCE FIGURES
(AS OF DECEMBER 31, 1998)
<TABLE>
<CAPTION>
STANDARDIZED
AVERAGE
NONSTANDARDIZED ANNUAL
TOTAL RETURN(1) TOTAL
----------------------- RETURN(2)
YEAR TO DATE CUMULATIVE ------------
(%) ENDING (%) ANNUALIZED ANNUALIZED
RETURN(3) VALUE(4) RETURN (%) RETURN (%) RETURN
------------ -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
KEMPER CONTRARIAN VALUE SUBACCOUNT................... 17.79%
Life of Subaccount (from 05/01/96)................. 20.72%
Life of Portfolio (from 05/01/96).................. $ 70,580 76.45% 23.71% N/A
One Year........................................... 47,102 17.76 17.76 10.46
KEMPER VALUE+GROWTH SUBACCOUNT....................... 18.69
Life of Subaccount (from 05/01/96)................. 18.31
Life of Portfolio (from 05/01/96).................. 66,831 67.08 21.21 N/A
One Year........................................... 47,463 18.66 18.66 11.39
KEMPER HORIZON 20+ SUBACCOUNT........................ 11.64
Life of Subaccount (from 05/01/96)................. 13.68
Life of Portfolio (from 05/01/96).................. 60,748 51.87 16.95 N/A
One Year........................................... 44,640 11.60 11.60 4.28
KEMPER MONEY MARKET SUBACCOUNT(7).................... 3.87
Life of Subaccount (from 04/06/82)................. 4.26
Life of Portfolio (from 04/06/82).................. 95,070 137.68 5.31 N/A
Ten Years.......................................... 60,752 51.88 4.27 2.05
Five Years......................................... 48,110 20.27 3.76 0.93
Three Years........................................ 45,195 12.99 4.15 0.30
One Year........................................... 41,528 3.82 3.82 -3.20
KEMPER HIGH YIELD SUBACCOUNT(6)...................... 0.20
Life of Subaccount (from 04/06/82)................. 10.72
Life of Portfolio (from 04/06/82).................. 236,918 492.30 11.22 N/A
Ten Years.......................................... 93,387 133.47 8.85 7.17
Five Years......................................... 55,634 39.09 6.82 4.60
Three Years........................................ 49,707 24.27 7.51 4.34
One Year........................................... 40,064 0.16 0.16 -6.39
KEMPER GOVERNMENT SECURITIES SUBACCOUNT.............. 5.71
Life of Subaccount (from 11/03/89)................. 4.99
Life of Portfolio (from 09/03/87).................. 80,965 102.41 6.42 N/A
Ten Years.......................................... 79,226 98.06 7.07 5.83
Five Years......................................... 51,933 29.83 5.36 3.12
Three Years........................................ 46,033 15.08 4.79 1.65
One Year........................................... 42,269 5.67 5.67 -1.11
KEMPER INVESTMENT GRADE BOND SUBACCOUNT.............. 6.60
Life of Subaccount (from 05/01/96)................. 3.86
Life of Portfolio (from 05/01/96).................. 47,144 17.86 6.35 N/A
One Year........................................... 42,632 6.58 6.58 0.25
</TABLE>
The performance data quoted for the Subaccounts is based on past performance and
is not representative of future
results. Investments return and principal value will fluctuate so that unit
values, when redeemed, may be worth
more or less than their original cost. See page B-29 for additional information.
B-8
<PAGE> 93
PERFORMANCE FIGURES
(AS OF DECEMBER 31, 1998)
(CONTINUED)
<TABLE>
<CAPTION>
STANDARDIZED
AVERAGE
NONSTANDARDIZED ANNUAL
TOTAL RETURN(1) TOTAL
----------------------- RETURN(2)
YEAR TO DATE CUMULATIVE ------------
(%) ENDING (%) ANNUALIZED ANNUALIZED
RETURN(3) VALUE(4) RETURN (%) RETURN (%) RETURN
------------ -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
KEMPER GLOBAL INCOME SUBACCOUNT(5)................... 9.61%
Life of Subaccount (from 05/01/97)................. 3.07%
Life of Portfolio (from 05/01/97).................. $ 44,722 11.81% 6.92% N/A
One Year........................................... 43,838 9.60 9.60 3.29
KEMPER GROWTH SUBACCOUNT............................. 13.68
Life of Subaccount (from 12/09/83)................. 13.14
Life of Portfolio (from 12/09/83).................. 278,184 595.46 13.74 N/A
Ten Years.......................................... 186,451 366.13 16.64 15.42
Five Years......................................... 81,380 103.45 15.26 13.05
Three Years........................................ 65,390 63.47 17.80 14.54
One Year........................................... 45,457 13.64 13.64 6.39
KEMPER SMALL CAP GROWTH.............................. 16.91
Life of Subaccount (from 05/02/94)................. 21.00
Life of Portfolio (from 05/02/94).................. 103,737 159.34 22.65 N/A
Three Years........................................ 78,328 95.82 25.11 22.25
One Year........................................... 46,752 16.88 16.88 9.89
KEMPER SMALL CAP VALUE SUBACCOUNT.................... -12.35
Life of Subaccount (from 05/01/96)................. -0.16
Life of Portfolio (from 05/01/96).................. 42,559 6.40 2.35 N/A
One Year........................................... 35,052 -12.37 -12.37 -17.73
KEMPER INTERNATIONAL SUBACCOUNT(5)................... 8.66
Life of Subaccount (from 01/06/92)................. 8.05
Life of Portfolio (from 01/06/92).................. 73,681 84.20 9.13 N/A
Five Years......................................... 57,276 43.19 7.44 5.34
Three Years........................................ 53,693 34.23 10.31 7.43
One Year........................................... 43,453 8.63 8.63 2.02
KEMPER TOTAL RETURN SUBACCOUNT(6).................... 13.72
Life of Subaccount (from 04/06/82)................. 11.04
Life of Portfolio (from 04/06/82).................. 263,276 558.19 11.92 N/A
Ten Years.......................................... 132,472 231.18 12.72 11.12
Five Years......................................... 68,982 72.46 11.52 9.04
Three Years........................................ 62,073 55.18 15.77 12.33
One Year........................................... 45,470 13.68 13.68 6.24
</TABLE>
The performance data quoted for the Subaccounts is based on past performance and
is not representative of future
results. Investments return and principal value will fluctuate so that unit
values, when redeemed, may be worth
more or less than their original cost. See page B-29 for additional information.
B-9
<PAGE> 94
PERFORMANCE FIGURES
(AS OF DECEMBER 31, 1998)
(CONTINUED)
<TABLE>
<CAPTION>
STANDARDIZED
AVERAGE
NONSTANDARDIZED ANNUAL
TOTAL RETURN(1) TOTAL
----------------------- RETURN(2)
YEAR TO DATE CUMULATIVE ------------
(%) ENDING (%) ANNUALIZED ANNUALIZED
RETURN(3) VALUE(4) RETURN (%) RETURN (%) RETURN
------------ -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
KEMPER HORIZON 10+ SUBACCOUNT........................ 9.96%
Life of Subaccount (from 05/01/96)................. 10.18%
Life of Portfolio (from 05/01/96).................. $ 55,978 39.94% 13.42% N/A
One Year........................................... 43,964 9.91 9.91 2.64
KEMPER HORIZON 5 SUBACCOUNT.......................... 8.40
Life of Subaccount (from 05/01/96)................. 7.56
Life of Portfolio (from 05/01/96).................. 52,410 31.03 10.66 N/A
One Year........................................... 43,342 8.35 8.35 1.18
KEMPER BLUE CHIP SUBACCOUNT.......................... 12.44
Life of Subaccount (from 05/01/97)................. 9.67
Life of Portfolio (from 05/01/97).................. 49,739 24.35 13.95 N/A
One Year........................................... 44,965 12.41 12.41 5.72
</TABLE>
The performance data quoted for the Subaccounts is based on past performance and
is not representative of future
results. Investments return and principal value will fluctuate so that unit
values, when redeemed, may be worth
more or less than their original cost. See page B-29 for additional information.
B-10
<PAGE> 95
PERFORMANCE FIGURES--NOTES
* N/A Not Applicable
(1) The Nonstandardized Total Return figures quoted are based on a hypothetical
$40,000 initial investment and assumes the deduction of all recurring
charges and fees applicable under the Contract except for the Withdrawal
Charge and any charge for applicable premium taxes which may be imposed in
certain states.
(2) The Standardized Average Annual Total Return figures quoted are based on a
hypothetical $1,000 initial investment and assumes the deduction of all
recurring charges and fees applicable under the Contract including the
applicable Withdrawal Charge that may be imposed at the end of the quoted
period. Premium taxes are not reflected.
(3) The Year to Date percentage return figures quoted are based on the change in
unit values for the period January 1, 1998 through December 31, 1998.
(4) The Ending Values quoted are based on a $10,000 initial investment and
assumes the deduction of all recurring charges and fees applicable under the
Contract except for the Withdrawal Charge and any charge for applicable
premium taxes which may be imposed in certain states.
(5) There are special risks associated with investing in non-U.S. companies,
including fluctuating foreign currency exchange rates, foreign governmental
regulations and differing degrees of liquidity that may adversely affect
portfolio securities.
(6) The high yield potential offered by these Subaccounts reflect the
substantial risks associated with investments in high-yield bonds.
(7) An investment in the Kemper Money Market Subaccount is neither insured nor
guaranteed by the U.S. government. There can be no assurance that the Kemper
Money Market Portfolio will be able to maintain a stable net asset value of
$1.00 per share.
B-11
<PAGE> 96
TAX-DEFERRED ACCUMULATION
<TABLE>
<CAPTION>
NON-QUALIFIED CONVENTIONAL
ANNUITY SAVINGS PLAN
AFTER-TAX CONTRIBUTIONS
AND TAX-DEFERRED EARNINGS
--------------------------------
TAXABLE LUMP AFTER-TAX CONTRIBUTIONS
NO WITHDRAWALS SUM WITHDRAWAL AND TAXABLE EARNINGS
-------------- -------------- -----------------------
<S> <C> <C> <C>
10 Years............. $107,946 $ 86,448 $ 81,693
20 Years............. 233,048 165,137 133,476
30 Years............. 503,133 335,021 218,082
</TABLE>
This chart compares the accumulation of a $50,000 initial investment into a
Non-Qualified Annuity and a Conventional Savings Plan. Contributions to the
Non-qualified Annuity and the Conventional Savings Plan are made after-tax. Only
the gain in the Non-Qualified Annuity will be subject to income tax in a taxable
lump sum withdrawal. The chart assumes a 37.1% federal marginal tax rate and an
8% annual return. The 37.1% federal marginal tax is based on a marginal tax rate
of 36%, representative of the target market, adjusted to reflect a decrease of
$3 of itemized deductions for each $100 of income over $117,950. Tax rates are
subject to change as is the tax-deferred treatment of the Certificates. Income
on Non-Qualified Annuities is taxed as ordinary income upon withdrawal. A 10%
tax penalty may apply to early withdrawals. See "Federal Income Taxes" in the
prospectus. The chart does not reflect the following charges and expenses under
Kemper Passport: 1.10% mortality and expense risk; .15% administration charges;
6% maximum deferred withdrawal charge; and $30 annual records maintenance
charge. The tax-deferred accumulation would be reduced if these charges were
reflected. No implication is intended by the use of these assumptions that the
return shown is guaranteed in any way or that the return shown represents an
average or expected rate of return over the period of the Contracts.
[IMPORTANT--THIS IS NOT AN ILLUSTRATION OF YIELD OR RETURN]
Unlike savings plans, contributions to Non-Qualified Annuities provide
tax-deferred treatment on earnings. In addition, contributions to tax-deferred
retirement annuities are not subject to current tax in the year of contribution.
When monies are received from a Non-Qualified Annuity (and you have many
different options on how you receive your funds), they are subject to income
tax. At the time of receipt, if the person receiving the monies is retired, not
working or has additional tax exemptions, these monies may be taxed at a lesser
rate.
B-12
<PAGE> 97
APPENDIX B
STATE PREMIUM TAX CHART
<TABLE>
<CAPTION>
RATE OF TAX
-------------------------------
QUALIFIED NON-QUALIFIED
STATE PLANS PLANS
----- --------- -------------
<S> <C> <C>
California.................................................. .50% 2.35%*
District of Columbia........................................ 2.25% 2.25%*
Kentucky.................................................... 2.00%* 2.00%*
Maine....................................................... -- 2.00%
Nevada...................................................... -- 3.50%*
South Dakota................................................ -- 1.25%
West Virginia............................................... 1.00% 1.00%
Wyoming..................................................... -- 1.00%
</TABLE>
* Taxes become due when annuity benefits commence, rather than when the
premiums are collected. At the time of annuitization, the premium tax
payable will be charged against the Certificate Value.
B-13
<PAGE> 98
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses of issuance and distribution of the Contracts and Certificates,
other than any underwriting discounts and commissions, are as follows:
<TABLE>
<CAPTION>
AMOUNT*
----------
<S> <C>
Securities and Exchange Commission Registration Fees........ $14,729.64
Printing and Engraving...................................... $50,000
Accounting Fees and Expenses................................ $15,000
Legal Fees and Expenses..................................... $ 2,500
----------
Total Expenses.......................... $82,229.64
==========
</TABLE>
- ---------------
* Expenses are estimated and are for period ending May 1, 2000 for continuous
offering of interests pursuant to Rule 415 but are not deducted from
proceeds.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article VI, Section 1. of the Bylaws of Kemper Investors Life Insurance Company
provides for indemnification of Directors and Officers as follows:
SECTION 1. The company shall indemnify any person against all expenses
(including attorneys fees), judgments, fines, amounts paid in settlement
and other costs actually and reasonably incurred by him in connection with
any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative (other than an action by
or in the right of the company) in which he is a party or is threatened to
be made party by reason of his being or having been a director, officer,
employee or agent of the company, or serving or having served, at the
request of the company, as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
or by reason of his holding a fiduciary position in connection with the
management or administration of retirement, pension, profit sharing or
other benefit plans including, but not limited to, any fiduciary liability
under the Employee Retirement Income Security Act of 1974 and any amendment
thereof, if he acted in good faith and in a manner he reasonably believed
to be in and not opposed to the best interests of the company, and with
respect to any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful. The termination of any action, suit or
proceeding by judgment, order, settlement, conviction, or upon a plea of
NOLO CONTENDERE or its equivalent, shall not, of itself, create a
presumption that he did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Within the past three years, Registrant has sold, in reliance on Rule 506 of
Regulation D under the Securities Act of 1933, as amended, unregistered Private
Placement Group and Individual Variable Life Insurance Policies ("Policies") to
banks and other corporations as a financing or cost recovery vehicle for pre-
and post-retirement employee benefits and related liabilities. There was no
predetermined aggregate offering price as purchase amounts are premium payments
under life insurance policies which are based on the lives insured and insurance
underwriting. Certain offerings of the Policies were made directly by the
Registrant and not through a principal underwriter. When offered directly by the
Registrant, no commissions were paid for the sale of the Policies. Certain
offerings of the Policies were made through Zurich Capital Markets Securities
Inc. or Life Insurance Solutions, LLC, doing its securities business as LIS
Securities, affiliates of Registrant, as principal underwriter for the Policies.
In these instances, compensation of up to 3% of premium may be paid to
registered broker-dealers for distribution-related activities involving the
Policies.
Registrant has also sold unregistered Private Placement Individual Variable Life
Insurance Policies and Group Flexible Premium Variable Deferred Annuity
Contracts (collectively "HNW Policies") to certain high net worth
II-1
<PAGE> 99
"qualified purchasers", as that term is defined under Section 3(c)(7) of the
Securities Act of 1933. There was no predetermined aggregate offering price as
purchase amounts are premium payments under life insurance policies which are
based on the lives insured and insurance underwriting or purchase payments under
annuity contracts. Life Insurance Solutions, LLC, or Investors Brokerage
Services, Inc., affiliates of Registrant, serves as principal underwriter of
these offerings. Compensation up to 3% of premium may be paid to registered
broker-dealers for distribution-related activities involving the HNW Policies.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S> <C>
(1)1 (a) Distribution Agreement
(2)1 (b) Specimen Selling Group Agreement of Investors Brokerage
Services, Inc.
(2)1 (c) General Agent Agreement
(5)1 (d) Fund Participation Agreement among KILICO, Kemper Variable
Series (formerly known as Kemper Investors Fund), Zurich
Kemper Investments, Inc. and Kemper Distributors, Inc.
(4)1 (e)(i) Participation Agreement between KILICO and Scudder Variable
Life Investment Fund
(4)1 (e)(ii) Participating Contract and Policy Agreement between KILICO
and Scudder Kemper Investments, Inc.
(4)1 (e)(iii) Indemnification Agreement between KILICO and Scudder Kemper
Investments, Inc.
(11)1 (f) Form of Fund Participation Agreement by and among The Alger
American Fund, KILICO and Fred Alger & Company, Incorporated
(6)1 (g)(i) Fund Participation Agreement among KILICO, Fidelity Variable
Insurance Products Fund and Fidelity Distributors
Corporation.
(7)1 (g)(ii) Amendment to Fund Participation Agreement among KILICO,
Fidelity Variable Insurance Products Fund and Fidelity
Distributors Corporation.
(6)1 (g)(iii) Fund Participation Agreement among KILICO, Fidelity Variable
Insurance Products Fund II and Fidelity Distributors
Corporation.
(8)1 (g)(iv) Amendment to Fund Participation Agreement among KILICO,
Fidelity Variable Insurance Products Fund II and Fidelity
Distributors Corporation.
(9)1 (h)(i) Fund Participation Agreement among KILICO, Janus Aspen
Series and Janus Capital Corporation.
(10)1 (h)(ii) Service Agreement between KILICO and Janus Capital
Corporation.
1 (i) Fund Participation Agreement by and between KILICO and
American Century Investment Management, Inc.
(11)1 (j) Form of Fund Participation Agreement between KILICO and J.P.
Morgan Series Trust II.
(5)1 (k)(i) Participation Agreement By and Among KILICO and Warburg,
Pincus Trust and Credit Suisse Asset Management, LLC (f/k/a
Warburg Pincus Asset Management Inc.) and Counsellors
Securities Inc.
(12)1 (k)(ii) Service Agreement between Credit Suisse Asset Management,
LLC (f/k/a Warburg Pincus Asset Management Inc.) and Federal
Kemper Life Assurance Company and KILICO
(11)1 (l)(i) Fund Participation Agreement between KILICO and The Dreyfus
Socially Responsible Growth Fund, Inc.
(11)1 (l)(ii) Administrative Services Agreement by and between The Dreyfus
Corporation and KILICO.
(13)1 (l)(iii) Form of Fund Participation Agreement between KILICO, The
Dreyfus Socially Responsible Growth Fund, Inc., Dreyfus
Investment Portfolios and Dreyfus Variable Investment Fund.
(1)3 (a) Articles of Incorporation
(2)3 (b) Bylaws
4 (a) Form of Group Variable and Market Value Adjusted Annuity
Contract
</TABLE>
II-2
<PAGE> 100
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S> <C>
4 (b) Form of Individual Variable and Market Value Adjusted
Annuity Contract and Enrollment Application
4 (c) Form of Group Master Application
4 (d) Form of Variable Annuity Application
5 Opinion and Consent of Counsel regarding legality (To be
filed by amendment)
23 (a) Consents of PricewaterhouseCoopers LLP, Independent Public
Accountants (To be filed by amendment)
23 (c) Consent of Counsel (See Exhibit 5)
</TABLE>
- ---------------
(1) Incorporated herein by reference to the Registration Statement on Form S-1
(File No. 333-02491) filed on or about April 12, 1996.
(2) Incorporated herein by reference to Amendment No. 2 to the Registration
Statement on Form S-1 (File No. 333-02491) filed on or about April 23, 1997.
(3) Incorporated herein by reference to Post-Effective Amendment No. 28 to the
Registration Statement on Form N-4 (File No. 2-72671) filed on or about
April 28, 1999.
(4) Incorporated herein by reference to Amendment No. 5 to the Registration
Statement on Form S-1 for KILICO (File No. 333-22389) filed on or about
April 20, 1999.
(5) Incorporated herein by reference to Amendment No. 3 to the Registration
Statement of KILICO on Form S-1 filed on or about April 8, 1998 (File No.
333-22389).
(6) Incorporated herein by reference to Post-Effective Amendment No. 24 to the
Registration Statement on Form N-4 (File No. 2-72671) filed on or about
April 26, 1996.
(7) Incorporated herein by reference to Pre-Effective Amendment No. 1 to the
Registration Statement on Form S-6 (File No. 333-88845) filed on or about
December 29 1999.
(8) Incorporated herein by reference to Post-Effective Amendment No. 6 to the
Registration Statement on Form S-6 (File No. 33-65399) filed on or about
April 23, 1999.
(9) Incorporated herein by reference to Post-Effective Amendment No. 23 to the
Registration Statement on Form N-4 (File No. 2-72671) filed on or about
September 14, 1995.
(10) Incorporated herein by reference to Post-Effective Amendment No. 25 to the
Registration Statement on Form N-4 (File No. 2-72671) filed on or about
April 28, 1997.
(11) Incorporated herein by reference to Post-Effective Amendment No. 28 to the
Registration Statement on Form N-4 (File No. 2-72671) filed on or about
April 28, 1999.
(12) Incorporated herein by reference to Post-Effective Amendment No. 4 to the
Registration Statement of FKLA Variable Separate Account on Form S-6 (File
No. 33-79808) filed on or about April 30, 1997.
(13) Incorporated herein by reference to Post-Effective Amendment No. 7 to the
Registration Statement on Form N-4 filed on or about November 1, 1999 (File
No. 333-22375).
(B) FINANCIAL STATEMENTS (TO BE FILED BY AMENDMENT)
Report of Independent Public Accountants
KILICO and Subsidiaries Consolidated Balance Sheets, as of December 31,
1999 and 1998
KILICO and Subsidiaries Consolidated Statements of Operations, years ended
December 31, 1999, 1998 and 1997
KILICO and Subsidiaries Consolidated Statements of Comprehensive Income,
years ended December 31, 1999, 1998 and 1997
KILICO and Subsidiaries Consolidated Statements of Stockholder's Equity,
years ended December 31, 1999, 1998 and 1997
KILICO and Subsidiaries Consolidated Statements of Cash Flows, years ended
December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
II-3
<PAGE> 101
ITEM 17. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the Prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in the registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
(2) That, for the determining of any liability under the Securities Act of
1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liabilities under the Securities Act of 1933, each filing of
the registrant's annual report pursuant to section 13(a) or section 15(d) of
the Securities Exchange Act of 1934 (and, where applicable, each filing of
an employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(c) Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officer and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment
by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
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<PAGE> 102
SIGNATURES
As required by the Securities Act of 1933, the Registrant has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Long Grove and State of Illinois on the 14th day
of March, 2000.
KEMPER INVESTORS LIFE INSURANCE COMPANY
(Registrant)
BY: /s/ GALE K. CARUSO
---------------------------------------
Gale K. Caruso, President and Chief
Executive Officer
As required by the Securities Act of 1933, this Registration Statement has been
signed below by the following directors and principal officers of Kemper
Investors Life Insurance Company in the capacities indicated on the 14th day of
March, 2000.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ GALE K. CARUSO President, Chief Executive Officer and Director
- ----------------------------------------------- (Principal Executive Officer)
Gale K. Caruso
/s/ JOHN B. SCOTT Chairman of the Board and Director
- -----------------------------------------------
John B. Scott
/s/ FREDERICK L. BLACKMON Senior Vice President and Chief Financial
- ----------------------------------------------- Officer (Principal Financial Officer and
Frederick L. Blackmon Principal Accounting Officer)
/s/ W.H. BOLINDER Director
- -----------------------------------------------
William H. Bolinder
/s/ DAVID A. BOWERS Director
- -----------------------------------------------
David A. Bowers
/s/ ELIANE C. FRYE Director
- -----------------------------------------------
Eliane C. Frye
/s/ GUNTHER GOSE Director
- -----------------------------------------------
Gunther Gose
/s/ JAMES E. HOHMANN Director
- -----------------------------------------------
James E. Hohmann
</TABLE>
II-4
<PAGE> 103
EXHIBIT LIST
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGES
- ------- ----------- ------------
<C> <S> <C>
1(i) Fund Participation Agreement by and between KILICO and
American Century Investment Management, Inc.
4(a) Form of Group Variable and Market Value Adjusted Annuity
Contract
4(b) Form of Individual Variable and Market Value Adjusted
Annuity Contract and Enrollment Application
4(c) Form of Group Master Application
</TABLE>
<PAGE> 1
Exhibit 1(i)
PARTICIPATION AGREEMENT
THIS AGREEMENT is made and entered into as of the 1st day of May, 1999,
by and between American Century Investment Management, Inc. (the "Adviser"), a
Delaware corporation, and Kemper Investors Life Insurance Company (the
"Insurance Company"), an Illinois corporation, on its own behalf and on behalf
of each of its segregated asset accounts set forth on Schedule A hereto, as may
be amended from time to time (each such account hereinafter referred to as an
"Account").
WHEREAS, the Adviser serves as investment adviser to American Century
Variable Portfolios, Inc. (the "Investment Company") an open-end management
investment company registered under the Investment Company Act of 1940, as
amended (the "1940 Act"), and the offering of its shares is registered under the
Securities Act of 1933, as amended (the "1933 Act"); and
WHEREAS, the common stock of the Investment Company is divided into
several series of shares, each designated a "Fund" and representing an interest
in a particular managed portfolio of securities and other assets; and
WHEREAS, the Investment Company was organized to act as the investment
vehicle for variable annuity and variable life insurance contracts offered by
separate accounts of insurance companies which have entered into participation
agreements with the Investment Company substantially identical to this Agreement
("Participating Insurance Companies"); and
WHEREAS, the Investment Company has obtained an order from the
Securities and Exchange Commission (the "SEC") dated March 22, 1988 (File No.
812-6937), granting Participating Insurance Companies and their separate
accounts exemptions from the provisions of Sections 9(a), 13(a), 15(a), and
15(b) of the 1940 Act, and Rules 6e-2(b)(15) and 6e-3(T)(b)(15) thereunder, to
the extent necessary to permit shares of the Investment Company to be sold to
and held by variable annuity and variable life insurance separate accounts of
both affiliated and unaffiliated life insurance companies (the "Mixed and Shared
Funding Exemptive Order"); and
WHEREAS, the Adviser is duly registered as an investment adviser under
the Investment Advisers Act of 1940 and any applicable state securities law; and
WHEREAS, the Insurance Company has registered or will register under
the 1933 Act the variable annuity and variable life insurance contracts under
which the Funds are to be made available as investment vehicles (the
"Contracts"); and
WHEREAS, each Account is a duly organized, validly existing segregated
asset account, established by resolution of the board of directors of the
Insurance Company on the date shown for that Account on Schedule A hereto, to
set aside and invest assets attributable to the Contracts; and
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<PAGE> 2
WHEREAS, the Insurance Company has registered or will register each
Account as a unit investment trust under the 1940 Act; and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Insurance Company intends to purchase shares of the Funds at
net asset value on behalf of each Account to fund the Contracts;
NOW, THEREFORE, in consideration of their mutual promises, the parties
hereto agree as follows:
ARTICLE I. SALE OF FUND SHARES
1.1. For purposes of this Article I, the Insurance Company shall be the
Investment Company's agent for receipt of purchase and redemption orders from
the Accounts and receipt by the Insurance Company shall constitute receipt by
the Investment Company; provided that the Investment Company receives notice of
such orders by 9:00 a.m., Eastern Time, on the next following Business Day. In
this Agreement, "Business Day" shall mean any day on which the New York Stock
Exchange is open for trading and on which the Investment Company calculates its
net asset value pursuant to the rules of the SEC.
1.2. The Adviser agrees to cause the Investment Company to sell to the
Insurance Company those shares of the Funds which each Account orders, executing
such orders on a daily basis at the net asset value next computed after receipt
by the Investment Company or its agent of the orders. The Adviser will cause the
Investment Company to make its shares available for purchase by the Insurance
Company at the applicable net asset value per share by the Insurance Company and
its Accounts on those days on which the Investment Company calculates its Funds'
net asset values pursuant to rules of the SEC and in accordance with its then
current prospectus. The Investment Company shall use reasonable efforts to
calculate its Funds' net asset values on each day on which the New York Stock
Exchange is open for trading. Notwithstanding the foregoing, the directors of
the Investment Company may refuse to sell shares of any Fund to any person, or
suspend or terminate the offering of shares of any Fund if such action is
required by law or by regulatory authorities having jurisdiction or is, in the
sole discretion of the directors of the Investment Company acting in good faith
and in light of their fiduciary duties under federal and any applicable state
laws, necessary in the best interests of the shareholders of that Fund.
1.3. The Adviser agrees that the shares of the Investment Company will
be sold only to Participating Insurance Companies and their separate accounts.
No shares of any Fund will be sold to the general public.
1.4. The Investment Company agrees to redeem for cash, at the Insurance
Company's request, any full or fractional shares of the Investment Company held
by an Account, executing such requests on a daily basis at the net asset value
next computed after receipt by the Investment Company or its agent of the
request for redemption.
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<PAGE> 3
1.5. The Insurance Company agrees to purchase and redeem the shares of
each Fund offered by the then current prospectus of the Investment Company in
accordance with the provisions of that prospectus.
1.6. With respect to payment of the purchase price by the Insurance
Company and of redemption proceeds by the Investment Company, the Insurance
Company and the Investment Company shall net all purchase and redemption orders
on a given Business Day and shall transmit one net payment for all of the Funds.
Payment for net purchases shall be in federal funds transmitted by wire and
shall be initiated by the Insurance Company's bank prior to 4:00 p.m. Eastern
Time and received by the Investment Company prior to 6:00 p.m., Eastern Time, on
the next Business Day after receipt by the Investment Company or its agent of
the purchase order. If payment in federal funds for any purchase is not received
or is received by the Insurance Company after the close of business on such
Business Day, the Investment Company shall promptly upon the Insurance Company's
request reimburse the Insurance Company for any charges, costs, fees, interest
or other expenses incurred by the Insurance Company as a result of portfolio
transactions effected by the Insurance Company based upon such redemption
request. Payments for net redemption transactions shall be made by wire transfer
by the Funds to the accounts designated by the Insurance Company on the Next
Business Day after receipt by the Funds of the redemption order; provided,
however, the Funds reserve the right to settle redemption transactions within
the time period set forth in the applicable Fund's then-current prospectus.
1.7. For the purpose of Section 2.9, upon receipt by the Investment
Company of the federal funds wired as payment for net purchase orders, such
funds shall cease to be the responsibility of the Insurance Company and shall
become the responsibility of the Investment Company.
1.8. Issuance and transfer of the Investment Company's shares will be
by book entry only. Stock certificates will not be issued to the Insurance
Company or any Account. Shares ordered from the Investment Company will be
recorded in an appropriate title for each Account.
1.9. The Adviser (or one of its affiliates) shall furnish advance
notice, as practicable, but at the latest same day notice (by wire or telephone,
followed by written confirmation) to the Insurance Company of any dividend or
capital gain distribution payable on the Funds' shares. The Insurance Company
hereby elects to receive all dividends and capital gain distributions payable on
a Fund's shares in additional shares of that Fund. The Insurance Company
reserves the right to revoke this election and to receive all such dividends and
capital gain distributions in cash. The Adviser shall notify the Insurance
Company of the number of shares issued as payment of dividends and
distributions.
1.10. The Adviser (or one of its affiliates) shall make the daily
closing net asset value, dividend and capital gain information for each Fund
available on a per share basis to the Insurance Company as soon as reasonably
practical after the information is calculated and shall make the information
available by 6:30 p.m., Eastern Time, on each Business Day. Any material errors
in the calculation of net asset value, dividend and capital gain information
shall be reported immediately upon discovery to the Insurance Company.
Non-material errors will be
3
<PAGE> 4
corrected in the next Business Day's net asset value for the Fund in question.
In the event any adjustment is required to correct any error in the computation
of the net asset value of a Fund's shares at the shareholder level as a result
of a pricing error that is deemed to be material under the pricing policy of the
Fund's Board of Directors or which Adviser otherwise deems necessary to correct
at the shareholder level, Adviser shall reimburse the Insurance Company for its
reasonable out-of-pocket expenses, not including overtime wages, in correcting
such accounts.
ARTICLE II. REPRESENTATIONS, WARRANTIES, AND AGREEMENTS
2.1. The Insurance Company represents, warrants and agrees that (i) the
offerings of the Contracts are or will be registered under the 1933 Act, (ii)
the Contracts will be issued and sold in compliance in all material respects
with all applicable federal and state laws, and (iii) the sale of the Contracts
shall comply in all material respects with applicable state insurance
suitability requirements. The Insurance Company further represents that it is an
insurance company duly organized and in good standing under applicable law and
that it has legally and validly established each Account prior to any issuance
or sale thereof as a segregated asset account under the Illinois Insurance Code
and has registered, or warrants and agrees that prior to any issuance or sale of
the Contracts it will register each Account as a unit investment trust in
accordance with the provisions of the 1940 Act to serve as a segregated asset
account for the Contracts.
2.2. The Insurance Company represents that the Contracts are currently
treated as annuity, endowment, or life insurance contracts under applicable
provisions of the Internal Revenue Code of 1986, as amended (the "Code"), and
warrants and agrees that (i) it will make every effort to maintain such
treatment and (ii) it will notify the Investment Company and the Adviser
immediately upon having a reasonable basis for believing that the Contracts have
ceased to be so treated or that they might not be so treated in the future.
2.3. The Insurance Company represents and warrants that (i) this
Agreement has been duly authorized by all necessary corporate action and, when
executed and delivered, shall constitute the legal, valid and binding obligation
of the Insurance Company, enforceable in accordance with its terms; (ii) each
Contract provides for the allocation of net amounts received by the Company to
an Account for investment in shares of one or more specified insurance
companies; (iii) selection of a particular investment company is made by the
Contract Owner under a particular Contract, who may change such selection from
time to time; and (iv) the activities of the Insurance Company contemplated
herein comply in all material respects with all provisions of federal and state
securities laws applicable to such activities.
2.4. The Adviser warrants and agrees that shares of the Investment
Company sold pursuant to this Agreement are and authorized for sale in
accordance with all applicable federal and state securities laws, and that the
Investment Company is and shall remain registered under the 1940 Act. The
Investment Company shall register and qualify the shares for sale in accordance
with the laws of the various states only if and to the extent deemed advisable
by the Investment Company or the Adviser.
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<PAGE> 5
2.5. The Adviser represents that the Investment Company is lawfully
organized and validly existing under the laws of the State of Maryland and
represents, warrants and agrees that it does and will comply in all material
respects with the 1940 Act.
2.6. The Adviser represents that the Investment Company is currently
qualified as a regulated investment company under Subchapter M of the Code and
warrants and agrees that (i) it will make all reasonable efforts to maintain its
qualification (under Subchapter M or any successor or similar provision) and
(ii) it will notify the Insurance Company immediately upon having a reasonable
basis for believing that it has ceased to so qualify or that it might not so
qualify in the future.
2.7. The Adviser makes no representation or warranty as to whether any
aspect of its operations or those of the Investment Company (including, but not
limited to, fees and expenses and investment policies) complies or will comply
with the insurance laws or regulations of the various states.
2.8. The Adviser represents that it is and warrants that it shall
remain duly registered as an investment adviser under all applicable federal and
state securities laws and agrees that it shall perform its obligations for the
Investment Company in compliance in all material respects with the laws of the
State of Delaware and any applicable state and federal securities laws.
2.9. The Adviser represents and warrants that all of its officers,
employees, investment advisers, and other individuals or entities described in
Rule 17g-1 under the 1940 Act dealing with the money and/or securities of the
Investment Company are, and shall continue to be at all times, covered by a
blanket fidelity bond or similar coverage for the benefit of the Investment
Company in an amount not less than the minimum coverage required currently by
Rule 17g-1 under the 1940 Act or related provisions as may be promulgated from
time to time. That fidelity bond shall include coverage for larceny and
embezzlement and shall be issued by a reputable bonding company.
ARTICLE III. VOTING
3.1. If and to the extent required by law, the Insurance Company shall:
(a) solicit voting instructions from Contract owners;
(b) vote Investment Company shares in accordance with instructions
received from Contract owners; and
(c) vote Investment Company shares for which no instructions have
been received in the same proportion as Investment Company
shares of that Fund for which instructions have been received;
so long as and to the extent that the SEC continues to interpret the 1940 Act to
require pass-through voting privileges for variable contract owners. The
Insurance Company reserves the right to vote Investment Company shares held in
any segregated asset account in its own
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<PAGE> 6
right, to the extent permitted by law. Participating Insurance Companies shall
be responsible for assuring that each of their separate accounts participating
in the Investment Company calculates voting privileges in a manner consistent
with the provisions set forth above.
ARTICLE IV. DISCLOSURE DOCUMENTS, SALES MATERIAL, AND INFORMATION
4.1. The Adviser or one of its affiliates shall provide, at its
expense, the Insurance Company with as many copies of the Investment Company's
current prospectus and statement of additional information, and any amendment or
supplement thereto, as the Insurance Company may reasonably request provided,
however, that if at any time the Adviser or its agent reasonably deems the usage
by the Insurance Company of such items to be excessive, it may request the
Insurance Company Demonstrate the reasonableness of such usage. If the Adviser
believes the reasonableness of such usage has not been adequately shown, it may
request the Insurance Company pay the cost of printing (including press time)
and delivery of any excess copies of such materials. Unless the Insurance
Company agrees to make such payments, the Adviser may refuse to supply such
additional materials and will be in compliance with Section 4.1 if it delivers
the number as may be required under applicable law. If requested by the
Insurance Company in lieu thereof, the Investment Company or Adviser shall
provide such documentation, at its expense, including a final copy of the, as
set in type in a form suitable for printing or in camera-ready copy, and other
assistance as is reasonably necessary in order for the Insurance Company once
each year (or more frequently if the prospectus for the Investment Company is
amended) to have the prospectus for the Contracts and the Investment Company's
prospectus printed together in one document.
4.2. The Investment Company's prospectus shall state that the statement
of additional information for the Investment Company is available from the
Investment Company, and the Investment Company or Adviser shall print and
provide, at its expense, the statement of additional information, and any
amendment or supplement thereto, free of charge to the Insurance Company to be
provided to any Contract owner or prospective owner who requests the statement
of additional information.
4.3. The Adviser (or one of its affiliates) shall provide, at its
expense, the Insurance Company with copies of its proxy materials, reports to
shareholders and other communications to shareholders in such quantity as the
Insurance Company shall reasonably require for distribution to Contract owners,
subject to the provisions set forth in Section 4.1 above. If requested by the
Insurance Company in lieu thereof, the Investment Company or Adviser shall
provide such documentation, at its expense, including a final copy of its proxy
material, reports to shareholders and other communications to shareholders as
set in type in a form suitable for printing or in camera-ready copy, and other
assistance as is reasonably necessary in order for the Insurance Company to
print such shareholder communications for distribution to Contract owners.
4.4. The Adviser (or one of its affiliates) shall provide the materials
described in Sections 4.1-4.3 to the Insurance Company as soon as reasonably
practicable. The cost of any distribution of prospectuses, periodic final
reports and other materials described above to the
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<PAGE> 7
Contract owners shall be paid by the Company and shall not be the responsibility
of the Adviser or the Investment Company.
4.5.(A) The Adviser (or one of its affiliates) shall provide the
Insurance Company with as much notice prior to filing as is reasonably
practicable of any proxy solicitation for any Fund, including any shareholder
proposal, and of any material change in the Investment Company's registration
statement. The Investment Company and the Adviser will cooperate with the
Insurance Company so as to enable it to solicit voting instructions from
Contract owners and/or to make changes to a Contract's registration statement in
an orderly manner.
4.5.(B) The Insurance Company shall provide pass-through voting
privileges to all Contract Owners so long as the SEC continues to interpret the
1940 Act as requiring such privileges. It shall be the responsibility of the
Insurance Company to assure that it and the separate accounts of the other
Participating Companies participating in any Fund calculate voting privileges in
a consistent manner.
4.5.(C) The Insurance Company will distribute to Contract owners all
proxy material furnished by the Adviser and will vote shares in accordance with
instructions received from such Contract owners. The Insurance Company shall
vote Fund shares for which no voting instructions are received in the same
proportion as shares for which such instructions have been received. The
Insurance Company and its agents shall not oppose or interfere with the
solicitation of proxies for Fund shares held for such Contract Owners.
4.5.(D) Notwithstanding any other provision of this Participation
Agreement, Adviser agrees to reimburse or pay directly Insurance Company for
costs related to the printing, mailing and tabulation of any proxy initiated by
the Adviser or Investment Company.
4.6. The Insurance Company shall furnish, or shall cause to be
furnished, to the Adviser or its designee, each piece of sales literature and
other promotional material in which the Investment Company or the Adviser is
named at least fifteen calendar days prior to its use. No such material shall be
used if the Adviser or its designee reasonably objects to such use within a
reasonable period after receipt of such material, unless the Insurance Company
makes such changes as the Adviser may require.
4.7. The Insurance Company shall not give any information or make any
representation or statement on behalf of the Investment Company or concerning
the Investment Company in connection with the sale of the Contracts other than
the information or representations contained in the Investment Company's
registration statement, prospectus or statement of additional information, as
that registration statement, prospectus or statement of additional information
may be amended or supplemented from time to time, or in reports or proxy
statements for the Investment Company, or in sales literature and other
promotional material approved by the Adviser or its designee, except with the
permission of the Investment Company or the Adviser. The Investment Company and
the Adviser agree to respond to any request for approval as soon as is
reasonably practicable and agree not to unreasonably withhold such approval.
4.8. The Adviser or its designee, shall furnish, or shall cause to be
furnished, to the Insurance Company or its designee, each piece of sales
literature and other promotional material
7
<PAGE> 8
in which the Insurance Company or any Account or Contract is named at least
fifteen calendar days prior to its use. No such material shall be used if the
Insurance Company or its designee reasonably objects to such use within a
reasonable period after receipt of that material.
4.9. Neither the Investment Company nor the Adviser shall give any
information or make any representation or statement on behalf of the Insurance
Company or concerning the Insurance Company, any Account, or the Contracts other
than the information or representations contained in a registration statement,
prospectus or statement of additional information for the Contracts, as that
registration statement, prospectus or statement of additional information may be
amended or supplemented from time to time, or in published reports for any
Account which are in the public domain or approved by the Insurance Company for
distribution to Contract owners, or in sales literature and other promotional
material approved by the Insurance Company or its designee, except with the
permission of the Insurance Company. The Insurance Company agrees to respond to
any request for approval as soon as is reasonably practicable and agrees not to
unreasonably withhold such approval.
4.10. The Adviser will provide or cause to be provided to the Insurance
Company at least one complete copy of each prospectus, statement of additional
information, report, proxy statement, and any amendment to any of the above,
that relates to the Investment Company or its shares.
4.11. The Insurance Company will provide to the Investment Company at
least one complete copy of each registration statement, prospectus, statement of
additional information, report, solicitation for voting instructions, piece of
sales literature and other promotional material, application for exemption,
request for no-action letter, and any amendment to any of the above, that
relates to the Contracts or the Accounts and the Funds.
4.12. For purposes of this Article IV, the phrase "sales literature and
other promotional material" includes, but is not limited to, advertisements
(such as material published, or designed for use in, a newspaper, magazine, or
other periodical, radio, television, telephone or tape recording, videotape
display, signs or billboards, motion pictures, or other public media), sales
literature (i.e., any written communication distributed or made generally
available to customers or the public, including brochures, circulars, research
reports, market letters, form letters, shareholder newsletters, seminar texts,
reprints or excerpts of any other advertisement, sales literature, or published
article), educational or training materials or other communications distributed
or made generally available to some or all agents or employees, and any other
material constituting sales literature or advertising under NASD rules, the 1933
Act, the 1934 Act, or the 1940 Act.
4.13. In addition, at the request of the Insurance Company, the Adviser
shall provide the Insurance Company electronic versions of the documents
referenced in this Article IV in one of the following formats: EDGAR, TXT (text
file), DOC (Word Document) or RFT (Rich Text).
4.14. At the request of any party to this Agreement, each other party
will make available to the requesting party's independent auditors and/or
representative of the appropriate regulatory agencies, all records, data and
access to operating procedures that may be reasonably requested.
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ARTICLE V. FEES AND EXPENSES
5.1. Neither the Investment Company nor the Adviser shall pay a fee or
other compensation to the Insurance Company under this Agreement, except as set
forth in Section 5.4.
5.2. All expenses incident to performance by the Investment Company
under this Agreement shall be paid by the Investment Company. The Investment
Company shall bear the cost of registration and qualification of the Investment
Company's shares, preparation and filing of the Investment Company's prospectus,
statement of additional information, registration statement, proxy materials and
reports, setting in type and printing the prospectus if providing printed copies
to Insurance Company, proxy materials and reports to shareholders, preparation
of all statements and notices required by any federal or state law, and all
taxes on the issuance or transfer of the Investment Company's shares.
5.3. The Insurance Company shall bear the cost of registration and
qualification of the Accounts and the Contracts, preparation and filing of the
Contracts' prospectuses and registration statements, and printing and
distributing to Contract owners and prospective owners the Contract
prospectuses. The Insurance Company shall bear the cost of distributing to
Contract Owners and prospective owners of the Contracts the Investment Company's
prospectus, proxy materials, reports and other shareholder communications.
5.4. The Insurance Company bears the responsibility and correlative
expense for administrative and support services for Contract owners. The Adviser
recognizes the Insurance Company as the sole shareholder of shares of the
Investment Company issued under this Agreement. The Adviser further recognizes
that the Investment Company will derive a substantial administrative convenience
by virtue of having the Insurance Company as the sole shareholder of the shares
issued under this Agreement rather than multiple shareholders having record of
ownership of such shares. The administrative and other services to be provided
to Contract Owners by the Insurance Company are set forth in Schedule B hereto.
In consideration of the savings resulting from the provision of these services
by the Insurance Company instead of by the Adviser, the Adviser agrees to pay to
the Insurance Company an amount computed daily and paid quarterly in arrears
equal to 25 basis points (0.25%) per annum of the average aggregate amount
invested by the Insurance Company in the Investment Company under this
Agreement. The Adviser will calculate and pay the Insurance Company its
administrative service fee within thirty (30) days after the end of each
calendar quarter. The parties agree that such payments are for administrative
services and investor support services, and do not constitute payment for
investment advisory, distribution or other services. Payment of such amounts by
the Adviser shall not increase the fees paid by the Investment Company or its
shareholders.
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ARTICLE VI. DIVERSIFICATION
6.1. The Adviser represents that the Investment Company will comply
with the diversification requirements for variable annuity, endowment, modified
endowment or life insurance contracts set forth in Section 817(h) of the Code,
and the rules and regulations thereunder, including without limitation Treasury
Regulation 1.817-5, and any amendments or other modifications to that section or
regulation at all times necessary to satisfy those requirements. The Investment
Company will notify the Insurance Company immediately upon having a reasonable
basis for believing that it has ceased to comply or might not so comply and will
immediately take all reasonable steps to adequately diversify and to achieve
compliance within the grace period afforded by Regulation 1.817-5.
ARTICLE VII. POTENTIAL CONFLICTS
7.1. The directors of the Investment Company will monitor the
Investment Company for the existence of any material irreconcilable conflict
among the interests of the variable contract owners of all separate accounts
(the Participating Insurance Companies) investing in the funds of the Investment
Company. A material irreconcilable conflict may arise for a variety of reasons,
including: (a) an action by any state insurance regulatory authority; (b) a
change in applicable federal or state insurance, tax, or securities laws or
regulations, or a public ruling, private letter ruling, no-action or
interpretive letter, or any similar action by insurance, tax, or securities
regulatory authorities; (c) an administrative or judicial decision in any
relevant proceeding; (d) the manner in which the investments of any Fund are
being managed; (e) a difference in voting instructions given by variable annuity
contract and variable life insurance contract owners; or (f) a decision by a
Participating Insurance Company to disregard the voting instructions of variable
contract owners. The directors of the Investment Company shall promptly inform
the Insurance Company if they determine that a material irreconcilable conflict
exists and the implications thereof. The directors of the Investment Company
shall have sole authority to determine whether a material irreconcilable
conflict exists and their determination shall be binding upon the Insurance
Company.
7.2. The Insurance Company and the Adviser each will report any
potential or existing conflicts of which it is aware to the directors of the
Investment Company. The Insurance Company and the Adviser each will assist the
directors of the Investment Company in carrying out their responsibilities under
this Article VII and under the Mixed and Shared Funding Exemptive Order by
providing the directors] of the Investment Company with all information
reasonably necessary for them to consider any issues raised. This includes, but
is not limited to, an obligation by the Insurance Company to inform the
directors of the Investment Company whenever Contract owner voting instructions
are disregarded. These responsibilities shall be carried out by the Insurance
Company with a view only to the interests of the Contract owners and by the
Adviser with a view to the interests of all contract owners.
7.3. If it is determined by a majority of the directors of the
Investment Company, or a majority of the directors who are not interested
persons of the Investment Company, any of its Funds, or the Adviser (the
"Independent Directors"), that a material irreconcilable conflict exists, the
Insurance Company and/or other Participating Insurance Companies shall, at their
expense
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and to the extent reasonably practicable (as determined by a majority of the
Independent Directors), take whatever steps are necessary to remedy or eliminate
the irreconcilable material conflict, up to and including: (1) withdrawing the
assets allocable to some or all of the separate accounts from the Investment
Company or any Fund and reinvesting those assets in a different investment
medium, including, but not limited to, another Fund of the Investment Company,
or submitting the question whether such segregation should be implemented to a
vote of all affected variable contract owners and, as appropriate, segregating
the assets of any appropriate group (e.g., annuity contract owners, life
insurance contract owners, or variable contract owners of one or more
Participating Insurance Companies) that votes in favor of such segregation, or
offering to the affected variable contract owners the option of making such a
change; and (2) establishing a new registered management investment company or
managed separate account and obtaining any necessary approvals or orders of the
SEC in connection therewith.
7.4. If a material irreconcilable conflict arises because of a decision
by the Insurance Company to disregard Contract owner voting instructions and
that decision represents a minority position or would preclude a majority vote,
the Insurance Company may be required, at the Investment Company's election, to
withdraw the affected Account's investment in the Investment Company and
terminate this Agreement with respect to that Account; provided, however, that
such withdrawal and termination shall be limited to the extent required by the
foregoing material irreconcilable conflict as determined by a majority of the
Independent Directors.
7.5. If a material irreconcilable conflict arises because a particular
state insurance regulator's decision applicable to the Insurance Company
conflicts with the majority of other state regulators, then the Insurance
Company will withdraw the affected Account's investment in the Investment
Company and terminate this Agreement with respect to that Account; provided,
however, that such withdrawal and termination shall be limited to the extent
required by the foregoing material irreconcilable conflict as determined by a
majority of the Independent Directors.
7.6. For purposes of Sections 7.3 through 7.6 of this Agreement, a
majority of the Independent Directors shall determine whether any proposed
action adequately remedies any material irreconcilable conflict, but in no event
will the Investment Company be required to establish a new funding medium for
the Contracts. The Insurance Company shall not be required by Section 7.3 to
establish a new funding medium for the Contracts if an offer to do so has been
declined by vote of a majority of Contract owners materially adversely affected
by the material irreconcilable conflict. In the event that the directors of the
Investment Company determine that any proposed action does not adequately remedy
any material irreconcilable conflict, then the Insurance Company will withdraw
the Account's investment in the Investment Company and terminate this Agreement.
ARTICLE VIII. INDEMNIFICATION
8.1. INDEMNIFICATION BY THE INSURANCE COMPANY
8.1(A). The Insurance Company agrees to indemnify and hold harmless the
Investment Company, the Adviser, each of their directors, officers, employees or
agents, and each person, if
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<PAGE> 12
any, who controls the Investment Company or the Adviser within the meaning of
Section 15 of the 1933 Act (collectively, the "Indemnified Parties" for purposes
of this Section 8.1) against any and all losses, claims, damages, liabilities
(including amounts paid in settlement with the written consent of the Insurance
Company) or expenses (including legal and other expenses) (collectively,
"Losses") to which the Indemnified Parties may become subject under any statute,
regulation, at common law or otherwise, insofar as such Losses (or actions in
respect thereof) are related to the sale, acquisition, or redemption of the
Investment Company's shares or the Contracts and:
(i) arise out of or are based upon any untrue statements of
any material fact contained in the registration statement or prospectus
for the Contracts (or any amendment or supplement to any of the
foregoing), or arise out of or are based upon the omission to state
therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, provided that this
Agreement to indemnify shall not apply as to any Indemnified Party if
such statement or omission was made in reliance upon and in conformity
with information furnished in writing to the Insurance Company by or on
behalf of the Investment Company for use in the registration statement
or prospectus for the Contracts (or any amendment or supplement) or
otherwise for use in connection with the sale of the Contracts or
Investment Company shares;
(ii) arise out of or as a result of statements or
representations (other than statements or representations contained in
the registration statement, prospectus or sales literature of the
Investment Company not supplied by the Insurance Company, or persons
under its control) or wrongful conduct of the Insurance Company or
persons under its control, with respect to the sale or distribution of
the Contracts or Investment Company shares;
(iii) arise out of any untrue statement of a material fact
contained in a registration statement, prospectus, or sales literature
of the Investment Company or any amendment or supplement thereto or the
omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading if such a
statement or omission was made in reliance upon information furnished
in writing to the Investment Company by or on behalf of the Insurance
Company;
(iv) result from any failure by the Insurance Company to
provide the services and furnish the materials under the terms of this
Agreement; or
(v) arise out of or result from any material breach of any
representation, warranty or agreement made by the Insurance Company in
this Agreement or arise out of or result from any other material breach
of this Agreement by the Insurance Company,
as limited by and in accordance with the provisions of Sections 8.1(b) and
8.1(c) hereof.
8.1(b). The Insurance Company shall not be liable under this
indemnification provision with respect to any Losses incurred or assessed
against an Indemnified Party that may arise from that Indemnified Party's
willful misfeasance, bad faith, or negligence in the performance of that
Indemnified Party's duties or by reason of that Indemnified Party's reckless
disregard of
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<PAGE> 13
obligations or duties under this Agreement or to the Investment Company,
whichever is applicable.
8.1(c). The Insurance Company shall not be liable under this
indemnification provision with respect to any claim made against an Indemnified
Party unless that Indemnified Party shall have notified the Insurance Company in
writing within a reasonable time after the summons or other first legal process
giving information of the nature of the claim shall have been served upon that
Indemnified Party (or after the Indemnified Party shall have received notice of
such service on any designated agent). Notwithstanding the foregoing, the
failure of any Indemnified Party to give notice as provided herein shall not
relieve the Insurance Company of its obligations hereunder except to the extent
that the Insurance Company has been prejudiced by such failure to give notice.
In addition, any failure by the Indemnified Party to notify the Insurance
Company of any such claim shall not relieve the Insurance Company from any
liability which it may have to the Indemnified Party against whom the action is
brought otherwise than on account of this indemnification provision. In case any
such action is brought against the Indemnified Parties, the Insurance Company
shall be entitled to participate, at its own expense, in the defense of the
action. The Insurance Company also shall be entitled to assume the defense
thereof, with counsel satisfactory to the party named in the action; provided,
however, that if the Indemnified Party shall have reasonably concluded that
there may be defenses available to it which are different from or additional to
those available to the Insurance Company, the Insurance Company shall not have
the right to assume said defense, but shall pay the costs and expenses thereof
(except that in no event shall the Insurance Company be liable for the fees and
expenses of more than one counsel for Indemnified Parties in connection with any
one action or separate but similar or related actions in the same jurisdiction
arising out of the same general allegations or circumstances). After notice from
the Insurance Company to the Indemnified Party of the Insurance Company's
election to assume the defense thereof, and in the absence of such a reasonable
conclusion that there may be different or additional defenses available to the
Indemnified Party, the Indemnified Party shall bear the fees and expenses of any
additional counsel retained by it, and the Insurance Company will not be liable
to that party under this Agreement for any legal or other expenses subsequently
incurred by the party independently in connection with the defense thereof other
than reasonable costs of investigation.
8.1(d). The Indemnified Parties will promptly notify the Insurance
Company of the commencement of any litigation or proceedings against them in
connection with the issuance or sale of the Investment Company's shares or the
Contracts or the operation of the Investment Company.
8.2. INDEMNIFICATION BY THE ADVISER
8.2(a). The Adviser agrees to indemnify and hold harmless the Insurance
Company, each of its directors, officers, employees or agents, and each person,
if any, who controls the Insurance Company within the meaning of Section 15 of
the 1933 Act (collectively, the "Indemnified Parties" for purposes of this
Section 8.2) against any and all losses, claims, damages, liabilities (including
amounts paid in settlement with the written consent of the Adviser) or expenses
(including legal and other expenses) (collectively, "Losses") to which the
Indemnified Parties may become subject under any statute, at common law or
otherwise, insofar
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as such Losses (or actions in respect thereof) are related to the sale,
acquisition, or redemption of the Investment Company's shares or the Contracts
and:
(i) arise out of or are based upon any untrue statement of any
material fact contained in the registration statement or prospectus of
the Investment Company (or any amendment or supplement to any of the
foregoing), or arise out of or are based upon the omission to state
therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, provided that this
Agreement to indemnify shall not apply as to any Indemnified Party if
the statement or omission was made in reliance upon and in conformity
with information furnished in writing to the Adviser or the Investment
Company by or on behalf of the Insurance Company for use in the
registration statement or prospectus for the Investment Company (or any
amendment or supplement) or otherwise for use in connection with the
sale of the Contracts or Investment Company shares;
(ii) arise out of or as a result of statements or
representations (other than statements or representations contained in
the registration statement, prospectus or sales literature for the
Contracts not supplied by the Adviser or persons under its control) or
wrongful conduct of the Investment Company, the Adviser or persons
under their control, with respect to the sale or distribution of the
Contracts or Investment Company shares;
(iii) arise out of any untrue statement of a material fact
contained in a registration statement, prospectus, or sales literature
covering the Contracts, or any amendment thereof or supplement thereto,
or the omission to state therein a material fact required to be stated
therein or necessary to make the statement or statements therein not
misleading, if such statement or omission was made in reliance upon
information furnished in writing to the Insurance Company by or on
behalf of the Investment Company;
(iv) result from any failure by the Investment Company or
Adviser to provide the services and furnish the materials under the
terms of this Agreement (including a failure, whether unintentional or
in good faith or otherwise, to comply with the diversification
requirements of Section 817(h) of the Code and the rules and
regulations thereunder); or
(v) arise out of or result from any material breach of any
representation, warranty or agreement made by the Adviser in this
Agreement or arise out of or result from any other material breach of
this Agreement by Adviser;
as limited by and in accordance with the provisions of Sections 8.2(b) and
8.2(c) hereof.
8.2(b). The Adviser shall not be liable under this indemnification
provision with respect to any Losses incurred or assessed against an Indemnified
Party that may arise from the Indemnified Party's willful misfeasance, bad
faith, or negligence in the performance of the Indemnified Party's duties or by
reason of the Indemnified Party's reckless disregard of obligations and duties
under this Agreement or to the Insurance Company or an Account, whichever is
applicable.
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8.2(c). The Adviser shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless the
Indemnified Party shall have notified the Adviser in writing within a reasonable
time after the summons or other first legal process giving information of the
nature of the claim shall have been served upon the Indemnified Party (or after
the Indemnified Party shall have received notice of such service on any
designated agent). Notwithstanding the foregoing, the failure of any Indemnified
Party to give notice as provided herein shall not relieve the Adviser of its
obligations hereunder except to the extent that the Adviser has been prejudiced
by such failure to give notice. In addition, any failure by the Indemnified
Party to notify the Adviser of any such claim shall not relieve the Adviser from
any liability which it may have to the Indemnified Party against whom such
action is brought otherwise than on account of this indemnification provision.
In case any such action is brought against the Indemnified Parties, the Adviser
will be entitled to participate, at its own expense, in the defense thereof. The
Adviser also shall be entitled to assume the defense thereof, with counsel
satisfactory to the party named in the action; provided, however, that if the
Indemnified Party shall have reasonably concluded that there may be defenses
available to it which are different from or additional to those available to the
Adviser, the Adviser shall not have the right to assume said defense, but shall
pay the costs and expenses thereof (except that in no event shall the Adviser be
liable for the fees and expenses of more than one counsel for Indemnified
Parties in connection with any one action or separate but similar or related
actions in the same jurisdiction arising out of the same general allegations or
circumstances). After notice from the Adviser to the Indemnified Party of the
Adviser's election to assume the defense thereof, and in the absence of such a
reasonable conclusion that there may be different or additional defenses
available to the Indemnified Party, the Indemnified Party shall bear the fees
and expenses of any additional counsel retained by it, and the Adviser will not
be liable to that party under this Agreement for any legal or other expenses
subsequently incurred by that party independently in connection with the defense
thereof other than reasonable costs of investigation.
8.2(d). The Insurance Company agrees to promptly notify the Adviser of
the commencement of any litigation or proceedings against it or any of its
officers or directors in connection with the issuance or sale of the Contracts
or the operation of the Accounts.
ARTICLE IX. APPLICABLE LAW
9.1. This Agreement shall be subject to the applicable provisions of
the 1933, 1934, and 1940 Acts, and the rules and regulations and rulings
thereunder, including any exemptions from those statutes, rules and regulations
the SEC may grant, and the terms hereof shall be interpreted and construed in
accordance therewith.
ARTICLE X. ADDITIONAL COVENANTS AND AGREEMENTS
10.1. Each party shall comply with all provisions of federal and state
laws applicable to its respective activities under this Agreement. All
obligations of each party under this Agreement are subject to compliance with
applicable federal and state laws.
10.2. Each party shall promptly notify the other parties in the event
that it is, for any reason, unable to perform any of its obligations under this
Agreement.
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10.3. The Insurance Company covenants and agrees that all orders
accepted and transmitted by it hereunder with respect to each Account on any
Business Day will be based upon instructions that it received from the Contract
owners, in proper form prior to the close of trading of the New York Stock
Exchange on that Business Day. The Insurance Company shall time stamp all orders
or otherwise maintain records that will enable the Company to demonstrate
compliance with this section.
10.4. The Insurance Company covenants and agrees that all orders
transmitted to the Investment Company shall be sent by or under the authority
and direction of a person designated by the Insurance Company as being duly
authorized to act on behalf of the owner of the Accounts. The Adviser shall be
entitled to rely on the existence of such authority and to assume that any
person transmitting orders for the purchase, redemption or transfer of Fund
shares on behalf of the Insurance Company is "an appropriate person" as used in
Sections 8-107 and 8-401 of the Uniform Commercial Code with respect to the
transmission of instructions regarding Fund shares on behalf of the owner of
such Fund shares. The Insurance Company further agrees to be responsible for the
accuracy, propriety and consequences of all data transmitted to the Adviser by
the Company by telephone, telecopy or other electronic transmission acceptable
to the Adviser.
10.5. The Insurance Company agrees that, to the extent it is able to do
so, it will use its best efforts to give equal emphasis and promotion to shares
of the Fund is given to other underlying investments of the Accounts, subject to
applicable SEC rules. In addition, the Insurance Company shall not impose any
fee, condition, or requirement for the use of the Funds as investment options
for the Contracts that operates to the specific prejudice of the Funds vis-a-vis
the other investment media made available for the Contracts by the Insurance
Company.
ARTICLE X. TERMINATION
11.1. This Agreement shall terminate:
(a) at the option of any party upon six months advance
written notice to the other parties; or
(b) at the option of the Insurance Company to the extent that
shares of a Fund are not reasonably available to meet the requirements
of the Contracts as determined by the Insurance Company, provided,
however, that such termination shall apply only to the Fund(s) not
reasonably available; or
(c) at the option of the Adviser in the event that formal
administrative proceedings are instituted against the Insurance Company
by the NASD, the SEC, an insurance commissioner or any other regulatory
body regarding the Insurance Company's duties under this Agreement or
related to the sale of the Contracts, the operation of any Account, or
the purchase of the Investment Company's shares, provided, however,
that the Adviser determines in its sole judgment exercised in good
faith, that any such administrative proceedings will have a material
adverse effect upon the ability of the Insurance Company to perform its
obligations under this Agreement; or
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(d) at the option of the Insurance Company in the event that
formal administrative proceedings are instituted against the Investment
Company or the Adviser by the NASD, the SEC, or any state securities or
insurance department or any other regulatory body, provided, however,
that the Insurance Company determines in its sole judgment exercised in
good faith, that any such administrative proceedings will have a
material adverse effect upon the ability of the Investment Company or
the Adviser to perform its obligations under this Agreement; or
(e) at the option of the Insurance Company, with respect to
any Account, upon receipt of any necessary approval and/or the vote of
the Contract owners having an interest in that Account (or any
subaccount) to substitute the shares of another investment company for
the corresponding Fund shares in accordance with the terms of the
Contracts for which those Fund shares had been selected to serve as the
underlying investment media. The Insurance Company will give at least
30 days prior written notice to the Investment Company of the date of
any proposed vote to replace the Investment Company's shares; or
(f) at the option of the Insurance Company in the event any of
the Investment Company's shares are not registered, issued or sold in
accordance with applicable state and/or federal law or exemptions
therefrom, or such law precludes the use of those shares as the
underlying investment media of the Contracts issued or to be issued by
the Insurance Company; or
(g) at the option of the Insurance Company if the Investment
Company ceases to qualify as a regulated investment company under
Subchapter M of the Code or under any successor or similar provision,
or if the Insurance Company reasonably believes that the Investment
Company may fail to so qualify; or
(h) at the option of the Insurance Company if the Investment
Company fails to meet the diversification requirements specified in
Section 817(h) of the Code and the rules and regulations thereunder; or
(i) at the option of the Adviser if (1) the Adviser, shall
determine, in its sole judgment reasonably exercised in good faith,
that the Insurance Company has suffered a material adverse change in
its business or financial condition or is the subject of material
adverse publicity and that material adverse change or material adverse
publicity will have a material adverse impact upon the business and
operations of either the Investment Company or the Adviser, (2) the
Adviser shall notify the Insurance Company in writing of that
determination and its intent to terminate this Agreement, and (3) after
considering the actions taken by the Insurance Company and any other
changes in circumstances since the giving of such a notice, the
determination of the Adviser shall continue to apply on the sixtieth
(60th) day following the giving of the notice, which sixtieth day shall
be the effective date of termination; or
(j) at the option of the Insurance Company if (1) the
Insurance Company shall determine, in its sole judgment reasonably
exercised in good faith, that either the
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Investment Company or the Adviser has suffered a material adverse
change in its business or financial condition or is the subject of
material adverse publicity and that material adverse change or
material adverse publicity will have a material adverse impact upon the
business and operations of the Insurance Company, (2) the Insurance
Company shall notify the Adviser in writing of the determination and
its intent to terminate the Agreement, and (3) after considering the
actions taken by the Investment Company and/or the Adviser and any
other changes in circumstances since the giving of such a notice, the
determination shall continue to apply on the sixtieth (60th) day
following the giving of the notice, which sixtieth day shall be the
effective date of termination; or
(k) at the option of any party hereto upon another party's
breach of a material provision of this Agreement, said
termination to be effective ten days after receipt of notice
unless the breach is cured to the satisfaction of the party
giving notice within such ten-day period; or
(l) at the option of the Adviser if, in the Adviser's
judgment, declining to accept any additional instructions for
the purchase or sale of shares of any Fund is warranted by
market, economic or political conditions; or
(m) upon assignment of this Agreement without the prior
written consent of all parties hereto.
11.2. No termination of this Agreement shall be effective (with the
exception of a termination under Section 11.1(l)) unless and until the party
terminating this Agreement gives the written notice specified below to all other
parties to this Agreement of its intent to terminate, which notice shall set
forth the basis for the termination:
(a) in the event that any termination is based upon the
provisions of Article VII or of Section 11.1(a), 11.1(i), 11.1(j), or
11.1(k) of this Agreement, the prior written notice shall be given in
advance of the effective date of termination as required by those
provisions; and
(b) in the event of any other termination under Section 11.1
of this Agreement, the effective date of termination shall be upon the
delivery and receipt of prompt written notice.
11.3. Notwithstanding any termination of this Agreement pursuant to
Section 10.1, for so long as the Investment Company continues to exist the
Investment Company and the Adviser shall at the option of the Insurance Company
continue to make available additional shares of the Investment Company pursuant
to the terms and conditions of this Agreement, for all Contracts in effect on
the effective date of termination of this Agreement ("Existing Contracts").
Specifically, without limitation, the owners of the Existing Contracts shall be
permitted to reallocate investments in the Investment Company, redeem
investments in the Investment Company and/or invest in the Investment Company
upon the making of additional purchase payments under the Existing Contracts.
The parties agree that this Section 11.4 shall not apply to
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any termination under Article VII and the effect of Article VII terminations
shall be governed by Article VII of this Agreement.
11.4. The provisions of Article VIII shall survive any termination of
this Agreement.
11.5. Following termination, the Adviser shall not have any payment
obligation to the Insurance Company (except for payment obligations accorded but
not yet paid as of the termination date).
ARTICLE XII. NOTICES
Any notice shall be sufficiently given when sent by registered or
certified mail to the other party at the address of that other party set forth
below or at such other address as the other party may from time to time specify
in writing.
If to the Investment Company or the Adviser:
American Century Investment Management, Inc.
4500 Main Street
Kansas City, Missouri 64111
Attn: Janet A. Nash, Esq.
(p) 816/340-4051
(f) 816/340-4964
If to the Insurance Company:
Kemper Investors Life Insurance Company
1 Kemper Drive
Long Grove, Illinois 60049
Attn: General Counsel
(p)
(f)
ARTICLE XIII. MISCELLANEOUS
13.1. Subject to the requirements of legal process and regulatory
authority, each party hereto shall use reasonable efforts to treat as
confidential the names and addresses of the owners of the Contracts and all
information reasonably identified as confidential in writing by any other party
hereto and, except as permitted by this Agreement, shall not disclose,
disseminate or utilize such names and addresses and other confidential
information without the express written consent of the affected party unless and
until that information may come into the public domain, or as required by a
court of law.
13.2. The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.
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13.3. This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
13.4. If any provision of this Agreement shall be held or made invalid
by a court decision, statute, rule or otherwise, the remainder of the Agreement
shall not be affected thereby.
13.5. Each party hereto shall cooperate with each other party and all
appropriate governmental authorities (including without limitation the SEC, the
NASD and state insurance regulators) and shall permit those authorities
reasonable access to its books and records in connection with any lawful
investigation or inquiry relating to this Agreement or the transactions
contemplated hereby.
13.6. The rights, remedies and obligations contained in this Agreement
are cumulative and are in addition to any and all rights, remedies and
obligations, at law or in equity, which the parties hereto are entitled to under
state and federal laws.
13.7. This Agreement shall be binding upon and inure to the benefit of
the parties and their respective successors and assigns; provided, that no party
may assign this Agreement without the prior written consent of the other
parties.
13.8. No provision of this Agreement may be amended or modified in any
manner except by written agreement properly authorized and executed by all
parties hereto.
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed in its name and on its behalf by its duly authorized
representative as of the date specified above.
AMERICAN CENTURY INVESTMENT MANAGEMENT, INC.
By: /S/
--------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
KEMPER INVESTORS LIFE INSURANCE COMPANY
By: /S/ JAMES E. HOHMANN
--------------------------------------
Name: James E. Hohmann
------------------------------------
Title:
-----------------------------------
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SCHEDULE A
Segregated Asset Accounts
Name Date Established
- ---- ----------------
KILCO Variable Annuity Separate Account September 13, 1977
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SCHEDULE B
Administrative and Other Services
Maintenance of Books and Records
. Assist as necessary to maintain book entry records on behalf of the
Investment Company regarding issuance to, transfer within (via net purchase
orders) and redemption by the Accounts of Investment Company shares.
Maintain a single master account with each Fund on behalf of each Contract
owner. Such account to be in the name of the Insurance Company as record
owner of the Fund shares.
. Maintain general ledgers regarding the Accounts' holdings of Investment
Company shares, coordinate and reconcile information, and coordinate
maintenance of ledgers by financial institutions and other Contract owner
service providers.
Communication with the Investment Company
. Serve as the agent of the Investment Company for receipt of purchase and
redemption orders from the Accounts and to transmit such orders, and
payment therefor, to the Investment Company.
. Coordinate with the Investment Company's agents respecting daily valuation
of the Investment Company's shares and the Accounts' units.
. Purchase Orders
- Determine net amount available for investment in the Investment
Company.
- Deposit receipts at the Investment Company's custodians (generally by
wire transfer).
- Notify the custodians of the estimated amount required to pay dividend
or distribution.
. Redemption Orders
- Determine net amount required for redemption by the Investment Company.
- Notify the custodian and Investment Company of cash required to meet
payments.
. Purchase and redeem shares of the Investment Company on behalf of the
Accounts at the then current price in accordance with the terms of the
Investment Company's then current prospectus.
. Assist in routing and revising sales and marketing materials to incorporate
or reflect the comments made by the Investment Company and/or the Adviser.
. Assist in enforcing procedures adopted on behalf of the Investment Company
to reduce, discourage, or eliminate market timing transactions in its
shares in order to reduce or eliminate adverse effects on the Investment
Company or its shareholders.
Processing Distributions from the Investment Company
. Process ordinary dividends and capital gains.
. Reinvest the Investment Company's distributions.
22
<PAGE> 23
Reports
. Periodic information reporting to the Contract owners, including, but not
limited to, furnishing registration statements, prospectuses, statements of
additional information, reports, solicitations for voting instructions,
sales and other promotional material, and any other SEC filings with
respect to the Accounts invested in the Investment Company, as not
otherwise provided for.
. Periodic information reporting about the Investment Company, including any
necessary delivery of the Investment Company's prospectus and annual and
semi-annual reports to Contract owners, as not otherwise provided for and
preparation and transmission to Contract owners of periodic statements are
required by law or the Contracts.
Investment Company-Related Contract Owner Services
. Provide general information with respect to Investment Company inquiries
(not including information about performance or related to sales).
. Provide information regarding performance of the Investment Company and its
Funds and the subaccounts of the Accounts.
. Oversee and assist the solicitation, counting and voting or Contract owner
voting interests in the Investment Company pursuant to Investment
Company-related proxy statements.
Other Administrative Support
. Provide other administrative and legal compliance support for the
Investment Company as mutually agreed upon by the Insurance Company and the
Investment Company or the Adviser.
. Relieve the Investment Company of other usual or incidental administrative
services provided to individual Contract owners.
. Maintain and preserve all records as required by law to be maintained and
preserved in connection with providing the Administrative Services for the
Contracts.
23
<PAGE> 1
EXHIBIT 4(a)
[ZURICH KEMPER LOGO]
[LETTERHEAD OF KEMPER INVESTORS LIFE INSURANCE COMPANY]
RIGHT TO CANCEL - FREE LOOK PROVISION - At any time within 10 days of receiving
this contract you may return it to us or to the agent through whom it was
purchased. Immediately upon our receipt, this contract will be voided as if it
had never been in force. All purchase payments allocated to the General Account
plus the Separate Account contract value computed at the end of the valuation
period following our receipt of this contract will then be refunded within ten
days.
We agree to pay an annuity to the Annuitant provided the Annuitant is living and
this contract is in force on the annuity date.
We further agree to pay the death benefit prior to the Annuity Date upon the
death of the Owner or the Annuitant when a death benefit is payable. Payment
will be made upon our receipt of due proof of death and the return of this
contract.
This contract is issued in consideration of the attached application and payment
of the initial purchase payment.
The provisions on this cover and the pages that follow are part of this
contract.
Signed for Kemper Investors Life Insurance Company at its home office in Long
Grove, Illinois.
/s/ Debra P. Rezabek /s/ Gale K. Caruso
Secretary President
FIXED AND VARIABLE DEFERRED ANNUITY
NON-PARTICIPATING
ALL BENEFITS, PAYMENTS AND VALUES PROVIDED BY THIS CONTRACT, WHEN BASED UPON THE
INVESTMENT EXPERIENCE OF THE SUBACCOUNTS, ARE VARIABLE AND ARE NOT GUARANTEED AS
TO DOLLAR AMOUNT. REFER TO THE VARIABLE ACCOUNT AND ANNUITY PERIOD PROVISIONS
FOR A DETERMINATION OF ANY VARIABLE BENEFITS.
This is a legal contract between the owner and Kemper Investors Life Insurance
Company.
READ YOUR CONTRACT CAREFULLY.
<PAGE> 2
INDEX
PAGE
ANNUITY OPTION TABLE Follows Page 7
ANNUITY PERIOD PROVISIONS 5-7
Election of Annuity Option 5-6
Annuity Options 6-7
Transfers During The Annuity Period 7
APPLICATION Follows Contract Schedule
CONTRACT SCHEDULE Follows Index
DEATH BENEFIT PROVISIONS 5
Amount Payable Upon Death 5
Payment Of Death Benefits 5
DEFINITIONS 1
ENDORSEMENTS, if any Follows Annuity Option Table
GENERAL ACCOUNT PROVISIONS 3
General Account 3
General Account Contract Value 3
GENERAL PROVISIONS 1-2
The Contract 1
Incontestability 2
Assignment 2
Reports 2
Premium Taxes 2
GUARANTEE PERIOD PROVISIONS 5
Guarantee Period Value 5
LOAN PROVISIONS 5
Loans 5
Loan Interest Rate 5
Loan Repayment 5
OWNERSHIP PROVISIONS 2
Owner of Contract 2
Change of Ownership 2
Beneficiary 2
PURCHASE PAYMENT PROVISIONS 2-3
Initial Purchase Payments 2
Purchase Payment Limitations 2-3
TRANSFER AND WITHDRAWAL PROVISIONS 4-5
Transfers During The Accumulation Period 4
Withdrawals During The Accumulation Period 4
Withdrawal Charges 4
Transfer and Withdrawal Procedures 4-5
VARIABLE ACCOUNT PROVISIONS 3-4
Separate Account 3
Liabilities Of Separate Account 3
Subaccounts 3
Rights Reserved By The Company 3
Accumulation Unit Value 3-4
<PAGE> 3
DEFINITIONS
ACCUMULATION PERIOD: The period between the
issue date and the Annuity Date.
ACCUMULATION UNIT: An accounting unit of
measure used to calculate the value of each
subaccount.
AGE: The attained age of the Annuitant.
ANNUITANT: The person named in the
application during whose lifetime the
annuity is to be paid. Under a nonqualified
plan when two people are named as Joint
Annuitants, the term "Annuitant" means the
Joint Annuitants or the survivor. You may
not change the person(s) named as the
Annuitant.
ANNUITY: A series of payments paid in
accordance with this contract which begins
on the annuity date.
ANNUITY DATE: The date on which this
Contract matures and annuity payments begin.
The original Annuity Date is stated in the
Contract Schedule. It must be at least one
year from the Issue Date and no later than
the maximum age at annuitization as stated
in the Contract Schedule. The Owner may
change the Annuity Date, but not beyond the
maximum age.
ANNUITY PERIOD: This is the period that
starts on the Annuity Date.
ANNUITY UNIT: An accounting unit of measure
used to calculate the amount of variable
annuity payments after the first annuity
payment.
ANNUITY UNIT VALUE: The value of an Annuity
Unit of a Subaccount determined for a
Valuation Period according to the formula
stated in this contract.
AUTOMATIC REBALANCING: An election you make
to have as transfer a portion of the
Separate Account Contract Value according to
a predetermined schedule. You may change the
schedule or terminate these transfers by
informing us in writing.
CONTRACT VALUE: The sum of the General
Account Contract Value plus the Separate
Account Contract Value plus the Accumulated
Guarantee Period Value.
CONTRACT YEAR: A one year period starting on
the Issue Date and successive contract
anniversaries.
DEBT: The principal of any outstanding loan
plus any loan interest due or accrued.
DOLLAR COST AVERAGING: The process of
automatically transferring funds from the
General Account Contract Value to the
Subaccounts or Guarantee Period Accounts.
FIXED ANNUITY: An annuity payment plan that
does not vary as to dollar amount.
FUND: An investment company or separate
series thereof, in which the Subaccounts of
the Separate Account invest.
GENERAL ACCOUNT: Our assets other than those
allocated to the Separate Account or any
other separate account. We guarantee a
minimum rate of interest on purchase
payments allocated to the General Account.
During the Accumulation Period, the only
funds allowed in the General Account are
subject to Dollar Cost Averaging.
GENERAL ACCOUNT CONTRACT VALUE: The General
Account Contract Value is the value of the
General Account of this contract on any
Valuation Date.
Page 5
<PAGE> 4
Page 6
DEFINITIONS (CONTINUED)
GUARANTEE PERIOD: A period of time during
which an amount is to be credited with a
guaranteed interest rate, subject to a
Market Value Adjustment prior to the end of
the Guarantee Period. The Guarantee Periods
initially offered are stated in the Contract
Schedule.
GUARANTEE PERIOD VALUE: The (1) Purchase
Payment allocated or amount transferred to a
Guarantee Period; plus (2) interest
credited; minus (3) withdrawals, previously
assessed withdrawal charges and transfers;
adjusted for (4) any applicable Market Value
Adjustment previously made. There is a $500
minimum on the sum of Purchase Payments and
amounts transferred to any Guarantee Period
Value.
ISSUE DATE: The Issue Date is stated in the
Contract Schedule. If the normal Issue Date
is the 29th, 30th or 31st of the month, the
Issue Date will be the 28th day of that
month. It is the date your Initial Purchase
Payment is available for use and begins to
the credited with interest and/or investment
experience.
MARKET ADJUSTED VALUE: A Guarantee Period
Value adjusted by the Market Value
Adjustment formula prior to the end of a
Guarantee Period.
MARKET VALUE ADJUSTMENT: An adjustment of
Guarantee Period Values in accordance with
the Market Value Adjustment formula prior to
the end of the 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 Market Value
Adjustment formula is stated in the Contract
Schedule.
MORTALITY AND EXPENSE RISK CHARGE: A charge
deducted in the calculation of the
Accumulation Unit value and the Annuity Unit
value. It is for our assumption of mortality
risks and expense guarantees.
NONQUALIFIED: This contract issued other
than as a qualified plan.
OWNER: See "You, Your, Yours" below.
PURCHASE PAYMENTS: The dollar amount we
receive in U.S. currency to buy the benefits
this contract provides.
QUALIFIED PLAN: A contract issued under a
retirement plan which qualifies for
favorable income tax treatment under Section
401, 403, 408 or 457 of the Internal Revenue
Code as amended.
RECORDS MAINTENANCE CHARGE: A charge
assessed against your contract as specified
in the Contract Schedule.
RECEIVED: Received by Kemper Investors Life
Insurance Company at its home office in Long
Grove, Illinois.
SEPARATE ACCOUNT: A unit investment trust
registered with the Securities and Exchange
Commission under the Investment Act of 1940
known as the KILICO Variable Annuity
Separate Account.
SEPARATE ACCOUNT CONTRACT VALUE: The sum of
the Subaccount Values of this contract on
Valuation Date.
SUBACCOUNTS: The Separate Account has
several Subaccounts. The availability
initially are stated in the contract
schedule.
SUBACCOUNT VALUE: The value of each
Subaccount calculated separately according
to the formula stated in this contract.
VALUATION DATE: Each business day that\
applicable law requires that we value the
assets of the Separate Account. Currently
this is each day that the New York Stock
Exchange is open for trading.
VALUATION PERIOD: The period that starts at
the close of a Valuation Date and ends at
the close of the next succeeding Valuation
Date.
<PAGE> 5
DEFINITIONS (CONTINUED)
VARIABLE ANNUITY: An annuity payment plan which
varies as to dollar amount because of Subaccount
investment experience.
WE, OUR, US: Kemper Investors Life Insurance
Company, Long Grove, Illinois.
YOU, YOUR, YOURS: The party(ies) named as Owner
in the application unless later changed as
provided in this contract. The Owner is the
Annuitant unless a different Owner is named in
the application. Under a nonqualified plan when
more than one person is named as Owner, the terms
"you," "your," "yours," means Joint Owners. The
Owner may be changed during the lifetime of the
Owner and the Annuitant. The Owner, prior to the
Annuity Date or any distribution of any death
benefit, has the exclusive right to exercise
every option and right conferred by this
contract.
GENERAL PROVISIONS
THE CONTRACT This contract, any attached endorsements and the
attached application constitute the entire
contract between the parties. All statements made
in the application are deemed representations and
not warranties. No statement will void this
contract or be used as a defense of a claim
unless it is contained in the application.
MODIFICATION OF CONTRACT Only our president, secretary and assistant
secretaries have the power to approve a change or
waive any provisions of this contract. Any such
modifications must be in writing. No agent or
person other than the officers named has the
authority to change or waive the provisions of
this contract.
INCONTESTABILITY We cannot contest this contract after it has been
in force for two years from the Issue Date.
CHANGE OF ANNUITY DATE You may write to us prior to distribution of a
death benefit or the first annuity payment date
and request a change of the Annuity Date.
ASSIGNMENT No assignment of this contract is binding unless
we receive it in writing. We assume no
responsibility for the validity or sufficiency of
any assignment. Once filed, the rights of the
Owner, Annuitant and beneficiary are subject to
the assignment. Any claim is subject to proof of
interest of the assignee.
DUE PROOF OF DEATH We must receive in written proof of death within
sixty days of the death within sixty days of the
death of the Owner or the Annuitant when a death
certificate, the written statement of a
physician, or any other proof satisfactory to us.
RESERVES, CONTRACT VALUES AND All reserves are equal to or greater than those
DEATH BENEFITS required by statute. Any available Contract Value
and death benefit are not less than the minimum
benefits required by the statutes of the state in
which this contract is delivered.
NON-PARTICIPATING This contract does not pay dividends. It will not
share in our surplus or earnings.
REPORTS At least once each Contract Year we will send you
a statement showing Purchase Payments received,
interest credited, investment experience; and
charges made since the last report, as well as
any other information required by statute.
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<PAGE> 6
Page 8
GENERAL PROVISIONS (CONTINUED)
PREMIUM TAXES We will make a deduction for state premium taxes
in certain situations. On any contract subject to
premium tax, as provided under applicable law,
the tax will be deducted from: a. the Purchase
Payments when we receive them; b. the Contract
Value upon total withdrawal; or c. from the total
Contract Value applied to an annuity option at
the time annuity payments start.
QUALIFIED PLANS If this contract is issued under a qualified plan
additional provisions may apply. The rider or
amendment to this contract used to qualify it
under the applicable section of the Internal
Revenue Code will indicate the extent of change
in the provisions.
OWNERSHIP PROVISIONS
OWNER OF CONTRACT The Annuitant is the original Owner unless
otherwise provided in the application.
Before the Annuity Date or any distribution of
death benefit, you have the right to cancel or
amend this contract if we agree. You may exercise
every option and right conferred by this contract
including the right of assignment. The Joint
Owners must agree to any change if more than
one owner is named.
CHANGE OF OWNERSHIP You may change the Owner by written request at
any time while the Annuitant is alive. You must
furnish information sufficient to clearly
identify the new Owner to us. The change is
subject to any existing assignment of this
contract. When we record the effective date of
the change, it will be the date the notice was
signed except for action taken by us prior to
receiving the request. Any change is subject to
the payment of any proceeds. We may require you
to return this contract to us for endorsement of
a change.
BENEFICIARY DESIGNATION AND The application for this contract shown the
CHANGE OF BENEFICIARY original beneficiary. You may change the
beneficiary if you send us a written change
form. Changes are subject to the following:
1. The change must be filed while the Annuitant
is alive and prior to the annuity date;
2. This contract must be in force at the time you
file a change;
3. Such change must not be prohibited by the
terms of an existing assignment, beneficiary
designation or other restriction;
4. Such change will take effect when we
receive it;
5. After we receive the change, it will take
effect on the date the change form is signed.
However, action taken by us before the change
form was received will remain in effect; and
6. The request for change must provide
information sufficient to identify the new
beneficiary.
We may require you to return this contract for
endorsement of a change.
<PAGE> 7
OWNERSHIP PROVISIONS (CONTINUED)
DEATH OF BENEFICIARY The interest of a beneficiary who dies before the
distribution of the death benefit will pass to
the other beneficiaries, if any, share and share
alike, unless otherwise provided in the
beneficiary designation. If no beneficiary
survives or is named, the distribution will be
made to your estate when you dies; or to the
estate of the annuitant upon the death of the
annuitant if you are not also the Annuitant, if a
beneficiary dies within ten days of the date of
your death, the death benefit will be paid as if
you had survived the beneficiary. If a
beneficiary dies within ten days of the death of
the Annuitant, and you are not the Annuitant, we
will pay the death benefit as if the Annuitant
survived the beneficiary. If you, the Annuitant,
and the beneficiary die simultaneously, we will
pay the death benefit as if you had survived the
Annuitant and the beneficiary.
PURCHASE PAYMENT PROVISIONS
INITIAL PURCHASE PAYMENT The minimum initial Purchase Payment is $25,000.
PURCHASE PAYMENT LIMITATIONS The minimum subsequent Purchase Payment is $500
for a nonqualified plan and $50 for a qualified
plan. We will accept a subsequent qualified plan
purchase payment of less than $50 when annual
contributions from a payroll deduction or salary
reduction plan equals or exceeds $600. The maximum
Purchase Payment that may be made during a
Contract Year without our approval is $500,000 for
a nonqualified plan; or the maximum permitted by
the Internal Revenue Code for a qualified plan. We
will not accept Purchase Payments more frequently
than once every other week.
Subsequent nonqualified Purchase Payments must
first be applied to the General Account or any
Subaccount whose value is less than $500. After
each initial account has been allocated at least
$500, Purchase Payments may be allocated to a new
account.
Subsequent qualified plan contributions from a
payroll deduction or salary reduction program of
$50 or more may be made to the General Account or
to an additional subaccount.
We will deduct any applicable state premium taxes
from the purchase payments we apply to the
contract.
We reserve the right to waive or modify these
limits.
PLACE OF PAYMENT All Purchase Payments under this contract must be
paid to us at our home office or such other
location as we may select. We will notify you
and any other interested parties in writing of
such other locations. Purchase Payments received
by an agent will begin earning interest after we
receive it.
GENERAL ACCOUNT PROVISIONS
GENERAL ACCOUNT The guaranteed benefits under this contract are
provided through the General Account.
GENERAL ACCOUNT CONTRACT
VALUE The General Account Contract Value includes
1. your Purchase Payments allocated to the General
Account; 2. amounts transferred from a Subaccount
to the General Account at your request; and 3. the
interest credited to amounts so allocated or
transferred. Transfers and withdrawals from the
General Account reduce the General Account
Contract Value.
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<PAGE> 8
Page 10
GENERAL ACCOUNT PROVISIONS (CONTINUED)
The initial General Account interest rate credited
to the initial Purchase Payment is in effect
through the end of the Guarantee Period and is
shown in the Contract Schedule. At the beginning
of each subsequent Guarantee Period shown in the
Contract Schedule, we will declare the General
Account interest rate applicable to the initial
Purchase Payment for each such subsequent
Guarantee Period. We will declare the General
Account interest rate with respect to each
subsequent Purchase Payment received. Any such
Purchase Payment we receive will be credited that
rate through the end of the Guarantee Period shown
in the Contract Schedule. At the beginning of each
subsequent Guarantee Period, we will declare the
General Account interest rate applicable to each
subsequent Purchase Payment for such Guarantee
Period.
We reserve the right to declare the General
Account current interest rates based upon: the
Issue Date; the date we receive a Purchase
Payment; or the date of account transfer.
We calculate the interest credited to the General
Account by compounding daily, at daily interest
rates, rates which would produce at the end of a
Contract Year a result identical to the one
produced by applying an annual interest rate.
The minimum guaranteed General Account interest
rate is 3.00% per year.
GUARANTEE PERIOD PROVISIONS
GUARANTEE PERIOD We hold all amounts allocated to a Guarantee
Period in a non-unitized separate account. The
initial Guarantee Periods available under the
Contract are shown in the Contract Schedule.
GUARANTEE PERIOD VALUE On any Valuation Date, the Guarantee Period
value includes:
1. your Purchase Payments or transfers allocated
to the Guarantee Period Value at the beginning of
its Guarantee Period; plus
2. interest credited; minus
3. withdrawals, previously assessed withdrawal
charges and transfers; minus
4. any applicable portion of the Records
Maintenance Charge and charges for other benefits;
adjusted for
5. any applicable Market Value Adjustment
previously made.
The Guarantee Periods initially elected and the
interest rates initially credited are shown in the
Contract Schedule. The initial interest rate
credited to subsequent Purchase Payments will be
declared at the time the payment is received. At
the end of a Guarantee Period, we will declare a
guaranteed interest rate applicable for the next
subsequent Guarantee Period of the same duration.
ACCUMULATED GUARANTEE PERIOD On any Valuation Date, the Accumulated Guarantee
VALUE Period value is the sum of the Guarantee Period
Values. At any time during the Accumulation
Period, the Accumulated Guarantee Period Value may
be allocated to a maximum of forty Guarantee
Periods.
We calculate the interest credited to the
Guarantee Period Value by compounding daily, at
daily interest rates, rates which would produce
at the end of a Contract Year a result identical
to the one produced by applying an annual
interest rate.
<PAGE> 9
GUARANTEE PERIOD PROVISIONS (CONTINUED)
MARKET VALUE ADJUSTMENT The Market Value Adjustment formula is stated in
the Contract Schedule. This formula is applicable
for both an upward or downward adjustment to a
Guarantee Period Value when, prior to the end of a
Guarantee Period, such value is:
1. taken as a total or partial withdrawal;
2. applied to purchase an annuity option; or
3. transferred to another Guarantee Period, the
Fixed Account, or a Subaccount.
However, a Market Value Adjustment will not be
applied to any Guarantee Period Value transaction
effected within 30 days after the end of the
applicable Guarantee Period.
VARIABLE ACCOUNT PROVISIONS
SEPARATE ACCOUNT The variable benefits under this contract are
provided through the KILICO Variable Annuity
Separate Account. This is called the Separate
Account. The Separate Account is registered with
the Securities and Exchange Commission as a unit
investment trust under the Investment Company
Act of 1940. It is a separate investment account
maintained by us into which a portion of the
company's assets have been allocated for this
contract and may be allocated for certain other
contracts.
LIABILITIES OF SEPARATE The assets equal to the reserves and other
ACCOUNT liabilities of the Separate Account will not be
charged with liabilities arising out of any other
business we may conduct. We will value the assets
of the Separate Account no each Valuation Date.
SEPARATE ACCOUNT CONTRACT On any Valuation Date the Separate Account
VALUE Contract Value is the sum of its Subaccount
values.
SUBACCOUNTS The Separate Account consists of several
Subaccounts. The initial Subaccounts available
under this Contract are shown in the Contract
Schedule. We may, from time to time, combine or
remove Subaccounts in the Separate Account and
establish additional Subaccounts of the Separate
Account. In such event we may permit you to select
other Subaccounts under this contract. However,
the right to select any other Subaccount is
limited by the terms and conditions we may impose
on such transactions.
FUND Each Subaccount of the Separate Account will buy
shares of a separate series of a fund. Each fund
is registered under the Investment Company Act of
1940 as an open-end diversified management
investment company. Each series of a fund
represents a separate investment portfolio which
corresponds to one of the Subaccounts of the
Separate Account.
If we establish additional Subaccounts each new
Subaccount will invest in a new series of a fund
or in shares of another investment company. We may
also substitute other investment companies.
RIGHTS RESERVED BY THE We reserve the right, subject to compliance with
COMPANY the current law or as it may be changed in the
future:
1. To operate the Separate Account in any form
permitted under the Investment Company Act of 1940
or in any other form permitted by law;
Page 11
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Page 12
VARIABLE ACCOUNT PROVISIONS (CONTINUED)
2. To take any action necessary to comply with or
obtain and continue any exemptions from the
Investment Company Act of 1940 or to comply with
any other applicable law;
3. To transfer any assets in any Subaccount to
another Subaccount or to one or more separate
accounts, or the General Account, or to add,
combine or remove Subaccounts in the Separate
Account;
4. To delete the shares of any of the portfolios
of a fund or any other open-end investment company
and to substitute, for the fund shares held in any
Subaccount, the shares of another portfolio of a
fund or the shares of another investment company
or any other investment permitted by law; and
5. To change the way we assess charges, but not to
increase the aggregate amount above that currently
charged to the Separate Account and the funds in
connection with the contracts.
When required by law, we will obtain your approval
of such changes and the approval of any regulatory
authority.
ACCUMULATION UNIT VALUE Each Subaccount has an accumulation unit value.
When Purchase Payments or other amounts are
allocated to a Subaccount, a number of units are
purchased based on the accumulation unit value of
the Subaccount at the end of the Valuation Period
during which the allocation is made. When amounts
are transferred out of or deducted from a
Subaccount, units are redeemed in a similar manner.
The value of a Subaccount on any Valuation Date is
the number of units held in the Subaccount times
the Accumulation Unit Value on that Valuation Date.
The accumulation unit value for each subsequent
Valuation Period is the investment experience
factor for that period multiplied by the
accumulation unit value for the period immediately
preceding. Each Valuation Period has a single
accumulation unit value that is applied to each day
in the period. The number of Accumulation Units
will not change as a result of investment
experience.
INVESTMENT EXPERIENCE Each Subaccount has its own investment experience
FACTOR factor. The investment experience of the Separate
Account is calculated by applying the investment
experience factor to the value in each Subaccount
during a Valuation Period.
The investment experience factor of a Subaccount
for a Valuation Period is determined by dividing
1. by 2. and subtracting 3. from the result, where:
1. is the net result of:
a. the net asset value per share of the investment
held in the Subaccount determined at the end of the
current Valuation Period; plus
b. the per share amount of any dividend or capital
gain distributions made by the investments held in
the Subaccount, if the "exdividend" date occurs
during the current Valuation Period; plus or minus
c. a charge or credit for taxes reserved for the
current Valuation Period which we determine
resulted from the investment operations of the
Subaccount;
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<PAGE> 11
VARIABLE ACCOUNT PROVISIONS (CONTINUED)
2. is the net asset value per share of the
investment held in the Subaccount, determined at
the end of the last Valuation Period;
3. is the factor representing the sum of the
Separate Account charges stated in the Contract
Schedule for the number of days in the Valuation
Period.
TRANSFER AND WITHDRAWAL PROVISIONS
TRANSFERS DURING THE You may direct the following transfers:
ACCUMULATION PERIOD
1. All or part of the Separate Account Contract
Value or a Guarantee Period Value may be
transferred to the General Account or to another
Subaccount. We will allow the first transfer
fifteen days after the Issue Date.
2. During the thirty days that follow a Contract
Year anniversary or the thirty day period that
follows the date you receive an annual report, if
later, all or part of the General Account Contract
Value, less debt, may be transferred to one or more
Subaccounts.
Transfers will also be subject to the
following conditions:
1. The minimum amount which may be transferred is
$500 or, if smaller, the remaining value in the
General Account or a Subaccount or Guarantee Period;
2. No partial transfer will be made if the remaining
Contract Value of the General Account or any
Subaccount or Guarantee period will be less than
$500 unless the transfer will eliminate your
interest in such account;
3. No transfer may be made within seven calendar
days of the date on which the first annuity payment
is due;
4. You may request an additional transfer from the
General Account to one or more Subaccounts during
the thirty day period before the date on which the
first annuity payment is due. Such transfer must
become effective no later than the seventh calendar
day before such due date;
5. When you request a transfer from the General
Account Contract Value to a Subaccount or Guarantee
Period, we will limit the amount that can be
transferred to the amount which exceeds debt, if
any, applicable to the total General Account
Contract Value for the Contract Year during which
the total transfer is made.
6. We reserve the right to charge $25 for each
transfer in excess of 12 in a Contract Year.
7. Transfers may not be made from any Subaccount or
Guarantee Period into the Fixed Account for the
six-month period following any transfer from the
Fixed Account into one or more of the Subaccounts.
Any transfer from a Guarantee Period is subject to a
Market Value Adjustment unless the transfer is
effective within thirty days after the end of the
applicable Guarantee Period.
We will transfer amounts bought by Purchase Payments
and all related accumulations received in a given
Contract Year, in the chronological order we
received them.
Any transfer request must clearly specify: 1. the
amount which is to be transferred; and 2. the names
of the accounts which are affected. We will only
honor a telephone transfer request if a properly
executed telephone transfer authorization is on file
with us. Such request for a transfer must comply
with the conditions of the authorization.
Page 13
<PAGE> 12
Page 14
TRANSFER AND WITHDRAWAL PROVISIONS (CONTINUED)
We reserve the right at any time and without
notice to any party, to terminate, suspend, or
modify these transfer rights.
WITHDRAWALS DURING THE During the Accumulation Period, you may withdraw
ACCUMULATION PERIOD all or part of the Contract Value reduced by any
withdrawal charge, applicable premium taxes, and
adjusted by any applicable Market Value
Adjustment. The Market Value Adjustment formula
will be applied to the applicable portion of the
total value withdrawn unless such withdrawal is
effective within thirty days after the end of the
applicable Guarantee Period. We must receive a
written request that indicates the amount of the
withdrawal from the Fixed Account and each
Subaccount and Guarantee Period. You must return
the Contract to us if you elect a total withdrawal.
Withdrawals are subject to these conditions:
1. Each withdrawal must be at least $100 or the
value that remains in the Fixed Account,
Subaccount, or Guarantee Period if smaller;
2. A minimum of $500 must remain in the account
after you make a withdrawal unless the account is
eliminated by such withdrawal;
3. The maximum you may withdraw from any account
is the value of the respective account less the
amount of any withdrawal charge;
4. Any withdrawal amount you request will be
increased by the withdrawal charge;
5. Partial withdrawals may not be taken from the
Fixed Account in the first Contract Year.
TRANSFER AND WITHDRAWAL We will withdraw or transfer from the General
PROCEDURES Account or Guarantee Periods as of the Valuation
Date that follows the date we receive your written
or telephone transfer request. To process a
withdrawal, the request must contain all required
information.
We will redeem the necessary number of Accumulation
Units to achieve the dollar amount when the
withdrawal or transfer is made from a Subaccount.
We will reduce the number of Accumulation Units
credited in each Subaccount by the number of
Accumulation Units redeemed. The reduction in the
number of Accumulation Units is determined on the
basis of the Accumulation Unit Value at the end of
the Valuation Period when we receive the request,
provided the request contains all required
information. We will pay the amount within seven
calendar days after the date we receive the
request, except as provided below.
DEFERMENT OF WITHDRAWAL OR If the withdrawal or transfer is to be made from a
TRANSFER Subaccount, we may suspend the right of withdrawal
or transfer or delay payment more than seven
calendar days: 1. during any period when the New
York Stock Exchange is closed other than customary
weekend and holiday closings; 2. when trading
markets normally utilized is restricted, or an
emergency exists as determination by the Securities
and Exchange Commission, so that disposal of
investments or determination of the Accumulation
Unit Value is not practical; or 3. for such other
periods as the Securities and Exchange Commission
by order may permit for protection of Owners.
We may defer the payment or a withdrawal or
transfer from the General Account or Guarantee
Periods, for the period permitted by law. This
can never be more than six months after you send
us a written request. During the period of
deferral, we will continue to credit interest, at
the then current interest rate(s), to the General
Account Contract Value and/or each Guarantee
Period Value.
<PAGE> 13
LOAN PROVISIONS
LOANS You may request a loan any time before the
Annuity Date. You must assign this contract
to us as security for a loan.
The maximum loan available is the General
Account Contract Value minus: 1. any
withdrawal charge that applies to the total
General Account Contract Value in the year in
which you make the loan; and 2. interest on
the loan paid to the end of the Contract Year
in which you make the loan.
We may defer granting a loan for six months
from the date we receive the written loan
request.
LOAN INTEREST The loan interest is 5.50% per year
compounded daily at the daily equivalent of a
5.50% annual rate. Interest is due at the end
of each Contract Year. If you do not pay
interest when it is due, we will add it to
the loan and it will bear interest at the
same rate as the loan. We will charge
interest on a daily basis.
LOAN PAYMENT You may repay a debt in full or in part at
any time prior to the Annuity Date.
If the debt equals or exceeds the General
Account Contract Value, less any withdrawal
charge that applies to the total withdrawal
of the General Account, your interest in the
General Account will terminate. The
termination occurs thirty-one days after we
mail notice of termination to your last known
address and that of any assignee of record.
We will apply any repayment of debt: first to
reduce that part of the debt that can be
attributed to interest; and second to that
part of the debt that can be attributed to
Purchase Payments.
EFFECT OF LOANS ON INTEREST RATES While there is a loan, the portion of the
General Account Contract Value that equals
the debt will earn interest at 3.00% per
year, compounded daily at the daily
equivalent of a 3.00% annual rate, instead of
the current interest rate.
DEATH BENEFIT PROVISIONS
AMOUNT PAYABLE UPON DEATH We compute the death benefit at the end of
the Valuation Period following: our receipt
of due proof of death; and the return of this
contract.
If death occurs prior to attaining age 75, we
will pay the greater of: a. the Contract
Value less debt; or b. the total amount of
Purchase Payments, less any debt and the
aggregate dollar amount of all previous
withdrawals. We will pay the Contract Value
less debt if death occurs at age 75 or later
PAYMENT OF DEATH BENEFITS We will pay a death benefit before the
Annuity Date if: the Owner who is also the
Annuitant dies; or either the Annuitant or
the Owner who is not the Annuitant dies.
The death benefit will be paid upon the death
of a Joint Owner. If Joint Annuitants are
named and they are not the Owners of this
contract, we will pay the death benefit upon
the death of the surviving Joint Annuitant.
We will pay the death benefit to the
beneficiary when we receive due proof of
death. We will then have no further
obligation under this contract.
When you die, we will pay the death benefit
in a lump sum. This sum may be deferred for
up to five years from the date of your death.
<PAGE> 14
DEATH BENEFIT PROVISIONS (CONTINUED)
Instead of a lump sum payment the beneficiary
may elect to have the death benefit
distributed as stated in Option 1 for a
period not to exceed the beneficiary's life
expectancy; or Options 2, or 3 based upon the
life expectancy of the beneficiary as
prescribed by federal regulations. The
beneficiary must make this choice within
sixty days of the time we receive due proof
of death and distribution must commence
within one year of the date of death.
If the beneficiary is not a natural person,
the beneficiary must elect that the entire
death benefit be distributed within five
years of your death. Distribution of the
death benefit must start within one year
after your death. It may start later if
prescribed by federal regulations.
If the primary beneficiary is the surviving
spouse when you die, the surviving spouse may
elect to be the successor owner of this
contract. There will be no requirement to
start a distribution of death benefits.
ANNUITY PERIOD PROVISIONS
ELECTION OF ANNUITY OPTION We must receive an election of an Annuity
option in writing. You may make an election
before the Annuity Date providing the
Annuitant is alive. The Annuitant may make an
election on the Annuity Date unless you have
restricted the right to make such an
election. The beneficiary may make an
election when we pay the death benefit.
An election will be revoked by: 1. a
subsequent change of beneficiary; or 2. an
assignment of this contract unless the
assignment provides otherwise.
Subject to the terms of the death benefit
provision, the beneficiary may elect to have
the death benefit remain with us under one of
the Annuity options.
If an Annuity option is not elected, an
Annuity will be paid under Option 3 for a
guaranteed period of ten years and for as
long thereafter as the Annuitant is alive.
If the total Contract Value is applied under
one of the Annuity options, this contract
must be surrendered to us.
An option can not be changed after the first
Annuity payment is made.
If, on the seventh calendar day before the
first Annuity payment due date, all the
Contract Value is allocated to the General
Account or Guarantee Periods, the Annuity
will be paid as a fixed annuity. If all of
the Contract Value on such date is allocated
to the Separate Account, the Annuity will be
paid as a variable Annuity. If the Contract
Value on such date is allocated to both the
General Account and a subaccount, then the
Annuity will be paid as a combination of a
fixed and a variable Annuity. A fixed and
variable Annuity payment will reflect the
investment performance of the subaccounts in
accordance with the allocation of the
Contract Values existing on such date.
Allocations will not be changed thereafter,
except as provided in the Transfers During
the Annuity Period provision of this
contract.
Payments for all options are derived from the
applicable tables. Current Annuity rates will
be used if they produce greater payments than
those quoted in the contract. The age in the
tables is the age of the payee on the last
birthday before the first payment is due.
<PAGE> 15
ANNUITY PERIOD PROVISIONS (CONTINUED)
The option selected must result in a payment
that is at least equal to our minimum
payment, according to our rules, at the time
the Annuity option is chosen. If at any time
the payments are less than the minimum
payment, we have the right to increase the
period between payments to quarterly,
semi-annual or annual so that the payment is
at least equal to the minimum payment or to
make payment in one lump sum.
OPTION 1
FIXED INSTALMENT ANNUITY We will make monthly payments for a fixed
number of instalments. Payments must be made
for at least 5 years, but not more than 30
years.
OPTION 2
LIFE ANNUITY We will make monthly payments while the payee
is alive.
OPTION 3
LIFE ANNUITY WITH INSTALMENTS We will make monthly payments for a
GUARANTEED guaranteed period and thereafter while the
payee is alive. The guaranteed period must be
selected at the time the Annuity option is
chosen. The guaranteed periods available are
5, 10, 15 and 20 years.
OPTION 4
JOINT AND SURVIVOR ANNUITY We will pay the full monthly income while
both payees are alive. Upon the death of
either payee, we will continue to pay the
surviving payee a percentage of the original
monthly payment. The percentage payable to
the surviving payee must be selected at the
time the Annuity option is chosen. The
percentages available are 50%, 66 2/3%, 75%,
and 100%.
OTHER OPTIONS We may make other Annuity options available.
Payments are also available on a quarterly,
semi-annual or annual basis.
FIXED ANNUITY The General Account Contract Value on the
first day preceding the date on which the
first annuity payment is due, is first
reduced by any debt and premium taxes that
apply. The value that remains will be used to
determine the fixed annuity monthly payment
in accordance with the Annuity option
selected.
VARIABLE ANNUITY The Separate Account Contract Value, at the
end of the Valuation Period preceding the
Valuation Period that includes the date on
which the first Annuity payment is due, is
first reduced by any annuitization charge,
Records Maintenance Charge, charges for other
benefits if any that may be added by a rider
to this Contract and any premium taxes that
apply. The value that remains is used to
determine the first monthly Annuity payment.
The first monthly Annuity payment is based
upon the guaranteed annuity option shown in
the Annuity Option Table. You may elect any
option available.
The dollar amount of subsequent payments may
increase or decrease depending on the
investment experience of each Subaccount. The
number of Annuity Units per payment will
remain fixed for each Subaccount unless a
transfer is made. If a transfer is made, the
number of Annuity Units per payment will
change.
The number of Annuity Units for each
Subaccount is calculated by dividing a. by b.
where:
<PAGE> 16
ANNUITY PERIOD PROVISIONS (CONTINUED)
a. is the amount of the monthly payment that
can be attributed to that Subaccount; and
b. is the Annuity Unit Value for that
Subaccount at the end of the Valuation
Period. The Valuation Period includes the
date on which the payment is made.
Monthly Annuity payments, after the first
payment, are calculated by summing up, for
each Subaccount, the product of a. times b.
where:
a. is the number of Annuity Units per payment
in each Subaccount; and
b. is the Annuity Unit Value for that
Subaccount at the end of the Valuation
Period. The Valuation Period includes the
date on which the payment is made.
After the first payment, we guarantee that
the dollar amount of each Annuity payment,
will not be affected adversely by actual
expenses or charges in mortality experience
from the expense and mortality assumptions on
which we based the first payment.
ANNUITY UNIT VALUE The value of an Annuity Unit, for each
Subaccount, at the end of any subsequent
Valuation Period is determined by multiplying
the result of a. times b. by c. where:
a. is the Annuity Unit Value for the
immediately preceding Valuation Period; and
b. is the net investment factor for the
Valuation Period for which the Annuity Unit
Value is being calculated; and
c. is the interest factor of .99993235 per
calendar day of such subsequent Valuation
Period to offset the effect of the assumed
rate of 2.50% per year used in the Annuity
Option Table.
The net investment factor for each Subaccount
for any Valuation Period is determined by
dividing a. by b. where:
a. is the value of an Annuity Unit of the
applicable Subaccount as of the end of the
current Valuation Period plus or minus the
per share charge or credit for taxes
reserved; and
b. is the value of an Annuity Unit of the
applicable Subaccount as of the end of the
immediately preceding Valuation Period, plus
or minus the per share charge or credit for
taxes reserved.
TRANSFERS DURING THE ANNUITY During the Annuity Period, the payee(s) may
PERIOD not convert fixed Annuity payments to
variable Annuity payments. However, during
the Annuity Period, the payee(s), by sending
us a written notice in a form satisfactory to
us, may convert variable Annuity payments to
fixed Annuity payments; or have variable
Annuity payments reflect the investment
experience of other Subaccounts. A transfer
may be made subject to the following:
1. Transfers from a Subaccount to the General
Account can be effective only on an
anniversary of the first Annuity payment
date. We must receive notice of such transfer
at least thirty days prior to the effective
date of the transfer;
<PAGE> 17
ANNUITY PERIOD PROVISIONS (CONTINUED)
2. Transfers from one Subaccount to another
Subaccount will be effective during the
Valuation Period next succeeding the date the
notice is Received by us. However, if the
notice for the transfer is received within
seven days immediately preceding an Annuity
payment date, the transfer will be effective
during the Valuation Period next succeeding
that Annuity payment date. No transfer to a
Subaccount may be made during the first year
of the Annuity period. In subsequent years
all transfers between Subaccounts will be
made on the same day in a given year and are
limited to one transfer each year;
3. A payee may not have more than three
Subaccounts after any transfer; and
4. The payee's entire interest in a
Subaccount must be transferred.
The number of Annuity Units per payment
attributable to a Subaccount to which
transfer is made is equal to, in the case of
a transfer between Subaccounts, the number of
Annuity Units per payment in the Subaccount
from which transfer is being made multiplied
by the Annuity Unit Value for that
Subaccount, such amount being divided by the
Annuity Unit Value for the Subaccount to
which transfer is being made.
The amount of money allocated to the General
Account in the event of a transfer from a
Subaccount equals the annuity reserve for the
payee's interest in such subaccount. The
annuity reserve is the product of a.
multiplied by b. multiplied by c. where: a.
is the number of Annuity Units representing
the payee's interest in such Subaccount per
Annuity payment; b. is the Annuity Unit Value
for such Subaccount; and c. is the present
value of $1.00 per payment period using the
attained age(s) of the payee(s) and any
remaining guaranteed payments that may be due
at the time of the transfer. The guaranteed
monthly payments are based on an interest
rate of 2.50% per year and, where mortality
is involved, the "1983 Table a" individual
annuity mortality table developed by the
Society of Actuaries with a five year set
back. Money allocated to the General Account
upon such transfer will be applied under the
same Annuity option as originally elected.
Any guaranteed period payments will be
adjusted to reflect the number of guaranteed
payments have already been made. If all
guaranteed payments have already been made,
no further payments will be guaranteed.
All amounts and Annuity Unit Values are
determined as of the end of the Valuation
Period which precedes the effective date of
the transfer.
We reserve the right at any time and without
notice to any party to terminate, suspend or
modify the transfer privileges.
SUPPLEMENTARY AGREEMENT A supplementary agreement will be issued to
reflect payments that will be made under a
settlement option. If payment is made as a
death benefit distribution, the effective
date will be the date of death. Otherwise the
effective date will be the date chosen by the
Owner.
DATE OF FIRST PAYMENT Interest, under an option, will start to
accrue on the effective date of the
supplementary agreement. If the normal
effective date is the 29th, 30th, or 31st of
the month, the effective date will be the
28th day of that month.
EVIDENCE OF AGE, SEX AND We may require satisfactory evidence of the
SURVIVAL age, sex and the continued survival of any
person on whose life the income is based.
<PAGE> 18
ANNUITY PERIOD PROVISIONS (CONTINUED)
MISSTATEMENT OF AGE OR SEX If the age or sex of the payee has been
misstated, the amount payable under this
contract will be such as the Purchase
Payments sent to us would have purchased at
the correct age or sex. Interest not to
exceed 6% compounded each year will be
charged to any over payment or credited to
any underpayment against future payments we
may make under this contract.
BASIS OF ANNUITY OPTIONS The guaranteed monthly payments are based on
an interest rate of 2.50% per year and, where
mortality is involved, the "1983 Table a"
individual annuity mortality table developed
by the Society of Actuaries, with a five year
set back.
DISBURSEMENT OF FUNDS UPON When the payee dies, the value of any unpaid
DEATH OF PAYEE: UNDER installments will be paid, in one sum, to the
OPTIONS 1 OR 3 estate of the payee unless otherwise provided
in the supplementary agreement. The commuted
value based upon a minimum interest rate of
not less than 2.50% will be paid. The
commuted value of any variable installments
will be determined by applying the Annuity
Unit Value next determined by applying the
Annuity Unit Value next determined following
our receipt of due proof of death.
PROTECTION OF BENEFITS Unless otherwise provided in the
supplementary agreement, the payee may not
commute, anticipate, assign, alienate or
otherwise hinder the receipt of any payment.
CREDITORS The proceeds of this contract and any payment
under an annuity option will be exempt from
the claim of creditors and from legal process
to the extent permitted by law.
<PAGE> 19
FIXED AND VARIABLE DEFERRED ANNUITY
NON-PARTICIPATING
ALL BENEFITS, PAYMENTS AND VALUES PROVIDED BY THIS CONTRACT, WHEN BASED UPON THE
INVESTMENT EXPERIENCE OF THE SUBACCOUNTS, ARE VARIABLE AND ARE NOT GUARANTEED AS
TO DOLLAR AMOUNT. REFER TO THE VARIABLE ACCOUNT AND ANNUITY PERIOD PROVISIONS
FOR A DETERMINATION OF ANY VARIABLE BENEFITS.
This is a legal contract between the Owner and Kemper Investors Life Insurance
Company.
READ YOUR CONTRACT CAREFULLY
KEMPER INVESTORS LIFE INSURANCE COMPANY
A Stock Life Insurance Company
1 Kemper Drive, Long Grove, Illinois 60049-0001
<PAGE> 1
EXHIBIT 4(b)
[ZURICH KEMPER LOGO]
KEMPER INVESTORS LIFE INSURANCE COMPANY (KILICO)
1 Kemper Drive, Long Grove, Illinois 60049-0001
- -------------------------------------------------
VARIABLE ANNUITY APPLICATION
(FOR INDIVIDUAL AND GROUP PAYROLL DEDUCTION PLANS) ZURICH PREFERRED ANNUITY
- -------------------------------------------------------------------------------
1. Annuitant Information
- -------------------------------------------------------------------------------
Name of Annuitant
- -------------------------------------------------------------------------------
/ / Male / / Female SS#
- -------------------------------------------------------------------------------
Date of Birth
- -------------------------------------------------------------------------------
Address
- -------------------------------------------------------------------------------
City State Zip
- -------------------------------------------------------------------------------
Email Address
- -------------------------------------------------------------------------------
Daytime Phone
- -------------------------------------------------------------------------------
2. Owner Information
- -------------------------------------------------------------------------------
Please complete this section only if Owner(s) is other
than Proposed Annuitant(s).
Name of Owner
- -------------------------------------------------------------------------------
/ / Male / / Female SS#
- -------------------------------------------------------------------------------
Date of Birth
- -------------------------------------------------------------------------------
Address
- -------------------------------------------------------------------------------
City State Zip
- -------------------------------------------------------------------------------
Email Address
- -------------------------------------------------------------------------------
Daytime Phone
- -------------------------------------------------------------------------------
3. Beneficiary Information
- -------------------------------------------------------------------------------
Please check box next to beneficiary name if the beneficiary is the spouse of
the contract owner. (Each designation should equal 100%.)
Use Sec 11 for additional beneficiary(s).
/ / Primary % DOB
- -------------------------------------------------------------------------------
/ / Primary % DOB
- -------------------------------------------------------------------------------
/ / Contingent % DOB
- -------------------------------------------------------------------------------
4. Type of Plan
- -------------------------------------------------------------------------------
/ / Non-Qualified / / Roth IRA / / 408(b) IRA / / Simple IRA
/ / 403 / / 401 / / 457
The annuitant has received, read and understands the IRA Disclosure Statement.
Tax Year of Initial Contribution (if you selected either
- ------------------- an IRA or ROTH IRA).
5. Investment Options
- -------------------------------------------------------------------------------
Total Asset Allocation must Small/Mid Cap U.S. Stock
equal 100% ___% Kemper Small Cap Growth
___% American Century Value
Large Cap U.S. Stock ___% J.P. Morgan Small Company
___% Kemper Growth ___% Alger American Small Cap
___% Fidelity VIP Growth ___% Alger Mid Cap
___% Fidelity VIP Equity-Income ___% Janus Aspen Series
___% Fidelity VIP II Index 500 Aggressive Growth
___% Fidelity VIP II Contrafund
___% Janus Aspen Series Growth International Stock
___% Alger American Growth ___% Janus Aspen Series
___% Scudder Capital Growth Worldwide Growth
___% American Century Income ___% Scudder International
& Growth
U.S. Broad Fixed Income
___% Kemper Investment
Grade Bond
___% Kemper Government
Securities
___% Scudder Bond
Emerging Markets Other
___% Warburg Pincus Emerging ___%________________________
Markets ___%________________________
___%________________________
Speciality Stock ___%________________________
___% Kemper Technology ___%________________________
___% Dreyfus Socially
Responsible Growth MVA Guarantee Period
($5,000 Min.)
Balanced ___%____________________year
___% Kemper Total Return ___%____________________year
___% Janus Aspen Series Balanced ___%____________________year
___%____________________year
Miscellaneous Fixed Income
___% Kemper High Yield DCA Account (Complete DCA form)
___% Kemper Money Market ___%__________________months
___%__________________months
<PAGE> 2
6. Automatic Asset Rebalancing
- -------------------------------------------------------------------------------
MVA options excluded. Target allocations listed below should only be used if
different from original investment and DCA options.
/ / I elect Automatic Asset Rebalancing (AAR) among the subaccounts listed
below:
Every: / / 1 Month / / 3 Months / / 6 Months / / 12 Months
Beginning:_____________/_____________/_______________
TARGET ALLOCATIONS TOTAL ASSET ALLOCATION MUST EQUAL 100%.
Large Cap U.S. Stock Small/Mid Cap U.S. Stock
___% Kemper Growth ___% Kemper Small Cap Growth
___% Fidelity VIP Growth ___% American Century Value
___% Fidelity VIP Equity-Income ___% J.P. Morgan Small Company
___% Fidelity VIP II Index 500 ___% Alger American Small Cap
___% Fidelity VIP II Contrafund ___% Alger Mid Cap
___% Janus Aspen Series Growth ___% Janus Aspen Series
___% Alger American Growth Aggressive Growth
___% Scudder Capital Growth
___% American Century Income International Stock
& Growth ___% Janus Aspen Series
Worldwide Growth
___% Scudder International
U.S. Broad Fixed Income Balanced
___% Kemper Investment ___% Kemper Total Return
Grade Bond ___% Janus Aspen Series Balanced
___% Kemper Government
Securities Miscellaneous Fixed Income
___% Scudder Bond ___% Kemper High Yield
___% Kemper Money Market
Emerging Markets
___% Warburg Pincus Emerging
Markets
Speciality Stock
___% Kemper Technology
___% Dreyfus Socially
Responsible Growth
7. Sutiability (must be completed by IBS representatives)
- -------------------------------------------------------------------------------
Income
- -------------------------------------------------------------------------------
Net Worth (exclusive of home)
- -------------------------------------------------------------------------------
Tax Bracket Number of Dependents
- -------------------------------------------------------------------------------
Risk Factors (check one):
- -------------------------------------------------------------------------------
/ / Conservative / / Moderate / / Aggressive / / Speculative
- -------------------------------------------------------------------------------
Financial Objectives (check one):
/ / Long Term Growth / / Short Term Growth / / Income
/ / Tax Advantage / / Capital Preservation
- -------------------------------------------------------------------------------
Employer Name
- -------------------------------------------------------------------------------
Occupation
- -------------------------------------------------------------------------------
Is the contract owner associated with the NASD? / / Yes / / No
If so, how?
- -------------------------------------------------------------------------------
Is the contract owner associated with the broker/dealer? / / Yes / / No
If so, how?
- -------------------------------------------------------------------------------
MUST BE COMPLETED BY NON-IBS REPRESENTATIVES:
/ / Suitability information has been obtained and filed with the broker/dealer.
8. Account Access Authorization
- -------------------------------------------------------------------------------
The owner of this contract has access to his/her contract via our interactive
voice response system, client services representatives, and our Internet service
system. Check all that apply.
/ / I hereby authorize the servicing sales representative to make changes to my
account on my behalf without additional written authorization.
/ / I hereby authorize __________________________ to make changes to my account.
/ / I hereby authorize my spouse ________________ to make changes to my account.
9. Annuitization
- -------------------------------------------------------------------------------
The annuity date will be the annuitant's 95th birthday unless another year is
requested here:___________________________________________________________
10. Replacement Compliance
- -------------------------------------------------------------------------------
Is this annuity intended to replace or change any existing life
insurance or annuity? / / Yes / / No
11. Special Requests
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE> 3
12. Contribution Information
- -------------------------------------------------------------------------------
Are you applying for scheduled periodic payments through payroll
deduction? / / Yes / / No
How much will you be contributing each payroll period? $_______________________
Gross Annual Salary $ _________________________________________________________
Employer Contribution (if applicable)
Dollar or % amount each payroll period ________________________________________
Frequency of employer contribution_____________________________________________
13. Signatures
- -------------------------------------------------------------------------------
Receipt is acknowledged of the current prospectus for Kemper Investors Fund
and the KILICO Variable Annuity Separate Account. Payments and values provided
by the contract, when based on investment experience of the subaccounts, are
variable and are not guaranteed as to dollar amount.
/ / If you want a Statement of Additional information, please check here.
I agree that the above statements are true and correct to the best of my
knowledge and belief and are made as a basis for my application. By signing
this application, I agree to have my prospectus updates, semi-annual and
annual reports delivered on a IBM system compatible diskette.
Otherwise, if I do not consent to diskette delivery, I elect one of the
following:
/ / I wish to have my prospectus updates, semi-annual and annual
reports delivered by e-mail. I understand I may incur on-line charges.
My e-mail address is:______________________________________________________
(please inform KILICO of any e-mail address changes.)
/ / I wish to have paper copies of prospectus updates, semi-annual and annual
reports mailed to me.
I understand I may revoke my electronic consent at anytime by calling
1-888-477-9700.
Application made at (City) (State) (Date)
- -------------------------------------------------------------------------------
Signature of Owner
- -------------------------------------------------------------------------------
14. Agent's Report
- -------------------------------------------------------------------------------
Is the annuity intended to change or replace any existing life
insurance or annuity? / / Yes / / No
If yes, please indicate annuity or life insurance below, enter the
qualification code and submit any required replacement forms.
/ / Life Insurance / / Annuity Qualification Code _________________________
Signature of Agent Daytime Phone
- -------------------------------------------------------------------------------
Agent Name Agent Number
- -------------------------------------------------------------------------------
Name and Address of Firm
- -------------------------------------------------------------------------------
City State Zip
- -------------------------------------------------------------------------------
15. Plan Information (to be completed by agent)
- -------------------------------------------------------------------------------
Is this application for an existing ZKL group?
/ / Yes SUPPLY GROUP NUMBER _____ BILL NUMBER _____
/ / No PLEASE ALSO COMPLETE THE EMPLOYER INFORMATION AND BILLING REQUEST
FORM ZKL-6571.
<PAGE> 1
EXHIBIT 4(c)
[ZURICH KEMPER LOGO]
KEMPER INVESTORS LIFE INSURANCE COMPANY (KILICO)
1 Kemper Drive, Long Grove, Illinois 60049-0001 telephone 800-621-5001
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GROUP MASTER APPLICATION
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Application
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Application for
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Name of Product
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Name of Group
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Principal Office Street Address
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City State Zip
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Benefits and payments provided by this contract, when based on Guarantee Period
Values, may increase or decrease in accordance with the Market Value Adjustment
formula stated in the contract schedule.
Benefits, payments and values provided by this contract, when based upon the
investment experience of the subaccounts, are variable and are not guaranteed
as to dollar amount. Refer to the variable account and annuity period provisions
for a determination of any variable benefits.
Signatures
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Signature of Authorized Representative
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Typed Name
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Title
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Signed at (City, State and Zip)
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Date
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Witnessed by
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Licensed Agent
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