KILICO VARIABLE ANNUITY SEPARATE ACCOUNT, 485BPOS, 1995-09-14

KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
485BPOS, 1995-09-14

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<PAGE> 1

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

COMMISSION FILE NOS. 2-72671
811-3199
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--------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM N-4

<TABLE>
<S> <C>
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933 / /

Pre-Effective Amendment No. / /

Post-Effective Amendment No. 23 /X/
and
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940 / /

Amendment No. 34 /X/
</TABLE>

KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
(EXACT NAME OF REGISTRANT)

KEMPER INVESTORS LIFE INSURANCE
COMPANY
(NAME OF INSURANCE COMPANY)

<TABLE>
<S> <C>
1 Kemper Drive, Long Grove, Illinois 60049
(Address of Insurance Company's Principal Executive Offices) (Zip Code)
Insurance Company's Telephone Number, including Area Code: (708) 320-4506
</TABLE>

Debra P. Rezabek, Esq.
1 Kemper Drive
Long Grove, Illinois 60049
(Name and Address of Agent for Service)

COPIES TO:

FRANK JULIAN, ESQ. JOAN E. BOROS, ESQ.
KEMPER INVESTORS LIFE INSURANCE COMPANY KATTEN MUCHIN & ZAVIS
KLIC LEGAL T-1 1025 THOMAS JEFFERSON STREET, N.W.
1 KEMPER DRIVE WASHINGTON, D.C. 20007
LONG GROVE, ILLINOIS 60049

Approximate Date of Proposed Public Offering: Continuous

It is proposed that this filing will become effective (check appropriate box)

/ / immediately upon filing pursuant to paragraph (b) of Rule 485

/X/ on September 15, 1995 pursuant to paragraph (b) of Rule 485

/ / 60 days after filing pursuant to paragraph (a)(i) of Rule 485

/ / on (date) pursuant to paragraph (a)(i) of Rule 485

/ / 75 days after filing pursuant to paragraph (a)(ii)

/ / on (date) pursuant to paragraph (a)(ii) of Rule 485

If appropriate, check the following box:

/ / This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.

The Registrant has registered an indefinite number of securities pursuant
to Section 24(f) of the 1940 Act. The Rule 24f-2 Notice for the Registrant's
most recent fiscal year was filed on February 27, 1995.
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<PAGE> 2

CROSS-REFERENCE SHEET
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT

REGISTRATION STATEMENT ON FORM N-4

<TABLE>
<CAPTION>
N-4 ITEM NO. LOCATION IN PROSPECTUS
------------- ----------------------
<S> <C> <C>
PART A
Item 1. Cover Page........................... Cover Page
Item 2. Definitions.......................... Definitions
Item 3. Synopsis............................. Summary; Summary of Expenses;
Example
Item 4. Condensed Financial Information...... Condensed Financial Information
Item 5. General Description of Registrant,
Depositor and Portfolio
Companies.......................... KILICO and the Separate Account; Fixed
Accumulation Options; Voting Rights
Item 6. Deductions and Expenses.............. Contract Charges and Expenses
Item 7. General Description of Variable
Annuity Contracts.................. The Contracts
Item 8. Annuity Period....................... The Annuity Period
Item 9. Death Benefit........................ The Annuity Period; The Accumulation
Period
Item 10. Purchases and Contract Value......... KILICO and the Separate Account; The
Contracts
Item 11. Redemptions.......................... The Contracts
Item 12. Taxes................................ Federal Income Taxes
Item 13. Legal Proceedings.................... Legal Proceedings
Item 14. Table of Contents of the Statement of
Additional Information............. Table of Contents
PART B
Item 15. Cover Page........................... Cover Page
Item 16. Table of Contents.................... Table of Contents
Item 17. General Information and History...... Not Applicable
Item 18. Services............................. Services to the Separate Account
Item 19. Purchase of Securities Being
Offered............................ Not Applicable
Item 20. Underwriters......................... Services to the Separate Account
Item 21. Calculation of Performance Data...... Performance Information of
Subaccounts
Item 22. Annuity Payments..................... Not Applicable
Item 23. Financial Statements................. Financial Statements
</TABLE>

PART C

Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C to this Registration Statement.
<PAGE> 3

SUPPLEMENT DATED SEPTEMBER 15, 1995

TO PROSPECTUS DATED MAY 1, 1995 FOR

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PERIODIC PAYMENT

VARIABLE ANNUITY CONTRACTS

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

KEMPER ADVANTAGE III

ISSUED BY

KEMPER INVESTORS LIFE INSURANCE COMPANY

Effective September 15, 1995, new Subaccounts are being added as investment
options under the Contracts. The new investment options are not available to all
Contract Owners. The new investment options are available only under Contracts
that are sold or serviced by broker-dealers that have entered into a selling
group agreement that authorizes the sale of Contracts with the new options.
Pending regulatory approval, the new options are not available in California.

The new Funds in which the Subaccounts invest are as follows:

JANUS ASPEN SERIES

Growth Portfolio

Aggressive Growth Portfolio

Worldwide Growth Portfolio

Balanced Portfolio

Short-Term Bond Portfolio

LEXINGTON NATURAL RESOURCES TRUST

LEXINGTON EMERGING MARKETS FUND

Prospectuses for the new Funds are attached to this Supplement.

The changes to the Prospectus follow with references to those parts of the
Prospectus that are modified by this Supplement.

All references in the Prospectus to the Fund are revised to refer to the Funds,
as appropriate.

INTRODUCTION

The second paragraph on the cover page of the Prospectus is revised to read as
follows:

"Purchase payments for the Contracts may be allocated to one or more of the
options under which Contract values accumulate on either a variable or
fixed basis. These options consist of the fourteen Subaccounts of the
Separate Account and the Fixed Accumulation Option of the General Account.
Each Subaccount invests in one of the Portfolios of the following
management investment companies; the Kemper Investors Fund which is managed
by Kemper Financial Services, Inc., the Janus Aspen Series which is managed
by Janus Capital Corporation and the Lexington Natural Resources Trust and
Lexington Emerging Markets Fund which are managed by Lexington Management
Corporation.

The Kemper Investors Fund currently consists of the following Portfolios:
Money Market, Total Return, High Yield, Equity, Government Securities,
International and Small Capitalization Equity ("Small Cap"). The following
Portfolios of the Janus Aspen Series are available under the Contracts:
Growth, Aggressive Growth, Worldwide Growth, Balanced and Short-Term Bond.
Lexington Natural Resources Trust and Lexington Emerging Markets Fund each
currently consist of only one Portfolio.

Subaccounts and Portfolios may be added in the future. Contract values
allocated to any of the Subaccounts will vary to reflect the investment
performance of the corresponding Portfolio. The accompanying Prospectus for
the Funds describe the investment objectives and the attendant risks of the
Funds. Contract values allocated to the Fixed Accumulation Option will
accumulate on a fixed basis."

<PAGE> 4

The fourth paragraph on the cover page of the Prospectus is revised to read as
follows:

"THIS PROSPECTUS IS VALID ONLY IF ACCOMPANIED OR PRECEDED BY A CURRENT
PROSPECTUS FOR THE KEMPER INVESTORS FUND, JANUS ASPEN SERIES, LEXINGTON
NATURAL RESOURCES TRUST AND LEXINGTON EMERGING MARKETS FUND. ALL
PROSPECTUSES SHOULD BE READ AND RETAINED FOR FUTURE REFERENCE."

DEFINITIONS

The definitions of "Fund" and "Subaccounts" on pages 1 and 2 of the Prospectus
are revised and a new definition of "Portfolio" is added as follows:

"FUND OR FUNDS--The Kemper Investors Fund, the Janus Aspen Series, the
Lexington Natural Resources Trust and the Lexington Emerging Markets Fund,
including any Portfolios thereunder."

"PORTFOLIO--A series of a Fund with its own objective and policies, which
represents shares of beneficial interest in a separate portfolio of
securities and other assets. Portfolio is sometimes referred to herein as a
Fund."

"SUBACCOUNTS--The fourteen subdivisions of the Separate Account, the assets
of which consist solely of shares of the corresponding Portfolios."

SUMMARY

The third paragraph under "Summary" on page 2 of the Prospectus is revised to
read as follows:

"KILICO provides for variable accumulations and benefits under the
Contracts by crediting purchase payments to one or more Subaccounts of the
Separate Account as selected by the Contract Owner. Each Subaccount invests
in one of the following corresponding Funds: the Kemper Investors Fund's
Money Market, Total Return, High Yield, Equity, Government Securities,
International and Small Cap Portfolios; the Janus Aspen Series' Growth,
Aggressive Growth, Worldwide Growth, Balanced and Short-Term Bond
Portfolios; the Lexington Natural Resources Trust; and the Lexington
Emerging Markets Fund. (See "The Funds" page 7.) The Contract Values
allocated to the Separate Account will vary with the investment performance
of the Portfolios and Funds selected by the Contract Owner."

The second sentence of the fourth paragraph appearing on page 3 is revised to
read as follows:

"In addition, the advisers of the Funds deduct varying charges against the
assets of the Funds for providing investment advisory services. (See the
Funds' Prospectuses for such information.)"

S-2

<PAGE> 5

The Summary of Expenses and Example Tables appearing on page 4 are revised as
follows:

SUMMARY OF EXPENSES

<TABLE>
<S> <C>
CONTRACT OWNER TRANSACTION EXPENSES
Sales Load Imposed on Purchases (as a percentage of purchase payments) ................................. None
Contingent Deferred Sales Load (as apercentage of amount surrendered)*

Year of Withdrawal After Purchase
---------------------------------
First year .................................................... 6%
Second year ................................................... 5%
Third year .................................................... 4%
Fourth year ................................................... 3%
Fifth year .................................................... 2%
Sixth year .................................................... 1%
Seventh year and following ................................... 0%
Surrender Fees ......................................................................................... None
Exchange Fee ......................................................................................... None
ANNUAL CONTRACT FEE (Records Maintenance Charge)** ...................................................... $36
</TABLE>

SEPARATE ACCOUNT ANNUAL EXPENSES

(as a percentage of average daily account value)

<TABLE>
<S> <C>
Mortality and Expense Risk 1.00%
Administration .......................... .30%
Account Fees and Expenses 0%
Total Separate Account
Annual Expenses ...................... 1.30%

</TABLE>

FUND ANNUAL EXPENSES

(as percentage of each Portfolio's average net assets for the period ended
December 31, 1994)

<TABLE>
<CAPTION>
KINF KINF KINF
MONEY TOTAL KINF KINF GOVERNMENT KINF KINF
MARKET RETURN HIGH YIELD EQUITY SECURITIES INTERNATIONAL SMALL CAP
--------- --------- --------- --------- ---------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Management Fees ...... 50% .55% .60% .60% .55% .75% .65%
Other Expenses ...... .03 .06 .05 .06 .09 .18 .60
--- --- --- --- --- --- ----
Total Portfolio
Annual Expenses ... .53% .61% .65% .66% .64% .93% 1.25%
=== === === === === === ====

<CAPTION>
JANUS JANUS JANUS LEXINGTON LEXINGTON
JANUS AGGRESIVE WORLDWIDE JANUS SHORT-TERM NATURAL EMERGING
GROWTH**** GROWTH**** GROWTH**** BALANCED**** BOND**** RESOURCES MARKETS
---------- ---------- ---------- ----------- ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Management Fees ...... 66% .77% .69% .83% 0% 1.00% .85%
Other Expenses ...... .22 .28 .49 .74 .65 .55 .45
--- ---- ---- ---- --- ---- ----
Total Portfolio
Annual Expenses ... .88% 1.05% 1.18% 1.57% .65% 1.55% 1.30%
=== ==== ==== ==== === ==== ====

</TABLE>

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EXAMPLE

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<TABLE>
<CAPTION>
Subaccount 1 year 3 years 5 years 10 years
---------- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C>
If you surrender your contract at the end of the applicable KINF Money Market $ 83 $ 108 $ 134 $239
time period: KINF Total Return 84 111 138 248
You would pay the following expenses on a $1,000 KINF High Yield 84 112 140 252
investment, assuming 5% annual return on assets: KINF Equity 84 112 141 253
KINF Government Securities 84 111 139 250
KINF International 87 120 154 281
KINF Small Cap 90 130 -- --
Janus Growth 86 119 -- --
Janus Aggressive Growth 88 124 -- --
Janus Worldwide Growth 89 128 -- --
Janus Balanced 93 139 -- --
Janus Short-Term Bond 84 112 -- --
Lexington Natural Resources 93 138 -- --
Lexington Emerging Markets 90 131 -- --
If you do not surrender your contract: KINF Money Market 21 65 111 239
You would pay the following expenses KINF Total Return 22 67 115 248
on a $1,000 investment, assuming KINF High Yield 22 69 117 252
5% annual return on assets: KINF Equity 22 69 118 253
KINF Government Securities 22 68 116 250
KINF International 25 77 132 281
KINF Small Cap 28 87 -- --
Janus Growth 25 76 -- --
Janus Aggressive Growth 26 81 -- --
Janus Worldwide Growth 28 85 -- --
Janus Balanced 32 97 -- --
Janus Short-Term Bond 22 69 -- --
Lexington Natural Resources 31 96 -- --
Lexington Emerging Markets 29 88 -- --
</TABLE>

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

The purpose of the preceding table is to assist Contract Owners in understanding
the various costs and expenses that a Contract Owner in a Subaccount will bear
directly or indirectly. The table reflects expenses of both the Separate Account
and the Fund. THE EXAMPLE SHOULD NOT BE CONSIDERED TO BE A REPRESENTATION OF
PAST OR FUTURE EXPENSES AND DOES NOT INCLUDE THE DEDUCTION OF STATE PREMIUM
TAXES, WHICH MAY BE ASSESSED BEFORE OR UPON ANNUITIZATION. ACTUAL EXPENSES MAY
BE GREATER OR LESS THAN THOSE SHOWN. 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. See "Contract Charges and Expenses" for more information regarding the
various costs and expenses.

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

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

*** Annualized based on fund inception of March 30, 1994.

**** The expense figures shown are net of certain expense waivers from Janus
Capital Corporation. Without such waivers, Management Fees, Other Expenses
and Total Portfolio Operating Expenses for the Portfolios for the fiscal
year ended December 31, 1994 were: 1.00%, .22% and 1.22%, respectively, for
the Growth Portfolio; 1.00%, .28% and 1.28%, respectively, for the
Aggressive Growth Portfolio; 1.00%, .49% and 1.49%, respectively, for the
Worldwide Growth Portfolio; 1.00%, .74% and 1.74%, respectively, for the
Balanced Portfolio; and 0.65%, 0.75% and 1.40%, respectively, for the
Short-Term Bond Portfolio. See the prospectus and Statement of Additional
Information of Janus Aspen Series for a description of these waivers.

S-3

<PAGE> 6

THE FUNDS

The section titled "The Fund" beginning on page 7 of the Prospectus is revised
to read as follows:

"The Funds

The Separate Account invests in shares of the Kemper Investors Fund, the
Janus Aspen Series, the Lexington Natural Resources Trust and the Lexington
Emerging Markets Fund, open-end, management investment companies.
Registration of the Funds by the Securities and Exchange Commission does
not involve supervision of their management, investment practices or
policies by the Commission. The Funds are designed to provide investment
vehicles for variable life insurance and variable annuity contracts and, in
the case of the Janus Aspen Series, certain qualified retirement plans.
Shares of the Funds are sold only to insurance company separate accounts
and qualified retirement plans. In addition to selling shares to separate
accounts of KILICO and its affiliates, shares of the Funds may be sold to
separate accounts of insurance companies not affiliated with KILICO. It is
conceivable that in the future it may be disadvantageous for variable life
insurance separate accounts and variable annuity separate accounts of
companies unaffiliated with KILICO, or for variable life insurance separate
accounts, variable annuity separate accounts and qualified retirement plans
to invest simultaneously in the Funds. Currently, neither KILICO nor the
Funds foresee any such disadvantages to variable life insurance owners,
variable annuity owners or qualified retirement plans. Management of the
Funds has an obligation to monitor events to identify material conflicts
between such owners and determine what action, if any, should be taken. In
addition, if KILICO believes that a Fund's response to any of those events
or conflicts insufficiently protects the owners, it will take appropriate
action on its own.

A Fund may consist of separate Portfolios. The assets of each Portfolio are
held separate from the assets of the other Portfolios, and each Portfolio
has its own distinct investment objective and policies. Each Portfolio
operates as a separate investment fund, and the investment performance of
one Portfolio has no effect on the investment performance of any other
Portfolio.

The investment objectives and policies of the Funds and their Portfolios
are summarized below:

KEMPER INVESTORS FUND

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

TOTAL RETURN PORTFOLIO: This Portfolio seeks a high total return, a
combination of income and capital appreciation, by investing in a
combination of debt securities and common stocks. The Portfolio's
investments will normally consist of fixed-income and equity securities.
Fixed-income securities will include bonds and other debt securities and
preferred stocks, some of which may have a call on common stocks through
attached warrants or a conversion privilege. Equity investments normally
will consist of common stocks and securities convertible into or
exchangeable for common stocks; however the Portfolio may also make private
placement investments (which are normally restricted securities).

HIGH YIELD PORTFOLIO: This Portfolio seeks to provide a high level of
current income by investing in fixed-income securities, including lower
rated and unrated securities which may entail relatively greater risk of
loss of income or principal but may offer a current yield or yield to
maturity which is higher. Lower and unrated securities, which are sometimes
referred to by the popular press as "junk bonds," have widely varying
characteristics and quality. The Portfolio invests in U.S. Government,
corporate, and other notes and bonds paying high current income.

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

S-4

<PAGE> 7

securities other than U.S. Government securities, and will engage in
options and financial futures transactions. The Portfolio may purchase or
sell portfolio securities on a when-issued or delayed delivery basis. The
Portfolio's current return is sought from interest income and net
short-term gains on securities and options and futures transactions.

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

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

JANUS ASPEN SERIES

GROWTH PORTFOLIO: This Portfolio seeks long-term growth of capital by
investing primarily in common stocks, with an emphasis on companies with
larger market capitalizations.

AGGRESSIVE GROWTH PORTFOLIO: This Portfolio is a nondiversified portfolio
that seeks long-term growth of capital by investing primarily in common
stocks. The common stocks held by the Portfolio will normally have an
average market capitalization between $1 billion and $5 billion.

WORLDWIDE GROWTH PORTFOLIO: This Portfolio seeks long-term growth of
capital by investing primarily in common stocks of foreign and domestic
companies.

BALANCED PORTFOLIO: This Portfolio seeks long-term growth of capital
balanced by current income. The Portfolio normally invests 40-60% of its
assets in equity securities selected for their growth potential and 40-60%
in fixed-income securities.

SHORT-TERM BOND PORTFOLIO: This Portfolio seeks a high level of current
income while minimizing interest rate risk by investing in shorter term
fixed-income securities. Its average-weighted maturity is normally less
than three years.

LEXINGTON NATURAL RESOURCES TRUST

This Fund seeks long-term growth of capital through investment primarily in
common stocks of companies that own or develop natural resources and other
basic commodities, or supply goods and services to such companies. Current
income will not be a factor. Total return will consist of capital
appreciation.

LEXINGTON EMERGING MARKETS FUND

This Fund seeks long-term growth of capital primarily through investment in
equity securities of companies domiciled in, or doing business in emerging
countries and emerging markets.

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

There is no assurance that any of the Funds or Portfolios will achieve its
stated objective. More detailed information, including a description of
risks involved in investing in each of the Subaccounts that invest in the
Funds, may be found in the corresponding prospectus for the Fund, which
must accompany or precede this Prospectus, and the Fund's Statement of
Additional Information available upon request. Read the prospectus
carefully before investing.

Kemper Financial Services, Inc., an affiliate of KILICO is the investment
adviser for the seven Portfolios of the Kemper Investors Fund. Janus
Capital Corporation is the investment adviser for the five available
Portfolios of the Janus Aspen Series. Lexington Management Corporation is
the investment adviser for the Lexington Natural Resources Trust and the
Lexington Emerging Markets Fund. The investment advisers are paid fees for
their services by the Funds they manage. KILICO 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.

S-5

<PAGE> 8

For their advisory services to the Portfolios, the advisers receive
compensation at the following rates:

KEMPER INVESTORS FUND

Kemper Financial Services, Inc. receives compensation monthly at annual
rates equal to .50 of 1%, .55 of 1%, .60 of 1%, .60 of 1%, .55 of 1%, .75
of 1% and .65 of 1% of the average daily net asset values of the Money
Market Portfolio, the Total Return Portfolio, the High Yield Portfolio, the
Equity Portfolio, the Government Securities Portfolio, the International
Portfolio, and the Small Cap Portfolio, respectively.

JANUS ASPEN SERIES

Janus Capital Corporation receives a monthly advisory fee for the Growth
Portfolio, the Aggressive Growth Portfolio, the Worldwide Growth Portfolio
and the Balanced Portfolio based on the following schedule (expressed as an
annual rate):

<TABLE>
<CAPTION>
AVERAGE DAILY NET
ASSETS OF PORTFOLIO ANNUAL RATE
------------------- -----------
<S> <C>
First $30,000,000..................... 1.00%
Next $270,000,000..................... .75%
Next $200,000,000..................... .70%
Over $500,000,000..................... .65%
</TABLE>

However, Janus Capital Corporation has agreed to reduce each of the above
Portfolios' advisory fees to the extent that such fee exceeds the effective
rate of a fund managed by Janus Capital Corporation with similar investment
objective and policies.

Janus Capital Corporation receives a monthly advisory fee for the
Short-Term Bond Portfolio based on the following advisory fee schedule
(expressed as an annual rate): .65% of the first $300,000,000 of the
average daily net assets plus .55% of the average daily net assets in
excess of $300,000,000.

LEXINGTON NATURAL RESOURCES TRUST

Lexington Management Corporation receives a monthly investment advisory fee
at the annual rate of 1.00% of the Fund's average net assets.

LEXINGTON EMERGING MARKETS FUND

Lexington Management Corporation receives a monthly investment advisory fee
at the annual rate of 0.85% of the Fund's average net assets.

PERFORMANCE INFORMATION

The third sentence appearing under Performance Information on page 9 of the
Prospectus is revised to read as follows:

"The High Yield Subaccount, the Government Securities Subaccount and the
Janus Short-Term Bond Subaccount may also advertise 'yield'."

The following is added on page 10 of the Prospectus to the end of the paragraph
appearing under Performance Information:

"In addition, the Subaccounts may provide comparative information with
regard to the Standard & Poor's Midcap Index, Lehman Brothers
Government/Corporate 1-3 Year Bond Index, Lehman Brothers Long
Government/Corporate Bond Index, Russell 2000 Index and the NASDAQ
Composite, U.S. Treasury Obligations and the Morgan Stanley International
World Index and may provide Ibbotson Associates or Micropad performance
analysis rankings.

S-6

<PAGE> 9

DISTRIBUTION OF CONTRACTS

The section titled "Distribution of Contracts" appearing on page 22 of the
Prospectus is amended by adding the following sentence to the end thereof:

"The investment options described in the September 15, 1995 Supplement are
not available to all Contract Owners. These investment options are
available only under Contracts that are sold or serviced by broker-dealers
that have entered into a selling group agreement that authorizes the sale
of Contracts with these options."

S-7

<PAGE> 10

KEMPER ADVANTAGE III
PROSPECTUS - MAY 1, 1995

THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY SECURITIES IN ANY STATE, TO ANY PERSON, TO WHOM IT IS NOT LAWFUL
TO MAKE SUCH AN OFFER IN SUCH STATE. A FIXED AND VARIABLE ANNUITY ISSUED BY
KEMPER INVESTORS LIFE INSURANCE COMPANY.
<PAGE> 11

PROSPECTUS--MAY 1, 1995
--------------------------------------------------------------------------------

PERIODIC PAYMENT

VARIABLE ANNUITY CONTRACTS
--------------------------------------------------------------------------------

ISSUED BY
KEMPER INVESTORS LIFE INSURANCE COMPANY
IN CONNECTION WITH
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
HOME OFFICE: 1 KEMPER DRIVE, LONG GROVE, ILLINOIS 60049 (708) 320-4500

The types of Periodic Payment Deferred Variable Annuity Contracts ("Periodic
Payment Contract" or "Contracts") offered by this Prospectus are issued by
Kemper Investors Life Insurance Company ("KILICO") and are designed to provide
annuity benefits under retirement plans which may or may not qualify for the
Federal tax advantages available under Section 401, 403, 408 or 457 of the
Internal Revenue Code of 1986, as amended.

Purchase payments for the Contracts may be allocated to one or more of the
investment options under which Contract values accumulate on either a variable
or fixed basis. These options consist of the seven Subaccounts of the Separate
Account and the Fixed Accumulation Option of the General Account. Each
Subaccount invests in one of the portfolios of the Kemper Investors Fund (the
"Fund") which is managed by Kemper Financial Services, Inc. ("KFS"). The Fund
currently consists of the following Portfolios: Money Market, Total Return, High
Yield, Equity, Government Securities, International and Small Capitalization
Equity ("Small Cap"). Subaccounts and Portfolios may be added in the future.
Contract values allocated to any of the Subaccounts will vary to reflect the
investment performance of the corresponding Portfolio. The accompanying
Prospectus for the Fund describes the investment objectives and the attendant
risks of the Portfolios of the Fund. Contract values allocated to the Fixed
Accumulation Option will accumulate on a fixed basis.

This Prospectus is designed to provide you with certain essential information
that you should know before investing. A Statement of Additional Information
dated May 1, 1995 has been filed with the Securities and Exchange Commission and
is incorporated herein by reference. A Statement of Additional Information is
available upon request from KILICO by writing or calling the address or
telephone number listed above. A table of contents for the Statement of
Additional Information is on page 25 of this Prospectus.

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

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE> 12

TABLE OF CONTENTS
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Page
-----
<S> <C>
DEFINITIONS................................................................................. 1
SUMMARY..................................................................................... 2
SUMMARY OF EXPENSES......................................................................... 4
CONDENSED FINANCIAL INFORMATION............................................................. 5
KILICO, THE SEPARATE ACCOUNT AND THE FUND................................................... 7
FIXED ACCUMULATION OPTION................................................................... 10
THE CONTRACTS............................................................................... 10
CONTRACT CHARGES AND EXPENSES............................................................... 14
THE ANNUITY PERIOD.......................................................................... 16
FEDERAL INCOME TAXES........................................................................ 19
DISTRIBUTION OF CONTRACTS................................................................... 22
VOTING RIGHTS............................................................................... 22
REPORTS TO CONTRACT OWNERS AND INQUIRIES.................................................... 22
DOLLAR COST AVERAGING....................................................................... 23
SYSTEMATIC WITHDRAWAL PLAN.................................................................. 23
PROVISIONS OF PRIOR CONTRACTS............................................................... 23
LEGAL PROCEEDINGS........................................................................... 25
TABLE OF CONTENTS--STATEMENT OF ADDITIONAL INFORMATION...................................... 25
</TABLE>
<PAGE> 13

DEFINITIONS

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

ACCUMULATION PERIOD--The period between the Date of Issue of a Contract and
the Annuity Date.

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

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

ANNUITY DATE--The date on which annuity payments are to commence.

ANNUITY OPTION--One of several forms in which annuity payments can be made.

ANNUITY PERIOD--The period starting on the Annuity Date.

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

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

CONTRACT--A Variable Annuity Contract offered by this Prospectus. With
respect to a Contract issued on a group basis, the certificate issued to an
individual shall be deemed for the purposes of this Prospectus to be a
Contract.

CONTRACT OWNER OR OWNER--The person designated in the Contract as having
the privileges of ownership defined in the Contract.

CONTRACT VALUE--The sum of the values of the Owner's Contract interest in
the Subaccount(s) of the Separate Account and the General Account.

CONTRACT YEAR--Period between anniversaries of the Date of Issue of a
Contract, or with respect to a Contract issued on a group basis, the period
between anniversaries of the date of issue of a certificate.

CONTRACT QUARTER--Periods between quarterly anniversaries of the Date of
Issue of the Contract, or with respect to a Contract issued on a group
basis, the period between quarterly anniversaries of the date of issue of a
certificate.

CONTRIBUTION YEAR--Each Contract Year in which a Purchase Payment is made
and each succeeding year measured from the end of the Contract Year during
which such Purchase Payment was made. For example, if a Contract Owner
makes an initial payment of $15,000 and then makes a subsequent payment of
$10,000 during the fourth Contract Year, the fifth Contract Year will be
the fifth Contribution Year for the purpose of Accumulation Units
attributable to the initial payment and the second Contribution Year with
respect to Accumulation Units attributable to the subsequent $10,000
payment.

DATE OF ISSUE--The date on which the first Contract Year commences.

DEBT--The principal of any outstanding loan from the General Account
Contract Value, plus any accrued interest. Requests for loans must be made
in writing to KILICO.

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

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

GENERAL ACCOUNT--All the assets of KILICO other than those allocated to any
Separate Account. KILICO guarantees a minimum rate of interest on Purchase
Payments allocated to the General Account.

GENERAL ACCOUNT CONTRACT VALUE--The value of the Owner's Contract interest
in the General Account.

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

NON-QUALIFIED PLAN CONTRACT--A Contract issued in connection with a
retirement plan which does not receive favorable tax treatment under
Section 401, 403, 408 or 457 of the Internal Revenue Code.

PURCHASE PAYMENTS--Amounts paid to KILICO by or on behalf of a Contract
Owner.

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

1
<PAGE> 14

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

SEPARATE ACCOUNT CONTRACT VALUE--The sum of the Owner's Contract interest
in the Subaccount(s).

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

SUBACCOUNT VALUE--The value of the Owner's Contract interest in each
Subaccount.

UNITHOLDER--The person holding the voting rights with respect to an
Accumulation or Annuity Unit.

VALUATION DATE--Each day when the New York Stock Exchange is open for
trading, as well as each day otherwise required. (See "Accumulation Unit
Value.")

VALUATION PERIOD--The interval of time between two consecutive Valuation
Dates.

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

WITHDRAWAL CHARGE--The "contingent deferred sales charge" assessed against
certain withdrawals of Accumulation Units in their first six Contribution
Years or against certain annuitization of Accumulation Units in their first
six Contribution Years.

WITHDRAWAL VALUE--Contract Value less Debt, and any premium tax payable if
the Contract is being annuitized, minus any Withdrawal Charge applicable to
that Contract.

SUMMARY

The Contracts described in the Prospectus provide a way to invest on a
tax-deferred basis and to receive annuity benefits in accordance with the
annuity option selected and the retirement plan under which the Contract has
been purchased. The Prospectus offers both Non-Qualified Plan and Qualified Plan
Contracts. KILICO makes several underlying investment options, including seven
variable Subaccounts and a Fixed Accumulation Option, available for the Contract
Owner to pursue his or her investment objectives.

The minimum initial Purchase Payment for a Non-Qualified Plan Contract is $2,500
and the minimum subsequent payment is $500. The minimum Purchase Payment for a
Qualified Plan Contract is $50. However, so long as annualized contribution
amounts from a payroll or salary deduction plan are equal to or greater than
$600, a periodic payment for a Qualified Plan Contract under $50 will be
accepted. For a Non-Qualified Plan Contract a minimum of $500 in Contract Value
must be allocated to an investment option before another investment option can
be selected. For a Qualified Plan Contract, as long as contribution amounts to a
new investment option from a payroll or salary reduction plan are equal to or
greater than $50 per month, another such investment option may be selected. The
maximum Purchase Payment for a Qualified Plan Contract is the maximum permitted
under the plan pursuant to which the Contract is issued. (See "The Contracts,"
page 10.)

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

KILICO also provides for fixed accumulations and benefits under the Contracts in
the Fixed Accumulation Option of the General Account. Any portion of the
purchase payment allocated to the Fixed Accumulation Option is credited with
interest daily at a rate periodically declared by KILICO in its sole discretion,
but not less than 3%. (See "Fixed Accumulation Option," page 10.)

2
<PAGE> 15

The investment risk under the Contracts is borne by the Contract Owner, except
to the extent that Contract Values are allocated to the Fixed Accumulation
Option and are guaranteed to earn at least 3% interest.

Transfers between Subaccounts are permitted before and after annuitization, if
allowed by the applicable retirement plan and subject to certain limitations.
Restrictions apply to transfers out of the Fixed Accumulation Option. (See
"Transfer During Accumulation Period" and "Transfer During Annuity Period,"
pages 12 and 17, respectively.)

No sales charge is deducted from any Purchase Payment. A Contract Owner may
withdraw up to 10% of the Contract Value less Debt in any Contract Year without
assessment of any charge. If the Contract Owner withdraws an amount in excess of
10% of the Contract Value less Debt in any Contract Year, the amount withdrawn
in excess of 10% is subject to a contingent deferred sales charge ("Withdrawal
Charge"). The Withdrawal Charge starts at 6% in the first Contribution Year and
reduces by 1% each Contribution Year so that there is no charge in the seventh
and later Contribution Years. (See "Withdrawal Charge," page 15.) The Withdrawal
Charge also applies at the annuitization of Accumulation Units in their sixth
Contribution Year or earlier, except as set forth under "Withdrawal Charge."
However, in no event shall the aggregate Withdrawal Charges assessed against a
Contract exceed 7.25% of the aggregate Purchase Payments made under the
Contract. Please note that adverse tax consequences may occur with respect to
certain withdrawals. (See "Tax Treatment of Withdrawals, Loans and Assignments,"
page 20.)

KILICO makes charges under the Contract for assuming the mortality and expense
risk and administrative expenses under the Contract, for records maintenance,
and for any applicable premium taxes. (See "Charges Against the Separate
Account," page 14.) In addition, KFS makes a charge against the assets of each
of the Portfolios for providing investment advisory services. (See the Fund
prospectus for such information).

The Contracts may be purchased in connection with retirement plans which qualify
either under Section 401 or 403(b) of the Internal Revenue Code of 1986, as
amended (the "Code") or as individual retirement account plans established under
Section 408 of the Code. The Contracts are also available in connection with
state and municipal deferred compensation plans and other entities qualified
under Section 457 of the Code and under other deferred compensation
arrangements, and are also offered under other retirement plans which may not
qualify for similar tax advantages. (See "Non-Qualified Plan Contracts," page 19
and "Qualified Plans," page 20.)

A Contract Owner has the right within the "free look" period (generally ten
days, subject to state variation) after receiving the Contract to cancel the
Contract by delivering or mailing it to KILICO. Upon receipt by KILICO, the
Contract will be cancelled and a refund will be made. The amount of the refund
will depend on the state in which the Contract is issued; however, it generally
will be an amount at least equal to the Contract Value. (See "The Contracts,"
page 10.)

3
<PAGE> 16

--------------------------------------------------------------------------------
SUMMARY OF EXPENSES
--------------------------------------------------------------------------------
CONTRACT OWNER TRANSACTION EXPENSES

<TABLE>
<CAPTION>
<S> <C>
Sales Load Imposed on Purchases (as a percentage of purchase payments)......................................... None
Contingent Deferred Sales Load (as a percentage of amount surrendered)*
Year of Withdrawal After Purchase
---------------------------------
First year...................................... 6%
Second year..................................... 5%
Third year...................................... 4%
Fourth year..................................... 3%
Fifth year...................................... 2%
Sixth year...................................... 1%
Seventh year and following...................... 0%
Surrender Fees................................................................................................. None
Exchange Fee................................................................................................... None
ANNUAL CONTRACT FEE (Records Maintenance Charge)**............................................................. $36
</TABLE>

<TABLE>
<CAPTION>
SEPARATE ACCOUNT ANNUAL EXPENSES
(as a percentage of average daily account value)

<S> <C>
Mortality and Expense Risk... 1.00%
Administration............... .30%
Account Fees and Expenses.... 0%
Total Separate Account
Annual Expenses............ 1.30%
</TABLE>

FUND ANNUAL EXPENSES
(as percentage of each Portfolio's average net assets)

<TABLE>
<CAPTION>
MONEY TOTAL GOVERNMENT
MARKET RETURN HIGH YIELD EQUITY SECURITIES INTERNATIONAL SMALL CAP
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
--------- --------- ---------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Management Fees...... .50% .55% .60% .60% .55% .75% .65%
Other Expenses....... .03 .06 .05 .06 .09 .18 .60
Total Portfolio ------ ------ ------ ------ ------ ------ ------
Annual Expenses.... .53% .61% .65% .66% .64% .93% 1.25%
====== ====== ====== ====== ====== ====== ======
</TABLE>

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

<TABLE>
<CAPTION>
1 3 5 10
SUBACCOUNT YEAR YEARS YEARS YEARS
---------- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C>
If you surrender your contract at the end of the applicable Money Market $ 83 $ 108 $ 134 $ 239
time period: Total Return 84 111 138 248
You would pay the following expenses on a $1,000 High Yield 84 112 140 252
investment, assuming 5% annual return on assets: Equity 84 112 141 253
Government Securities 84 111 139 250
International 87 120 154 281
Small Cap 90 130 -- --

If you do not surrender your contract: Money Market 21 65 111 239
You would pay the following expenses Total Return 22 67 115 248
on a $1,000 investment, assuming High Yield 22 69 117 252
5% annual return on assets: Equity 22 69 118 253
Government Securities 22 68 116 250
International 25 77 132 281
Small Cap 28 87 -- --

</TABLE>

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

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

4
<PAGE> 17

CONDENSED FINANCIAL INFORMATION

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

Selected data for the last ten years for accumulation units outstanding as of
the year ended December 31st for each period:

<TABLE>
<CAPTION>
Flexible Payment Contracts
--------------------------------------------------------------------------------------------------
1994*** 1993 1992** 1991 1990 1989* 1988 1987 1986 1985
------ ------ ------ ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
TAX QUALIFIED
Accumulation unit value at
beginning of period
Money Market Subaccount... $2.051 2.014 1.966 1.875 1.751 1.621 1.523 1.443 1.367 1.277
Total Return Subaccount... 4.236 3.816 3.790 2.776 2.669 2.174 1.960 1.967 1.726 1.357
High Yield Subaccount..... 4.517 3.802 3.261 2.169 2.591 2.651 2.311 2.204 1.891 1.569
Equity Subaccount......... 3.520 3.102 3.025 1.916 1.923 1.515 1.524 1.513 1.399 1.129
Government Securities
Subaccount*.............. 1.388 1.317 1.256 1.101 1.013
International
Subaccount**............. 1.293 .983 1.000
Accumulation unit value at
end of period
Money Market Subaccount... $2.111 2.051 2.014 1.966 1.875 1.751 1.621 1.523 1.443 1.367
Total Return Subaccount... 3.796 4.236 3.816 3.790 2.776 2.669 2.174 1.960 1.967 1.726
High Yield Subaccount..... 4.372 4.517 3.802 3.261 2.169 2.591 2.651 2.311 2.204 1.891
Equity Subaccount......... 3.345 3.520 3.102 3.025 1.916 1.923 1.515 1.524 1.513 1.399
Government Securities
Subaccount*.............. 1.337 1.388 1.317 1.256 1.101 1.013
International
Subaccount**............. 1.234 1.293 .983
Small Cap Subaccount***... 1.033
Number of accumulation
units outstanding at end
of period
(000's omitted)
Money Market Subaccount... 733 844 1,081 1,720 2,388 2,417 3,127 4,394 4,455 5,801
Total Return Subaccount... 1299 1,511 1,859 1,924 2,355 2,888 3,652 5,546 5,673 5,687
High Yield Subaccount..... 532 657 670 723 885 1,587 2,104 1,854 3,402 2,353
Equity Subaccount......... 238 222 303 255 251 578 489 1,022 1,423 1,785
Government Securities
Subaccount*.............. 237 257 267 288 170 168
International
Subaccount**............. 625 284 91
Small Cap Subaccount***... 14

<CAPTION>
Periodic Payment Contracts
------------------------------------------------------------------------------------------------------
1994*** 1993 1992** 1991 1990 1989* 1988 1987 1986 1985
------- ------- ------- ------ ------ ------ ------ ------ ------ ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
TAX QUALIFIED
Accumulation unit value at
beginning of period
Money Market Subaccount... 1.981 1.950 1.910 1.827 1.712 1.589 1.498 1.423 1.352 1,266
Total Return Subaccount... 4.092 3.696 3.682 2.705 2.609 2.131 1.927 1.940 1.707 1,346
High Yield Subaccount..... 4.363 3.683 3.168 2.114 2.533 2.599 2.272 2.174 1.871 1,557
Equity Subaccount......... 3.417 3.020 2.954 1.876 1.889 1.492 1.506 1.500 1.390 1,126
Government Securities
Subaccount*.............. 1.371 1.305 1.248 1.097 1.012
International
Subaccount**............. 1.285 .980 1.000
Accumulation unit value at
end of period
Money Market Subaccount... 2.033 1.981 1.950 1.910 1.827 1.712 1.589 1.498 1.423 1,352
Total Return Subaccount... 3.656 4.092 3.696 3.682 2.705 2.609 2.131 1.927 1.940 1,707
High Yield Subaccount..... 4.210 4.363 3.683 3.168 2.114 2.533 2.599 2.272 2.174 1,871
Equity Subaccount......... 3.238 3.417 3.020 2.954 1.876 1.889 1.492 1.506 1.500 1,390
Government Securities
Subaccount*.............. 1.317 1.371 1.305 1.248 1.097 1.012
International
Subaccount**............. 1.223 1.285 .980
Small Cap Subaccount***... 1.031
Number of accumulation
units outstanding at end
of period
(000's omitted)
Money Market Subaccount... 15,997 14,891 12,605 14,973 21,581 14,185 16,953 20,296 10,799 6,774
Total Return Subaccount... 110,428 108,395 100,100 81,776 70,620 68,024 63,669 68,367 47,935 30,984
High Yield Subaccount..... 26,546 26,749 22,202 19,861 22,623 28,032 22,281 14,320 23,972 7,532
Equity Subaccount......... 58,845 50,289 42,078 28,271 22,451 19,163 17,780 17,000 10,278 13,170
Government Securities
Subaccount*.............. 24,332 31,898 28,368 23,035 12,918 7,794
International
Subaccount**............. 61,490 38,844 10,372
Small Cap Subaccount***... 8.304

</TABLE>

(Continued on next page)

5
<PAGE> 18

CONDENSED FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
Flexible Payment Contracts
--------------------------------------------------------------------------------------------------------
1994*** 1993 1992** 1991 1990 1989* 1988 1987 1986 1985
------ ------ ----- ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NON-TAX
QUALIFIED
Accumulation unit value at
beginning of period
Money Market Subaccount... $2.051 $2.014 1.966 1.875 1.751 1.621 1.523 1.443 1.367 1.277
Total Return Subaccount... 3.922 3.533 3.509 2.570 2.471 2.013 1.815 1.822 1.598 1.256
High Yield Subaccount..... 4.325 3.640 3.122 2.077 2.481 2.538 2.213 2.110 1.811 1.503
Equity Subaccount......... 3.508 3.091 3.014 1.909 1.917 1.509 1.518 1.508 1.394 1.125
Government Securities
Subaccount*.............. 1.388 1.317 1.256 1.101 1.013
International
Subaccount**............. 1.293 .983 1.000
Accumulation unit value at
end of period
Money Market Subaccount... $2.111 $2.051 2.014 1.966 1.875 1.751 1.621 1.523 1.443 1.367
Total Return Subaccount... 3.515 3.922 3.533 3.509 2.570 2.471 2.013 1.815 1.822 1.598
High Yield Subaccount..... 4.186 4.325 3.640 3.122 2.077 2.481 2.538 2.213 2.110 1.811
Equity Subaccount......... 3.334 3.508 3.091 3.014 1.909 1.917 1.509 1.518 1.508 1.394
Government Securities
Subaccount*.............. 1.337 1.388 1.317 1.256 1.101 1.013
International
Subaccount**............. 1.234 1.293 .983
Small Cap Subaccount***... 1.033
Number of accumulation
units outstanding at end
of period
(000's omitted)
Money Market Subaccount... 6,914 7,153 8,495 11,926 15,563 19,006 22,047 28,702 36,072 56,027
Total Return Subaccount... 6,613 8,042 8,853 9,586 10,291 12,244 15,032 20,329 21,648 22,557
High Yield Subaccount..... 3,621 4,517 4,876 5,240 6,652 11,895 14,871 16,264 25,551 24,295
Equity Subaccount......... 1,370 1,671 2,032 1,773 1,955 1,931 2,890 3,890 4,469 8,828
Government Securities
Subaccount*.............. 1,465 2,101 2,317 2,728 2,442 1,494
International
Subaccount**............. 2,450 1.712 1,041
Small Cap Subaccount***... 227

<CAPTION>
Periodic Payment Contracts
------------------------------------------------------------------------------------------------------

1994*** 1993 1992** 1991 1990 1989* 1988 1987 1986 1985

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

<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NON-TAX
QUALIFIED
Accumulation unit value at
beginning of period
Money Market Subaccount... 1.981 1.950 1.910 1.827 1.712 1.589 1.498 1.423 1.352 1.266

Total Return Subaccount... 3.812 3.444 3.431 2.520 2.431 1.986 1.796 1.808 1.591 1.254

High Yield Subaccount..... 4.250 3.588 3.086 2.059 2.467 2.532 2.214 2.117 1.822 1.517

Equity Subaccount......... 3.412 3.015 2.949 1.873 1.887 1.490 1.503 1.498 1.388 1.124

Government Securities
Subaccount*.............. 1.371 1.305 1.248 1.097 1.012
International
Subaccount**............. 1.285 .980 1.000
Accumulation unit value at
end of period
Money Market Subaccount... 2.033 1.981 1.950 1.910 1.827 1.712 1.589 1.498 1.423 1.352

Total Return Subaccount... 3.406 3.812 3.444 3.431 2.520 2.431 1.986 1.796 1.808 1.591

High Yield Subaccount..... 4.101 4.250 3.588 3.086 2.059 2.467 2.532 2.214 2.117 1.822

Equity Subaccount......... 3.233 3.412 3.015 2.949 1.873 1.887 1.490 1.503 1.498 1.388

Government Securities
Subaccount*.............. 1.317 1.371 1.305 1.248 1.097 1.012
International
Subaccount**............. 1.223 1.285 .980
Small Cap Subaccount***... 1.031
Number of accumulation
units outstanding at end
of period
(000's omitted)
Money Market Subaccount... 7,343 6,204 9,820 10,507 11,618 9,243 7,783 7,202 6,864 1,734

Total Return Subaccount... 24,773 26,640 26,043 19,953 18,485 18,671 15,835 18,807 7,053 2,702

High Yield Subaccount..... 12,416 14,735 14,424 12,799 11,858 18,281 14,589 10,186 9,306 4,723

Equity Subaccount......... 19,776 17,851 15,849 9,577 7,812 5,542 9,303 8,919 3,820 9,192

Government Securities
Subaccount*.............. 23,487 28,787 28,286 18,252 10,338 2,109
International
Subaccount**............. 14,546 15,713 3,646
Small Cap Subaccount***... 1,242
</TABLE>

* The Government Securities Subaccount commenced business on November 6, 1989.
** The International Subaccount commenced business on January 6, 1992.
*** The Small Cap Subaccount commenced business on May 2, 1994.

The financial statements and report of independent auditors of KILICO are also
contained in the Statement of Additional Information.

6
<PAGE> 19

KILICO, THE SEPARATE ACCOUNT AND THE FUND

KEMPER INVESTORS LIFE INSURANCE COMPANY

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

On April 11, 1995, Kemper and an investor group comprised of Zurich Insurance
Company ("Zurich") and Insurance Partners, L.P. and Insurance Partners Offshore
(Bermuda), L.P. announced that they reached an agreement in principle pursuant
to which Kemper, including KILICO, would be acquired in a merger transaction.
Following the transaction, Zurich, or an affiliate, would be the majority owner
of Kemper, including KILICO. A definitive agreement is expected in early May,
subject to the completion of the investor group's due diligence. Consummation of
the transaction is subject to, among other things, stockholder and regulatory
approvals. The transaction is expected to close early in the fourth quarter of
1995.

THE SEPARATE ACCOUNT

KILICO originally established the KILICO Variable Annuity Separate Account (the
"Separate Account") on May 29, 1981 pursuant to Illinois law as the KILICO Money
Market Separate Account, registered with the Securities and Exchange Commission
("Commission") as an open-end, diversified management investment company under
the Investment Company Act of 1940 ("1940 Act"). On November 2, 1989, Contract
Owners approved a Reorganization under which the Separate Account was
restructured as a unit investment trust registered with the Commission under the
1940 Act. Such registration does not involve supervision by the Commission of
the management, investment practices or policies of the Separate Account or
KILICO.

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

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

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

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

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

THE FUND

The Separate Account invests in shares of the Kemper Investors Fund, a series
type mutual fund registered with the Commission as an open-end, diversified
management investment company. Registration of the Fund does not involve
supervision of its management, investment practices or policies by the
Commission. The Fund is designed to provide an investment vehicle for variable
life insurance and variable annuity contracts. Shares of the Fund are sold only
to insurance company separate accounts. In addition to selling shares to
variable annuity and variable life separate accounts of KILICO and its
affiliates (currently, the Separate Account and KILICO Variable Separate
Account), shares of the Fund may be sold to variable life insurance and variable
annuity separate accounts of

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<PAGE> 20

insurance companies not affiliated with KILICO. It is conceivable that in the
future it may be disadvantageous for variable life insurance separate accounts
and variable annuity separate accounts of companies unaffiliated with KILICO, or
for both variable life insurance separate accounts and variable annuity separate
accounts, to invest simultaneously in the Fund. Currently, neither KILICO nor
the Fund foresees any such disadvantages to either variable life insurance or
variable annuity owners. Management of the Fund has an obligation to monitor
events to identify material conflicts between such owners and determine what
action, if any, should be taken. In addition, if KILICO believes that the Fund's
response to any of those events or conflicts insufficiently protects the Owners,
it will take appropriate action on its own.

The Fund currently consists of the following Portfolios: Money Market, Total
Return, High Yield, Equity, Government Securities, International and Small Cap.
The assets of each Portfolio are held separate from the assets of the other
Portfolios, and each Portfolio has its own distinct investment objective and
policies. Each Portfolio operates as a separate investment fund, and the
investment performance of one Portfolio has no effect on the investment
performance of any other Portfolio.

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

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

TOTAL RETURN PORTFOLIO: This Portfolio seeks a high total return, a combination
of income and capital appreciation, by investing in a combination of debt
securities and common stocks. The Portfolio's investments will normally consist
of fixed-income and equity securities. Fixed-income securities will include
bonds and other debt securities and preferred stocks, some of which may have a
call on common stocks through attached warrants or a conversion privilege.
Equity investments normally will consist of common stocks and securities
convertible into or exchangeable for common stocks; however the Portfolio may
also make private placement investments (which are normally restricted
securities).

HIGH YIELD PORTFOLIO: This Portfolio seeks to provide a high level of current
income by investing in fixed-income securities, including lower rated and
unrated securities which may entail relatively greater risk of loss of income or
principal but may offer a current yield or yield to maturity which is higher.
Lower and unrated securities, which are sometimes referred to by the popular
press as "junk bonds," have widely varying characteristics and quality. The
Portfolio invests in U.S. Government, corporate, and other notes and bonds
paying high current income.

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

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

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

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

There is no assurance that any of the Portfolios of the Fund will achieve its
stated objective. More detailed information, including a description of risks
involved in investing in each of the Portfolios, may be found in the prospectus
for the Fund, which must accompany or precede this Prospectus, and the Fund's
Statement of Additional

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<PAGE> 21

Information available upon request from Kemper Investors Life Insurance Company,
1 Kemper Drive, Long Grove, Illinois 60049, or Kemper Financial Services, Inc.,
120 South LaSalle Street, Chicago, Illinois 60603. Read the prospectus carefully
before investing.

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

CHANGE OF INVESTMENTS

KILICO reserves the right, subject to applicable law, to make additions to,
deletions from, or substitutions for the shares held by the Separate Account or
that the Separate Account may purchase. KILICO reserves the right to eliminate
the shares of any of the portfolios of the Fund and to substitute shares of
another portfolio of the Fund or of another investment company, if the shares of
a portfolio are no longer available for investment, or if in its judgment
further investment in any portfolio becomes inappropriate in view of the
purposes of the Separate Account. KILICO will not substitute any shares
attributable to a Contract Owner's interest in a Subaccount of the Separate
Account without notice to the Contract Owner and prior approval of the
Commission, to the extent required by the 1940 Act or other applicable law.
Nothing contained in this Prospectus shall prevent the Separate Account from
purchasing other securities for other series or classes of policies, or from
permitting a conversion between series or classes of policies on the basis of
requests made by Contract Owners.

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

If deemed by KILICO to be in the best interests of persons having voting rights
under the Policy, the Separate Account may be: (a) operated as a management
company under the 1940 Act; (b) deregistered under that Act in the event such
registration is no longer required; or (c) combined with other KILICO separate
accounts. To the extent permitted by law, KILICO may also transfer the assets of
the Separate Account associated with the Contract to another separate account,
or to the General Account.

PERFORMANCE INFORMATION

From time to time, the Separate Account may advertise several types of
performance information for the Subaccounts. All Subaccounts may advertise
"average annual total return" and "total return," except "average annual total
return" is not shown for the Money Market Subaccount. The High Yield Subaccount
and the Government Securities Subaccount may also advertise "yield." The Money
Market Subaccount may advertise "yield" and "effective yield." Each of these
figures is based upon historical earnings and is not necessarily representative
of the future performance of a Subaccount. Average annual total return and total
return calculations measure the net income of a Subaccount plus the effect of
any realized or unrealized appreciation or depreciation of the underlying
investments in the Subaccount for the period in question. Average annual total
return will be quoted for periods of at least one year, five years if
applicable, and the life of Subaccount, ending with the most recent calendar
quarter. Average annual total return figures are annualized and, therefore,
represent the average annual percentage change in the value of an investment in
a Subaccount over the applicable period. Total return figures are not annualized
and represent the actual percentage change over the applicable period. Yield is
a measure of the net dividend and interest income earned over a specific one
month or 30-day period (seven-day period for the Money Market Subaccount)
expressed as a percentage of the value of the Subaccount's Accumulation Units.
Yield is an annualized figure, which means that it is assumed that the
Subaccount generates the same level of net income over a one year period which
is compounded on a semi-annual basis. The effective yield for the Money Market
Subaccount is calculated similarly but includes the effect of assumed
compounding calculated under rules prescribed by the Securities and Exchange
Commission. The Money Market Subaccount's effective yield will be slightly
higher than its yield due to this compounding effect. The Subaccounts' units are
sold at Accumulation Unit value. The Subaccounts' performance figures and
Accumulation Unit values will fluctuate. Units of the Subaccount are redeemable
by an

9
<PAGE> 22

investor at Accumulation Unit value, which may be more or less than original
cost. The performance figures include the deduction of all expenses and fees,
including a prorated portion of the Records Maintenance Charge. Redemptions
within the first six years after purchase may be subject to a Withdrawal Charge
that ranges from 6% the first year to 0% after six years; however, the aggregate
Withdrawal Charge will not exceed 7.25% of aggregate Purchase Payments under the
Contract. Yield, effective yield and total return figures do not include the
effect of any Withdrawal Charge that may be imposed upon the redemption of
units, and thus may be higher than if such charges were deducted. Average annual
total return figures include the effect of the applicable Withdrawal Charge that
may be imposed at the end of the period in question. Additional information
concerning a Subaccount's performance appears in the Statement of Additional
Information. The Subaccounts may provide comparative information with regard to
the Dow Jones Industrial Average, the Standard & Poor's 500 Stock Index, the
Consumer Price Index, the CDA Certificate of Deposit Index, the Lehman Brothers
Government and Corporate Bond Index, the Salomon Brothers High Grade Corporate
Bond Index and the Merrill Lynch Government/Corporate Master Index, the CDA
Mutual Fund--International Index, and the Morgan Stanley Capital International
Europe, Australia, Far East Index and may provide Lipper Analytical Services,
Inc., the VARDS Report and Morningstar, Inc. performance analysis rankings. From
time to time, the Separate Account may quote information from publications such
as MORNINGSTAR, INC., THE WALL STREET JOURNAL, MONEY MAGAZINE, FORBES,
BARRON'S, FORTUNE, THE CHICAGO TRIBUNE, USA TODAY, INSTITUTIONAL INVESTOR,
REGISTERED REPRESENTATIVE, INVESTMENT ADVISOR AND VARDS.

FIXED ACCUMULATION OPTION

CONTRIBUTIONS UNDER THE FIXED PORTION OF THE CONTRACT AND TRANSFERS TO THE
FIXED PORTION BECOME PART OF THE GENERAL ACCOUNT OF THE INSURANCE COMPANY,
WHICH SUPPORTS INSURANCE AND ANNUITY OBLIGATIONS. BECAUSE OF EXEMPTIVE AND
EXCLUSIONARY PROVISIONS, INTERESTS IN THE GENERAL ACCOUNT HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 ("1933 ACT") NOR IS THE GENERAL
ACCOUNT REGISTERED AS AN INVESTMENT COMPANY UNDER THE INVESTMENT COMPANY ACT OF
1940 ("1940 ACT"). ACCORDINGLY, NEITHER THE GENERAL ACCOUNT NOR ANY INTERESTS
THEREIN GENERALLY ARE SUBJECT TO THE PROVISIONS OF THE 1933 OR 1940 ACTS AND
KILICO HAS BEEN ADVISED THAT THE STAFF OF THE SECURITIES AND EXCHANGE
COMMISSION HAS NOT REVIEWED THE DISCLOSURES IN THIS PROSPECTUS WHICH RELATE TO
THE FIXED PORTION. DISCLOSURES REGARDING THE FIXED PORTION OF THE CONTRACT AND
THE GENERAL ACCOUNT HOWEVER, MAY BE SUBJECT TO CERTAIN GENERALLY APPLICABLE
PROVISIONS OF THE FEDERAL SECURITIES LAWS RELATING TO THE ACCURACY AND
COMPLETENESS OF STATEMENTS MADE IN PROSPECTUSES.

The Contracts offer a Fixed Accumulation Option (the General Account) under
which KILICO allocates payments to its General Account and pays a fixed interest
rate for stated periods. This Prospectus describes only the element of the
Contract pertaining to the Separate Account except where it makes specific
reference to fixed accumulation and annuity elements.

The Contracts guarantee that payments allocated to the General Account will earn
a minimum fixed interest rate of 3%. KILICO, at its discretion, may credit
interest in excess of 3%. KILICO reserves the right to change the rate of excess
interest credited as provided under the terms of the Contract. KILICO also
reserves the right to declare separate rates of excess interest for Purchase
Payments or amounts transferred at designated times, with the result that
amounts at any given designated time may be credited with a higher or lower rate
of excess interest than the rate or rates of excess interest previously credited
to such amounts and Purchase Payments paid or amounts transferred at any other
designated time.

THE CONTRACTS
A. GENERAL INFORMATION.

This Prospectus offers both Qualified Plan Contracts and Non-Qualified Plan
Contracts. The minimum Purchase Payment for a Qualified Plan is $50. However, so
long as annualized contribution amounts from a payroll or salary deduction plan
are equal to or greater than $600, a periodic payment under $50 will be
accepted. The maximum annual amount of Purchase Payments may be limited by the
provisions of the retirement plan pursuant to which the Contract has been
purchased. For a Non-Qualified Plan Contract the minimum initial Purchase
Payment is $2,500 and the minimum subsequent payment is $500. An initial
allocation of less than $500 may be made to the General Account or to a
Subaccount, or to the General Account and one Subaccount. For a Non-Qualified
Plan, no subsequent allocations of Purchase Payments may be made to any
additional Subaccount until allocations total at least $500 to each Subaccount
in which the Contract has an interest. For a Qualified Plan Contract, as long as
annualized contribution amounts to a new Subaccount from a payroll or salary
reduction plan are equal to or greater than $25 per month, allocations to
another such Subaccount may be made.

KILICO may at any time amend the Contract in accordance with changes in the law,
including applicable tax laws, regulations or rulings, and for other purposes.
Contracts permitting flexible payments are no longer offered, although Purchase
Payments are still permitted under previously issued flexible payment contracts.

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<PAGE> 23

A Contract Owner is allowed a "free look" period (generally 10 days, subject to
state variation) after receiving the Contract, to review it and decide whether
or not to keep it. If the Contract Owner decides to return the Contract, it may
be cancelled by delivering or mailing it to KILICO. Upon receipt by KILICO, the
Contract will be cancelled and a refund will be made. The amount of the refund
will depend on the state in which the Contract is issued; however, it generally
will be an amount at least equal to the Contract Value on the date of receipt by
KILICO, without any deduction for withdrawal charges or Records Maintenance
charges. However, in some states applicable law requires that the amount of the
Purchase Payment be returned.

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

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

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

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

B. THE ACCUMULATION PERIOD.

1. APPLICATION OF PURCHASE PAYMENTS.

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

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

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

2. ACCUMULATION UNIT VALUE.

Each Subaccount has an Accumulation Unit value. When Purchase Payments or other
amounts are allocated to a Subaccount, a number of units are purchased based on
the Subaccount's Accumulation Unit value at the end of the Valuation Period
during which the allocation is made. When amounts are transferred out of or
deducted from a Subaccount, units are redeemed in a similar manner.

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

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<PAGE> 24

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

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

(1) is the net result of:

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

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

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

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

(3) is the factor representing the mortality and expense risk and
administrative cost charge stated in the Contract for the number of days in
the Valuation Period.

3. CONTRACT VALUE.

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

4. TRANSFER DURING ACCUMULATION PERIOD.

During the Accumulation Period, a Contract Owner may transfer the Contract Value
among the Subaccounts and the Fixed Accumulation Option subject to the following
provisions: (i) No transfer can be made until the initial Purchase Payment has
been in a Subaccount or the General Account for fifteen days; (ii) Once all or
part of the Owner's Separate Account Contract Value has been transferred to the
General Account or from one Subaccount to another Subaccount another transfer
may not be made within the next fifteen day period; (iii) Once all or part of
the Owner's General Account Contract Value has been transferred to a Subaccount
another transfer may not be made within the next fifteen day period; and (iv)
The General Account Contract Value, less Debt, may be transferred one time
during the Contract Year to one or more Subaccounts in the thirty day period
following an anniversary of a Contract Year or the thirty day period following
the date of the confirmation statement provided for the period through the
anniversary date, if later.

KILICO will make transfers pursuant to proper written or telephone instructions
which specify in detail the requested changes. Before telephone transfer
instructions will be honored by KILICO, a telephone transfer authorization must
be completed by the Contract Owner. The minimum partial transfer amount is $500.
No partial transfer may be made if the value of the Contract Owner's remaining
Contract interest in a Subaccount or the General Account, from which amounts are
to be transferred, would be less than $500 after such transfer. Transfers
involving a Subaccount will be based upon the Accumulation Unit values next
determined following receipt of valid, complete transfer instructions by KILICO.
The transfer privilege may be suspended, modified or terminated at any time
(subject to state requirements). KILICO disclaims all liability for acting in
good faith in following instructions which are given in accordance with
procedures established by KILICO, including requests for personal identifying
information, that are designed to limit unauthorized use of the privilege.
Therefore, a Contract Owner would bear the risk of loss in the event of a
fraudulent telephone transfer.

5. WITHDRAWAL DURING ACCUMULATION PERIOD.

The Contract Owner may redeem all or a portion of the Contract Value less Debt
and previous withdrawals. Contract Owners should be aware that such withdrawals
may, under certain circumstances, be subject to adverse tax consequences under
the Internal Revenue Code. (See "Tax Treatment of Withdrawals, Loans and
Assignments.") A withdrawal of the entire Contract Value is called a surrender.

A Contract Owner may withdraw up to 10% of the Contract Value less Debt in any
Contract Year without assessment of any charge. If the Contract Owner withdraws
an amount in excess of 10% of the Contract Value in

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<PAGE> 25

any Contract Year, the amount withdrawn in excess of 10% is subject to a
Withdrawal Charge. The Withdrawal Charge starts at 6% in the first Contribution
Year and reduces by 1% each Contribution Year, so that there is no charge
against Accumulation Units withdrawn in their seventh and later Contribution
Years. However, in no event shall the aggregate Withdrawal Charges assessed
against a Contract exceed 7.25% of the aggregate Purchase Payments made under
the Contract.

In the case of a Contract invested other than solely in one Subaccount, a
Contract Owner requesting a partial withdrawal must specify what portion of the
Owner's Contract interest is to be redeemed. If a Contract Owner does not
specify what portion of the Owner's Contract interest is to be redeemed, KILICO
will redeem Accumulation Units from all Subaccounts in which the Contract Owner
has an interest and the General Account. The number of Accumulation Units
redeemed from each Subaccount and the amount redeemed from the General Account
will be in approximately the proportion which the Owner's Contract interest in
each Subaccount and in the General Account bears to the Contract Value. In all
cases, the Accumulation Units attributable to the earliest Contribution Years
will be redeemed first.

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

(1) The amount requested must be at least $500, or the Owner's entire
interest in the Subaccount or the General Account from which withdrawal is
requested.

(2) The Owner's Contract interest in the Subaccount, or the General Account
from which the withdrawal is requested must be at least $500 after the
withdrawal is completed.

Election to withdraw shall be made in writing to KILICO at its home office at 1
Kemper Drive, Long Grove, Ill. 60049 and should be accompanied by the Contract
if the request is for total withdrawal. Withdrawal requests will not be received
except on KILICO business days which are those days when the New York Stock
Exchange is open for trading. The Withdrawal Value attributable to the
Subaccounts is determined on the basis of the Accumulation Unit values next
computed following receipt of the request in proper order. The Withdrawal Value
attributable to the Subaccounts will be paid within seven (7) days after the
date a proper written request is received by KILICO at its home office provided,
however, that KILICO may suspend the right of withdrawal or delay payment more
than seven (7) days (a) during any period when the New York Stock Exchange is
closed (other than customary weekend and holiday closings), (b) when trading in
the markets a Portfolio of the Fund normally utilizes is restricted or an
emergency exists as determined by the Securities and Exchange Commission, so
that disposal of the Subaccount's investments or determination of its
Accumulation Unit value is not reasonably practicable, or (c) for such other
periods as the Securities and Exchange Commission by order may permit for the
protection of Contract Owners or Unitholders.

A participant in the Texas Optional Retirement Program ("ORP") is required to
obtain a certificate of termination from the participant's employer before a
Contract can be redeemed. This requirement is imposed because the Attorney
General of Texas has ruled that participants in the ORP may redeem their
interest in a Contract issued pursuant to the ORP only upon termination of
employment in Texas public institutions of higher education, or upon retirement,
death or total disability. In those states adopting identical requirements for
optional retirement programs, KILICO will follow the same procedures. See
"Qualified Plans" for information on tax-sheltered annuities.

6. DEATH BENEFIT.

If the Annuitant dies during the Accumulation Period, prior to attaining age 75,
the Contract Value less Debt as computed at the end of the Valuation Period next
following receipt by KILICO of due proof of death and the return of the
Contract, or the total amount of Purchase Payments less Debt, whichever is
greater, will be paid to the designated Beneficiary. If a Contract has been
subject to any partial withdrawal, the death benefit will be the greater of (a)
the Contract Value less Debt or (b) the total amount of Purchase Payments, less
both Debt and the aggregate dollar amount of all previous partial withdrawals.
If death occurs at age 75 or later, the death benefit will be the Contract Value
less Debt. The Owner or Beneficiary, as appropriate, may elect to have all or a
part of the death proceeds paid to the Beneficiary under one of the Annuity
Options described under "Annuity Options" below.

For Non-Qualified Plan Contracts issued on and after January 19, 1985, if the
Owner is not the Annuitant and the Owner dies before the Annuitant, the death
benefit will be paid to the designated Beneficiary. The death benefit is
determined as stated above, except that the age of the Owner at death is used in
determining the amount payable. If the Beneficiary is the surviving spouse of
the Owner, the surviving spouse may elect to be treated as the successor Owner
of the Contract with no requirement to begin Death Benefit distribution. 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.

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<PAGE> 26

CONTRACT CHARGES AND EXPENSES

Charges and deductions under the Contracts are made for KILICO's assumption of
mortality and expense risk and administrative expenses, and for an annual
Records Maintenance Charge. Subject to certain expense limitations, investment
management fees and other expenses of the Fund are indirectly borne by the
Contract Owner. KILICO will deduct state premium taxes from Contract Value when
paid by KILICO. Where applicable, the dollar amount of state premium taxes
previously paid or paid upon annuitization by KILICO will be charged back
against the Contract Value when and if the Contract is annuitized. Additionally,
where applicable, a Withdrawal Charge may be assessed by KILICO in the event of
early withdrawal or early annuitization.

A. CHARGES AGAINST THE SEPARATE ACCOUNT.

During the Accumulation Period and the Annuity Period, KILICO assesses that
portion of each Subaccount representing assets under Periodic Payment Contracts
with a daily asset charge for mortality and expense risks and administrative
costs, which amounts to an aggregate of one and three-tenths percent (1.30%) per
annum (consisting of approximately .70% for mortality risks, approximately .30%
for expense risks and approximately .30% for administrative costs). Flexible
Payment Contracts, which are no longer offered, have a daily asset charge of
1.00%. The administrative charge is intended to cover the average anticipated
administrative expenses to be incurred over the period the Contracts are in
force. With an administrative charge based on a percentage of assets, however,
there is not necessarily a direct relationship between the amount of the charge
and the administrative costs of a particular account. Additionally, KILICO
deducts an annual Records Maintenance Charge of $36 (assessed ratably each
quarter) for each Contract as described below. The Records Maintenance Charge is
not assessed during the Annuity Period.

These charges may be decreased by KILICO without notice but may not exceed the
rate or amount shown above. If the daily asset charge is insufficient to cover
the risks and costs, any loss or deficiency will fall on KILICO. Conversely, if
the charges prove more than sufficient, the gain will accrue to KILICO, creating
a profit which would be available for any proper corporate purpose including,
among other things, payment of distribution expenses.

1. RECORDS MAINTENANCE CHARGE.

KILICO will assess an annual Records Maintenance Charge of $36 (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. This charge is to
reimburse KILICO for expenses incurred in establishing and maintaining the
records relating to a Contract's participation in the Separate Account. This
charge has been set at a level not greater than its costs. The imposition of the
Records Maintenance Charge will be made 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, an equal portion of the
applicable charge will be assessed 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 each Subaccount, or from the
General Account Contract Value if necessary to meet the assessment.

2. MORTALITY RISK.

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

The mortality risk assumed by KILICO arises from two contractual obligations.
First, in case of the death of the Contract Owner or of the Annuitant prior to
the Annuitant's 75th birthday, and prior to the Annuity Date, KILICO will return
to the Beneficiary the Contract Value minus Debt, or the total amount of
Purchase Payments minus Debt, whichever is greater. If a Contract has been
subject to a partial withdrawal, the death benefit shall be the greater of (a)
Contract Value minus Debt, or (b) the total amount of Purchase Payments, minus
both Debt and the aggregate dollar amount of all previous partial withdrawals.
The second contractual obligation assumed by KILICO is to continue to make
annuity payments to each Annuitant for the entire life of the Annuitant under
Annuity Options involving life contingencies.

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

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<PAGE> 27

3. EXPENSE RISK.

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

4. ADMINISTRATIVE COSTS.

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

B. WITHDRAWAL CHARGE.

No sales charge is deducted from any Purchase Payment. However, a contingent
deferred sales charge ("Withdrawal Charge") will be used to cover expenses
relating to the sale of the Contracts, including commissions paid to sales
personnel, and other promotion and acquisition expenses. Also, withdrawals
(which may include certain loans) may be subject to certain adverse tax
consequences. (See "Tax Treatment of Withdrawals, Loans and Assignments.")

A Contract Owner may withdraw up to 10% of the Contract Value less Debt
determined at the time the withdrawal is requested in any Contract Year without
assessment of any charge. If the Contract Owner withdraws an amount in excess of
10% of the Contract Value in any Contract Year, the amount withdrawn in excess
of 10% subjects the Contract to a Withdrawal Charge. The Withdrawal Charge
starts at 6% in the first Contribution Year and reduces by 1% each Contribution
Year, so that there is no charge against Accumulation Units withdrawn or
annuitized in their seventh and later Contribution Years as shown below:

<TABLE>
<CAPTION>
YEAR OF
WITHDRAWAL
AFTER WITHDRAWAL
PURCHASE CHARGE
--------- ----------
<S> <C>
First......................................... 6%
Second........................................ 5%
Third......................................... 4%
Fourth........................................ 3%
Fifth......................................... 2%
Sixth......................................... 1%
Seventh and following......................... 0%
</TABLE>

When a withdrawal is requested, the recipient will receive a check in the amount
requested. To the extent that any Withdrawal Charge is applicable, the Contract
Value will be reduced by the amount of the Withdrawal Charge in addition to the
actual dollar amount sent to the Owner.

Because the Contribution Years are Contract Years in which a Purchase Payment is
made, Contract Owners may be subject to a Withdrawal Charge as indicated above,
even though the Contract may have been issued many years earlier. However, in no
event shall the aggregate Withdrawal Charges assessed against a Contract exceed
7.25% of the aggregate Purchase Payments made under the Contract. (For
additional details, see "Withdrawal During Accumulation Period.")

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

The Withdrawal Charge also applies at the time of annuitization to amounts
attributable to Accumulation Units in their sixth Contribution Year or earlier.
The amount annuitized is subject to the Withdrawal Charge, as applicable. There
shall be no Withdrawal Charge assessed upon annuitization so long as annuity
payments provide for payment under Annuity Options 2, 3 or 4, or payments under
Annuity Option 1 are scheduled to continue for at least five years. Effective
September 4, 1990, for Qualified Plan Contracts, Withdrawal Charges will be
waived if a Contract is

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<PAGE> 28

surrendered in the sixth Contract Year or later when the Annuitant is at least
59 1/2 years old at the time of such surrender.

The Withdrawal Charge may be reduced or eliminated, but only to the extent
KILICO anticipates that it will incur lower sales expenses or perform fewer
services because of economies arising from the size of the particular group, the
average contribution per participant, or the use of mass enrollment procedures.
Units of a Subaccount sold to officers, directors and employees of KILICO and
the Fund, the Fund's investment adviser, and principal underwriter or certain
affiliated companies, or to any trust, pension, profit-sharing or other benefit
plan for such persons may be withdrawn without any Withdrawal Charge.

C. FUND INVESTMENT MANAGEMENT FEE AND OTHER EXPENSES.

The net asset value of each of the Portfolios of the Fund reflects investment
management fees and certain general operating expenses already deducted from the
assets of the Portfolios. Subject to certain limitations, these fees and
expenses are indirectly borne by the Contract Owners. Investment management fees
are described on page 9. Further detail about fees and expenses of the
Portfolios is provided in the attached Prospectus for the Fund and in the Fund's
Statement of Additional Information.

D. STATE PREMIUM TAXES.

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

THE ANNUITY PERIOD

Contracts may be annuitized under one of several Annuity Options. Annuity
payments will begin on the Annuity Date under the Annuity Option selected by the
Owner.

1. ANNUITY PAYMENTS.

Annuity payments will be determined on the basis of (i) the annuity table
specified in the Contract, (ii) the Annuity Option selected, and (iii) the
investment performance of the Subaccount selected. The Annuitant receives the
value of a fixed number of Annuity Units each month. The value of an Annuity
Unit will reflect the investment performance of the Subaccounts selected, and
the amount of each annuity payment will vary accordingly. Annuity payments may
be subject to a Withdrawal Charge if made within the sixth Contribution Year or
earlier. If the Owner elects an annuity which provides either an income benefit
period of five years or more, or a benefit under which payment is contingent
upon the life of the payee(s), any applicable Withdrawal Charges will be waived.

2. ANNUITY OPTIONS.

The Contract Owner may elect to have annuity payments made under any one of the
Annuity Options specified in the Contract and described below. The Contract
Owner may decide at any time (subject to the provisions of any applicable
retirement plan) to commence annuity payments. A change of Annuity Option is
permitted if made before the date annuity payments are to commence. For a
Non-Qualified Plan Contract, if no other Annuity Option is elected, monthly
annuity payments will be made in accordance with Option 3 below with a ten (10)
year period certain. For a Qualified Plan Contract, if no other Annuity Option
is elected, monthly annuity payments will be made in the form of a qualified
joint and survivor annuity with a monthly income at two-thirds of the full
amount payable during the lifetime of the surviving payee. Generally, annuity
payments will be made in monthly installments. However, if the net proceeds
available to apply under an Annuity Option are less than $2,000, KILICO shall
have the right to pay the annuity in one lump sum. In addition, if the first
payment provided would be less than $25, KILICO shall have the right to change
the frequency of payments to quarterly, semiannual or annual intervals resulting
in an initial payment of at least $25.

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

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<PAGE> 29

individual life income option. The age of the payee will also influence the
amount of periodic annuity payments because presumably the older the payee, the
shorter the life expectancy and the larger the payments. Finally, if the
Contract Owner participates in a Subaccount with higher investment performance,
it is likely the Contract Owner will receive a higher periodic payment.

For Non-Qualified Plan Contracts issued on and after January 19, 1985, if the
Owner dies before the Annuity Date, Annuity Options which may be elected are
limited. The Annuity Options available are (a) Option 2 or (b) Option 1 or 3 for
a period no longer than the life expectancy of the Beneficiary (but not less
than 5 years from the Owner's death). If the Beneficiary is not an individual,
the entire interest must be distributed within 5 years of the Owner's death. The
Death Benefit distribution must begin no later than one year from the Owner's
death or such later date as prescribed by federal regulation.

OPTION 1--INCOME FOR SPECIFIED PERIOD.

An annuity payable monthly for a selected number of years ranging from five to
thirty. Upon payee's death, if the Beneficiary is a natural person, KILICO will
automatically continue payments for the remainder of the certain period to the
Beneficiary. If the Beneficiary is either an estate or trust, KILICO will pay a
commuted value of the remaining payments. Variable Annuity payments under Option
1 reflect the payment of the mortality and expense risk charge, even though
there is no life contingency risk associated with Option 1.

OPTION 2--LIFE INCOME.

An annuity payable monthly during the lifetime of the payee, terminating with
the last monthly payment due prior to the death of the payee. If this Option is
elected, annuity payments terminate automatically and immediately on the death
of the payee without regard to the number or total amount of payments made.
Thus, it is possible for an individual to receive only one payment if death
occurred prior to the date the second payment was due.

OPTION 3--LIFE INCOME WITH INSTALLMENTS GUARANTEED.

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

OPTION 4--JOINT AND SURVIVOR ANNUITY.

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

Payees under Option 1 by written notice to KILICO may cancel all or part of the
remaining payments due and receive that part of the remaining value of the
Contract.

3. ALLOCATION OF ANNUITY.

The Contract Owner may elect to have payments made on a fixed or variable basis,
or a combination of both. An Owner may exercise the transfer privilege during
the Accumulation Period for the purposes of such allocation. Any General Account
Contract Value will be annuitized on a fixed basis. Any Separate Account
Contract Value will be annuitized on a variable basis. Transfers during the
Annuity Period are permitted subject to stated limitations.

4. TRANSFER DURING ANNUITY PERIOD.

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

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

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

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

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<PAGE> 30

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

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

5. ANNUITY UNIT VALUE.

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

For each Subaccount, the Annuity Unit value for any Valuation Period is
determined by multiplying the Annuity Unit value for the immediately preceding
Valuation Period by the net investment factor for the Valuation Period for which
the Annuity Unit value is being calculated, and multiplying the result by an
interest factor which offsets the effect of the assumed investment earnings rate
of 2.5% per annum which is assumed in the annuity tables contained in the
Contract.

The net investment factor for each Subaccount for any Valuation Period is
determined by dividing (a) by (b) where:

(a) Is the value of an Accumulation Unit for the applicable Subaccount as
of the end of the current Valuation Period, plus or minus the per share
charge or credit for taxes reserved.

(b) Is the value of an Accumulation Unit for the applicable Subaccount as
of the end of the immediately preceding Valuation Period, plus or minus the
per share charge or credit for taxes reserved.

6. FIRST PERIODIC PAYMENT.

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

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

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

A 2.5% per annum assumed investment rate is built into the annuity tables
contained in the Contracts. If the actual net investment rate exceeds 2.5% per
annum, payments will increase at a rate equal to the amount of such excess.
Conversely, if the actual rate is less than 2.5% per annum, annuity payments
will decrease.

7. SUBSEQUENT PERIODIC PAYMENTS.

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

8. FIXED ANNUITY PAYMENTS.

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

9. DEATH BENEFIT.

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

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<PAGE> 31

FEDERAL INCOME TAXES

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

A. KILICO'S TAX STATUS.

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

Under current interpretations of existing Federal income tax law, investment
income of the Separate Account, to the extent that it is applied to increase an
individual Contract Owner's equity, is not taxed. Thus, a Subaccount may realize
net investment income and dividends, and the Subaccount may receive and reinvest
them, all without Federal income tax consequences for the Separate Account.
However, as a result of the Tax Reform Act of 1986, if the Contract Owner is not
an individual, income attributable to Purchase Payments made after February 28,
1986 generally is taxed to the Contract Owner.

B. AMOUNTS RECEIVED AS AN ANNUITY.

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

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

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

For Annuity Dates after December 31, 1986, the excludable amount of any payment
may not exceed the unrecovered investment in the Contract immediately before
such payment. For Annuity Dates after July 1, 1986, the amount of the
unrecovered investment is allowed as a deduction on the final return of a
deceased Annuitant where annuity payments cease before the investment in the
Contract has been fully recovered.

C. NON-QUALIFIED PLAN CONTRACTS.

1. DIVERSIFICATION REQUIREMENTS.

While Section 72 of the Code governs the taxation of annuities in general,
Section 817(h) of the Code provides that nonqualified annuity contracts will not
be treated as annuities unless the underlying investments are "adequately
diversified" in accordance with regulations prescribed by the Secretary of the
Treasury. Such regulations require, among other things, that a mutual fund
underlying an annuity contract, such as those underlying the Contracts, may
invest no more than 55% of the value of its assets in one investment; 70% in two
investments; 80% in three investments; and 90% in four investments. If the above
diversification requirements are not met by each and every Portfolio, the
annuity contract could lose its overall tax status as an annuity, resulting in
current taxation of the excess of cash value over the "investment in the
contract" (as defined above) to the Contract Owner. KILICO has reviewed the
diversification regulations and believes that the Contracts are in compliance
with these regulations and that there is no threat to their current favorable
tax status as annuities. Furthermore, KILICO intends to make whatever changes
may be necessary and appropriate to these Contracts in the future in order to
maintain their continued favorable tax treatment.

In connection with the earlier issuance of temporary regulations relating to
diversification requirements, the Treasury Department announced that such
regulations do not provide guidance concerning the extent to which owners may
direct their investments to particular Subaccounts. Moreover any additional rule
may apply to pension plan contracts. It is possible that when such guidance is
available, the Contract may need to be modified to comply with such guidance.
Accordingly, KILICO reserves the right to modify the Contract as necessary to
prevent the

19
<PAGE> 32

Contract Owner from being considered the owner of the assets of the Subaccount.
Because the guidance has not been published, there can be no assurance as to
content or even whether application will be prospective only.

2. TAX TREATMENT OF WITHDRAWALS, LOANS AND ASSIGNMENTS.

Withdrawals from Non-Qualified Plan Contracts will be allocable first to any
investment in the Contract made prior to August 14, 1982 (if any), then to
ordinary income attributable to such investment, then to ordinary income
attributable to investment in the Contract made after August 13, 1982, and
finally to investment in the Contract made after August 13, 1982. Loans under a
Contract or collateral assignments or pledges of any portion of the value of
such Contract attributable to investment in the Contract after August 13, 1982
or income attributable to such investment are treated as withdrawals.

If the Owner transfers a Non-Qualified Plan Contract issued after April 22, 1987
by gift, the Owner must include in gross income the excess of the Contract Value
over the investment in the Contract as of the date of transfer.

Non-Qualified Plan Contracts entered into after October 21, 1988 which were
issued by KILICO (or an affiliate) during a calendar year are to be aggregated
and considered a single contract for purposes of determining the amount of any
withdrawal, loan, or assigned or pledged cash value includible in the Owner's
gross income.

3. 10-PERCENT PENALTY TAX ON PREMATURE DISTRIBUTIONS.

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

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

D. QUALIFIED PLANS.

The Contracts offered by this Prospectus are designed to be suitable for use
under Qualified Plans. Such contracts are commonly referred to as "Qualified
Plan Contracts." KILICO, in its sole discretion, reserves the right to waive
certain minimums with respect to large group contracts. Taxation of participants
in such Qualified Plans varies with the type of plan and the terms and
conditions of the specific plan. Qualified Plan Contract Owners, Annuitants and
Beneficiaries are cautioned that benefits under a Qualified Plan may be subject
to the terms and conditions of the plan regardless of the terms and conditions
of the Contracts issued pursuant to the plan. Following are general descriptions
of the types of Qualified Plans and of the use of the Contracts in connection
therewith. Purchasers intending to use the Contracts in connection with
Qualified Plans should seek competent tax advice.

(A) PENSION AND PROFIT-SHARING PLANS.

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

(b) TAX-SHELTERED ANNUITIES.

Section 403(b) of the Code permits public school employees and employees of
certain types of charitable, educational and scientific organizations
specified in Section 501(c)(3) of the Code to purchase annuity contracts
and, subject to certain limitations, exclude the amount of purchase
payments from gross income for tax purposes. Generally, the annual
contribution limit is 20% of an employee's includible compensation times
the number of years of service, less previously excluded contributions. For
salary reduction plans the maximum contribution is $9,500. These annuity
contracts are commonly referred to as "tax-sheltered annuities."

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<PAGE> 33

To the extent attributable to contributions to your tax-sheltered annuity
contract under a salary reduction agreement (or to transfers of such
amounts from other contracts), contributions made or earnings credited
after December 31, 1988 may not be withdrawn until separation from service,
attainment of age 59 1/2, death or disability. Salary reduction
contributions after December 31, 1988 may also be withdrawn in the case of
hardship within the meaning of section 403(b)(11) of the Internal Revenue
Code. Further, all amounts transferred to your contract from a Section
403(b)(7) custodial account are subject to such restrictions on withdrawal.
Under your employer's tax-sheltered annuity plan, you may be allowed to
transfer your contract value to other types of options, such as other fixed
or variable annuity contracts or Section 403(b)(7) custodial accounts.

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

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

(D) INDIVIDUAL RETIREMENT ANNUITIES.

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

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

(E) DEFERRED COMPENSATION PLANS.

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

An employee electing to participate in a Section 457 Plan should understand
that all rights and benefits are governed strictly by the terms of the
plan. The employer is legal owner of any Contracts issued under the plan.
The employee is, in fact, a general creditor of the employer under the
terms of the plan. The employer, as owner of the Contracts, also retains
all voting and redemption rights which may accrue through the Contracts
issued under the plan.

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

E. TAX WITHHOLDING.

KILICO is required to withhold federal income tax on the taxable portion of all
distributions under the Contracts unless the individual elects under a
nonqualified plan not to be subject to withholding. The rate of withholding will
depend on the type of distribution.

F. OTHER CONSIDERATIONS.

Because of the complexity of the law and its application to a specific
individual, tax advice may be needed by a person contemplating purchase of a
Contract or the exercise of elections under a Contract. The above comments

21
<PAGE> 34

concerning the Federal income tax consequences are not exhaustive, and special
rules are provided with respect to situations not discussed in this Prospectus.

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

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

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

DISTRIBUTION OF CONTRACTS

The Contracts are sold by licensed insurance agents, where the Contracts may be
lawfully sold, who are registered representatives of broker-dealers which are
registered under the Securities Exchange Act of 1934 and are members of the
National Association of Securities Dealers, Inc. In addition to commissions,
KILICO may, from time to time, pay or allow additional promotional incentives,
in the form of cash or other compensation, to broker-dealers that sell the
Contracts. In some instances, such other incentives may be offered only to
certain licensed broker-dealers that sell or are expected to sell during
specified time periods certain minimum amounts of the Contracts or other
contracts issued by KILICO. The Contracts are distributed through the principal
underwriter for the Separate Account, which is Investors Brokerage Services,
Inc. ("IBS"), a wholly owned subsidiary of KILICO, which enters into selling
group agreements with affiliated and unaffiliated broker-dealers.

VOTING RIGHTS

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

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

REPORTS TO CONTRACT OWNERS AND INQUIRIES

Immediately after each Contract anniversary, Contract Owners will be sent
statements for their own Contract showing the amount credited to each Subaccount
and to the Fixed Accumulation Option. It will also show the interest rate(s)
that KILICO is crediting upon amounts then held under the Fixed Accumulation
Option. In addition, Contract Owners transferring amounts among the investment
options or making additional payments will receive written confirmation of such
transactions. Upon request, any Contract Owner will be sent a current statement
in a form similar to that of the annual statement described above. Each Contract
Owner will also be sent an annual and a semi-annual report for the Fund and a
list of the securities held in each Portfolio of the Fund, as required by the
1940 Act.

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

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<PAGE> 35

DOLLAR COST AVERAGING

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

Transfers will be made in the amounts designated by the Contract Owner and must
be at least $500 per Subaccount or General Account. The total Contract Value in
the Money Market or Government Securities Subaccount at the time Dollar Cost
Averaging is elected must be at least equal to the amount designated to be
transferred on each Transfer Date multiplied by the duration selected. Dollar
Cost Averaging will cease automatically if the Contract Value does not equal or
exceed the amount designated to be transferred on each Transfer Date and the
remaining amount will be transferred.

Dollar Cost Averaging will terminate when (i) the number of designated monthly
transfers has been completed, (ii) the Contract Value attributable to the Money
Market or Government Securities Subaccount is insufficient to complete the next
transfer, (iii) the Contract Owner requests termination in writing and such
writing is received by KILICO at its home office at least five (5) business days
prior to the next Transfer Date in order to cancel the transfer scheduled to
take effect on such date, or (iv) the Contract is surrendered or annuitized.

If the General Account has a balance of at least $10,000, a Contract Owner may
elect automatic calendar quarter transfers of interest accrued in the General
Account to one or more of the Subaccounts. A Contract Owner may enroll in this
program at any time by completing the proper Dollar Cost Averaging enrollment
form and returning it to KILICO at its home office at least ten (10) days prior
to the end of the calendar quarter. The Transfer Date will be within five
business days of the end of the calendar quarter.

Following the Issue Date, a Contract Owner may initiate, reinstate or change
Dollar Cost Averaging or change existing Dollar Cost Averaging terms by properly
completing the new enrollment form and returning it to KILICO at its home office
at least five (5) business days, ten (10) business days for General Account
transfers, prior to the next Transfer Date such transfer is to be made.

When utilizing Dollar Cost Averaging, a Contract Owner must be invested in the
Money Market or Government Securities Subaccount or the General Account and may
be invested in the General Account and a maximum of five other Subaccounts at
any given time. Election of Dollar Cost Averaging is not available during the
Annuity Period.

SYSTEMATIC WITHDRAWAL PLAN

KILICO administers a Systematic Withdrawal Plan ("SWP") which allows certain
Contract Owners to pre-authorize periodic withdrawals during the Accumulation
Period. Contract Owners entering into a SWP agreement instruct KILICO to
withdraw selected amounts from the General Account, or from any of the
Subaccounts on a monthly, quarterly, semi-annual or annual basis. Currently the
SWP is available to Contract Owners who request a minimum $100.00 periodic
payment. If the amounts distributed under the SWP exceed the amount free of
surrender charge (currently 10% of Contract Value) then the surrender charge
will be applied on any amounts exceeding the 10% free withdrawal. WITHDRAWALS
TAKEN UNDER THE SWP MAY BE SUBJECT TO THE 10% FEDERAL TAX PENALTY ON EARLY
WITHDRAWALS AND TO INCOME TAXES AND WITHHOLDING. SEE "FEDERAL INCOME TAXES."
Contract owners interested in SWP may obtain an application and full information
concerning this program and its restrictions from their representative or
KILICO's home office. The right is reserved to amend the SWP on thirty days'
notice. The SWP may be terminated at any time by the Contract Owner or KILICO.

PROVISIONS OF PRIOR CONTRACTS

Certain provisions of the Contract became effective upon the later of June 1,
1993 or the date of state approval. If the provisions are not yet approved in
your state, you will receive an earlier version of the Contract and the
following provisions will apply:

FIXED ACCUMULATION OPTIONS. Fixed accumulations and benefits under the
contracts are provided in two Fixed Accumulation Options of the General Account.
Any portion of the purchase payment allocated to a Fixed

23
<PAGE> 36

Accumulation Option is credited with interest daily at a rate declared by KILICO
in its sole discretion, but not less than 4%.

TRANSFER DURING ACCUMULATION PERIOD. During the Accumulation Period, a Contract
Owner may transfer the Contract Value among the Subaccounts and the Fixed
Accumulation Options subject to the following provisions: (i) No transfer can be
made until the initial Purchase payment has been in a Subaccount or General
Account I or II for fifteen days; (ii) Once all or part of the Owner's Separate
Account Contract value has been transferred to General Account I or II or from
one Subaccount to another Subaccount another transfer may not be made within the
next fifteen day period; (iii) Once all or part of the Owner's General Account I
Contract Value has been transferred to General Account II or to a Subaccount
another transfer may not be made within the next fifteen day period; and (iv)
General Account II Contract value, less Debt may be transferred one time during
the Contract Year to one or more Subaccounts or to General Account I in the
thirty day period following the anniversary of a Contract year or the thirty day
period following the date of the confirmation statement provided for the period
through the anniversary date, if later.

WITHDRAWALS DURING ACCUMULATION PERIOD. The Contract owner may request a
partial withdrawal subject to the following conditions:

(1) The amount requested must be at least $500 or the Owner's entire interest in
the Subaccount, General Account I or General Account II from which withdrawal is
requested.

(2) The Owner's Contract interest in the Subaccount, General Account I or
General Account II from which the withdrawal is requested must be at least $500
after the withdrawal is completed.

RECORDS MAINTENANCE CHARGE. KILICO will assess an annual Records Maintenance
Charge of $25 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 imposition of
the Records Maintenance Charge will be made on December 31st of each year.

ANNUITY UNIT VALUE AND FIRST PERIODIC PAYMENT. For purposes of determining the
value of an Annuity Unit and the amount of the first annuity payment, the
assumed interest rate is 4%, which is also reflected in the annuity tables
contained in the Contracts.

DOLLAR COST AVERAGING. A Contract Owner may predesignate a portion of the
Contract value under a Contract attributable to General Account I, Money Market
or Government Securities Subaccount to be automatically transferred on a monthly
basis to one or more of the other Subaccounts and the General Account II. A
Contract Owner may enroll in this program at the time the Contract is issued or
any time thereafter by properly completing the Dollar Cost Averaging enrollment
form and returning it to KILICO at its home office at least five (5) business
days prior to the second Tuesday of a month which is the date that all dollar
cost averaging transfers will be made ("Transfer Date").

Transfers will be made in the amounts designated by the Contract Owner and must
be at least $500 per Subaccount or General Account I or II. The total Contract
Value in General Account I, the Money Market or Government Securities Subaccount
at the time Dollar Cost Averaging is elected must be at least equal to the
amount designated to be transferred on each transfer date multiplied by the
duration selection. Dollar Cost Averaging will cease automatically if the
Contract value does not equal or exceed the amount designated to be transferred
on each Transfer Date and the remaining amount will be transferred.

Dollar Cost Averaging will terminate when (i) the number of designated monthly
transfers has been completed, (ii) the Contract Value attributable to General
Account I, Money Market or Government Securities Subaccount is insufficient to
complete the next transfer, (iii) the Contract Owner requests termination in
writing and such writing is received by KILICO at its home office at least five
(5) days prior to the next Transfer Date in order to cancel the transfer
scheduled to take effect on such date, or (iv) the Contract is surrendered.

If General Account II has a balance of at least $10,000, a Contract Owner may
elect automatic calendar quarter transfers of interest accrued in General
Account II to one or more of the Subaccounts. A Contract Owner may enroll in
this program at any time by completing the proper Dollar Cost Averaging
enrollment form and returning it to KILICO at its home office at least ten (10)
days prior to the end of the calendar quarter. The transfer will occur within
five business days of the end of the calendar quarter.

24
<PAGE> 37

its home office at least five (5) business days, ten (10) business days for
General Account II transfers prior to the next transfer Date such transfer is to
be made.

When utilizing Dollar Cost Averaging, a Contract owner must be invested in
either the General Account or the Money Market or Government Securities
Subaccount and be invested in a maximum of five other Subaccounts at any given
time. Election of Dollar Cost Averaging is not available during the annuity
period.

Systematic withdrawals may be done from General Account I or II or from any of
the Subaccounts.

LEGAL PROCEEDINGS

There are no material legal proceedings pending to which the Separate Account,
KILICO or KFS is a party. With respect to KILICO, in 1992, the Staff of the
Securities and Exchange Commission commenced an investigation into certain of
Kemper Corporation's ("Kemper's") real estate-related accounting practices and
related disclosures. KILICO's accounting and disclosure practices are consistent
with those of Kemper. Kemper fully cooperated throughout the Staff's
investigation which has now concluded. Kemper and the Staff have had settlement
discussions respecting this matter, and KILICO anticipates that this matter will
be resolved with respect to Kemper in 1995 with the filing of an administrative
proceeding.

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; Report of Independent Auditors, Financial Statements of the Separate
Account, Report of Independent Auditors and Financial Statements of KILICO. The
Statement of Additional Information should be read in conjunction with this
Prospectus.

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<PAGE> 38

APPENDIX

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

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

A. REVOCATION

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

B. STATUTORY REQUIREMENTS

The provisions of this contract meet the requirements of Section 408(b) of the
Internal Revenue Code as to form for use as an IRA annuity contract described in
Items 1 through 5 below. The contract has received a favorable determination
letter from the Internal Revenue Service as to the form of the annuity. However,
this is not a determination by the IRS of the IRA's merits. If you set up an IRA
using an annuity contract it must meet the following requirements:

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

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

3. The contract must have flexible premiums.

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

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

C. ROLLOVERS AND DIRECT TRANSFERS

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

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

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

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

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

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

D. ALLOWANCE OF DEDUCTION

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

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<PAGE> 39

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

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

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

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

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

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

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

E. SEP-IRA'S

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

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

F. TAX STATUS OF THE CONTRACT AND DISTRIBUTIONS

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

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

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

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

G. REQUIRED DISTRIBUTIONS

You must start receiving minimum distributions from your IRA starting with the
year you reach age 70 1/2 (your 70 1/2 year). Ordinarily, you must receive the
minimum distribution for any year by December 31. However, you may delay the
minimum distribution for your 70 1/2 year until April 1 of the following year.

Figure your required minimum distribution for each year by dividing the value of
your IRA as of the close of business on December 31 of the preceding year by the
applicable life expectancy. The applicable life expectancy is your remaining
life expectancy or the remaining joint life and last survivor expectancy of you
and your designated

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<PAGE> 40

beneficiary. Life expectancies are determined using the expected return multiple
tables shown in IRS Publication 590 "Individual Retirement Arrangements." If a
designated beneficiary is more than 10 years younger than you, that beneficiary
is assumed to be exactly 10 years younger. To obtain a free copy of IRS
Publication 590 and other IRS forms, phone the IRS toll free at 1-800-829-3676
or write the IRS Forms Distribution Center for your area as shown in your income
tax return instructions.

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

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

If the actual distribution from your IRA during a year after you die or reach
age 70 1/2 is less than the minimum amount that should be distributed in
accordance with the rules set forth at Items 5, 6 and 7 above, the difference is
an excess accumulation. There is a 50% excise tax on any excess accumulations.
However, if you have a good reason for having an excess accumulation in your IRA
you may not have to pay the tax. For example, if you have been given wrong
advice or you made a mistake in using or did not understand the excess
accumulation rules, you may request the IRS to excuse the tax.

H. TAX ON EXCESS CONTRIBUTIONS

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

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

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

I. TAX ON PREMATURE DISTRIBUTIONS

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

1. To amounts that are rolled over tax free.

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

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

J. IRA EXCISE TAX REPORTING

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

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<PAGE> 41

K. BORROWING

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

L. FINANCIAL DISCLOSURE

1. If this is a regular contribution IRA, the following information, based on
the charts shown at the back of this form, which assumes you were to make a
level contribution to the fixed account at the beginning of each year of $1,000,
must be completed prior to your signing the enrollment application.

<TABLE>
<CAPTION>
END
OF LUMP SUM TERMINATION AT LUMP SUM TERMINATION
YEAR VALUE OF CONTRACT * AGE VALUE OF CONTRACT *
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1 60
------------------------------------------------------------------------------------------------------
2 65
------------------------------------------------------------------------------------------------------
3 70
------------------------------------------------------------------------------------------------------
4
------------------------------------------------------------------------------------------------------
5
------------------------------------------------------------------------------------------------------
</TABLE>

* Includes applicable withdrawal charges as described in Item M below.

2. If this is a rollover IRA, the following information, based on the charts
shown at the back of this form, and all of which assumes you make one
contribution to the fixed account of $1,000 at the beginning of this year, must
be completed prior to your signing the enrollment application.

* Includes applicable withdrawal charges as described in Item M below.

M. FINANCIAL DISCLOSURE FOR THE SEPARATE ACCOUNT (VARIABLE ACCOUNT)

1. If on the enrollment application you indicated an allocation to a Subaccount,
this contract will be assessed a daily charge of an amount which will equal an
aggregate of 1.30% per annum for Periodic Payment Contracts.

2. An annual records maintenance charge of $36.00 will be assessed ratably each
quarter against the Separate Account value, if you have participated in a
Subaccount during the year. If insufficient values are in the Subaccounts when
the charge is assessed, the charge will be assessed against General Account
value.

3. Withdrawal (early annuitization) charges as follows will be assessed based on
the years elapsed since purchase payments (in a given contract year) were
received by the Company; under 1 year, 6%; over 1 to 2 years, 5%; over 2 to 3
years, 4%; over 3 to 4 years, 3%; over 4 to 5 years, 2%; over 5 to 6 years, 1%;
6th year and thereafter, 0%.

4. The method used to compute and allocate the annual earnings is contained in
the prospectus under the heading "Accumulation Unit Value."

5. The growth in value of your contract is neither guaranteed nor projected but
is based on the investment experience of the Separate Account.

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<PAGE> 42

GUARANTEED LUMP SUM TERMINATION OF DEFERRED FIXED AND VARIABLE ANNUITY
COMPLETELY ALLOCATED TO THE GENERAL ACCOUNT WITH 3% GUARANTEED EACH YEAR.
(TERMINATION VALUES ARE BASED ON $1,000 ANNUAL CONTRIBUTIONS AT THE BEGINNING OF
EACH YEAR.)

<TABLE>
<CAPTION>
END OF TERMINATION END OF TERMINATION END OF TERMINATION END OF TERMINATION
YEAR VALUES* YEAR VALUES* YEAR VALUES* YEAR VALUES*
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 $ 1,000 14 $17,371 27 $41,703 40 $ 77,436
---------------------------------------------------------------------------------------------------
2 2,000 15 18,929 28 43,991 41 80,796
---------------------------------------------------------------------------------------------------
3 3,038 16 20,534 29 46,348 42 84,256
---------------------------------------------------------------------------------------------------
4 4,130 17 22,187 30 48,775 43 87,821
---------------------------------------------------------------------------------------------------
5 5,264 18 23,889 31 51,275 44 91,492
---------------------------------------------------------------------------------------------------
6 6,442 19 25,643 32 53,850 45 95,274
---------------------------------------------------------------------------------------------------
7 7,665 20 27,449 33 56,503 46 99,169
---------------------------------------------------------------------------------------------------
8 8,932 21 29,309 34 59,235 47 103,181
---------------------------------------------------------------------------------------------------
9 10,236 22 31,225 35 62,048 48 107,313
---------------------------------------------------------------------------------------------------
10 11,580 23 33,199 36 64,947 49 111,569
---------------------------------------------------------------------------------------------------
11 12,965 24 35,232 37 67,932 50 115,953
---------------------------------------------------------------------------------------------------
12 14,390 25 37,326 38 71,007
---------------------------------------------------------------------------------------------------
13 15,859 26 39,482 39 74,174
---------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
END OF TERMINATION END OF TERMINATION END OF TERMINATION END OF TERMINATION
YEAR VALUES* YEAR VALUES* YEAR VALUES* YEAR VALUES*
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 $ 1,000 14 $ 1,513 27 $ 2,221 40 $ 3,262
---------------------------------------------------------------------------------------------------
2 1,013 15 1,558 28 2,288 41 3,360
---------------------------------------------------------------------------------------------------
3 1,053 16 1,605 29 2,357 42 3,461
---------------------------------------------------------------------------------------------------
4 1,095 17 1,653 30 2,427 43 3,565
---------------------------------------------------------------------------------------------------
5 1,138 18 1,702 31 2,500 44 3,671
---------------------------------------------------------------------------------------------------
6 1,183 19 1,754 32 2,575 45 3,782
---------------------------------------------------------------------------------------------------
7 1,230 20 1,806 33 2,652 46 3,895
---------------------------------------------------------------------------------------------------
8 1,267 21 1,860 34 2,732 47 4,012
---------------------------------------------------------------------------------------------------
9 1,305 22 1,916 35 2,814 48 4,132
---------------------------------------------------------------------------------------------------
10 1,344 23 1,974 36 2,898 49 4,256
---------------------------------------------------------------------------------------------------
11 1,384 24 2,033 37 2,985 50 4,384
---------------------------------------------------------------------------------------------------
12 1,426 25 2,094 38 3,075
---------------------------------------------------------------------------------------------------
13 1,469 26 2,157 39 3,167
---------------------------------------------------------------------------------------------------
</TABLE>

* Includes applicable withdrawal charges.

30
<PAGE> 43

SUPPLEMENT DATED SEPTEMBER 15, 1995
TO STATEMENT OF ADDITIONAL INFORMATION
DATED MAY 1, 1995 FOR

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

PERIODIC PAYMENT

VARIABLE ANNUITY CONTRACTS

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

KEMPER ADVANTAGE III

ISSUED BY

KEMPER INVESTORS LIFE INSURANCE COMPANY

The Statement of Additional Information is modified effective September 15, 1995
as follows.

1. The fourth sentence of the first paragraph appearing under Services to
the Separate Account on page B-1 of the Statement of Additional
Information is revised to read as follows:

"KILICO maintains records of all purchases and redemptions of shares
of each Fund by each of the Subaccounts."

2. The first paragraph appearing under Performance Information of
Subaccounts on page B-1 of the Statement of Additional Information is
revised by adding the following to the end thereof:

"In addition, yield information may be provided in the case of the
Janus Short-Term Bond Subaccount."

3. The first sentence of the fourth paragraph appearing under Performance
Information of Subaccounts on page B-1 of the Statement of Additional
Information is revised to read as follows:

"The yield for the KINF High Yield Subaccount, the KINF Government
Securities Subaccount, and the Janus Short-Term Bond Subaccount is
computed in accordance with a standard method prescribed by rules of
the Securities and Exchange Commission."

4. The first paragraph appearing under Performance Information of
Subaccounts on page B-3 of the Statement of Additional Information is
revised by adding the following after the eighth sentence but before the
ninth sentence:

"The Janus Growth, Janus Aggressive Growth, Janus Worldwide Growth,
Janus Balanced, Janus Short-Term Bond, Lexington Natural Resources
and Lexington Emerging Markets Subaccounts may also be compared to
the Standard & Poor's Midcap Index, the Lehman Brothers
Government/Corporate 1-3 Year Bond Index, the Lehman Brothers Long
Government/Corporate Bond Index, the Russell 2000 Index, and the
NASDAQ composite. In addition, the Janus Worldwide Growth
Subaccount's performance may also be compared to the Morgan Stanley
International World Index.

31
<PAGE> 44

[KEMPER LOGO]

KEMPER ADVANTAGE III
A Flexible Payment Fixed and Variable Annuity from
Kemper Investors Life Insurance Company
1 Kemper Drive, Long Grove, IL 60049

Issued by Kemper Investors Life Insurance Company
Securities distributed by Investors Brokerage Services, Inc.

[RECYCLED LOGO]
ADV 01 (5/95) PRINTED ON RECYCLED PAPER Policy Form Series L-1000
<PAGE> 45

STATEMENT OF ADDITIONAL INFORMATION

MAY 1, 1995

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

PERIODIC PAYMENT

VARIABLE ANNUITY CONTRACTS

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

ISSUED BY

KEMPER INVESTORS LIFE INSURANCE COMPANY

IN CONNECTION WITH

KILICO VARIABLE ANNUITY SEPARATE ACCOUNT

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

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

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Services to the Separate Account....................................... B-1
Performance Information of Subaccounts................................. B-1
State Regulation....................................................... B-8
Experts................................................................ B-8
Financial Statements................................................... B-8
</TABLE>
<PAGE> 46

SERVICES TO THE SEPARATE ACCOUNT

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

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

KILICO pays commissions to the seller which may vary but are not anticipated to
exceed in the aggregate an amount equal to six percent (6%) of Purchase
Payments. During 1994, 1993 and 1992, KILICO incurred gross commissions payable
of approximately $13,085,000, $15,143,000 and $18,600,000 to licensed insurance
agents.

PERFORMANCE INFORMATION OF SUBACCOUNTS

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

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

No standard formula has been prescribed for calculating total return
performance. Total return performance for a specific period is calculated by
first taking an investment (assumed to be $10,000 below) in each Subaccount's
units on the first day of the period at the maximum offering price, which is the
Accumulation Unit Value per unit ("initial investment") and computing the ending
value ("ending value") of that investment at the end of the period. The ending
value does not include the effect of the applicable Withdrawal Charge that may
be imposed at the end of the period, and thus may be higher than if such charge
were deducted. The total return percentage is then determined by subtracting the
initial investment from the ending value and dividing the remainder by the
initial investment and expressing the result as a percentage. An assumed
investment of $10,000 was chosen because that approximates the size of a typical
account. The account size used affects the performance figure because the
Records Maintenance Charge is a fixed per account charge. Total return
quotations for various periods are set forth in the table below.

The yield for the High Yield Subaccount and the Government Securities Subaccount
is computed in accordance with a standard method prescribed by rules of the
Securities and Exchange Commission. The yields for the High Yield Subaccount and
Government Securities Subaccount, based upon the one month period ended March
31, 1995 were 9.20% and 4.97%, respectively. The yield quotation is computed by
dividing the net investment income per

B-1
<PAGE> 47

unit earned during the specified one month or 30-day period by the accumulation
unit values on the last day of the period, according to the following formula
that assumes a semi-annual reinvestment of income:

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

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

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

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

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

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

The Money Market Subaccount's yield is computed in accordance with a standard
method prescribed by rules of the Securities and Exchange Commission. Under that
method, the current yield quotation is based on a seven-day period and computed
as follows: the net change in the Accumulation Unit Value during the period is
divided by the Accumulation Unit Value at the beginning of the period ("base
period return") and the result is divided by 7 and multiplied by 365 and the
current yield figure carried to the nearest one-hundredth of one percent.
Realized capital gains or losses and unrealized appreciation or depreciation of
the Account's portfolio are not included in the calculation. The Money Market
Subaccount's yield for the seven-day period ended March 31, 1995 was 4.26% and
average portfolio maturity was 27 days.

The Money Market Subaccount's effective yield is determined by taking the base
period return (computed as described above) and calculating the effect of
assumed compounding. The formula for the effective yield is: (base period return
+1) (3)65 L 7 - 1. The Money Market Subaccount's effective yield for the seven
day period ended March 31, 1995 was 4.35%.

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;
however, the aggregate Withdrawal Charge will not exceed 7.25% of aggregate
Purchase Payments under the Contract. Yield, effective yield and total return do
not reflect the effect of the Withdrawal Charge or premium taxes that may be
imposed upon the redemption of units. Average annual total return reflects the
effect of the applicable Withdrawal Charge (but not premium tax) that may be
imposed at the end of the period in question.

The figures below show performance information for periods from March 5, 1982
(inception) for the Money Market Subaccount, Total Return Subaccount and High
Yield Subaccount and for periods from December 9, 1983 (inception) for the
Equity Subaccount to December 31, 1994. 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 Government Securities Subaccount was
added to the Separate Account to invest in the Fund's Government Securities
Portfolio. For the Government Securities Subaccount, performance figures will
reflect investment experience as if the Government Securities Subaccount had
been available under the Contracts since September 3, 1987, the inception date
of the Government Securities Portfolio. Performance of the Subaccounts will vary
from time to time, and these results are not necessarily representative of
future results. Performance information is also shown for the year ended
December 31, 1994. The total return performance of each Subaccount is calculated
for a specified period of time by assuming an initial Purchase Payment of
$10,000 fully allocated to each Separate Account and the deduction of all
expenses and fees, including a prorated portion of the $36 annual Records
Maintenance Charge. No withdrawals are assumed. The percentage increases are
determined by subtracting the initial Purchase Payment from the ending value and
dividing the remainder by the beginning value.

B-2
<PAGE> 48

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

B-3
<PAGE> 49

<TABLE>
<CAPTION>
VALUES OF INITIAL $10,000 INVESTMENT IN
SUBACCOUNTS--AS OF DECEMBER 31, 1994
-------------------------------------------------- COMPARED TO
Non- Non- ---------------------------------------
Qualified Qualified Qualified Qualified Dow Jones Standard Consumer
Ending Percentage Ending Percentage Industrial & Poor's Price EAFE
TOTAL RETURN TABLE Value Increase Value Increase Average(1) 500(2) Index(3) (13)
---------------------------------- --------- ---------- --------- ---------- --------- -------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
EQUITY SUBACCOUNT
Life of Subaccount(4)........... $32,261 222.61% $32,215 222.15% 351.28% 304.56% 47.95%
Ten years....................... 28,648 186.48 28,649 186.49 349.67 282.68 42.14
Five years...................... 17,056 70.56 17,056 70.56 63.05 51.60 18.72
One year........................ 9,450 (5.50) 9,450 (5.50) 5.02 1.31 2.67
TOTAL RETURN SUBACCOUNT
Life of Subaccount(5)........... $36,253 262.53% $33,758 237.58% 664.33% 553.57% 58.41%
Ten years....................... 26,912 169.12 26,912 169.12 349.67 282.68 42.14
Five years...................... 13,893 38.93 13,893 38.93 63.05 51.60 18.72
One year........................ 8,903 (10.97) 8,903 (10.97) 5.02 1.31 2.67
INTERNATIONAL SUBACCOUNT
Life of Subaccount (14)......... $12,187 21.87% $12,187 21.87% 31.94% 19.99% 8.56% 26.64%
One year........................ 9,499 (5.01) 9,499 (5.01) 5.02 1.31 2.67 8.06
SMALL CAP SUBACCOUNT
Life of Subaccount(15).......... $10,296 2.96% $10,296 2.96%
</TABLE>

<TABLE>
<CAPTION>
COMPARED TO
VALUES OF INITIAL $10,000 INVESTMENT IN --------------------------------------------------------------
SUBACCOUNTS--AS OF DECEMBER 31, 1994 Salomon
-------------------------------------------------- Bros. Lehman Merrill
Non- Non- High Grade Bros. Lynch
TOTAL Qualified Qualified Qualified Qualified Consumer CDA Cert. Corp. Govt./Corp. Govt./Corp.
RETURN Ending Percentage Ending Percentage Price of Deposit Bond Bond Master
TABLE Value Increase Value Increase Index(3) Index(6) Index(7) Index(8) Index(9)
----------- --------- ---------- --------- ---------- -------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MONEY
MARKET
SUBACCOUNT
Life of
Subaccount
(10).... $20,157 101.57% $20,157 101.57% 58.41% 153.99% 404.53% 301.86% 302.39%
Ten
years..... 15,924 59.24 15,924 59.24 42.14 90.66 198.97 155.53 157.17
Five
years..... 11,785 17.85 11,785 17.85 18.72 29.69 49.43 44.93 45.45
One
year..... 10,230 2.30 10,230 2.30 2.67 5.05 (5.74) (3.51) (3.27)
HIGH YIELD
SUBACCOUNT
Life of
Subaccount
(11)... $41,931 319.31% $40,843 308.43% 58.41% 153.99% 404.53% 301.86% 302.39%
Ten
years..... 26,895 168.95 26,895 168.95 42.14 90.66 198.97 155.53 157.17
Five
years..... 16,523 65.23 16,523 65.23 18.72 29.69 49.43 44.93 45.45
One
year..... 9,625 (3.75) 9,625 (3.75) 2.67 5.05 (5.74) (3.51) (3.27)
GOVERNMENT
SECURITIES
SUBACCOUNT
Life of
Subaccount
(12)... $14,925 49.25% $14,925 49.25% 30.86% 57.55% 100.07% 84.45% 85.30%
Five
years..... 12,941 29.41 12,941 29.41 18.72 29.69 49.43 44.93 45.45
One
year..... 9,578 (4.22) 9,578 (4.22) 2.67 5.05 (5.74) (3.51) (3.27)
</TABLE>

<TABLE>
<CAPTION>
Average Annual
Total Return COMPARED TO
(based on $1,000 ----------------------------------------
investment) Standard
--------------------- Dow Jones & Poor's Consumer
AVERAGE ANNUAL TOTAL Non- Industrial 500 Stock Price EAFE
RETURN TABLE Qualified Qualified Average(1) Index(2) Index(3) (13)
------------------------------------------------------------- --------- --------- ---------- --------- -------- ----
<S> <C> <C> <C> <C> <C> <C>
EQUITY SUBACCOUNT
Life of Subaccount(4)...................................... 10.85% 10.83% 14.56% 13.44% 3.60%
Ten years.................................................. 10.69 10.69 16.22 14.36 3.58
Five years................................................. 9.89 9.89 10.27 8.68 3.49
One year................................................... (12.73) (12.73) 5.02 1.31 2.67
TOTAL RETURN SUBACCOUNT
Life of Subaccount(5)...................................... 9.97% 9.31% 17.29% 15.86% 3.67%
Ten years.................................................. 9.45 9.45 16.22 14.36 3.58
Five years................................................. 4.70 4.70 10.27 8.68 3.49
One year................................................... (18.45) (18.45) 5.02 1.31 2.67
INTERNATIONAL SUBACCOUNT
Life of Subaccount (14).................................... 4.31% 4.31% 9.68% 6.26% 2.77% 8.19%
One year................................................... (11.76) (11.76) 5.02 1.31 2.67 8.06
</TABLE>

B-4
<PAGE> 50
<TABLE>
<CAPTION>
COMPARED TO
AVERAGE ANNUAL ------------------------------------------------------------
TOTAL RETURN LEHMAN
(BASED ON $1,000 SALOMON BROS. BROS. MERRILL LYNCH
INVESTMENT) CONSUMER HIGH GRADE GOVT./CORP. GOVT./CORP.
AVERAGE ANNUAL TOTAL ----------------------------- PRICE CORP. BOND BOND MASTER
RETURN TABLE QUALIFIED NON-QUALIFIED INDEX(3) INDEX(7) INDEX(8) INDEX(9)
--------------------------------- --------- ------------- -------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
HIGH YIELD SUBACCOUNT
Life of Subaccount(11)......... 11.60% 11.36% 3.67 13.53 11.53 11.54
Ten years...................... 9.84 9.84 3.58 11.57 9.84 9.91
Five years..................... 8.94 8.94 3.49 8.36 7.70 7.78
One year....................... (11.04) (11.04) 2.67 (5.74) (3.51) (3.27)
GOVERNMENT SECURITIES SUBACCOUNT
Life of Subaccount(12)......... 5.02% 5.02% 3.74 9.92 8.71 8.77
Five years..................... 3.91 3.91 3.49 8.36 7.70 7.78
One year....................... (11.34) (11.34) 2.67 (5.74) (3.51) (3.27)
SMALL CAP SUBACCOUNT
Life of Subaccount(15)......... (5.09) (5.09)

<CAPTION>
YIELD INFORMATION QUALIFIED AND NON-QUALIFIED
--------------------------- -----------------------------
<S> <C>
HIGH YIELD SUBACCOUNT
30 day period ended 3/31/95.... 9.20%

GOVERNMENT SECURITIES SUBACCOUNT
30 day period ended 3/31/95.... 4.97%

MONEY MARKET SUBACCOUNT
7 day period ended 3/31/95..... 4.26%
</TABLE>

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

B-5
<PAGE> 51

The following tables illustrate an assumed $10,000 investment in shares of
certain Subaccounts. The ending value does not include the effect of the
applicable Withdrawal Charge that may be imposed at the end of the period, and
thus may be higher than if such charge were deducted. Each table covers the
period from commencement of operations of the Subaccount to December 31, 1994.
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TOTAL RETURN SUBACCOUNT

NON-
YEAR QUALIFIED QUALIFIED
ENDED TOTAL TOTAL
12/31 VALUE VALUE
----- -------- --------
<S> <C> <C>
1982 .................... $ 12,336 $ 11,769
1983 .................... 14,313 13,211
1984 .................... 13,427 12,508
1985 .................... 17,019 15,853
1986 .................... 19,328 18,003
1987 .................... 19,188 17,872
1988 .................... 21,207 19,752
1989 .................... 25,945 24,164
1990 .................... 26,889 25,043
1991 .................... 36,583 34,069
1992 .................... 36,703 34,179
1993 .................... 40,598 37,805
1994 .................... 36,253 33,758

HIGH YIELD SUBACCOUNT
NON-
YEAR QUALIFIED QUALIFIED
ENDED TOTAL TOTAL
12/31 VALUE VALUE
----- -------- --------
<S> <C> <C>
1982 .................... $ 12,363 $ 11,920
1983 .................... 14,000 13,427
1984 .................... 15,557 15,155
1985 .................... 18,686 18,203
1986 .................... 21,710 21,149
1987 .................... 22,693 22,105
1988 .................... 25,944 25,273
1989 .................... 25,278 24,624
1990 .................... 21,092 20,546
1991 .................... 31,597 30,778
1992 .................... 36,712 35,760
1993 .................... 43,466 42,338
1994 .................... 41,931 40,843

<CAPTION>
INTERNATIONAL SUBACCOUNT

QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
----- --------
<S> <C>
1992 .................... $ 9,803
1993 .................... 12,836
1994 .................... 12,187

<CAPTION>
SMALL CAP SUBACCOUNT

QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
----- --------
<S> <C>
1994 .................... $ 10,296

<CAPTION>
EQUITY SUBACCOUNT
NON-
YEAR QUALIFIED QUALIFIED
ENDED TOTAL TOTAL
12/31 VALUE VALUE
----- -------- --------
<S> <C> <C>
1983 .................... $ 10,290 $ 10,271
1984 .................... 11,254 11,237
1985 .................... 13,898 13,877
1986 .................... 14,986 14,965
1987 .................... 15,043 15,022
1988 .................... 14,908 14,887
1989 .................... 18,871 18,844
1990 .................... 18,736 18,709
1991 .................... 29,479 29,437
1992 .................... 30,123 30,080
1993 .................... 34,063 34,011
1994 .................... 32,261 32,215

<CAPTION>
MONEY MARKET SUBACCOUNT

QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
----- --------
<S> <C>
1982 .................... $ 10,747
1983 .................... 11,575
1984 .................... 12,630
1985 .................... 13,479
1986 .................... 14,185
1987 .................... 14,922
1988 .................... 15,827
1989 .................... 17,045
1990 .................... 18,195
1991 .................... 19,003
1992 .................... 19,385
1993 .................... 19,661
1994 .................... 20,157

<CAPTION>
GOVERNMENT SECURITIES SUBACCOUNT

QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
----- --------
<S> <C>
1987 .................... $ 10,030
1988 .................... 10,232
1989 .................... 11,437
1990 .................... 12,396
1991 .................... 14,084
1992 .................... 14,708
1993 .................... 15,559
1994 .................... 14,925
</TABLE>

The following table compares the performance of the Subaccounts over various
periods with that of other variable annuity funds within the categories
described below according to data reported by Lipper Analytical Services, Inc.
("Lipper"), New York, New York, mutual fund reporting service. Lipper rankings
are based on changes in net asset value, with all income and capital gain
dividends reinvested. Such calculations do not include the effect of any sales

B-6
<PAGE> 52

charges and include the deduction of mortality and expense risk charges and
other asset based charges. Future performance cannot be guaranteed. Lipper
publishes performance analyses on a regular basis from which the following
rankings were derived.

<TABLE>
<CAPTION>
LIPPER VARIABLE ANNUITY
PERFORMANCE ANALYSIS
-------------------------------------
2/28/94 2/28/89
TO TO
SUBACCOUNT 2/28/95 2/28/95
---------- --------------- --------------
<S> <C> <C>
Total Return (Q).............................................. 113 out of 117 17 out of 52
Total Return (NQ)............................................. 112 out of 117 18 out of 52
High Yield (Q)................................................ 20 out of 60 21 out of 39
High Yield (NQ)............................................... 21 out of 60 20 out of 39
Equity (Q).................................................... 43 out of 84 7 out of 36
Equity (NQ)................................................... 43 out of 84 8 out of 36
Money Market (Q).............................................. 80 out of 169 59 out of 106
Money Market (NQ)............................................. 80 out of 169 59 out of 106
Government Securities (Q & NQ)................................ 8 out of 12 N/A
International (Q & NQ)........................................ 42 out of 48 N/A
</TABLE>

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

TAX-DEFERRED ACCUMULATION

<TABLE>
<CAPTION>
TAX-DEFERRED NON-QUALIFIED CONVENTIONAL
RETIREMENT ANNUITY ANNUITY SAVINGS PLAN

BEFORE-TAX CONTRIBUTIONS AFTER-TAX CONTRIBUTIONS
AND TAX-DEFERRED EARNINGS. AND TAX-DEFERRED EARNINGS.
-------------------------- -------------------------- AFTER-TAX
TAXABLE TAXABLE CONTRIBUTIONS
LUMP LUMP AND
NO SUM NO SUM TAXABLE
WITHDRAWALS WITHDRAWAL WITHDRAWALS WITHDRAWAL EARNINGS.
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
10 Years................ $ 33,898 $ 22,732 $ 23,283 $ 20,746 $ 22,137
20 Years................ 100,018 66,967 68,698 56,258 60,535
30 Years................ 228,992 151,140 157,284 119,479 127,136
</TABLE>

This chart compares the accumulation of monthly contributions into a
Tax-Deferred Retirement Annuity through a payroll reduction program, a
Non-qualified Annuity and a Conventional Savings Plan. Before-tax contributions
to the Tax-Deferred Retirement Annuity are $200 per month and the entire amount
of a taxable lump sum withdrawal will be subject to income tax. After-tax
contributions to the Non-qualified Annuity and the Conventional Savings Plan are
$138 per month. Only the gain in the Non-qualified Annuity will be subject to
income tax in a taxable lump sum withdrawal. The chart assumes a 31% tax bracket
and an 8% annual return. Tax rates are subject to change as is the tax-deferred
treatment of the Contracts. Tax-deferred retirement accumulations, as well as
the income on non-qualified annuities, are taxed as ordinary income upon
withdrawal. A 10% tax penalty may apply to early withdrawals. See "Federal
Income Taxes" in the prospectus. For the Tax-Deferred Retirement Annuity and the
Non-Qualified Annuity the figures include a deduction for all applicable
Contract charges. 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 tax-deferred retirement annuities and
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 tax-deferred
retirement annuity or non-qualified annuity (and you have many different options
on how you receive your funds), they are subject to income

B-7
<PAGE> 53

tax. At the time of receipt, if the person receiving the monies is retired, not
working or has additional tax exemptions, these monies may be taxed at a lesser
rate.

STATE REGULATION

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

EXPERTS

The financial statements of KILICO and the Separate Account have been included
in the Statement of Additional Information in reliance upon the reports of KPMG
Peat Marwick LLP, independent certified public accountants, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing. As discussed in the notes to KILICO's consolidated financial
statements effective January 1, 1994, KILICO changed its method of accounting
for investment securities to adopt the provisions of the Financial Accounting
Standards Board's Statement of Financial Accounting Standards ("SFAS") 115,
ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBTS AND EQUITY SECURITIES. Also, as
discussed in the notes, effective January 1, 1993, KILICO changed its method of
accounting for impairment of loans receivable to adopt the provisions of SFAS
114, ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN, and changed its method of
accounting for income taxes to adopt the provisions of SFAS 109, ACCOUNTING FOR
INCOME TAXES. Further, as discussed in the notes, KILICO adopted the provisions
of SFAS 106, EMPLOYERS' ACCOUNTING FOR POSTRETIREMENT BENEFITS OTHER THAN
PENSIONS in 1992.

FINANCIAL STATEMENTS

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

B-8
<PAGE> 54

INDEPENDENT AUDITORS' REPORT

THE BOARD OF DIRECTORS
KEMPER INVESTORS LIFE INSURANCE COMPANY:

We have audited the accompanying combined statement of assets and liabilities
and contract owners' equity of the KILICO Variable Annuity Separate Account as
of December 31, 1994, and the related combined statement of operations for the
year then ended, and the combined statements of changes in contract owners'
equity for the years ended December 31, 1994 and 1993. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

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

KPMG Peat Marwick LLP

Chicago, Illinois
February 13, 1995

B-9
<PAGE> 55

KILICO VARIABLE ANNUITY SEPARATE ACCOUNT

COMBINED STATEMENT OF ASSETS AND LIABILITIES AND CONTRACT OWNERS' EQUITY

DECEMBER 31, 1994 (IN THOUSANDS)

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

<CAPTION>
SMALL
INTER- CAPITALIZATION
NATIONAL EQUITY
SUB- SUB-
ACCOUNT ACCOUNT
------- -------------
<S> <C> <C>
ASSETS
Investments,
at current
value.......... 122,709 12,909
Dividends
and other
receivables.... 6 12
------- ------
Total
assets........ 122,715 12,921
------- ------
LIABILITIES
AND CONTRACT
OWNERS'
EQUITY
Liabilities:
Mortality
and expense
risk and
adminis-
trative
charges........ 131 12
Other.......... -- 106
------- ------
Total
liabili-
ties.......... 131 118
------- ------
Contract
owners'
equity......... 122,584 12,803
======= ======
ANALYSIS OF CONTRACT
OWNERS' EQUITY
Excess of
proceeds
from units
sold over
payments
for units
redeemed....... 117,687 12,753
Accumulated
net investment
income
(loss)......... (907) (161)
Accumulated
net realized
gain (loss)
on sales of
investments.... 2,355 (77)
Unrealized
appreciation
(depreciation)
of investments.. 3,449 288
------- ------
Contract
owners'
equity.......... 122,584 12,803
======= ======

</TABLE>

See accompanying notes to combined financial statements.

B-10
<PAGE> 56

KILICO VARIABLE ANNUITY SEPARATE ACCOUNT

COMBINED STATEMENT OF OPERATIONS

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

MONEY MONEY TOTAL
MARKET MARKET RETURN HIGH YIELD
COMBINED SUBACCOUNT SUBACCOUNT #2 SUBACCOUNT SUBACCOUNT
--------- ---------- -------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Dividends and
capital gains
distributions................ $ 105,315 3,840 153 58,451 19,146

Expenses:

Mortality and expense
risk and administrative
charges.................... 20,153 1,266 1 8,636 2,988
--------- ----- --- -------- --------

Net investment income (loss)... 85,162 2,574 152 49,815 16,158
--------- ----- --- -------- --------

Net realized and unrealized gain
(loss) on investments:

Net realized gain (loss) on
sales of investments....... 11,105 -- -- 878 3,164

Change in unrealized
appreciation (depreciation)
of investments............. (199,366) -- -- (121,752) (27,264)
--------- ----- --- -------- --------

Net realized and unrealized gain
(loss) on investments........ (188,261) -- -- (120,874) (24,100)
--------- ----- --- -------- --------

Net increase (decrease) in
contract owners' equity
resulting from
operations................... $(103,099) 2,574 152 (71,059) (7,942)
========= ===== === ======== ========
</TABLE>

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

See accompanying notes to combined financial statements.

<TABLE>
<CAPTION>
SMALL
GOVERNMENT CAPITALIZATION
EQUITY SECURITIES INTERNATIONAL EQUITY
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT(a)
---------- ---------- ------------- --------------
<S> <C> <C> <C> <C>
Dividends and
capital gains
distributions................ 14,860 7,695 1,170 --

Expenses:

Mortality and expense
risk and administrative
charges.................... 4,137 1,379 1,585 161
------- ------- ------ -----

Net investment income (loss)... 10,723 6,316 (415) (161)
------- ------- ------ -----

Net realized and unrealized gain
(loss) on investments:

Net realized gain (loss) on
sales of investments....... 5,853 (726) 2,013 (77)

Change in unrealized
appreciation (depreciation)
of investments............. (32,435) (10,070) (8,133) 288
------- ------- ------ -----

Net realized and unrealized gain
(loss) on investments........ (26,582) (10,796) (6,120) 211
------- ------- ------ -----

Net increase (decrease) in
contract owners' equity
resulting from
operations................... (15,859) (4,480) (6,535) 50
======= ======= ====== =====
</TABLE>

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

See accompanying notes to combined financial statements.

B-11
<PAGE> 57

KILICO VARIABLE ANNUITY SEPARATE ACCOUNT

COMBINED STATEMENTS OF CHANGES IN CONTRACT OWNERS' EQUITY

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

<TABLE>
<CAPTION>
MONEY MARKET MONEY MARKET
COMBINED SUBACCOUNT SUBACCOUNT #2
---------------------------- ----------------------- ---------------------
1994 1993 1994 1993 1994 1993
---------- --------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Operations:
Net investment income (loss)....... $ 85,162 49,841 2,574 997 152 127
Net realized gain (loss) on sales
of investments................... 11,105 19,074 -- -- -- --
Change in unrealized appreciation
(depreciation) of investments.... (199,366) 72,722 -- -- -- --
---------- --------- ------- ------- ------ ------
Net increase (decrease) in
contract owners' equity
resulting from operations...... (103,099) 141,637 2,574 997 152 127
---------- --------- ------- ------- ------ ------
Account unit transactions:
Proceeds from units sold........... 254,411 266,721 19,971 12,800 6,673 4,794
Net transfers (to) from affiliate
and subaccounts.................. 3,471 48,524 16,310 (2,660) (6,297) (8,394)
Payments for units redeemed........ (152,336) (104,210) (24,064) (13,103) (68) (84)
---------- --------- ------- ------- ------ ------
Net increase (decrease) in
contract owners' equity from
account unit transactions...... 105,546 211,035 12,217 (2,963) 308 (3,684)
---------- --------- ------- ------- ------ ------
Total increase (decrease) in contract
owners' equity..................... 2,447 352,672 14,791 (1,966) 460 (3,557)
Contract owners' equity:
Beginning of period................ 1,428,707 1,076,035 64,159 66,125 3,225 6,782
---------- --------- ------- ------- ------ ------
End of period...................... $1,431,154 1,428,707 78,950 64,159 3,685 3,225
========== ========= ======= ======= ====== ======
</TABLE>

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

See accompanying notes to combined financial statements.

B-12
<PAGE> 58
<TABLE>
<CAPTION>

SMALL
GOVERNMENT CAPITALIZATION
TOTAL RETURN HIGH YIELD EQUITY SECURITIES INTERNATIONAL EQUITY
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
-------------------- ------------------- ------------------- ------------------- ------------------ ---------------
1994 1993 1994 1993 1994 1993 1994 1993 1994 1993 1994(a) 1993
-------- ------- ------- ------- ------- ------- ------- ------- ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
49,815 28,972 16,158 11,854 10,723 2,502 6,316 5,694 (415) (305) (161) --
878 6,051 3,164 2,654 5,853 9,420 (726) 632 2,013 317 (77) --
(121,752) 23,970 (27,264) 19,150 (32,435) 18,912 (10,070) (1,182) (8,133) 11,872 288 --
-------- ------- ------- ------- ------- ------- ------- ------- ------- ------ ------- ------
(71,059) 58,993 (7,942) 33,658 (15,859) 30,834 (4,480) 5,144 (6,535) 11,884 50 --
-------- ------- ------- ------- ------- ------- ------- ------- ------- ------ ------- ------
89,169 104,977 34,261 39,600 52,913 56,537 15,214 32,889 32,734 15,124 3,476 --
(16,297) (5,727) (15,720) 15,978 25,150 9,542 (24,188) (4,289) 15,006 44,074 9,507 --
(58,032) (43,640) (24,877) (18,723) (24,735) (16,241 (12,918) (10,666) (7,412) (1,753) (230) --
-------- ------- ------- ------- ------- ------- ------- ------- ------- ------ ------- ------
14,840 55,610 (6,336) 36,855 53,328 49,838 (21,892) 17,934 40,328 57,445 12,753 --
-------- ------- ------- ------- ------- ------- ------- ------- ------- ------ ------- ------
(56,219) 114,603 (14,278) 70,513 37,469 80,672 (26,372) 23,078 33,793 69,329 12,803 --
640,084 525,481 231,766 161,253 282,801 202,129 117,881 94,803 88,791 19,462 -- --
-------- ------- ------- ------- ------- ------- ------- ------- ------- ------ ------- ------
583,865 640,084 217,488 231,766 320,270 282,801 91,509 117,881 122,584 88,791 12,803 --
======== ======= ======= ======= ======= ======= ======= ======= ======= ====== ======== ======

</TABLE>

B-13
<PAGE> 59

KILICO VARIABLE ANNUITY SEPARATE ACCOUNT

NOTES TO COMBINED FINANCIAL STATEMENTS

(1) GENERAL INFORMATION AND SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION.

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

SECURITY VALUATION.

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

SECURITY TRANSACTIONS AND INVESTMENT INCOME.

Security transactions are accounted for on the trade date (date the order to buy
or sell is executed). Dividends and capital gains distributions are recorded as
income on the ex-dividend date. Realized gains and losses from security
transactions are reported on an identified cost basis.

ACCUMULATION UNIT VALUATION.

On each day the New York Stock Exchange (the "Exchange") is open for trading,
the accumulation unit value is determined as of the earlier of 3:00 p.m.
(Chicago time) or the close of the Exchange by dividing the total value of each
Subaccount's investments and other assets, less liabilities, by the number of
accumulation units outstanding in the respective Subaccount.

FEDERAL INCOME TAXES.

The operations of the Separate Account are included in the Federal income tax
return of KILICO. Under existing Federal income tax law, investment income and
realized capital gains and losses of the Separate Account increase liabilities
under the contract and are, therefore, not taxed. Thus the Separate Account may
realize net investment income and capital gains and losses without Federal
income tax consequences.

(2) SUMMARY OF INVESTMENTS

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

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

B-14
<PAGE> 60

NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)

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

MONEY MARKET PORTFOLIO: This Portfolio invests primarily in short-term
obligations of major banks and corporations. The Money Market Subaccount
represents the ADVANTAGE III Money Market Subaccount and the PASSPORT Money
Market Subaccount #1. Money Market Subaccount #2 represents funds allocated by
the owner of a contract to the dollar cost averaging program. Under the dollar
cost averaging program, an owner may predesignate a portion of the Subaccount
value to be automatically transferred on a monthly basis to one or more of the
other Subaccounts. This option is only available to PASSPORT individual and
group variable and market value adjusted deferred annuity contracts. At December
31, 1994, no industry exceeded 20% of the Portfolio's assets.

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

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

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

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

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

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

(3) TRANSACTIONS WITH AFFILIATES

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

B-15
<PAGE> 61

NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)

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

For contracts issued prior to May 1, 1994, KILICO has undertaken to reimburse
each of the ADVANTAGE III Money Market, Total Return, High Yield, and Equity
Subaccounts whose direct and indirect operating expenses exceed eighty
hundredths of one percent (.80%) of average daily net assets. In determining
reimbursement of direct and indirect operating expenses, for each Subaccount,
charges for mortality and expense risks and administrative expenses, and records
maintenance charges are excluded and, for each Portfolio, charges for taxes,
extraordinary expenses, and brokerage and transaction costs are excluded. During
the year ended December 31, 1994, no such payment was made.

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

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

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

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

(5) CONTRACT OWNERS' EQUITY

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

B-16
<PAGE> 62

NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)

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

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

B-17
<PAGE> 63

NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)

<TABLE>
<CAPTION>
NUMBER CONTRACT
OF UNIT OWNERS'
UNITS VALUE EQUITY
-------- ------ ----------
<S> <C> <C> <C>
PASSPORT SUBACCOUNT

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

B-18
<PAGE> 64

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

The Board of Directors
Kemper Investors Life Insurance Company:

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

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

As discussed in the notes to the consolidated financial statements, effective
January 1, 1994, the Company changed its method of accounting for investment
securities to adopt the provisions of the Financial Accounting Standards Board's
Statement of Financial Accounting Standards ("SFAS") 115, ACCOUNTING FOR CERTAIN
INVESTMENTS IN DEBT AND EQUITY SECURITIES. Also, as discussed in the notes,
effective January 1, 1993, the Company changed its method of accounting for
impairment of loans receivable to adopt the provisions of SFAS 114, ACCOUNTING
BY CREDITORS FOR IMPAIRMENT OF A LOAN, and changed its method of accounting for
income taxes to adopt the provisions of SFAS 109, ACCOUNTING FOR INCOME TAXES.
Further, as discussed in the notes, the Company adopted the provisions of SFAS
106, EMPLOYERS' ACCOUNTING FOR POSTRETIREMENT BENEFITS OTHER THAN PENSIONS in
1992.

KPMG PEAT MARWICK LLP
Chicago, Illinois
March 3, 1995

B-19
<PAGE> 65

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET
(in thousands, except share data)

<TABLE>
<CAPTION>
DECEMBER 31
---------------------------
1994 1993
---------- ----------
<S> <C> <C>
ASSETS
Fixed maturities, available for sale, at market (cost: 1994,
$3,707,356; 1993, $3,333,202)..................................... $3,463,732 $3,441,224
Equity securities, at market (cost: 1994, $14,947; 1993, $35,170)... 14,767 67,700
Short-term investments.............................................. 204,164 402,463
Joint venture mortgage loans........................................ 351,359 730,753
Third-party mortgage loans.......................................... 318,682 132,162
Other real estate-related investments............................... 237,242 291,489
Policy loans........................................................ 277,743 264,112
Other invested assets............................................... 25,760 43,267
---------- ----------
Total investments......................................... 4,893,449 5,373,170
Cash................................................................ 23,189 7,487
Accrued investment income........................................... 125,543 132,834
Deferred insurance acquisition costs................................ 310,465 288,097
Fixed assets, at cost less accumulated depreciation................. 3,735 6,413
Receivable for securities sold...................................... -- 26,631
Reinsurance recoverable............................................. 642,801 745,554
Other assets and receivables........................................ 29,914 34,058
Assets held in separate accounts.................................... 1,507,984 1,499,471
---------- ----------
Total assets.............................................. $7,537,080 $8,113,715
========== ==========
LIABILITIES
Future policy benefits.............................................. $4,843,690 $5,040,002
Ceded future policy benefits........................................ 642,801 745,554
Payable for securities purchased.................................... 574 43,758
Other accounts payable and liabilities.............................. 66,687 66,298
Deferred income taxes............................................... 41,364 64,045
Liabilities related to separate accounts............................ 1,507,984 1,499,471
---------- ----------
Total liabilities......................................... 7,103,100 7,459,128
---------- ----------
Commitments and contingent liabilities
STOCKHOLDER'S EQUITY
Capital stock--$10 par value,
authorized 300,000 shares; outstanding 250,000 shares............. 2,500 2,500
Additional paid-in capital.......................................... 491,994 409,423
Unrealized gain (loss) on investments............................... (236,443) 93,096
Retained earnings................................................... 175,929 149,568
---------- ----------
Total stockholder's equity................................ 433,980 654,587
---------- ----------
Total liabilities and stockholder's equity................ $7,537,080 $8,113,715
========== ==========
</TABLE>

See accompanying notes to consolidated financial statements.

B-20
<PAGE> 66

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands)

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

See accompanying notes to consolidated financial statements.

B-21
<PAGE> 67

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
(in thousands)

<TABLE>
<CAPTION>
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
CAPITAL STOCK, beginning and end of year................. $ 2,500 $ 2,500 $ 2,500
--------- --------- ---------
ADDITIONAL PAID-IN CAPITAL, beginning of year............ 409,423 310,237 280,237
Capital contributions from Parent........................ 82,500 90,000 30,000
Transfer of limited partnership interest to Parent....... 71 9,186 --
--------- --------- ---------
End of year.................................... 491,994 409,423 310,237
--------- --------- ---------
UNREALIZED GAIN (LOSS) ON INVESTMENTS, beginning of
year................................................... 93,096 39,872 (830)
Unrealized gain (loss) on revaluation of investments,
net.................................................... (329,539) 53,224 40,702
--------- --------- ---------
End of year.................................... (236,443) 93,096 39,872
--------- --------- ---------
RETAINED EARNINGS, beginning of year..................... 149,568 136,055 187,941
Net income (loss)........................................ 26,361 14,043 (51,886)
Dividend of limited partnership interest to Parent....... -- (530) --
--------- --------- ---------
End of year.................................... 175,929 149,568 136,055
--------- --------- ---------
Total stockholder's equity..................... $ 433,980 $ 654,587 $ 488,664
========= ========= =========
</TABLE>

See accompanying notes to consolidated financial statements.

B-22
<PAGE> 68

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)

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

See accompanying notes to consolidated financial statements.

B-23
<PAGE> 69

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

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

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

LIFE INSURANCE REVENUE AND EXPENSES

Revenue for annuities and interest-sensitive life products consists of
investment income, and policy charges such as mortality, expense and surrender
charges. Expenses consist of benefits and interest credited to contracts, policy
maintenance costs and amortization of deferred insurance acquisition costs. Also
reflected in fees and other income are ceding commissions received as a result
of certain reinsurance transactions entered into by the Company during 1992.
(See the note captioned "Reinsurance" on page B-38.)

DEFERRED INSURANCE ACQUISITION COSTS

The costs of acquiring new business, principally commission expense and certain
policy issuance and underwriting expenses, have been deferred to the extent they
are recoverable from estimated future gross profits on the related contracts and
policies. The deferred insurance acquisition costs for annuities, separate
account business and interest-sensitive life products are being amortized over
the estimated contract life in relation to the present value of estimated gross
profits. Beginning in 1994, deferred insurance acquisition costs reflect the
estimated impact of unrealized gains or losses on fixed maturities held as
available for sale in the investment portfolio, through a credit or charge to
stockholder's equity, net of income tax.

FUTURE POLICY BENEFITS

Liabilities for future policy benefits related to annuities and
interest-sensitive life contracts reflect net premiums received plus interest
credited during the contract accumulation period and the present value of future
payments for contracts that have annuitized. Current interest rates credited
during the contract accumulation period range from 4 percent to 8.75 percent.
Future minimum guaranteed interest rates vary from 4 percent to 8.75 percent for
periods ranging from a portion of 1995 up to a portion of 1999 and are generally
3 percent to 4.5 percent thereafter. For contracts that have annuitized,
interest rates that are used in determining the present value of future payments
range principally from 3 percent to 11.25 percent.

INVESTED ASSETS AND RELATED INCOME

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

Mortgage loans are carried at their unpaid balance net of unamortized discount
and any applicable reserve. Other real estate-related investments net of any
applicable reserve and write-downs include certain bonds issued by real

B-24
<PAGE> 70

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

estate finance or development companies; notes receivable from real estate
ventures; investments in real estate ventures carried at cost, adjusted for the
equity in the operating income or loss of such ventures; and real estate owned
carried primarily at fair value.

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

The Company adopted SFAS 114, ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN,
in the fourth quarter of 1993. SFAS 114 defines "impaired loans" as loans in
which it is probable that a creditor will be unable to collect all amounts due
according to the contractual terms of the loan agreement. In the fourth quarter
of 1994, the Company adopted SFAS 118, ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF
A LOAN--INCOME RECOGNITION AND DISCLOSURES. SFAS 118 amends SFAS 114, providing
clarification of income recognition issues and requiring additional disclosures
relating to impaired loans. The adoption of SFAS 118 had no effect on the
Company's financial position or results of operations at or for the year ended
December 31, 1994.

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

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

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

Policy loans are carried at their unpaid balance. Other invested assets consist
primarily of venture capital and a leveraged lease and are carried at cost.

Realized gains or losses on sales of investments, determined on the basis of
identifiable cost on the disposition of the respective investment, recognition
of other-than-temporary declines in value and changes in real estate-related
reserves and write-downs are included in revenue. Unrealized gains or losses on
revaluation of investments are credited or charged to stockholder's equity net
of deferred income tax.

The amortized cost of fixed maturities is adjusted for amortization of premiums
and accretion of discounts to maturity, or in the case of mortgage-backed
securities, over the estimated life of the security. Such amortization is
included in net interest income. Amortization of the discount or premium from
mortgage-backed securities is recognized using a level effective yield method
which considers the estimated timing and amount of prepayments of the underlying
mortgage loans and is adjusted to reflect differences which arise between the
prepayments originally anticipated and the actual prepayments received and
currently anticipated. To the extent that the estimated lives of mortgage-backed
securities change as a result of changes in prepayment rates, the adjustment is
also included in net investment income. The Company does not accrue interest
income on fixed maturities deemed to be impaired on

B-25
<PAGE> 71

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

an other-than-temporary basis, or on mortgage loans, real estate-related bonds
and other real estate loans where the likelihood of collection of interest is
doubtful.

SEPARATE ACCOUNT BUSINESS

The assets and liabilities of the separate accounts represent segregated funds
administered and invested by the Company for purposes of funding variable
annuity and variable life insurance contracts for the exclusive benefit of
variable annuity and variable life insurance contract holders. The Company
receives administrative fees from the separate account and retains varying
amounts of withdrawal charges to cover expenses in the event of early
withdrawals by contract holders. The assets and liabilities of the separate
accounts are carried at market value.

INCOME TAX

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

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

FIXED ASSETS

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

OTHER

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

(2) CASH FLOW INFORMATION

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

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

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

The Company also transferred its equity ownership interests in two limited
partnerships during 1994 and 1993. (See the note captioned "Related-Party
Transactions" on page B-38.)

B-26
<PAGE> 72

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(3) INVESTED ASSETS AND RELATED INCOME

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

<TABLE>
<CAPTION>
ESTIMATED UNREALIZED
CARRYING AMORTIZED ---------------------
(in thousands) VALUE COST GAINS LOSSES
---------- ---------- -------- ---------
<S> <C> <C> <C> <C>
1994
U.S. treasury securities and obligations of U.S.
government agencies and authorities.............. $ 10,682 $ 10,998 $ 24 $ (340)
Obligations of states and political subdivisions,
special revenue and nonguaranteed................ 25,021 25,691 -- (670)
Debt securities issued by foreign governments...... 109,624 120,950 50 (11,376)
Corporate securities............................... 1,679,428 1,805,933 7,027 (133,532)
Mortgage-backed securities......................... 1,638,977 1,743,784 -- (104,807)
---------- ---------- -------- ---------
Total fixed maturities...................... $3,463,732 $3,707,356 $ 7,101 $(250,725)
========== ========== ======== =========
1993
U.S. treasury securities and obligations of U.S.
government agencies and authorities.............. $ 11,686 $ 11,464 $ 240 $ (18)
Obligations of states and political subdivisions,
special revenue and nonguaranteed................ 16,434 15,232 1,202 --
Debt securities issued by foreign governments...... 114,275 112,825 2,782 (1,332)
Corporate securities............................... 2,025,888 1,948,268 89,445 (11,825)
Mortgage-backed securities......................... 1,272,941 1,245,413 34,268 (6,740)
---------- ---------- -------- ---------
Total fixed maturities...................... $3,441,224 $3,333,202 $127,937 $ (19,915)
========== ========== ======== =========
</TABLE>

Upon default or indication of potential default by an issuer of fixed maturity
securities, the Company-owned issue(s) of such issuer would be placed on
nonaccrual status and, since declines in market value would no longer be
considered by the Company to be temporary, would be analyzed for possible
write-down. Any such issue would be written down to its net realizable value,
determined in the manner described in the following paragraph, during the fiscal
quarter in which the impairment was determined to have become other than
temporary, unless such net realizable value exceeded the Company's carrying
value for such issue. Thereafter, each issue on nonaccrual status is regularly
reviewed, and additional write-downs may be taken in light of later
developments.

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

B-27
<PAGE> 73

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(3) INVESTED ASSETS AND RELATED INCOME (CONTINUED)

The Company's $907 million real estate portfolio consists of the following:

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

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

At December 31, 1994, the Company had $216.2 million of mortgage loans and other
real estate-related investments (net of reserves and write-downs) that were
non-income producing for the preceding 12 months.

The Company's real estate reserve was allocated as follows:

REAL ESTATE RESERVE
(in millions)

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

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

B-28
<PAGE> 74

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(3) INVESTED ASSETS AND RELATED INCOME (CONTINUED)

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

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

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

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

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

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

Based on the level of troubled real estate-related investments the Company
experienced in 1994 and 1993, the Company anticipates additional foreclosures
and deeds in lieu of foreclosure in 1995 and beyond. Any consolidation

B-29
<PAGE> 75
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(3) INVESTED ASSETS AND RELATED INCOME (CONTINUED)

accounting resulting from foreclosures would add the related ventures' assets
and senior third-party liabilities to the Company's balance sheet and eliminate
the Company's loans to such ventures.

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

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

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

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

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

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

The sources of net investment income were as follows:

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

B-30
<PAGE> 76

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(3) INVESTED ASSETS AND RELATED INCOME (CONTINUED)

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

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

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

(4) UNCONSOLIDATED INVESTEES

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

The Company's direct and indirect real estate joint venture investments are
accounted for utilizing the equity method, with the Company recording its share
of the operating results of the respective partnerships. The Company, as an
equity owner, has the ability to fund, and historically has elected to fund,
operating requirements of certain of the joint ventures. Consolidation
accounting methods are not utilized as the Company, in most instances, does not
own more than 50 percent in the aggregate, and in any event, major decisions of
the partnership must be made jointly by all partners.

B-31
<PAGE> 77

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(4) UNCONSOLIDATED INVESTEES (CONTINUED)

Selected financial information, as of December 31, 1994 and 1993, is presented
below separately for the MLP, ventures with the Prime Group, Inc. or its
affiliates ("Prime"), and other real estate-related partnerships. (See the note
captioned "Concentration of Credit Risk" on page B-34.) Such real estate-related
information for 1994 and 1993 was based on unaudited financial information
received by the Company from the respective entities.

SELECTED FINANCIAL INFORMATION
(in thousands)

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

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

Included in the immediately preceding and immediately following tables are real
estate loans to partnerships or corporations in which the Company and other
Kemper subsidiaries hold equity interests. At December 31, 1994, the Company had
other joint venture-related loans totaling $16.0 million before reserves, not
included in the table above, to partnerships in which the Company has options to
acquire equity interests or has made loans with

B-32
<PAGE> 78

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(4) UNCONSOLIDATED INVESTEES (CONTINUED)

additional interest features. These joint venture-related loans totaled $38.5
million at December 31, 1993. Also at December 31, 1994, the Company had joint
venture-related loans totaling $37.5 million before reserves, not included in
the table above, to partnerships in which Lumbermens and Fidelity Life
Association, an affiliated mutual insurance company ("FLA"), had equity
interests. These joint venture-related loans totaled $68.1 million before
reserves at December 31, 1993. (See the note captioned "Financial
Instruments--Off-Balance-Sheet Risk" on page B-40.)

SELECTED FINANCIAL INFORMATION
(in thousands)

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

B-33
<PAGE> 79

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(5) CONCENTRATION OF CREDIT RISK

The Company generally strives to maintain a diversified invested asset
portfolio; however, certain concentrations of credit risk exist, including
mortgage-backed securities and real estate.

Approximately 49.2 percent of the Company's investment-grade fixed maturities at
December 31, 1994 were mortgage-backed securities. These investments consist
primarily of marketable mortgage pass-through securities issued by the
Government National Mortgage Association, the Federal National Mortgage
Association or the Federal Home Loan Mortgage Corporation and other
investment-grade securities collateralized by mortgage pass-through securities
issued by these entities. The Company has not made any material investments in
interest-only or other similarly volatile tranches of mortgage-backed
securities. The Company's mortgage-backed investments are generally of AAA
credit quality, and the markets for the Company's investments in mortgage-backed
securities have been and are expected to remain liquid.

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

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

<TABLE>
<S> <C>
GEOGRAPHIC DISTRIBUTION AS OF DECEMBER 31, 1994
California........................ 26.9%
Illinois.......................... 26.2
Texas............................. 11.2
Ohio.............................. 6.3
Spain............................. 4.0
Colorado.......................... 3.8
Oregon............................ 3.0
Indiana........................... 2.7
Washington........................ 2.7
Hawaii............................ 2.5
Virginia.......................... 2.5
Florida........................... 2.1
Other(1).......................... 6.1
-----
Total........................ 100.0%
=====

DISTRIBUTION BY PROPERTY TYPE AS OF DECEMBER 31, 1994
Office............................ 21.5%
Land.............................. 20.4
Industrial........................ 14.7
Retail............................ 13.9
Hotel............................. 11.7
Apartment......................... 5.0
Residential....................... 4.7
Mixed use......................... 2.1
Other............................. 6.0
-----
Total........................ 100.0%
=====
</TABLE>

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

The Company had $246.3 million (5.0 percent of invested assets and cash), $240.5
million (4.9 percent of invested assets and cash) and $102.8 million (2.1
percent of invested assets and cash) of mortgage loans and other real estate
investments in California, Illinois and Texas, respectively, at December 31,
1994. The majority of the Illinois and Texas loans and other investments are
Prime-related. The majority of the California loans and other investments are
MLP-related. (See the note captioned "Unconsolidated Investees.") Real estate
markets have been depressed in recent periods in areas where most of the
Company's real estate portfolio is located. Southern California shows

B-34
<PAGE> 80

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(5) CONCENTRATION OF CREDIT RISK (CONTINUED)

signs of improvement, although real estate market conditions there have
continued to be worse than in many other areas of the country. Northern
California and Illinois currently reflect some stabilization and improvement.

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

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

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

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

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

Undeveloped land, including the Spanish projects, represented approximately 20.4
percent of the Company's real estate portfolio at December 31, 1994. To maximize
the value of certain land and other projects, additional development is
proceeding or is planned. Such development of existing projects may continue to
require substantial funding, either from the Company or third parties. In the
present real estate markets, third-party financing can require credit enhancing
arrangements (e.g., standby financing arrangements and loan commitments) from
the Company. The values of development projects are dependent on a number of
factors, including Kemper's and the Company's plans with respect thereto,
obtaining necessary permits and market demand for the permitted use of the
property. There can be no assurance that such permits will be obtained as
planned or at all, nor that such expenditures will occur as scheduled, nor that
Kemper's and the Company's plans with respect to such projects may not change
substantially.

(6) INCOME TAXES

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

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

B-35
<PAGE> 81

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(6) INCOME TAXES (CONTINUED)

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

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

The Company adopted SFAS 109, Accounting for Income Taxes, as of January 1,
1993. SFAS 109 established new principles for calculating and reporting the
effects of income taxes in financial statements. SFAS 109 replaced the income
statement orientation inherent in APB Opinion 11 with a balance sheet approach.
Under the new approach, deferred tax assets and liabilities are generally
determined based on the difference between the financial statement and tax bases
of assets and liabilities using enacted tax rates in effect for the year in
which the differences are expected to reverse. Under SFAS 109, the effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. SFAS 109 allows
recognition of deferred tax assets if future realization of the tax benefit is
more likely than not, with a valuation allowance for the portion that is not
likely to be realized.

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

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

B-36
<PAGE> 82

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(6) INCOME TAXES (CONTINUED)

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

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

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

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

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

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

B-37
<PAGE> 83

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(6) INCOME TAXES (CONTINUED)

The tax returns through the year 1986 have been examined by the Internal Revenue
Service ("IRS"). Changes proposed are not material to the Company's financial
position. The tax returns for the years 1987 through 1990 are currently under
examination by the IRS.

(7) RELATED-PARTY TRANSACTIONS

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

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

The Company has loans to joint ventures, consisting primarily of mortgage loans
on real estate, in which the Company and/or one of its affiliates has an
ownership interest. At December 31, 1994 and 1993, joint venture mortgage loans
totaled $351 million and $731 million, respectively, and during 1994, 1993 and
1992, the Company earned interest income on these joint venture loans of $22.0
million, $63.1 million and $116.3 million, respectively.

As of January 1, 1993, all of the Company's personnel are employees of Federal
Kemper Life Assurance Company ("FKLA"), an affiliated company. Prior to January
1, 1993, the majority of the Company's personnel were employees of another
affiliated company, Kemper Financial Services, Inc. ("KFS"). The Company is
allocated expenses for the utilization of KFS and FKLA employees and facilities
and the information systems of Kemper Service Company ("KSvC") based on the
Company's share of administrative, legal, marketing, investment management,
information systems and operation and support services. During 1994, 1993 and
1992, expenses allocated to the Company from KFS and KSvC amounted to $6.5
million, $3.1 million and $28.2 million, respectively. The Company also paid to
KFS investment management fees of $6.0 million, $6.7 million and $5.9 million
during 1994, 1993 and 1992, respectively. The Company paid Kemper Sales Company
$7.1 million in 1992 for services relating to the distribution of the Company's
products. In addition, expenses allocated to the Company from FKLA during 1994,
1993 and 1992 amounted to $11.1 million, $13.1 million and $1.1 million,
respectively.

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

(8) REINSURANCE

In the ordinary course of business, the Company enters into reinsurance
agreements to diversify risk and limit its overall financial exposure to certain
blocks of fixed-rate annuities. The Company generally cedes 100 percent of the
related annuity liabilities under the terms of the reinsurance agreements.
Although these reinsurance agreements contractually obligate the reinsurers to
reimburse the Company, they do not discharge the Company from its primary
liabilities and obligations to policyholders. As such, these amounts paid or
deemed to have been paid are recorded on the Company's consolidated balance
sheet as reinsurance recoverables and ceded future policy benefits.

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

B-38
<PAGE> 84

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(8) REINSURANCE (CONTINUED)

December 31, 1994, the reinsurance recoverable related to the fixed-rate annuity
liabilities ceded to FLA amounted to approximately $643 million.

(9) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS

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

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

The status of the plan as of December 31, 1994 and 1993, was as follows:

Accumulated postretirement benefit obligation:

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

Components of the net periodic postretirement benefit cost:

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

A one percentage point increase in the assumed health care cost trend rate for
each year would increase the accumulated postretirement benefit obligation as of
December 31, 1994 and 1993 by $48 thousand and $69 thousand, respectively, and
the net postretirement health care interest and service costs for the years
ended December 31, 1994 and 1993 by $14 thousand and $19 thousand, respectively.

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

(10) COMMITMENTS AND CONTINGENT LIABILITIES

The Company is involved in various legal actions for which it establishes
liabilities where appropriate. In the opinion of the Company's management, based
upon the advice of legal counsel, the resolution of such litigation is not
expected to have a material adverse effect on the consolidated financial
statements.

Although none of the Company or its joint venture projects have been identified
as a "potentially responsible party" under federal environmental guidelines,
inherent in the ownership of or lending to real estate projects is the
possibility that environmental pollution conditions may exist on or near or
relate to properties owned or previously owned on properties securing loans.
Where the Company has presently identified remediation costs, they have been

B-39
<PAGE> 85

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(10) COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)

taken into account in determining the cash flows and resulting valuations of the
related real estate assets. Based on the Company's receipt and review of
environmental reports on most of the projects in which it is involved, the
Company believes its environmental exposure would be immaterial to its
consolidated results of operations. However, the Company may be required in the
future to take actions to remedy environmental exposures, and there can be no
assurance that material environmental exposures will not develop or be
identified in the future. The amount of future environmental costs is impossible
to estimate due to, among other factors, the unknown magnitude of possible
exposures, the unknown timing and extent of corrective actions that may be
required, the determination of the Company's liability in proportion to others
and the extent such costs may be covered by insurance or various environmental
indemnification agreements.

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

The Company is liable for guaranty fund assessments related to certain
unaffiliated insurance companies that have become insolvent during the years
1994 and prior. The Company's financial statements include provisions for all
known assessments that will be levied against the Company as well as an estimate
of amounts (net of estimated future premium tax recoveries) that the Company
believes it will be assessed in the future for which the life insurance industry
has estimated the cost to cover losses to policyholders. The Company is also
contingently liable for any future guaranty fund assessments related to
insolvencies of unaffiliated insurance companies, for which the life insurance
industry has been unable to estimate the cost to cover losses to policyholders.
No specific amount can be reasonably estimated for such insolvencies as of
December 31, 1994.

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

The Company has continued to fund both existing projects and legal commitments.
At December 31, 1994, the Company had future legal loan commitments and stand-by
financing agreements totaling $376.1 million to support the financing needs of
various real estate investments. To the extent these arrangements are called
upon, amounts loaned would be secured by assets of the joint ventures, including
first mortgage liens on the real estate. The Company's criteria in making these
arrangements are the same as for its mortgage loans and other real estate
investments. The Company presently expects to fund approximately $96.5 million
of these arrangements, along with providing capital to existing projects. The
total legal commitments, along with estimated working capital requirements are
considered in the Company's analysis of real estate-related reserves and
write-downs. The disparity between total legal commitments and the amount
expected to be funded relates principally to standby financing arrangements that
provide credit enhancements to certain tax-exempt bonds, which the Company does
not presently expect to fund. The fair values of loan commitments and standby
financing agreements are estimated in conjunction with and using the same
methodology as the fair value estimates of mortgage loans and other real
estate-related investments.

(12) DERIVATIVE FINANCIAL INSTRUMENTS

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

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

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

The Company's hedges relating to foreign currency exposure are implemented using
forward contracts on foreign currencies. These are generally short duration
contracts with U.S. money-center banks. The Company records realized and
unrealized gains and losses on such investments in net income on a current
basis. The amounts of gain

B-40
<PAGE> 86

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(12) DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)

(loss) included in net income during 1994, 1993 and 1992 totaled $6.4 million,
$(2.8) million and $(2.4) million, respectively.

(13) FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair value disclosures are required under SFAS 107. Such fair value estimates
are made at specific points in time, based on relevant market information and
information about the financial instrument. These estimates do not reflect any
premium or discount that could result from offering for sale at one time the
Company's entire holdings of a particular financial instrument. A significant
portion of the Company's financial instruments are carried at fair value. (See
the note captioned "Invested Assets and Related Income" on page B-27.) Fair
value estimates for financial instruments not carried at fair value are
generally determined using discounted cash flow models and assumptions that are
based on judgments regarding current and future economic conditions and the risk
characteristics of the investments. Although fair value estimates are calculated
using assumptions that management believes are appropriate, changes in
assumptions could significantly affect the estimates and such estimates should
be used with care.

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

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

Fixed maturities: Fair values for fixed maturity securities carried at market
value were determined by using market quotations, or independent pricing
services that use prices provided by market makers or estimates of market values
obtained from yield data relating to instruments or securities with similar
characteristics, or fair value as determined in good faith by the Company's
portfolio manager, Kemper Financial Services, Inc.

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

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

Mortgage loans and other real estate-related investments: Fair values for
mortgage loans and other real estate-related investments were estimated on a
project-by-project basis. Generally, the projected cash flows of the collateral
are discounted using a discount rate of 10 to 12 percent. The resulting
collateral estimates were then used to determine the value of the Company's real
estate-related investments. The estimate of fair value should be used with care
given the inherent difficulty of estimating the fair value of real estate due to
the lack of a liquid quotable market.

Other loans and investments: The carrying amounts reported in the consolidated
balance sheet for these instruments approximate fair values. The fair values of
policy loans were estimated by discounting the expected future cash flows using
an interest rate charged on policy loans for similar policies currently being
issued.

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

B-41
<PAGE> 87

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(13) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)

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

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

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

(14) STOCKHOLDER'S EQUITY--RETAINED EARNINGS

The maximum amount of dividends which can be paid by insurance companies
domiciled in the State of Illinois to shareholders without prior approval of
regulatory authorities is restricted if such dividend, together with other
distributions during the twelve preceding months would exceed the greater of ten
percent of statutory surplus as regards policyholders as of the preceding
December 31, or statutory net income for the preceding calendar year, then such
proposed dividend must be reported to the Director of Insurance at least 30 days
prior to the proposed payment date and may be paid only if not disapproved.
Illinois insurance laws also permit payment of dividends only out of earned
surplus, exclusive of most unrealized capital gains. The maximum amount of
dividends which can be paid by the Company in 1995 is currently $0. The Company
paid no cash dividends in 1994, 1993 or 1992.

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

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

B-42
<PAGE> 88

APPENDIX B

STATE PREMIUM TAX CHART

<TABLE>
<CAPTION>
Rate of Tax
--------------------------------
Qualified Non-Qualified
State Plans Plans
----- ----- -----
<S> <C> <C>
California...................................................... .50% 2.35%*
District of Columbia............................................ 2.25% 2.25%*
Kansas.......................................................... -- 2.00%*
Kentucky........................................................ 2.00%* 2.00%*
Maine........................................................... -- 2.00%
Mississippi..................................................... -- 1.00%
Nevada.......................................................... -- 3.50%*
Pennsylvania.................................................... -- 2.00%
South Dakota.................................................... -- 1.25%
West Virginia................................................... 1.00% 1.00%
Wyoming......................................................... -- 1.00%
</TABLE>

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

B-43
<PAGE> 89

PART C

OTHER INFORMATION

ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS

(A) FINANCIAL STATEMENTS:

(1) Financial Statements included in Part A of the Registration
Statement: Condensed Financial Information

(2) Financial Statements included in Part B of the Registration
Statement:

(i) KILICO Variable Annuity Separate Account

Independent Auditors' Report

Combined Statement of Assets and Liabilities and Contract Owners'
Equity as of December 31, 1994

Combined Statement of Operations for the Year Ended December 31,
1994

Combined Statements of Changes in Contract Owners' Equity for the
Years Ended December 31, 1994 and 1993

Notes to Combined Financial Statements

(ii) Kemper Investors Life Insurance Company

Independent Auditors' Report

Kemper Investors Life Insurance Company and Subsidiaries
Consolidated Balance Sheet as of December 31, 1994 and 1993

Kemper Investors Life Insurance Company and Subsidiaries
Consolidated Statement of Operations for the Years Ended
December 31, 1994, 1993 and 1992

Kemper Investors Life Insurance Company and Subsidiaries
Consolidated Statement of Stockholder's Equity for the Years
Ended December 31, 1994, 1993 and 1992

Kemper Investors Life Insurance Company and Subsidiaries
Consolidated Statement of Cash Flows for the Years Ended
December 31, 1994, 1993 and 1992

Notes to Consolidated Financial Statements

(B) EXHIBITS:

<TABLE>
<S> <C>
*1.1 A copy of resolution of the Board of Directors of Kemper Investors Life Insurance
Company dated September 13, 1977.
*1.2 A copy of Record of Action of Kemper Investors Life Insurance Company dated April
15, 1983.
2. Not Applicable.
+++++3.1 Distribution Agreement between Investors Brokerage Services, Inc. and KILICO.
+++++3.2 Addendum to Selling Group Agreement of Kemper Financial Services, Inc.
3.3 Selling Group Agreement of Investors Brokerage Services, Inc.
****4. Form of Variable Annuity Contract.
****5. Form of application.
**6. Kemper Investors Life Insurance Company articles of incorporation and by-laws.
7. Inapplicable.
8.1 Fund Participation Agreement among KILICO, Lexington Natural Resources Trust and
Lexington Management Corporation.
8.2 Fund Participation Agreement among KILICO, Lexington Emerging Markets Fund and
Lexington Management Corporation.
8.3 Fund Participation Agreement among KILICO, Janus Aspen Series and Janus Capital
Corporation.
++9. Opinion and Consent of Counsel.
11. Inapplicable.
12. Inapplicable.
</TABLE>

C-1
<PAGE> 90

<TABLE>
<S> <C>
+++13. Schedules for Computation of Performance Information.
*****13.1 Schedule for Computation of Performance Information for Small Cap Subaccount.
13.2 Schedules for Computation of Performance Information for Janus Growth, Janus
Aggressive Growth, Janus Worldwide Growth, Janus Balanced, Janus Short-Term Bond,
Lexington Natural Resources and Lexington Emerging Markets Subaccounts.
+++++14. Organizational Chart.
+15.1 Powers of Attorney.
***15.2 Power of Attorney--John B. Scott.
16. Representation of Counsel (Rule 485(b)).
++++17. Schedule V--Valuation and Qualifying Accounts.
</TABLE>

---------------
* Incorporated by reference to Pre-Effective Amendment No. 2 to Registration
Statement of Form N-1 for KILICO Equity Separate Account (File No.
2-83892) filed on or about November 16, 1983.

** Incorporated by reference to Post-Effective Amendment No. 7 to the
Registration Statement on Form N-3 filed on or about February 28, 1986.

*** Incorporated by reference to Exhibits filed with the Registration
Statement on Form S-1 for KILICO (File No. 33-46881) filed on or about
March 31, 1992.

**** Incorporated by reference to Exhibits filed with the Registration
Statement on Form N-4 filed on or about April 27, 1993.

***** Incorporated by reference to Post-Effective Amendment No. 21 to the
Registration Statement on Form N-4 filed on or about April 29, 1994.

+ Incorporated by reference to the Registration Statement on Form N-4 filed
on or about October 23, 1991.

++ Incorporated by reference to Post-Effective Amendment No. 15 to the
Registration Statement on Form N-4 filed on or about April 24, 1991.

+++ Incorporated by reference to Post-Effective Amendment No. 16 to the
Registration Statement on Form N-4 filed on or about October 31, 1991.

++++ Incorporated herein by reference to Exhibits filed with the Amendment to
Registration Statement on Form S-1 for KILICO (File No. 33-46881) filed on
or about April 13, 1995.

+++++ Incorporated by reference to Post-Effective Amendment No. 22 to the
Registration Statement filed on or about April 27, 1995.

ITEM 25. DIRECTORS AND OFFICERS OF KEMPER INVESTORS LIFE INSURANCE COMPANY

The directors and principal officers of KILICO are listed below
together with their current positions. The address of each officer and
director is 1 Kemper Drive, Long Grove, Illinois 60049.

<TABLE>
<CAPTION>
NAME OFFICE WITH KILICO
---- ------------------
<S> <C>
John B. Scott........................ Chairman, Chief Executive Officer, President and
Director
John H. Fitzpatrick.................. Senior Vice President, Chief Financial Officer and
Director
James R. Boris....................... Director
David B. Mathis...................... Director
Stephen B. Timbers................... Director
Jerome J. Cwiok...................... Executive Vice President
Eliane L. Frye....................... Executive Vice President
Debra P. Rezabek..................... Vice President, General Counsel, Director of
Government Affairs and Assistant Secretary
Kathleen A. Gallichio................ Corporate Counsel and Corporate Secretary
</TABLE>

ITEM 26. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE INSURANCE
COMPANY OR REGISTRANT

See Exhibit 14 for organizational charts of persons controlled or
under common control with Kemper Investors Life Insurance Company.

Investors Brokerage Services, Inc. and Investors Brokerage Services
Insurance Agency, Inc. are wholly owned subsidiaries of KILICO.

ITEM 27. NUMBER OF CONTRACT OWNERS

At March 31, 1995, the Registrant had approximately 151,911 qualified
and non-qualified Contract Owners.

C-2
<PAGE> 91

ITEM 28. INDEMNIFICATION

To the extent permitted by law of the State of Illinois and subject to
all applicable requirements thereof, Article VI of the By-Laws of Kemper
Investors Life Insurance Company ("KILICO") provides for the
indemnification of 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 in which he is a party or is threatened to
be made a party by reason of his being or having been a director, officer,
employee or agent of KILICO, or serving or having served, at the request of
KILICO, 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 KILICO, 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 KILICO, and, with respect to any
criminal action or proceeding, had reasonable cause to believe that his
conduct was unlawful. No indemnification shall be made in respect of any
claim, issue or matter as to which a director or officer shall have been
adjudged to be liable for negligence or misconduct in the performance of
his duty to the company, unless and only to the extent that the court in
which such action or suit was brought or other court of competent
jurisdiction shall determine upon application that, despite the
adjudication of liability but in view of all the circumstances of the case,
he is fairly and reasonably entitled to indemnity for such expenses as the
court shall deem proper.

Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers, employees
or agents of KILICO pursuant to the foregoing provisions, or otherwise,
KILICO has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in
that Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by KILICO
of expenses incurred or paid by a director, officer, employee of agent of
KILICO in the successful defense of any action, suit or proceeding) is
asserted by such director, officer, employee or agent of KILICO in
connection with variable annuity contracts, KILICO 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 KILICO is against public policy as
expressed in that Act and will be governed by the final adjudication of
such issue.

ITEM 29.(A) PRINCIPAL UNDERWRITER

Investors Brokerage Services, Inc., a wholly owned subsidiary of
Kemper Investors Life Insurance Company, acts as principal underwriter for
KILICO Variable Annuity Separate Account, KILICO Variable Separate Account
and Kemper Investors Life Insurance Company Variable Annuity Account C.

ITEM 29.(B) INFORMATION REGARDING PRINCIPAL UNDERWRITER, INVESTORS BROKERAGE
SERVICES, INC.

The address of each officer is 1 Kemper Drive, Long Grove, IL 60049.

<TABLE>
<CAPTION>
POSITION AND OFFICES
NAME WITH UNDERWRITER
---- --------------------
<S> <C>
John B. Scott....................................... Chairman and Director
Otis R. Heldman..................................... President and Director
Debra P. Rezabek.................................... Secretary and Director
Jerome J. Cwiok..................................... Director
Eliane L. Frye...................................... Director
Michael A. Kelly.................................... Vice President
Robert A. Daniel.................................... Vice President
David F. Dierenfeldt................................ Assistant Secretary
David R. Kickert.................................... Assistant Secretary
Frank J. Julian..................................... Assistant Secretary
</TABLE>

C-3
<PAGE> 92

ITEM 29.(C)

Inapplicable.

ITEM 30. LOCATION OF ACCOUNTS AND RECORDS

Accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the Rules
promulgated thereunder are maintained by Kemper Investors Life Insurance
Company at its home office at 1 Kemper Drive, Long Grove, Illinois 60049
and at 120 South LaSalle, Chicago, Illinois 60603.

ITEM 31. MANAGEMENT SERVICES

Inapplicable.

ITEM 32. UNDERTAKINGS

Inapplicable.

C-4
<PAGE> 93

SIGNATURES

As required by the Securities Act of 1933 and the Investment Company Act of
1940, the Registrant, KILICO Variable Annuity Separate Account, certifies that
it meets the requirements of Securities Act Rule 485(b) for effectiveness of
this Amendment to the Registration Statement and has duly caused this Amendment
to the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Long Grove and State of Illinois on
the 14th day of August, 1995.

KILICO VARIABLE ANNUITY SEPARATE
ACCOUNT
(Registrant)
By: Kemper Investors Life Insurance
Company

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

KEMPER INVESTORS LIFE INSURANCE
COMPANY
(Depositor)

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

As required by the Securities Act of 1933, this Amendment to the Registration
Statement has been signed below by the following directors and principal
officers of Kemper Investors Life Insurance Company in the capacities indicated
on the 14th day of August, 1995.

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

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

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

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

C-5
<PAGE> 94

EXHIBIT INDEX

<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER TITLE NUMBER*
------ ----- ----------
<S> <C> <C>
3.3 Selling Group Agreement of Investors Brokerage Services, Inc. .................
8.1 Fund Participation Agreement among KILICO, Lexington Natural Resources Trust
and Lexington Management Corporation ..........................................
8.2 Fund Participation Agreement among KILICO, Lexington Emerging Markets Fund and
Lexington Management Corporation ..............................................
8.3 Fund Participation Agreement among KILICO, Janus Aspen Series and Janus Capital
Corporation ...................................................................
13.2 Schedules for Computation of Performance Information for Janus Growth, Janus
Aggressive Growth, Janus Worldwide Growth, Janus Balanced, Janus Short-Term
Bond, Lexington Natural Resources and Lexington Emerging Markets
Subaccounts ...................................................................
16. Representation of Counsel (Rule 485(b))........................................
</TABLE>
------
* In manually signed original only.

<PAGE> 1

EXHIBIT 3.3

INVESTORS BROKERAGE SERVICES, INC.

SELLING GROUP AGREEMENT

THIS AGREEMENT ("Agreement") is made by and between Investors
Brokerage Services, Inc. ("IBS") and Broker-Dealer.

RECITALS:

A. IBS, pursuant to the provisions of Distribution Agreements
("Distribution Agreements") between it and Kemper Investors Life Insurance
Company ("KILICO") and between it and Federal Kemper Life Assurance Company
("FKLA"), acts as the principal underwriter of certain variable annuity
contracts and variable life insurance policies (the "variable products" or
"Contracts") issued by KILICO and FKLA. Such Contracts, and the investment
options available thereunder, are identified in Schedule 1 to this Agreement at
the time that this Agreement is executed, and such other Contracts that may be
added to Schedule 1 from time to time in accordance with Section 1.5 of this
Agreement. IBS desires that Broker-Dealer distribute such variable products in
those states or jurisdictions in which Broker-Dealer, IBS, KILICO, FKLA and the
Contracts are appropriately licensed, qualified or approved, and Broker-Dealer
desires to sell such Contracts, through its agents in such states or
jurisdictions, on the terms and conditions set forth hereinafter. KILICO and
FKLA have authorized IBS to enter into separate written agreements with
broker-dealers pursuant to which such broker-dealers would be authorized to
participate in the distribution of the Contracts and would agree to use their
best efforts to solicit applications for the Contracts to the general public.

B. KILICO and FKLA, pursuant to General Agent Agreements, have
authorized Broker-Dealer or an affiliate to act as a general agent ("General
Agent") for the solicitation of applications for the Contracts and to engage in
the distribution activities contemplated by this Agreement and such General
Agent Agreements.

C. The parties to this Agreement desire that Broker-Dealer be
authorized to solicit applications for the sale of the Contracts to the general
public subject to the terms and conditions set forth herein.

NOW, THEREFORE, in consideration of the premises and of the mutual
promises and covenants hereinafter set forth, the parties agree as follows:

Section 1: Representations and Warranties; Authorizations

1.1 Broker-Dealer agrees to use its best efforts on behalf of IBS
while performing the functions set forth herein. Broker-Dealer shall be free
to exercise its own judgment as to whom to solicit and the time, place, and
manner of solicitation. Broker-Dealer shall pay all expenses incurred by it
hereunder and shall comply with all applicable federal and state laws,
ordinances and regulations relating thereto.
<PAGE> 2

1.2 Broker-Dealer is authorized, except as hereinafter
specifically provided, to cause its representatives ("Registered
Representatives") to sell such Contracts in the states and jurisdictions in
which Broker-Dealer and its Registered Representatives are appropriately
licensed, registered or otherwise qualified and in which the Contracts are duly
authorized. Broker-Dealer shall not have the authority nor shall it grant such
authority to any of its Registered Representatives, on behalf of IBS, and
KILICO and/or FKLA: to make, alter or discharge any Contract or other contract
entered into pursuant to a Contract; to waive any Contract's forfeiture
provisions; to extend the time of paying any premiums; or to receive any monies
or premiums from applicants for or purchasers of the Contracts (except for the
sole purpose of forwarding monies or premiums to KILICO or FKLA). IBS, in its
sole discretion, may reject any application for a Contract submitted to it by
the Broker-Dealer or any of its Registered Representatives.

1.3 IBS, subject to the terms and conditions contained herein,
hereby authorizes Broker-Dealer as an independent contractor, on a
non-exclusive basis, to make sales of such Contracts for which IBS acts as
distributor. Broker-Dealer agrees to direct the sales activities of its
Registered Representatives and to enforce written supervisory procedures to
assure strict compliance with applicable rules and regulations under the
Securities Exchange Act of 1934 ("1934 Act"), the National Association of
Securities Dealers, Inc. ("NASD") rules, and other applicable federal and state
statutes and regulations.

1.4 Nothing herein contained shall constitute Broker-Dealer or any
of its Registered Representatives as employees of IBS, KILICO or FKLA in
connection with the solicitation of applications for the Contracts.

1.5 Schedule 1 to this Agreement may be amended by IBS at its sole
discretion from time to time to include other Contracts (or investment options)
distributed by IBS pursuant to the Distribution Agreements or other
distribution agreements with KILICO and FKLA, or to delete Contracts (or
investment options) from the Schedule. The provisions of this Agreement shall
be equally applicable to each Contract listed on Schedule 1 unless the context
otherwise requires.

Section 2: Representations and Warranties:
Registration, Licensing and Compliance

2.1 Broker-Dealer represents, warrants and covenants that:

a. It is and will remain at all times during the terms
of this Agreement a member in good standing of the
NASD and a broker-dealer duly registered with the
Securities and Exchange Commission ("SEC") under the
1934 Act and licensed as a broker-dealer in each
state or other jurisdiction in which Broker-Dealer
intends to perform its functions and fulfill its
obligations under this Agreement.

2
<PAGE> 3

b. It is in compliance, and during the term of this
Agreement, will remain in compliance, with all
applicable federal and state security laws and
regulations and the requirements of the NASD and any
applicable securities exchanges of which it is a
member.

c. It is a corporation organized, existing and in good
standing under applicable state law and is qualified
to do business as a corporation in those states or
jurisdictions where it is or will be doing business.

d. Only Registered Representatives of Broker-Dealer who
are agents of KILICO and FKLA, and who are licensed,
registered, or otherwise qualified to offer and sell
the variable products, may do so under this Agreement
and as permitted under the applicable insurance laws
of such state or jurisdiction under which the
Registered Representatives are authorized to perform
their activities.

e. It is in compliance with all applicable insurance
laws and regulations, including without limitation
state insurance laws and regulations imposing
insurance licensing requirements.

f. It shall carry out its sales and administrative
obligations under this Agreement in continued
compliance with federal and state laws and
regulations, including those governing securities
and/or insurance-related activities or transactions,
as applicable.

g. It has blanket bond insurance coverage.
Broker-Dealer has the affirmative duty to maintain
its blanket bond insurance coverage. Broker-Dealer
will notify IBS immediately in the event a
determination is made to cancel, terminate or
substantially modify its blanket bond insurance
coverage.

2.2 Broker-Dealer will be responsible for the training,
supervision and control of its Registered Representatives engaged in the offer
and sale of the Contracts and will supervise strict compliance with applicable
federal and state securities laws and NASD rules. IBS shall have no
responsibility in connection with such program of supervision and compliance.

2.3 If General Agent is the same person as Broker-Dealer as
reflected in Recital B. to this Agreement, then by engaging in the distribution
activities contemplated by this Agreement, Broker-Dealer represents and
warrants that:

a. It has obtained a letter from the Staff of the SEC
advising Broker-Dealer that the Staff will not

3
<PAGE> 4

recommend enforcement action if General Agent is not
registered as a broker-dealer with the SEC; or

b. It is relying upon a no-action letter issued by the
Staff of the SEC at the request of a broker-dealer
that, also, was a licensed insurance agent engaged in
distribution activities similar to those contemplated
by this Agreement, and where the Staff did not
recommend enforcement action if the insurance agent
was not registered as a broker-dealer with the SEC;
and

c. It is complying and will continue to comply with the
conditions set forth in such letters at all times
while this Agreement is in effect.

2.4. If General Agent is an Affiliate of Broker-Dealer as reflected
in Recital B. to this Agreement, then by engaging in the distribution
activities contemplated by this Agreement, Broker-Dealer, on behalf of General
Agent, represents and warrants that at the time that this Agreement becomes
effective and during the term of this Agreement:

a. General Agent is wholly-owned by Broker-Dealer or is
wholly-owned by one or more associated persons of
Broker-Dealer;

b. General Agent and its personnel will be "associated
persons" of Broker-Dealer within the meaning of
Section 3(a)(18) of the 1934 Act;

c. General Agent will engage in the offer or sale of the
Contracts only through persons who are also
Registered Representatives of Broker-Dealer;

d. General Agent will not receive or handle customer
funds or securities;

e. Broker-Dealer will be responsible for the training,
supervision and control of its Registered
Representatives engaged in the offer or sale of the
Contracts on behalf of General Agent, as required
under the 1934 Act, the NASD rules and other
applicable federal and state statutes and
regulations, and will also be responsible for the
supervision and control of any of its associated
persons who are owners, directors, or executive
officers of General Agent;

f. Broker-Dealer will, in the offer and sale of the
Contracts by it or General Agent, comply with all
applicable requirements of the 1934 Act and the NASD,
including the requirement to maintain and preserve
books and records under Section 17(a) of the 1934 Act
and the rules thereunder; and

g. Commissions and fees relating to the Contracts will
be reflected in the quarterly FOCUS reports and the

4
<PAGE> 5

fee assessment reports filed by Broker-Dealer with
the NASD.

2.5 Broker-Dealer shall notify IBS and KILICO and FKLA immediately
in writing if Broker-Dealer fails to comply with any of the applicable
provisions set forth above.

2.6 IBS represents and warrants that all Contracts are legally
issued, registered and filed as required by applicable federal securities and
state insurance laws.

Section 3: Sales Materials

3.1 Broker-Dealer shall submit to IBS, for written approval in
advance of use, all promotional, sales, and advertising material and signs
involving the use of IBS's, KILICO's and FKLA's name and/or pertaining to the
sale of any Contract.

3.2 IBS will file such materials or will cause such materials to
be filed with the SEC, the NASD, and with any state securities regulatory
authorities, as appropriate.

Section 4: Compensation

4.1 Except as otherwise stated herein, Broker-Dealer shall be
entitled to commissions with respect to sales of such Contracts it shall make
in accordance with the Schedule of Commissions under the General Agent
Agreements with KILICO and FKLA. Commissions are payable by KILICO and FKLA
through IBS or as otherwise permitted by law or regulations. Any obligation of
IBS to pay such commissions will occur only following receipt of such amounts
by IBS from KILICO or FKLA.

Section 5: Term and Exclusivity of Agreement

5.1 No relationship of principal and agent or partnership or joint
venture between the parties hereto is intended to be established and neither
party shall hold itself out as the agent, partner or joint venturer of or with
the other party in any respect whatsoever. Except for this Agreement and the
General Agent Agreement, no other legal relationship is intended between the
parties.

5.2 This Agreement may be terminated at any time by either party
upon thirty (30) days written notice to the other, and may be terminated
immediately by IBS for cause. For purposes of this Section, "cause" shall mean
failure to return money to clients where appropriate, failure to account for
any money received from or on behalf of IBS, any fraud, misrepresentation or
dishonesty in any relationship with IBS, its affiliates, or any past, present
or proposed client, violation of any federal or state law or regulation, or
violation of any of the terms of this Agreement.

5.3 Notice of termination shall be deemed to be given on the day
mailed or delivered by hand to an officer of either party. If mailed to IBS,
such notice shall be addressed to the principal

5
<PAGE> 6

office of IBS, and if mailed to the Broker-Dealer, shall be addressed to the
last known address as shown on the records of IBS.

Section 6: Complaints and Investigations

6.1 Broker-Dealer shall cooperate fully in any securities or
insurance regulatory investigation or proceeding or judicial proceeding with
respect to IBS, KILICO and FKLA, and/or Broker-Dealer and its Registered
Representatives or any Affiliate, to the extent that such investigation or
proceeding is in connection with the Contracts marketed under this Agreement.

Section 7: Assignment

7.1 Broker-Dealer may not assign this Agreement without the prior
written approval of IBS.

7.2 This Agreement is exclusively for and shall inure to the
benefit of the parties hereto, their respective heirs, legal representatives,
successors and assigns and shall not be deemed to create any rights for the
benefit of third parities.

Section 8: Confidentiality

8.1 Each party will keep confidential information it may acquire
as a result of this Agreement regarding IBS, its affiliates' and subsidiaries'
affairs, including any customer list or other propriety information that it may
acquire in the performance of this Agreement, and shall not use such customer
list or information without the prior written consent of the other party which
requirement shall survive the termination of this Agreement.

Section 9: Modification of Agreement

9.1 This Agreement supersedes all prior agreements, either oral or
written, between the parties relating to the Contracts and, except for any
amendment of Schedule 1 pursuant to the terms of Section 1.5 hereof or of the
Schedule of Commissions pursuant to the terms of Section 4 hereof, may not be
modified in any way unless by written agreement signed by all of the parties.

Section 10: Indemnification

10.1 Broker-Dealer shall be responsible and liable for any damages
arising out of the acts or omissions of Broker-Dealer, its Registered
Representatives, and/or its employees and does hereby agree to indemnify and
hold IBS harmless against any loss or expense arising out of any of its
Registered Representatives, any Affiliate and/or employees failure to carry out
fully and without negligence the duties and responsibilities assigned to it
herein.

10.2 If any action or proceeding shall be brought against
Broker-Dealer relating to a Contract sold pursuant to this Agreement,
Broker-Dealer shall give prompt written notice to IBS.

6
<PAGE> 7

10.3 In the event of any dispute with a Contract owner, IBS shall
have the right to take such action as IBS may in its sole discretion deem
necessary to promptly effect a mitigation of damages or limitation of losses
without obtaining the prior consent of Broker-Dealer and without waiving or
electing to relinquish any rights or remedies IBS may have against
Broker-Dealer.

10.4 IBS shall have the right to settle with any Contract owner
engaged in a dispute with IBS or Broker-Dealer without the prior consent of
Broker-Dealer and without waiving or electing to relinquish any rights or
remedies IBS may have against Broker-Dealer.

10.5 The indemnification provisions of this Agreement shall remain
operative and in full force and effect, regardless of the termination of this
Agreement and shall survive any such termination.

10.6 Without limiting the foregoing indemnities, IBS and
Broker-Dealer each agree to indemnify and hold harmless the other against any
breach of representation, warranty or covenant herein by the indemnifying
party.

Section 11: Right, Remedies, etc. are Cumulative

11.1 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. Failure of either party to insist upon strict
compliance with any of the conditions of this Agreement shall not be construed
as a waiver of any of the conditions, but the same shall remain in full force
and effect. No waiver of any of the provisions of this Agreement shall be
deemed, or shall constitute a waiver of any other provisions, whether or not
similar, nor shall any waiver constitute a continuing waiver.

Section 12: Notices

12.1 All notices hereunder are to be made in writing and shall be
either hand delivered or transmitted by registered or certified United States
mail with return receipt requested to the principal office of the party and
shall be effective upon delivery, except as otherwise provided in Section 5.2
of this Agreement.

Section 13: Interpretation, Jurisdiction, etc.

13.1 This Agreement constitutes the whole agreement between the
parties hereto with respect to the subject matter hereof, and supersedes all
prior oral or written understandings, agreements or negotiations between the
parties with respect to the subject matter hereof. No prior writings by or
between the parties hereto with

7
<PAGE> 8

respect to the subject matter hereof shall be used by either party in
connection with the interpretation of any provisions of this Agreement.

13.2 This Agreement is made in the State of Illinois, and all
questions concerning its validity, construction or otherwise shall be
determined under the laws of Illinois without giving effect to principles of
conflict of laws.

Section 14: Headings

14.1 The headings 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.

Section 15: Counterparts

15.1 This Agreement may be executed in two or more counterparts,
each of which taken together shall constitute one and the same instrument.

Section 16: Severability

16.1 This is a severable Agreement. In the event that any
provisions of this Agreement would require a party to take action prohibited by
applicable federal or state law or prohibit a party from taking action required
by applicable federal or state law, then it is the intention of the parties
hereto that such provisions shall be enforced to the extent permitted under the
law, and, in any event, that all other provisions of this Agreement shall
remain valid and duly enforceable as if the provision at issue had never been a
part hereof.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed as of the day and year indicated below.

INVESTORS BROKERAGE __________________________________________
SERVICES, INC. ("Broker-Dealer")

BY_______________________________ BY _______________________________

Print Name_______________________ Print Name________________________

Title____________________________ Title_____________________________

Date_____________________________ Date______________________________

<PAGE> 1
EXHIBIT 8.1

FUND PARTICIPATION AGREEMENT

Kemper Investors Life Insurance Company (the "Company") and Lexington
Natural Resources Trust ("Lexington Fund" or the "Fund") and its investment
adviser, Lexington Management Corporation ("LMC") hereby agree to an
arrangement whereby shares of the Fund shall be made available to serve as
underlying investment media for Variable Annuity Contracts ("Contracts") to be
issued by the Company, subject to the following provisions:

1. Establishment of Accounts: Availability of Funds.

(a) The Company represents that it has established variable
annuity accounts and variable life accounts (the "Accounts"),
each of which is a separate account under Illinois Insurance
law, and has registered each of the Accounts as a unit
investment trust under the Investment Company Act of 1940 (the
"1940") to serve as an investment vehicle for the Contracts.
Each Contract provides for the allocation of net amounts
received by the Company to an Account for investment in the
shares of one or more specified open-end companies available
through that account as underlying investment media.
Selection of a particular fund and changes therein from time
to time are made by the Contract owner, as applicable under a
particular Contract.

(b) Lexington Fund and LMC represent and warrant that the
investments of the Fund will at all times be adequately
diversified within the meaning of Section 817(h) of the
Internal Revenue Service Code of 1986, as amended (the
"Code"), and the Regulations thereunder, and that at all times
while the Accounts are invested in the Fund all beneficial
interests will be owned by one or more insurance companies or
by any other party permitted under Section 1.817-5(f)(3) of
the Regulations promulgated under the Code.

2. Marketing and Promotion.

The Fund agrees to provide the Company with monthly and/or quarterly
performance information and such other information as the parties deem
appropriate for the promotion of the Fund within five (5) days of the end of
each month for monthly information and within (10) days of the end of each
calendar quarter for quarterly information.
<PAGE> 2

3. Pricing Information; Orders; Settlement

(a) Lexington Fund will make shares available to be purchased by
the Company, and will accept redemption orders from the
Company, on behalf of each Account at the net asset value
applicable to each order. Fund shares shall be purchased and
redeemed in such quantity and at such time determined by the
Company to be necessary to meet the requirements of those
Contracts for which the Fund serves as underlying investment
media.

(b) Lexington Fund will provide to the Company closing net asset
value, dividend and capital gain information at the close of
trading each day that the New York Stock Exchange (the
"Exchange") is open (each such day, a "business day"). The
Company will send via facsimile transmission to Lexington Fund
or its specified agent orders to purchase and/or redeem Fund
shares by 10:00 a.m., Eastern Time the following business day.
Payment for net purchases will be wired by the Company to a
custodial account designated by Lexington Fund to coincide
with the order for shares of the Fund not later than 12 noon,
Eastern Time on the day of the transaction.

(c) Orders from Contract owners or Participants received by the
Company and sent by the Company prior to the close of the
Exchange on any given business day via facsimile transmission
to Lexington Fund or its specified agent by 10:00 a.m.,
Eastern Time, the following business day will be executed by
Lexington Fund at the net asset value determined as of the
close of the Exchange on such prior business day. Any orders
received by the Company after the close of the Exchange on
such prior business day (or not meeting the foregoing
sentence's requirements) will be executed by Lexington Fund at
the net asset value determined as of the close of the
Exchange on the next business day following the day of receipt
of such order.

(d) Payments for net redemptions of shares of the Fund will be
wired by Lexington Fund from the Lexington Fund custodial
account to an account designated by the Company not later than
12 noon, Eastern Time on the day of the transaction.

(e) Each party has the right to rely on information or
confirmations provided by the other party (or by any
affiliate of the other party), and shall not be liable in the
event that an error is a result of any misinformation
supplied by the other party. If a mistake is caused in
supplying such information or confirmations, which results in
a reconciliation with incorrect information, the amount
required to make a Contract owner's account whole shall be
borne by the party providing the incorrect information.

2
<PAGE> 3

(f) LMC shall provide the Company within fifteen (15) business
days after the end of each calendar quarter a letter from a
Fund officer or compliance officer certifying to the continued
accuracy of the representations contained in Item 1 (b) above
and attaching a detailed listing of the individual securities
and other assets, if any, held by the Fund as of the end of
such calendar quarter.

(g) LMC agrees to provide the Company within ten (10) business
days after the end of each month a monthly statement of
account confirming all transactions made during the month.

4. Expenses.

(a) Except as otherwise provided in this Agreement, all expenses
incident to the performance by Lexington Fund under this
Agreement shall be paid by Lexington Fund including the cost
of registration of Lexington Fund shares with the Securities
and Exchange Commission (the "SEC") and in states where
required.

(b) Lexington Fund shall distribute to the Company its proxy
material, periodic fund reports to shareholders and other
material that are required by law to be sent to Contract
owners. In addition, Lexington Fund shall provide the
Company with a sufficient quantity of its prospectuses to be
used in connection with the offerings and transaction
contemplated by this Agreement. Subject to subsection (c)
below, the cost of preparing and printing such materials shall
be paid by Lexington Fund, and the cost of distributing such
materials shall be paid by the Company. However, if Lexington
Fund makes changes to its prospectus for its own benefit or
the benefit of someone other than the Company resulting in the
need to print and distribute one or more supplements to
contract holders, all costs associated with printing and
distributing any such supplement shall be borne by Lexington
Fund. In addition, Lexington Fund and LMC agree that to the
extent the Fund decides in the future to finance distribution
expenses pursuant to Rule 12b-1 of the 1940 Act, the Fund will
undertake to have the board of directors, a majority of whom
are not interested persons of the Fund, formulate and approve
any plan under Rule 12b-1 to finance distribution expenses.

3
<PAGE> 4

(c) In lieu of Lexington Fund's providing printed copies of
prospectuses and periodic fund reports to shareholder, the
Company shall have the right to request that Lexington Fund
provide a copy of such materials in an electronic format,
which the Company may use to have such materials printed
together with similar materials of other Account funding media
that the Company or any distributor will distribute to
existing or prospective Contract owners or participants. In
that event Lexington Fund shall reimburse the Company for the
same proportion of the total printing expense for such
materials as the number of pages in each such printed
document provided by Lexington Fund bears to the total number
of pages in such printed document.

5. Representations.

(a) The Company agrees that it and its agents shall not, without
the written consent of Lexington Fund, make representations
concerning Lexington Fund or its shares except those contained
in the then current prospectuses and in current printed sales
literature of Lexington Fund.

(b) The Company represents and warrants that interests in
Contracts are or will be registered under the Securities Act
of 1933 ("1933 Act") or are exempt from registration
thereunder; that the Contracts will be issued and sold in
compliance in all material respects with all applicable
federal and state laws and that the sale of the Contracts
shall comply in all material respects with state insurance
suitability requirements. The Company further represents and
warrants 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 and that each
Account is or will be registered as a unit investment trust
in accordance with the provisions of the 1940 Act to serve as
a segregated investment account for the Contracts or is exempt
from registration thereunder.

(c) The Company represents that the Contracts are currently
treated as annuity contracts under applicable provisions of
the Code and that it will make every effort to maintain such
treatment and that it will notify Lexington Fund and LMC
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.

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<PAGE> 5

(d) The Company represents and warrants that all of its directors,
officers and employees, if any, dealing with the money and/or
securities of the Fund are and shall continue to be at all
times covered by a blanket fidelity bond or similar coverage
for the benefit of the Fund in an amount not less than $2
million. The aforesaid bond shall include coverage for
larceny and embezzlement and shall be issued by a reputable
bonding company.

(e) LMC and Lexington Fund make no representation as to whether
any aspect of the Fund's operations (including, but not
limited to, fees and expenses and investment policies)
complies with the insurance laws or regulations of the
various states.

(f) The Lexington Fund represents that it will sell and distribute
Fund's shares in accordance with any applicable federal and
state securities laws, including without limitation, the 1933
Act, the Securities Exchange Act of 1934, and the 1940 Act.

(g) Lexington Fund represents it is currently qualified as a
regulated investment company under Subchapter M of the Code
and that it will maintain such qualification (under Subchapter
M or any successor or similar provision) and that it will
notify the Company immediately upon having a reasonable basis
for believing that it ceased to so qualify or might not so
qualify in the future. Lexington Fund and LMC acknowledge
that any failure to qualify as a regulated investment company
under Subchapter M of the Code would constitute a breach of
its representation and warranty under item 1 (b) of this
Agreement.

(h) LMC and Lexington Fund represent and warrant that the Funds'
shares sold pursuant to this Agreement shall be registered
under the 1933 Act, duly authorized for issuance and sold in
compliance with the laws of the State of Illinois and all
applicable federal and state securities laws and that the Fund
are and shall remain registered under the 1940 Act. The Fund
shall amend the registration statement for its shares under
the 1933 Act and 1940 Act from time to time as required in
order to effect the continuous offering of its shares. The
Fund shall also register and qualify its shares for sale in
accordance with the laws of the various states only if and to
the extent deemed advisable by the Fund or LMC.

(i) Lexington Fund represents that it is lawfully organized and
validly existing under the laws of its state of domicile and
that it is and will comply in all material respects with the
1940 Act.

5
<PAGE> 6

(j) LMC and Lexington Fund represent and warrant that LMC is duly
organized under its state of domicile, and is and shall
remain duly registered in all material respects under any
applicable federal and state securities laws, and further
that LMC shall perform its obligations for the Fund in
compliance in all material respects with applicable federal
and state securities laws.

(k) LMC and Lexington Fund represent and warrant that all of their
respective directors, officers, and employees dealing with
the money and/or securities of the Fund are and shall continue
to be at all times covered by a blanket fidelity bond or
similar coverage for the benefit of the Fund in an amount not
less than the minimal coverage as required currently by Rule
17g-(1) of the 1940 Act or related provisions as may be
promulgated from time to time. The aforesaid bond shall
include coverage for larceny and embezzlement and shall be
issued by a reputable bonding company.

6. Administration of Accounts.

(a) Administrative services to Contract owners shall be the
responsibility of the Company and shall not be the
responsibility of Lexington Fund or LMC. LMC recognizes the
Company as the sole shareholder of fund shares issued under
this Agreement. From time to time, LMC may pay amounts from
its past profits to the Company for providing certain
administrative services for the Fund or for providing other
services that relate to the Fund. In consideration of the
savings resulting from such arrangement, and to compensate the
Company for its costs, LMC agrees to pay to the Company an
amount equal to 25 basis points (0.25%) per annum of the
average aggregate amount invested by the Company in the Fund
under this Agreement. Payment of such amounts by LMC will
not increase the fees paid by the Fund or its shareholders.

(b) The parties agree that LMC's payments to the Company are for
administrative services only and do not constitute payment in
any manner for investment advisory services or for costs of
distribution.

(c) For the purposes of computing the administrative fee
reimbursement contemplated by this Section 6, the average
aggregate amount invested by the Company over a one month
period shall be computed by totaling the Company's aggregate
investment (share net asset value multiplied by total number
of shares held by the Company) on each business day during the
month and dividing by the total number of business days during
each month.

6
<PAGE> 7

(d) LMC will calculate the reimbursement of administrative
expenses at the end of each calendar quarter and will make
such reimbursement to the Company within 30 days thereafter.
The reimbursement check will be accompanied by a statement
showing the calculation of the monthly amounts payable by LMC
and such other supporting data as may be reasonably requested
by the Company.

7. Termination.

This agreement shall terminate as to the sale and issuance of new Contracts:

(a) at the option of either the Company or Lexington Fund, upon
three months advance written notice to the other;

(b) at the option of the Company, upon one week advance written
notice to Lexington Fund, if Lexington Fund shares are not
available for any reason to meet the requirement of Contracts
as determined by the Company.

(c) at the option of either the Company or Lexington Fund,
immediately upon institution of formal proceedings against
the broker-dealer or broker-dealers marketing the Contracts,
the Account, the Company, Lexington Fund, or LMC by the
National Association of Securities Dealers, Inc. (the "NASD"),
Securities and Exchange Commission (the "SEC") or any other
regulatory body;

(d) upon the requisite vote of Contract owners having an interest
in the Fund, to substitute for the Fund's shares the shares
of another investment company in accordance with the terms of
the applicable Contracts. The Company will give 60 days
written notice to Lexington Fund of any proposed vote to
replace the Fund's shares;

(e) upon assignment of the Agreement, unless made with the written
consent of all other parties hereto:

(f) if the Fund's shares are not registered, issued or sold in
conformance with Federal law or such law precludes the use of
Fund's shares as an underlying investment medium for Contracts
issued or to be issued by the Company. Prompt notice shall
be given by either party should such situation occur.

7
<PAGE> 8

(g) If the need for substitution of the shares of another
investment company, pursuant to Section 20(b) of the 1940
Act, arises out of the Fund's failure to be registered, issued
or sold in conformance with federal law or such law precludes
the use of the Fund as an underlying investment medium of
contracts issued or to be issued by the Company, the expenses
of obtaining such order shall be reimbursed by the Lexington
Fund or LMC. Lexington Fund and LMC shall cooperate with the
company in connection with such application.

8. Continuation of Agreement.

Termination as the result of any cause listed in Section 7 shall not affect
Lexington Fund's obligation to furnish its shares to Contracts then in force
for which its shares serve or may serve as the underlying medium unless such
further sale of Fund's shares is proscribed by law or the SEC or other
regulatory body.

9. Advertising Materials; Filed Documents

(a) Advertising and sales literature with respect to the Fund
prepared by the Company or its agents for use in marketing its
Contracts will be submitted to Lexington Fund or LMC for
review before such material is submitted to any regulatory
body for review.

(b) Lexington Fund will provide to the Company at least one
complete copy of all registration statements, prospectuses,
statements of additional information, annual and semiannual
reports, proxy statements and all amendments or supplements to
any of the above that relate to the Fund promptly after the
filing of such document with the SEC or other regulatory
authorities. The Company will provide to Lexington Fund at
least one complete copy of all registration statements,
prospectuses, statements of additional information, annual and
semi-annual reports, proxy statements, and all amendments or
supplements to any of the above that relate to each Account
promptly after the filing of such document with the SEC or
other regulatory authority.

10. Proxy Voting.

(a) The Company shall provide pass-through voting privileges on
Fund's shares to all Contract owners to the extent the SEC
continues to interpret the 1940 Act as requiring such
privileges. If shares are held in any other separate account
not required to be registered under the 1940 Act, those shares
will be voted in the Company's sole discretion.

8
<PAGE> 9

(b) The Company will distribute to Contract owners and
participants, as appropriate, all proxy material furnished by
Lexington Fund and will vote Fund's shares in accordance with
instructions received from Contract owners. The Company,
with respect to each Contract and in each Account, shall vote
Fund shares for which no instructions have been received in
the same proportion as shares for which such instructions have
been received. The Company and its agents shall not oppose or
interfere with the solicitation of proxies for Fund shares
held for such Contract owners.

11. Indemnification.

(a) The Company agrees to indemnify and hold harmless Lexington
Fund, LMC, and each of its directors, trustees, officers,
employees, agents and each person, if any, who controls the
Fund or its investment adviser within the meaning of the
Securities Act of 1933 (the "1933 Act") against any losses,
claims, damages or liabilities to which the Fund or any such
director, officer, employee, agent, or controlling person may
become subject, under the 1933 Act or otherwise, insofar as
such losses, claims, damages, or liabilities (or actions in
respect thereof) arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact
contained in the Registration Statement, prospectus or sales
literature of the Company, or arise out of or are based upon
the omission or the alleged omission to state therein a
material fact required to be stated therein or necessary to
make the statements or representations (other than statements
or representations contained in the prospectuses or sales
literature of the Fund) of the Company or its agents, with
respect to the sale and distribution of Contracts for which
Fund shares are the underlying investment. The Company will
reimburse any legal or other expenses reasonably incurred by
the Fund or any such director, officer, employee, agent,
investment adviser, or controlling person in connection with
investigating or defending any such loss, claim, damage,
liability or action; provided, however, that the Company will
not be liable in any such case to the extent that any such
loss, claim, damage or liability arises out of or is based
upon an untrue statement or omission or alleged omission made
in such Registration Statement or prospectus in conformity
with written materials furnished to the Company by the Fund
specifically for use therein. This indemnity agreement will
be in addition to any liability which the Company may
otherwise have.

9
<PAGE> 10

(b) The Company shall not be liable under this Section 11. to
Lexington Fund, LMC or other parties covered under Section 11.
(a) with respect to any losses, claims, damages or liabilities
(or actions in respect thereof) incurred or assessed against
any such party (including Lexington Fund and LMC) as such may
arise from such party's willful misfeasance, bad faith, or
negligence in the performance of such party's duties or by
reason of such party's reckless disregard of obligations or
duties under this Agreement.

(c) Lexington Fund and LMC agree to indemnify and hold harmless
the Company and its directors, officers, employees, agents and
each person, if any, who controls the Company within the
meaning of the 1933 Act against any losses, claims, damages or
liabilities to which the Company or any such director,
officer, employee, agent or controlling person may become
subject, under the 1933 Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon any untrue statement
or alleged untrue statement of any material fact contained in
the Registration Statement, prospectuses or sales literature
of the Fund, or arise out of or are based upon the omission or
the alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements
therein not misleading. Lexington Fund will reimburse any
legal or other expenses reasonably incurred by the Company or
any such director, officer, employee, agent, or controlling
person in connection with investigating or defending any such
loss, claim, damage, liability or action; provided, however,
that LMC and Lexington Fund will not be liable in any such
case to the extent that any such loss, claim, damage or
liability rises out of or is based upon a Registration
Statement or prospectuses which are in conformity with written
materials furnished to Lexington Fund by the Company
specifically for use therein. This indemnity agreement will
be in addition to any liability which Lexington Fund of LMC
may otherwise have.

(d) Lexington Fund and LMC agree to indemnify and hold harmless
the Company and its directors, officers, employees, agents and
each person, if any, who controls the Company within the
meaning of the 1933 Act against any losses, claims, damages or
liabilities to which the Company or any such director,
officer, employee, agent or controlling person may become
subject under the 1933 Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon the breach of any
representation or warranty in this Agreement by Lexington Fund
or LMC including but not limited to a failure of the Fund to
qualify under Subchapter M or a finding or claim that the

10
<PAGE> 11

Funds are not adequately diversified within the meaning of
Section 817(h) of the Code and/or that while this agreement is
in effect, all beneficial interests will be owned by one or
more insurance companies or by any other party permitted under
Section 1.817-5 (f)(3) of the Regulations promulgated under
the Code.

(e) Lexington Fund and LMC shall not be liable under this Section
11. to the Company or other parties covered under Section
11.(c) with respect to any losses, claims, damages or
liabilities (or actions in respect thereof) incurred or
assessed against any such party (including the Company) as
such may arise from such party's willful misfeasance, bad
faith, or negligence in the performance of such party's duties
or by reason of such party's reckless disregard of obligations
or duties under this Agreement.

(f) Promptly after receipt by an indemnified party hereunder of
notice of the commencement of action, such indemnified party
will, if a claim in respect thereof is to be made against the
indemnifying party hereunder, notify the indemnifying party
of the commencement thereof; but the omission so to notify the
indemnifying party will not relieve it from any liability
which it may have to any indemnified party otherwise than
under this Section 11. In case any such action is brought
against any indemnified party, and it notifies the
indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate therein
and, to the extent that it may wish to, assume the defense
thereof, with counsel satisfactory to such indemnified party
of its election to assume the defense thereof, the
indemnifying party will not be liable to such indemnified
party under this Section 11 for any legal or other expenses
subsequently incurred by such indemnified party in connection
with the defense thereof other than reasonable costs of
investigation.

12. Potential Conflicts.

(a) The Company has received a copy of an application for
exemptive relief, as amended, filed by Lexington Fund on
March 21, 1994, with the SEC and the order issued by the SEC
in response thereto (the "Shared Funding Exemptive Order").
The Company has reviewed the conditions to the requested
relief set forth in such application for exemptive relief. As
set forth in such application, the Board of Directors of Fund
(the "Board") will monitor the

11
<PAGE> 12

Fund for the existence of any material irreconcilable conflict
between the interests of the contract holders of all separate
accounts ("Participating Companies") investing in the Fund.
An irreconcilable material conflict may arise for a variety of
reasons, including: (i) an action by any state insurance
regulatory authority; (ii) a change in applicable federal or
state insurance, tax, or securities laws or regulations, or a
public ruling, private letter ruling, no-action or
interpretative letter, or any similar actions by insurance,
tax or securities regulatory authorities; (iii) an
administrative or judicial decision in any relevant
proceeding; (iv) the manner in which the investments of any
portfolio are being managed; (v) a difference in voting
instructions given by variable annuity contract holders and
variable life insurance contract holders; or (vi) a decision
by an insurer to disregard the voting instruction of contract
holders. The Board shall promptly inform the Company if it
determines that an irreconcilable material conflict exists and
the implications thereof.

(b) The Company will report any potential or existing conflicts of
which it is aware to the Board. The Company will assist the
Board in carrying out its responsibilities under the Shared
Funding Exemptive Order by providing the Board with all
information reasonably necessary for the Board to consider any
issues raised. This includes, but is not limited to, an
obligation by the Company to inform the Board whenever
contract holder voting instructions are disregarded.

(c) If a majority of the Board, or a majority of its disinterested
Board members, determines that a material irreconcilable
conflict exists with regard to contract holder investments in
the Fund, the Board shall give prompt notice to all
Participating Companies. If the Lexington Fund or LMC is
responsible for causing or creating said conflict, the Company
shall at its sole cost and expense, and to the extent
reasonably practicable (as determined by a majority of the
disinterested Board members), take such action as is necessary
to remedy or eliminate the irreconcilable material conflict.
If the Board determines that the Company is responsible for
causing or creating said conflict, the Company shall at its
sole cost and expense, and to the extent reasonably
practicable (as determined by a majority of the disinterested
Board members), take such action as is necessary to remedy or
eliminate the irreconcilable material conflict. Such
necessary action may include but shall not be limited to:

12
<PAGE> 13

(i) withdrawing the assets allocable to the Account from
the Fund and reinvesting such assets in a different
investment medium or submitting the question of
whether such segregation should be implemented to a
vote of all affected contract holders and as
appropriate, segregating the assets of any
appropriate group (i.e., annuity contract owners,
life insurance contract owners, or variable contract
owners of one or more Participating Companies) that
votes in favor of such segregation, or offering to
the affected contract holders the option of making
such a change; and/or

(ii) establishing a new registered management investment
company or managed separate account.

(d) If a material irreconcilable conflict arises as a result of a
decision by the Company to disregard its contract holder
voting instructions and said decision represents a minority
position or would preclude a majority vote by all of its
contract holders having an interest in the Fund, the Company
at its sole cost, may be required, at the Board's election, to
withdraw an Account's investment in the Fund and terminate
this Agreement; 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 disinterested members of the Board.

(e) For the purpose of this Section 12, a majority of the
disinterested Board members shall determine whether or not
any proposed action adequately remedies any irreconcilable
material conflict, but in no event will Lexington Fund be
required to establish a new funding medium for any Contract.
The Company shall not be required by this Section 12 to
establish a new funding medium for any Contract if an offer
to do so has been declined by vote of a majority of the
Contract owners or participants materially adversely affected
by the irreconcilable material conflict.

13. Miscellaneous.

(a) Amendment and Waiver. Neither this Agreement, nor any
provision hereof, may be amended, waived, discharged or
terminated orally, but only by an instrument in writing signed
by all parties hereto.

13
<PAGE> 14

(b) Notices. All notices and other communications hereunder shall
be given or made in writing and shall be delivered
personally, or sent by telex, telecopier or registered or
certified mail, postage prepaid, return receipt requested, to
the party or parties to whom they are directed at the
following addresses, or at such other addresses as may be
designated by notice from such party to all other parties.

To the Company:

Kemper Investors Life Insurance Company
1 Kemper Drive
Long Grove, IL 60049
Attention: General Counsel

To Lexington Management Corporation:

Lexington Management Corporation
Park 80 West Plaza Two
Saddle Brook, New Jersey 07663
Attention: Lisa Curcio
Senior Vice President & Secretary

Any notice, demand or other communication given in a manner
prescribed in this subsection (b) shall be deemed to have been delivered on
receipt.

(c) Successors and Assigns. This agreement shall be binding upon
and inure to the benefit of the parties hereto and their
respective permitted successors and assigns.

(d) Counterparts. This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute
one agreement, and any party hereto may execute this Agreement
by signing any such counterpart.

(e) Severability. In case any one or more of the provisions
contained in this Agreement should be invalid, illegal or
unenforceable in any respect, the validity, legality and
enforceability of the remaining provisions contained herein
shall not in any way be affected or impaired thereby.

(f) Entire Agreement. This Agreement constitutes the entire
agreement and understanding between the parties hereto and
supersedes all prior agreement and understandings relating to
the subject matter hereof.

(g) Governing Law. This Agreement shall be governed and
interpreted in accordance with the laws of the State of New
Jersey.

14
<PAGE> 15

14. Limitation on Liability of Trustees/Directors, etc.

This Agreement has been executed on behalf of the Fund by the undersigned
officer of the Fund in his/her capacity as an Officer of the Fund. The
obligations of this Agreement that pertain to the Fund shall only be binding
upon the assets and property of the Fund and shall not be binding upon any
individual trustee, director, officer or shareholder of the Fund. This
provision shall not affect the obligations or liabilities of LMC under this
Agreement.

IN WITNESS WHEREOF, the undersigned have executed this Agreement by their
duly authorized officers as of this 17th day of July, 1995.

KEMPER INVESTORS LIFE INSURANCE LEXINGTON MANAGEMENT CORPORATION
COMPANY

BY: /s/ Otis R. Heldman, Jr. BY: /s/ Lawrence Kantor
------------------------------ --------------------------------
Name: Otis R. Heldman, Jr. Name: Lawrence Kantor
Title: Marketing Officer Title: Managing Director &
Executive Vice President

LEXINGTON NATURAL RESOURCES TRUST

BY: /s/ Lisa Curcio
-----------------------------
Name: Lisa Curcio
Title: Vice President
& Secretary

<PAGE> 1

EXHIBIT 8.2

FUND PARTICIPATION AGREEMENT

Kemper Investors Life Insurance Company (the "Company") and Lexington
Emerging Markets Fund ("Lexington Fund" or the "Fund") and its investment
adviser, Lexington Management Corporation ("LMC") hereby agree to an
arrangement whereby shares of the Fund shall be made available to serve as
underlying investment media for Variable Annuity Contracts ("Contracts") to be
issued by the Company, subject to the following provisions:

1. Establishment of Accounts: Availability of Funds.

2. Marketing and Promotion.

The Fund agrees to provide the Company with monthly and/or quarterly
performance information and such other information as the parties deem
appropriate for the promotion of the Fund within five (5) days of the
end of each month for monthly information and within (10) days of the
end of each calendar quarter for quarterly information.

<PAGE> 2

3. Pricing Information; Orders; Settlement

(b) Lexington Fund will provide to the Company closing net asset
value, dividend and capital gain information at the close of
trading each day that the New York Stock Exchange (the
"Exchange") is open (each such day, a "business day"). The
Company will send via facsimile transmission to Lexington Fund
or its specified agent orders to purchase and/or redeem Fund
shares by 10:00 a.m., Eastern Time the following business day.
Payment for net purchases of the Fund and any other funds for
which LMC is the investment adviser, will be wired by the
Company to a custodial account designated by Lexington Fund to
coincide with the order for shares of the Fund not later
than 12 noon, Eastern Time on the day of the transaction.

(c) Orders from Contract owners or Participants received by
the Company and sent by the Company prior to the close of
the Exchange on any given business day via facsimile
transmission to Lexington Fund or its specified agent by
10:00 a.m., Eastern Time, the following business day will
be executed by Lexington Fund at the net asset value
determined as of the close of the Exchange on such prior
business day. Any orders received by the Company after the
close of the Exchange on such prior business day (or
not meeting the foregoing sentence's requirements) will be
executed by Lexington Fund at the net asset value
determined as of the close of the Exchange on the next
business day following the day of receipt of such order.

(d) Payments for net redemptions of shares of the Fund will
be wired by Lexington Fund from the Lexington Fund
custodial account to an account designated by the Company
not later than 12 noon, Eastern Time on the day of the
transaction.

(e) Each party has the right to rely on information or
confirmations provided by the other party (or by any
affiliate of the other party), and shall not be liable in
the event that an error is a result of any misinformation
supplied by the other party. If a mistake is caused in
supplying such information or confirmations, which results
in a reconciliation with incorrect information,
the amount required to make a Contract owner's account whole
shall be borne by the party providing the incorrect
information.

<PAGE> 3

(f) LMC shall provide the Company within fifteen (15)
business days after the end of each calendar quarter a letter
from a Fund officer or compliance officer certifying to
the continued accuracy of the representations contained
in Item 1 (b) above and attaching a detailed listing
of the individual securities and other assets, if any, held by
the Fund as of the end of such calendar quarter.

(g) LMC agrees to provide the Company within ten (10)
business days after the end of each month a monthly
statement of account confirming all transactions made
during the month.

4. Expenses.

(a) Except as otherwise provided in this Agreement, all
expenses incident to the performance by Lexington Fund
under this Agreement shall be paid by Lexington Fund
including the cost of registration of Lexington Fund shares
with the Securities and Exchange Commission (the
"SEC") and in states where required.

(b) Lexington Fund shall distribute to the Company its proxy
material, periodic fund reports to shareholders and other
material that are required by law to be sent to Contract
owners. In addition, Lexington Fund shall provide the
Company with a sufficient quantity of its prospectuses to
be used in connection with the offerings and transaction
contemplated by this Agreement. Subject to subsection
(c) below, the cost of preparing and printing such
materials shall be paid by Lexington Fund, and the cost
of distributing such materials shall be paid by the
Company. However, if Lexington Fund makes changes to its
prospectus for its own benefit or the benefit of someone
other than the Company resulting in the need to print and
distribute one or more supplements to contract holders, all
costs associated with printing and distributing any
such supplement shall be borne by Lexington Fund. In
addition, Lexington Fund and LMC agree that to the extent
the Fund decides in the future to finance distribution
expenses pursuant to Rule 12b-1 of the 1940 Act, the Fund
will undertake to have the board of directors, a majority
of whom are not interested persons of the Fund, formulate
and approve any plan under Rule 12b-1 to finance distribution
expenses.

<PAGE> 4

(c) In lieu of Lexington Fund's providing printed copies of
prospectuses and periodic fund reports to shareholder, the
Company shall have the right to request that
Lexington Fund provide a copy of such materials in an
electronic format, which the Company may use to have such
materials printed together with similar materials of other
Account funding media that the Company or any
distributor will distribute to existing or prospective
Contract owners or participants. In that event Lexington
Fund shall reimburse the Company for the same proportion of
the total printing expense for such materials as the
number of pages in each such printed document provided by
Lexington Fund bears to the total number of pages in such
printed document.

5. Representations.

(a) The Company agrees that it and its agents shall not,
without the written consent of Lexington Fund, make
representations concerning Lexington Fund or its shares
except those contained in the then current prospectuses and
in current printed sales literature of Lexington
Fund.

(b) The Company represents and warrants that interests in
Contracts are or will be registered under the Securities
Act of 1933 ("1933 Act") or are exempt from registration
thereunder; that the Contracts will be issued and sold in
compliance in all material respects with all applicable
federal and state laws and that the sale of the Contracts
shall comply in all material respects with state
insurance suitability requirements. The Company further
represents and warrants 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 and that each Account is or will
be registered as a unit investment trust in accordance with
the provisions of the 1940 Act to serve as a
segregated investment account for the Contracts or is
exempt from registration thereunder.

(c) The Company represents that the Contracts are currently
treated as annuity contracts under applicable provisions of
the Code and that it will make every effort to
maintain such treatment and that it will notify Lexington
Fund and LMC 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.

<PAGE> 5

(d) The Company represents and warrants that all of its
directors, officers and employees, if any, dealing with the
money and/or securities of the Fund are and shall
continue to be at all times covered by a blanket fidelity
bond or similar coverage for the benefit of the Fund in
an amount not less than $2 million. The aforesaid bond
shall include coverage for larceny and embezzlement and
shall be issued by a reputable bonding company.

(e) LMC and Lexington Fund make no representation as to
whether any aspect of the Fund's operations (including, but
not limited to, fees and expenses and investment
policies) complies with the insurance laws or regulations of
the various states.

(f) The Lexington Fund represents that it will sell and
distribute Fund's shares in accordance with any
applicable federal and state securities laws, including
without limitation, the 1933 Act, the Securities Exchange
Act of 1934, and the 1940 Act.

(g) Lexington Fund represents it is currently qualified as a
regulated investment company under Subchapter M of the Code
and that it will maintain such qualification
(under Subchapter M or any successor or similar
provision) and that it will notify the Company
immediately upon having a reasonable basis for believing
that it ceased to so qualify or might not so
qualify in the future. Lexington Fund and LMC acknowledge
that any failure to qualify as a regulated
investment company under Subchapter M of the Code would
constitute a breach of its representation and warranty
under item 1 (b) of this Agreement.

(h) LMC and Lexington Fund represent and warrant that the
Funds' shares sold pursuant to this Agreement shall be
registered under the 1933 Act, duly authorized for
issuance and sold in compliance with the laws of the State
of Illinois and all applicable federal and state
securities laws and that the Fund are and shall remain
registered under the 1940 Act. The Fund shall amend the
registration statement for its shares under the 1933 Act
and 1940 Act from time to time as required in order to
effect the continuous offering of its shares. The Fund
shall also register and qualify its shares for sale in
accordance with the laws of the various states only if and
to the extent deemed advisable by the Fund or LMC.

(i) Lexington Fund represents that it is lawfully organized
and validly existing under the laws of its state of
domicile and that it is and will comply in all material
respects with the 1940 Act.

<PAGE> 6

(j) LMC and Lexington Fund represent and warrant that LMC is
duly organized under its state of domicile, and is and
shall remain duly registered in all material respects
under any applicable federal and state securities laws, and
further that LMC shall perform its obligations for
the Fund in compliance in all material respects with
applicable federal and state securities laws.

(k) LMC and Lexington Fund represent and warrant that all of
their respective directors, officers, and employees dealing
with the money and/or securities of the Fund are
and shall continue to be at all times covered by a
blanket fidelity bond or similar coverage for the benefit
of the Fund in an amount not less than the minimal coverage
as required currently by Rule 17g-(1) of the
1940 Act or related provisions as may be promulgated from
time to time. The aforesaid bond shall include coverage
for larceny and embezzlement and shall be issued by a
reputable bonding company.

6. Administration of Accounts.

(a) Administrative services to Contract owners shall be the
responsibility of the Company and shall not be the
responsibility of Lexington Fund or LMC. LMC recognizes
the Company as the sole shareholder of fund shares issued
under this Agreement. From time to time, LMC may pay
amounts from its past profits to the Company for
providing certain administrative services for the Fund or
for providing other services that relate to the Fund. In
consideration of the savings resulting from such
arrangement, and to compensate the Company for its costs, LMC
agrees to pay to the Company an amount equal to 25
basis points (0.25%) per annum of the average aggregate
amount invested by the Company in the Fund under this
Agreement. Payment of such amounts by LMC will not
increase the fees paid by the Fund or its
shareholders.

(b) The parties agree that LMC's payments to the Company are
for administrative services only and do not constitute
payment in any manner for investment advisory services or
for costs of distribution.

(c) For the purposes of computing the administrative fee
reimbursement contemplated by this Section 6, the average
aggregate amount invested by the Company over a one month
period shall be computed by totaling the Company's aggregate
investment (share net asset value multiplied by
total number of shares held by the Company) on each business
day during the month and dividing by the total
number of business days during each month.

<PAGE> 7

(d) LMC will calculate the reimbursement of administrative
expenses at the end of each calendar quarter and will make
such reimbursement to the Company within 30 days
thereafter. The reimbursement check will be accompanied by
a statement showing the calculation of the monthly
amounts payable by LMC and such other supporting data as may
be reasonably requested by the Company.

7. Termination.

This agreement shall terminate as to the sale and issuance of new
Contracts:

(a) at the option of either the Company or Lexington Fund,
upon three months advance written notice to the other;

(b) at the option of the Company, upon one week advance
written notice to Lexington Fund, if Lexington Fund shares
are not available for any reason to meet the
requirement of Contracts as determined by the Company.

(c) at the option of either the Company or Lexington Fund,
immediately upon institution of formal proceedings against
the broker-dealer or broker-dealers marketing the
Contracts, the Account, the Company, Lexington Fund, or LMC
by the National Association of Securities Dealers,
Inc. (the "NASD"), Securities and Exchange Commission (the
"SEC") or any other regulatory body;

(d) upon the requisite vote of Contract owners having an
interest in the Fund, to substitute for the Fund's shares
the shares of another investment company in accordance
with the terms of the applicable Contracts. The Company
will give 60 days written notice to Lexington Fund of any
proposed vote to replace the Fund's shares;

(e) upon assignment of the Agreement, unless made with the
written consent of all other parties hereto:

(f) if the Fund's shares are not registered, issued or sold
in conformance with Federal law or such law precludes the
use of Fund's shares as an underlying investment medium
for Contracts issued or to be issued by the Company.
Prompt notice shall be given by either party should such
situation occur.

<PAGE> 8

(g) If the need for substitution of the shares of another
investment company, pursuant to Section 20(b) of the 1940
Act, arises out of the Fund's failure to be registered,
issued or sold in conformance with federal law or such law
precludes the use of the Fund as an underlying
investment medium of contracts issued or to be issued by the
Company, the expenses of obtaining such order shall
be reimbursed by the Lexington Fund or LMC. Lexington Fund
and LMC shall cooperate with the company in
connection with such application.

8. Continuation of Agreement.

Termination as the result of any cause listed in Section 7 shall
not affect Lexington Fund's obligation to furnish its shares to Contracts then
in force for which its shares serve or may serve as the underlying medium
unless such further sale of Fund's shares is proscribed by law or the
SEC or other regulatory body.

9. Advertising Materials; Filed Documents

10. Proxy Voting.

(a) The Company shall provide pass-through voting privileges
on Fund's shares to all Contract owners to the extent the
SEC continues to interpret the 1940 Act as requiring such
privileges. If shares are held in any other separate
account not required to be registered under the 1940 Act,
those shares will be voted in the Company's sole discretion.

<PAGE> 9

(b) The Company will distribute to Contract owners and
participants, as appropriate, all proxy material
furnished by Lexington Fund and will vote Fund's shares
in accordance with instructions received from Contract
owners. The Company, with respect to each Contract and
in each Account, shall vote Fund shares for which no
instructions have been received in the same proportion as
shares for which such instructions have been received. The
Company and its agents shall not oppose or interfere
with the solicitation of proxies for Fund shares held for
such Contract owners.

11. Indemnification.

(a) The Company agrees to indemnify and hold harmless
Lexington Fund, LMC, and each of its directors, trustees,
officers, employees, agents and each person, if any, who
controls the Fund or its investment adviser within the meaning
of the Securities Act of 1933 (the "1933 Act") against any
losses, claims, damages or liabilities to which the Fund or
any such director, officer, employee, agent, or controlling
person may become subject, under the 1933 Act or otherwise,
insofar as such losses, claims, damages, or liabilities (or
actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material
fact contained in the Registration Statement, prospectus or
sales literature of the Company, or arise out of or are based
upon the omission or the alleged omission to state therein a
material fact required to be stated therein or necessary to
make the statements or representations (other than statements
or representations contained in the prospectuses or sales
literature of the Fund) of the Company or its agents, with
respect to the sale and distribution of Contracts for which
Fund shares are the underlying investment. The Company will
reimburse any legal or other expenses reasonably incurred
by the Fund or any such director, officer, employee, agent,
investment adviser, or controlling person in connection with
investigating or defending any such loss, claim, damage,
liability or action; provided, however, that the Company will
not be liable in any such case to the extent that any such
loss, claim, damage or liability arises out of or is based
upon an untrue statement or omission or alleged omission made
in such Registration Statement or prospectus in conformity
with written materials furnished to the Company by the Fund
specifically for use therein. This indemnity agreement will
be in addition to any liability which the Company may
otherwise have.

<PAGE> 10

<PAGE> 11

(e) Lexington Fund and LMC shall not be liable under this
Section 11. to the Company or other parties covered under
Section 11.(c) with respect to any losses, claims,
damages or liabilities (or actions in respect thereof)
incurred or assessed against any such party (including
the Company) as such may arise from such party's willful
misfeasance, bad faith, or negligence in the performance
of such party's duties or by reason of such party's
reckless disregard of obligations or duties under this
Agreement.

(f) Promptly after receipt by an indemnified party hereunder of
notice of the commencement of action, such indemnified party
will, if a claim in respect thereof is to be made against the
indemnifying party hereunder, notify the indemnifying party of
the commencement thereof; but the omission so to notify the
indemnifying party will not relieve it from any liability
which it may have to any indemnified party otherwise than
under this Section 11. In case any such action is brought
against any indemnified party, and it notifies the
indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate therein
and, to the extent that it may wish to, assume the defense
thereof, with counsel satisfactory to such indemnified party
of its election to assume the defense thereof, the
indemnifying party will not be liable to such indemnified
party under this Section 11 for any legal or other expenses
subsequently incurred by such indemnified party in connection
with the defense thereof other than reasonable costs of
investigation.

12. Potential Conflicts.

(a) The Company has received a copy of an application for
exemptive relief, as amended, filed by Lexington Fund on
March 21, 1994, with the SEC and the order issued by the
SEC in response thereto (the "Shared Funding Exemptive
Order"). The Company has reviewed the conditions to the
requested relief set forth in such application for exemptive
relief. As set forth in such application, the
Board of Directors of Fund (the "Board") will monitor the

<PAGE> 12

(b) The Company will report any potential or existing
conflicts of which it is aware to the Board. The Company will
assist the Board in carrying out its responsibilities under
the Shared Funding Exemptive Order by providing the Board
with all information reasonably necessary for the Board to
consider any issues raised. This includes, but is not limited
to, an obligation by the Company to inform the Board whenever
contract holder voting instructions are disregarded.

<PAGE> 13

(i) withdrawing the assets allocable to the Account from
the Fund and reinvesting such assets in a different
investment medium or submitting the question of
whether such segregation should be implemented to
a vote of all affected contract holders and as
appropriate, segregating the assets of any
appropriate group (i.e., annuity contract owners,
life insurance contract owners, or variable contract
owners of one or more Participating Companies)
that votes in favor of such segregation, or offering
to the affected contract holders the option of making
such a change; and/or

(ii) establishing a new registered management investment
company or managed separate account.

(d) If a material irreconcilable conflict arises as a result
of a decision by the Company to disregard its contract
holder voting instructions and said decision represents
a minority position or would preclude a majority vote by
all of its contract holders having an interest in the
Fund, the Company at its sole cost, may be required, at the
Board's election, to withdraw an Account's investment
in the Fund and terminate this Agreement; 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 disinterested members of the Board.

(e) For the purpose of this Section 12, a majority of the
disinterested Board members shall determine whether or not
any proposed action adequately remedies any
irreconcilable material conflict, but in no event will
Lexington Fund be required to establish a new funding
medium for any Contract. The Company shall not be required
by this Section 12 to establish a new funding
medium for any Contract if an offer to do so has been
declined by vote of a majority of the Contract owners or
participants materially adversely affected by the
irreconcilable material conflict.

13. Miscellaneous.

(a) Amendment and Waiver. Neither this Agreement, nor any
provision hereof, may be amended, waived, discharged or
terminated orally, but only by an instrument in writing
signed by all parties hereto.

<PAGE> 14

(b) Notices. All notices and other communications hereunder
shall be given or made in writing and shall be delivered
personally, or sent by telex, telecopier or registered or
certified mail, postage prepaid, return receipt requested, to
the party or parties to whom they are directed at the
following addresses, or at such other addresses as may be
designated by notice from such party to all other parties.

To the Company:

Kemper Investors Life Insurance Company
1 Kemper Drive
Long Grove, IL 60049
Attention: General Counsel

To Lexington Management Corporation:

Lexington Management Corporation
Park 80 West Plaza Two
Saddle Brook, New Jersey 07663
Attention: Lisa Curcio
Senior Vice President & Secretary

Any notice, demand or other communication given in a manner prescribed
in this subsection (b) shall be deemed to have been delivered on
receipt.

(c) Successors and Assigns. This agreement shall be binding
upon and inure to the benefit of the parties hereto and
their respective permitted successors and assigns.

(d) Counterparts. This Agreement may be executed in any
number of counterparts, all of which taken together shall
constitute one agreement, and any party hereto may
execute this Agreement by signing any such counterpart.

(g) Governing Law. This Agreement shall be governed and
interpreted in accordance with the laws of the State of New
Jersey.

<PAGE> 15

14. Limitation on Liability of Trustees/Directors, etc.

IN WITNESS WHEREOF, the undersigned have executed this Agreement by
their duly authorized officers as of this 29th day of August, 1995.

KEMPER INVESTORS LIFE INSURANCE LEXINGTON MANAGEMENT CORPORATION
COMPANY

BY: /s/ Otis R. Heldman, Jr. BY: /s/ Lawrence Kantor
----------------------------- ----------------------------
Name: Otis R. Heldman, Jr. Name: Lawrence Kantor
Title: Marketing Officer Title: Managing Director &
Executive Vice
President

LEXINGTON EMERGING MARKETS FUND

BY: /s/ Lisa Curcio
------------------------------
Name: Lisa Curcio
Title: Vice President
& Secretary

<PAGE> 1
EXHIBIT 8.3

JANUS ASPEN SERIES

FUND PARTICIPATION AGREEMENT

THIS AGREEMENT is made this 24th day of July, 1995, between
JANUS ASPEN SERIES, an open-end management investment company organized as a
Delaware business trust (the "Trust"), JANUS CAPITAL CORPORATION, a Colorado
corporation (the "Adviser"), and KEMPER INVESTORS LIFE INSURANCE COMPANY, a
life insurance company organized under the laws of the State of Illinois (the
"Company"), on its own behalf and on behalf of each segregated asset account of
the Company set forth on Schedule A, as may be amended from time to time (the
"Accounts").

W I T N E S S E T H:

WHEREAS, the Trust is registered with the Securities and Exchange
Commission ("SEC") as an open-end management investment company under the
Investment Company Act of 1940, as amended (the "1940 Act"), and the Trust has
registered its shares under the Securities Act of 1933, as amended (the "1933
Act"); and

WHEREAS, the Trust desires to act as an investment vehicle for
separate accounts established for variable life insurance policies and variable
annuity contracts to be offered by insurance companies that have entered into
participation agreements with the Trust (the "Participating Insurance
Companies"); and

WHEREAS, the Trust issues shares of beneficial interest, divided into
several series of shares, each series representing an interest in a particular
managed portfolio of securities and other assets (the "Portfolios"); and

WHEREAS, the Trust has received an order from the SEC 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 Trust to be sold to and held by variable annuity and
variable life insurance separate accounts of both affiliated and unaffiliated
life insurance companies and certain qualified pension and retirement plans
(the "Exemptive Order"); and

WHEREAS, the Company desires to utilize shares of one or more
Portfolios as an investment vehicle for variable life insurance and/or variable
annuity contracts ("Contracts") funded by the Accounts; and

WHEREAS, the Adviser is registered as an investment adviser under the
Investment Advisers Act of 1940, as amended, and any applicable state
securities laws; and

WHEREAS, the Adviser serves as investment adviser to the Trust;
<PAGE> 2

NOW THEREFORE, in consideration of their mutual promises, the parties
agree as follows:

ARTICLE I.
Sale of Trust Shares

1.1. The Trust shall make shares of its Portfolios available to the
Accounts at the net asset value next computed after receipt of such purchase
order by the Trust (or its agent), as established in accordance with the
provisions of the then current prospectus of the Trust. Shares of a particular
Portfolio of the Trust shall be ordered in such quantities and at such times as
determined by the Company to be necessary to meet the requirements of the
Contracts. The Trustees of the Trust (the "Trustees") may refuse to sell shares
of any Portfolio to any person, or suspend or terminate the offering of shares
of any Portfolio if such action is required by law or by regulatory authorities
having jurisdiction or is, in the sole discretion of the Trustees 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
such Portfolio.

1.2. The Trust will redeem any full or fractional shares of any
Portfolio when requested by the Company on behalf of an Account at the net
asset value next computed after receipt by the Trust (or its agent) of the
request for redemption, as established in accordance with the provisions of the
then current prospectus of the Trust.

1.3. For the purposes of Sections 1.1 and 1.2, the Trust hereby
appoints the Company as its agent for the limited purpose of receiving and
accepting purchase and redemption orders resulting from investment in and
payments under the Contracts. Receipt by the Company shall constitute receipt
by the Trust provided that i) such orders are received by the Company in good
order prior to the time the net asset value of each Portfolio is priced in
accordance with its prospectus and ii) the Trust receives notice of such orders
by 11:00 a.m. New York time on the next following Business Day. "Business Day"
shall mean any day on which the New York Stock Exchange is open for trading and
on which the Trust calculates its net asset value pursuant to the rules of the
SEC.

1.4. Purchase orders that are transmitted to the Trust in accordance
with Section 1.3 shall be paid for by the Company no later than 12:00 noon New
York time on the same Business Day that the Trust receives notice of the order.
The Trust shall pay and transmit the proceeds of redemption orders that are
transmitted to the Trust in accordance with Section 1.3 no later than 12:00
noon New York time on the same Business Day that the Trust receives notice of
the redemption, except that the Trust reserves the right to postpone payment
upon redemption consistent with Section 22(e) of the 1940 Act and any rules
thereunder. Payments for such purchase orders will be made net of any
redemptions received on the same day as the purchase. Payments shall be made
in federal funds transmitted by wire.

-2-
<PAGE> 3

1.5. Issuance and transfer of the Trust's shares will be by book
entry only. Stock certificates will not be issued to the Company or the
Account. Shares ordered from the Trust will be recorded in the appropriate
title for each Account or the appropriate subaccount of each Account.

1.6. The Trust shall furnish prompt notice to the Company of any
income dividends or capital gain distributions payable on the Trust's shares.
The Company hereby elects to receive all such income dividends and capital gain
distributions as are payable on a Portfolio's shares in additional shares of
that Portfolio. The Trust shall notify the Company of the number of shares so
issued as payment of such dividends and distributions.

1.7. The Trust shall make the net asset value per share for each
Portfolio available to the Company on a daily basis as soon as reasonably
practical after the net asset value per share is calculated and shall use its
best efforts to make such net asset value per share available by 6 p.m. New
York time. Any material error in the calculation or reporting of net asset
value per share shall be reported immediately upon discovery to the Company.
In such event the Company shall be entitled to an adjustment to the number of
shares purchased or redeemed to reflect the correct net asset value per share
and the Trust or the Adviser shall bear the cost of correcting such errors.
Any error of a lesser amount shall be corrected in the next Business Day's net
asset value per share.

1.8. The Trust agrees that its shares will be sold only to
Participating Insurance Companies and their separate accounts and to certain
qualified pension and retirement plans to the extent permitted by the Exemptive
Order. No shares of any Portfolio will be sold directly to the general public.
The Company agrees that Trust shares will be used only for the purposes of
funding the Contracts and Accounts listed in Schedule A, as amended from time
to time.

1.9. The Trust agrees that all Participating Insurance Companies
shall have the obligations and responsibilities regarding pass-through voting
and conflicts of interest corresponding to those contained in Section 2.8 and
Article IV of this Agreement.

ARTICLE II.
Obligations of the Parties

2.1. The Trust shall prepare and be responsible for filing with the
SEC and any state regulators requiring such filing all shareholder reports,
notices, proxy materials (or similar materials such as voting instruction
solicitation materials), prospectuses and statements of additional information
of the Trust. The Trust shall bear the costs of registration and qualification
of its shares, preparation and filing of the documents listed in this Section
2.1. and all taxes to which an issuer is subject on the issuance and transfer
of its shares.

-3-
<PAGE> 4

2.2. At the option of the Company, the Trust shall either (a) provide
the Company (at the Company's expense) with as many copies of the Trust's
current prospectus, annual report, semi-annual report and other shareholder
communications, including any amendments or supplements to any of the
foregoing, as the Company shall reasonably request; or (b) provide the Company
with a camera ready copy of such documents in a form suitable for printing.
The Trust shall provide the Company with a copy of its statement of additional
information in a form suitable for duplication by the Company. The prospectus
and statement of additional information provided by the Trust shall relate
either to all Portfolios of the Trust or only selected Portfolios of the Trust,
as the Company shall reasonably request. The Trust (at its expense) shall
provide the Company with copies of any Trust-sponsored proxy materials in such
quantity as the Company shall reasonably require for distribution to Contract
owners.

2.3. The Company shall bear the costs of printing and distributing
the Trust's prospectus, statement of additional information, shareholder
reports and other shareholder communications to owners of and applicants for
policies for which the Trust is serving or is to serve as an investment
vehicle. The Company shall bear the costs of distributing proxy materials (or
similar materials such as voting solicitation instructions) to Contract owners.
The Company assumes sole responsibility for ensuring that such materials are
delivered to Contract owners in accordance with applicable federal and state
securities laws.

2.4. The Company agrees and acknowledges that the Adviser is the sole
owner of the name and mark "Janus" and that all use of any designation
comprised in whole or part of Janus (a "Janus Mark") under this Agreement shall
inure to the benefit of the Adviser. Except as provided in Section 2.5, the
Company shall not use any Janus Mark on its own behalf or on behalf of the
Accounts or Contracts in any registration statement, advertisement, sales
literature or other materials relating to the Accounts or Contracts without the
prior written consent of the Adviser. Upon termination of this Agreement for
any reason, the Company shall cease all use of any Janus Mark(s) as soon as
reasonably practicable.

2.5. The Company shall furnish, or cause to be furnished, to the
Trust (or its designee), a copy of the initial Contract prospectus and
statement of additional information in which the Trust or the Adviser is first
named prior to the filing of such document with the SEC. The Company shall
furnish, or shall cause to be furnished, to the Trust (or its designee) a copy
of each subsequent Contract prospectus and statement of additional information
in which the Trust or the Adviser is named concurrently with the filing of such
document with the SEC provided that there are no material changes in disclosure
related to the Trust or the Adviser. The Trust may, in its reasonable
discretion, request that the Company modify any references to the Trust or the
Adviser in subsequent filings. The Company shall furnish, or shall cause to be
furnished, to the Trust (or its designee), each piece of sales literature or
other promotional material in which the Trust or the Adviser is named, at least
five Business Days prior to its use or concurrently with the filing of such
document with the National Association of Securities Dealers, Inc. ("NASD"),
whichever is greater. No such material shall be used if the Trust (or its
designee) reasonably objects to such use within five Business Days after
receipt of such material.

-4-
<PAGE> 5

2.6 The Trust shall furnish, or cause to be furnished, to the Company
(or its designee), a copy of any initial Trust prospectus and statement of
additional information in which the Company is first named prior to the filing
of such document with the SEC. The Trust shall furnish, or shall cause to be
furnished, to the Company (or its designee) a copy of each subsequent Trust
prospectus and statement of additional information in which the Company is
named concurrently with the filing of such document with the SEC provided that
there are no material changes in disclosure related to the Company. The
Company may, in its reasonable discretion, request that the Trust modify any
references to the Company in subsequent filings. The Trust shall furnish, or
shall cause to be furnished to the Company (or its designee) each piece of
sales literature or other promotional material in which the Company is named,
at least five Business Days prior to its use or concurrently with the filing of
such document with the NASD, whichever is greater. No such material shall be
used if the Company (or its designee) reasonably objects to such use within
five Business Days after receipt of such material.

2.7. The Company shall not give any information or make any
representations or statements on behalf of the Trust or the Adviser or
concerning the Trust or the Adviser in connection with the sale of the
Contracts other than information or representations contained in and accurately
derived from the registration statement or prospectus for the Trust shares (as
such registration statement and prospectus may be amended or supplemented from
time to time), reports of the Trust, Trust-sponsored proxy statements, or in
sales literature or other promotional material approved by the Trust or its
designee or the Adviser, except as required by legal process or regulatory
authorities or with the written permission of the Trust or its designee or the
Adviser.

2.8. Neither the Trust nor the Adviser shall give any information or
make any representations or statements on behalf of the Company or concerning
the Company, the Accounts or the Contracts other than information or
representations contained in and accurately derived from the registration
statement or prospectus for the Contracts (as such registration statement and
prospectus may be amended or supplemented from time to time), or in materials
approved by the Company for distribution including sales literature or other
promotional materials, except as required by legal process or regulatory
authorities or with the written permission of the Company.

2.9. The Trust or the Adviser will provide the Company with as much
advance notice as is reasonably practicable of any material change affecting
the Portfolios (including, but not limited to, any material change in its
registration statement or prospectus affecting the Portfolios and any proxy
solicitation sponsored by the Trust or the Adviser affecting the Portfolios)
and consult with the Company in order to implement any such change in an
orderly manner, recognizing the expenses of changes and attempting to minimize
such expenses by implementing them in conjunction with regular annual updates
of the prospectus for the Contracts.

2.10. The Trust and the Adviser agree to maintain a blanket fidelity
bond or similar coverage for the benefit of the Trust in an amount not less
than the minimal coverage required by Section 17g-(1) of the 1940 Act or
related provisions as may be promulgated from time to time under the 1940 Act.

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<PAGE> 6

2.11. So long as, and to the extent that the SEC interprets the 1940
Act to require pass-through voting privileges for variable policyowners, the
Company will provide pass-through voting privileges to owners of policies whose
cash values are invested, through the Accounts, in shares of the Trust. The
Trust shall require all Participating Insurance Companies to calculate voting
privileges in the same manner and the Company shall be responsible for assuring
that the Accounts calculate voting privileges in the manner established by the
Trust. With respect to each Account, the Company will vote shares of the Trust
held by the Account and for which no timely voting instructions from
policyowners are received as well as shares it owns that are held by that
Account, in the same proportion as those shares for which voting instructions
are received. The Company and its agents will in no way recommend or oppose or
interfere with the solicitation of proxies for Trust shares held by Contract
owners without the prior written consent of the Trust, which consent may be
withheld in the Trust's sole discretion, except in the event that the Company
determines, in reliance on an opinion of counsel, that a proxy proposal would
result in a violation of applicable insurance laws.

2.12. The Trust and Adviser shall use their best efforts to maintain
qualification of each Portfolio as a Regulated Investment Company under
Subchapter M of the Internal Revenue Code of 1986, as amended ("Code") and
shall notify the Company immediately upon having a reasonable basis for
believing that a Portfolio has ceased to so qualify or that it might not so
qualify in the future. The Trust and the Adviser acknowledge that compliance
with Subchapter M is an essential element of compliance with Section 817(h).

2.13. The Trust and Adviser shall use their best efforts to enable
each Portfolio to comply with the requirements of Section 817(h) of the Code
and the regulations issued thereunder relating to the diversification
requirements for variable life insurance policies and variable annuity
contracts, and shall notify the Company immediately upon having a reasonable
basis for believing that any Portfolio has ceased or might cease to comply.

2.14. The Trust shall provide the Company or its designee with
reports certifying compliance with the aforesaid Section 817(h) diversification
and Subchapter M qualification requirements on a quarterly basis.

ARTICLE III.
Representations and Warranties

3.1. The Company represents and warrants that it is an insurance
company duly organized and in good standing under the laws of the State of
Illinois and that it has legally and validly established each Account as a
segregated asset account under such law on the date set forth in Schedule A.

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<PAGE> 7

3.2. The Company represents and warrants that each of the Accounts
(1) has been registered as a unit investment trust in accordance with the
provisions of the 1940 Act or, alternatively (2) has not been registered in
proper reliance upon an exclusion from registration under the 1940 Act.

3.3. The Company represents and warrants that the Contracts or
interests in the Accounts (1) are or, prior to issuance, will be registered as
securities under the 1933 Act or, alternatively (2) are not registered because
they are properly exempt from registration under the 1933 Act or will be
offered exclusively in transactions that are properly exempt from registration
under the 1933 Act. The Company further represents and warrants that the
Contracts will be issued and sold in compliance in all material respects with
all applicable federal and state laws; and the sale of the Contracts shall
comply in all material respects with state insurance suitability requirements.

3.4. The Trust represents and warrants that it is duly organized and
validly existing under the laws of the State of Delaware.

3.5. The Trust represents and warrants that the Trust shares offered
and sold pursuant to this Agreement are registered under the 1933 Act and the
Trust is registered under the 1940 Act. The Trust shall amend its registration
statement under the 1933 Act and the 1940 Act from time to time as required in
order to effect the continuous offering of its shares. The Trust shall
register and qualify its shares for sale in accordance with the laws of the
various states only if and to the extent deemed advisable by the Trust.

3.6. The Trust and the Adviser represent and warrant that the
investments of each Portfolio will comply with the diversification requirements
set forth in Section 817(h) of the Code and the rules and regulations
thereunder.

3.7. The Adviser represents and warrants that it is registered as an
investment adviser under the Investment Advisers Act of 1940, as amended, and
any applicable state securities laws.

ARTICLE IV.
Potential Conflicts

4.1. The parties acknowledge that the Trust's shares may be made
available for investment to other Participating Insurance Companies. In such
event, the Trustees will monitor the Trust for the existence of any material
irreconcilable conflict between the interests of the contract owners of all
Participating Insurance Companies. An irreconcilable material 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 interpretative 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 Portfolio are being managed;

-7-
<PAGE> 8

(e) a difference in voting instructions given by variable annuity contract and
variable life insurance contract owners; or (f) a decision by an insurer to
disregard the voting instructions of contract owners. The Trustees shall
promptly inform the Company if they determine that an irreconcilable material
conflict exists and the implications thereof.

4.2. The Company agrees to promptly report any potential or existing
conflicts of which it is aware to the Trustees. The Company will assist the
Trustees in carrying out their responsibilities under the Exemptive Order by
providing the Trustees with all information reasonably necessary for the
Trustees to consider any issues raised including, but not limited to,
information as to a decision by the Company to disregard Contract owner voting
instructions.

4.3. If it is determined by a majority of the Trustees, or a majority
of the disinterested Trustees, that a material irreconcilable conflict exists
that affects the interests of Contract owners, the Company shall, in
cooperation with other Participating Insurance Companies whose contract owners
are also affected, at its expense and to the extent reasonably practicable (as
determined by the Trustees) take whatever steps are necessary to remedy or
eliminate the irreconcilable material conflict, which steps could include: (a)
withdrawing the assets allocable to some or all of the Accounts from the Trust
or any Portfolio and reinvesting such assets in a different investment medium,
including (but not limited to) another Portfolio of the Trust, or submitting
the question of whether or not such segregation should be implemented to a vote
of all affected Contract owners and, as appropriate, segregating the assets of
any appropriate group (i.e., 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
Contract owners the option of making such a change; and (b) establishing a new
registered management investment company or managed separate account.

4.4. If a material irreconcilable conflict arises because of a
decision by the Company to disregard Contract owner voting instructions and
that decision represents a minority position or would preclude a majority vote,
the Company may be required, at the Trust's election, to withdraw the affected
Account's investment in the Trust and terminate this Agreement with respect to
such 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 disinterested Trustees. Any such
withdrawal and termination must take place within six (6) months after the
Trust gives written notice that this provision is being implemented. Until the
end of such six (6) month period, the Trust shall continue to accept and
implement orders by the Company for the purchase and redemption of shares of
the Trust.

4.5. If a material irreconcilable conflict arises because a
particular state insurance regulator's decision applicable to the Company
conflicts with the majority of other state regulators, then the Company will
withdraw the affected Account's investment in the Trust and terminate this
Agreement with respect to such Account within six (6) months after the Trustees
inform the Company in writing that it has determined that such decision has
created an irreconcilable material conflict; provided, however, that such
withdrawal and termination shall

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<PAGE> 9

be limited to the extent required by the foregoing material irreconcilable
conflict as determined by a majority of the disinterested Trustees. Until the
end of such six (6) month period, the Trust shall continue to accept and
implement orders by the Company for the purchase and redemption of shares of
the Trust.

4.6. For purposes of Sections 4.3 through 4.6 of this Agreement, a
majority of the disinterested Trustees shall determine whether any proposed
action adequately remedies any irreconcilable material conflict, but in no
event will the Company be required 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 irreconcilable material
conflict. In the event that the Trustees determine that any proposed action
does not adequately remedy any irreconcilable material conflict, then the
Company will withdraw the Account's investment in the Trust and terminate this
Agreement within six (6) months after the Trustees inform the Company in
writing of the foregoing determination; provided, however, that such withdrawal
and termination shall be limited to the extent required by any such material
irreconcilable conflict as determined by a majority of the disinterested
Trustees.

4.7. The Company shall at least annually submit to the Trustees such
reports, materials or data as the Trustees may reasonably request so that the
Trustees may fully carry out the duties imposed upon them by the Exemptive
Order, and said reports, materials and data shall be submitted more frequently
if deemed appropriate by the Trustees.

4.8. If and to the extent that Rule 6e-2 and Rule 6e-3(T) are
amended, or Rule 6e-3 is adopted, to provide exemptive relief from any
provision of the 1940 Act or the rules promulgated thereunder with respect to
mixed or shared funding (as defined in the Exemptive Order) on terms and
conditions materially different from those contained in the Exemptive Order,
then the Trust and/or the Participating Insurance Companies, as appropriate,
shall take such steps as may be necessary to comply with Rules 6e-2 and
6e-3(T), as amended, and Rule 6e-3, as adopted, to the extent such rules are
applicable.

ARTICLE V.
Indemnification

5.1. Indemnification By the Company. The Company agrees to indemnify
and hold harmless the Trust, the Adviser, and each of their Trustees or
Directors, officers, employees and agents and each person, if any, who controls
the Trust or the Adviser within the meaning of Section 15 of the 1933 Act
(collectively, the "Indemnified Parties" for purposes of this Article V)
against any and all losses, claims, damages, liabilities (including amounts
paid in settlement with the written consent of the Company) or expenses
(including the reasonable costs of investigating or defending any alleged loss,
claim, damage, liability or expense and reasonable legal counsel fees incurred
in connection therewith) (collectively, "Losses"), to which the Indemnified
Parties

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<PAGE> 10

may become subject under any statute or regulation, or at common law or
otherwise, insofar as such Losses:

(a) arise out of or are based upon any untrue statements or
alleged untrue statements of any material fact contained in a
registration statement or prospectus for the Contracts or in the
Contracts themselves or in sales literature generated or approved by
the Company on behalf of the Contracts or Accounts (or any amendment
or supplement to any of the foregoing) (collectively, "Company
Documents" for the purposes of this Article V), or arise out of or are
based upon the omission or the alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading, provided that this indemnity shall
not apply as to any Indemnified Party if such statement or omission or
such alleged statement or omission was made in reliance upon and was
accurately derived from written information furnished to the Company
by or on behalf of the Trust or the Adviser for use in Company
Documents or otherwise for use in connection with the sale of the
Contracts or Trust shares; or

(b) arise out of or result from statements or representations
(other than statements or representations contained in and accurately
derived from Trust Documents as defined in Section 5.2(a)) or wrongful
conduct of the Company or persons under its control, with respect to
the sale or acquisition of the Contracts or Trust shares; or

(c) arise out of or result from any untrue statement or
alleged untrue statement of a material fact contained in Trust
Documents as defined in Section 5.2(a) or the omission or alleged
omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading if
such statement or omission was made in reliance upon and accurately
derived from written information furnished to the Trust or the Adviser
by or on behalf of the Company; or

(d) arise out of or result from any failure by the Company to
provide the services or furnish the materials required under the terms
of this Agreement; or

(e) arise out of or result from any material breach of any
representation and/or warranty made by the Company in this Agreement
or arise out of or result from any other material breach of this
Agreement by the Company.

5.2. Indemnification By the Trust and the Adviser. The Trust and
Adviser agree to indemnify and hold harmless the Company and each of its
directors, officers, employees and agents and each person, if any, who controls
the Company within the meaning of Section 15 of the 1933 Act (collectively, the
"Indemnified Parties" for purposes of this Article V) against any and all
losses, claims, damages, liabilities (including amounts paid in settlement with
the written consent of the Adviser) or expenses (including the reasonable costs
of investigating or defending any alleged loss, claim, damage, liability or
expense and reasonable legal counsel fees incurred

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<PAGE> 11

in connection therewith) (collectively, "Losses"), to which the Indemnified
Parties may become subject under any statute or regulation, or at common law or
otherwise, insofar as such Losses:

(a) arise out of or are based upon any untrue statements or
alleged untrue statements of any material fact contained in the
registration statement or prospectus for the Trust (or any amendment
or supplement thereto), (collectively, "Trust Documents" for the
purposes of this Article V), or arise out of or are based upon the
omission or the alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements
therein not misleading, provided that this indemnity shall not apply
as to any Indemnified Party if such statement or omission or such
alleged statement or omission was made in reliance upon and was
accurately derived from written information furnished to the Trust by
or on behalf of the Company for use in Trust Documents or otherwise
for use in connection with the sale of the Contracts or Trust shares;
or

(b) arise out of or result from statements or representations
(other than statements or representations contained in and accurately
derived from Company Documents) or wrongful conduct of the Trust or
persons under its control, with respect to the sale or acquisition of
the Contracts or Trust shares; or

(c) arise out of or result from any untrue statement or
alleged untrue statement of a material fact contained in Company
Documents or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading if such statement or omission was
made in reliance upon and accurately derived from written information
furnished to the Company by or on behalf of the Trust; or

(d) arise out of or result from any failure by the Trust or
the Adviser to provide the services or furnish the materials required
under the terms of this Agreement; or

(e) arise out of or result from any material breach of any
representation and/or warranty made by the Trust or Adviser in this
Agreement or arise out of or result from any other material breach of
this Agreement by the Trust or Adviser.

5.3. None of the parties to this Agreement shall be liable under the
indemnification provisions of Sections 5.1 or 5.2, as applicable, with respect
to any Losses incurred or assessed against an Indemnified Party that arise from
such Indemnified Party's willful misfeasance, bad faith or negligence in the
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations or duties under this Agreement.

5.4. None of the parties to this Agreement shall be liable under the
indemnification provisions of Sections 5.1 or 5.2, as applicable, with respect
to any claim made against an Indemnified Party unless such Indemnified Party
shall have notified the other parties in writing within a reasonable time after
the summons, or other first written notification, giving information

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<PAGE> 12

of the nature of the claim shall have been served upon or otherwise received by
such Indemnified Party (or after such Indemnified Party shall have received
notice of service upon or other notification to any designated agent), but
failure to notify the party against whom indemnification is sought of any such
claim or shall not relieve that party from any liability which it may have to
the Indemnified Party in the absence of Sections 5.1 and 5.2.

5.5. In case any such action is brought against the Indemnified
Parties, the indemnifying party shall be entitled to participate, at its own
expense, in the defense of such action. The indemnifying party also shall be
entitled to assume the defense thereof, with counsel reasonably satisfactory to
the party named in the action. After notice from the indemnifying party to the
Indemnified Party of an election to assume such defense, the Indemnified Party
shall bear the fees and expenses of any additional counsel retained by it, and
the indemnifying party will not be liable to the Indemnified Party under this
Agreement for any legal or other expenses subsequently incurred by such party
independently in connection with the defense thereof other than reasonable
costs of investigation.

ARTICLE VI.
Termination

6.1 This Agreement shall terminate as to the sale and issuance of new
Contracts:

(a) at the option of any party, for any reason upon ninety
(90) days advance written notice to the other parties, unless a
shorter time period is agreed to in writing by the parties to this
Agreement;

(b) at the option of the Company, upon one week advance
written notice to the Trust, if the Trust shares are not reasonably
available to meet the requirements of the Contracts as determined by
the Company;

(c) at the option of the Company, immediately upon
institution of formal proceedings against the Trust or Adviser by the
NASD, SEC, or any other regulatory body that are deemed by the Company
to materially affect the performance of the obligations under this
Agreement;

(d) at the option of the Trust or the Adviser, immediately
upon institution of formal proceedings against the broker-dealer or
broker-dealers marketing the Contracts, the Account, or the Company by
the NASD, SEC, or any other regulatory body that are deemed by the
Trust or Adviser to materially affect the performance of the
obligations under this Agreement;

(e) upon the requisite vote of Contract owners having an
interest in the Trust, or SEC approval of an application pursuant to
Section 26(b) of the 1940 Act, to substitute

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<PAGE> 13

for the Trust's shares the shares of another investment company in
accordance with the terms of the applicable Contracts. The Company
will give sixty (60) days written notice to the Trust of any proposed
application or vote to replace the Trust's shares. The Trust and
Adviser shall cooperate with the Company in connection with such
application;

(f) upon assignment (as defined in Section 2(a)(4) of the
1940 Act) of the Agreement, unless made with the written consent of
all other parties hereto;

(g) if the Trust's shares are not registered, issued or sold
in conformance with Federal law or such law precludes the use of the
Trust's shares as an underlying investment medium for Contracts issued
or to be issued by the Company. Prompt notice shall be given by each
party should such situation occur;

(h) by any party to the Agreement upon a determination by a
majority of the Trustees of the Trust, or a majority of its
disinterested Trustees, that an irreconcilable material conflict
exists;

(i) at the option of the Trust or Adviser if the Contracts
cease to qualify as annuity contracts or life insurance contracts, as
applicable, under the Code or if the Contracts are not registered,
issued or sold in accordance with applicable state and/or federal law;
or

(j) if the need for substitution of the shares of another
investment company, pursuant to Section 26(b) of the 1940 Act, arises
out of the Trust's failure to be registered, issued or sold in
conformance with federal law, including applicable tax law, the
expenses of obtaining such order shall be reimbursed by the Trust or
Adviser. The Trust and Adviser shall cooperate with the Company in
connection with such application.

6.2 Notwithstanding any termination of this Agreement, the Trust
shall, at the option of the Company, continue to make available additional
shares of the Trust (or any Portfolio) pursuant to the terms and conditions of
this Agreement for all Contracts in effect on the effective date of termination
of this Agreement provided that the Company continues to pay the costs set
forth in Section 2.3.

6.3. The provisions of Articles III and V shall survive the
termination of this Agreement, and the provisions of Article IV and Section
2.11 shall survive the termination of this Agreement as long as shares of the
Trust are held on behalf of Contract owners in accordance with Section 6.2.

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<PAGE> 14

ARTICLE VII.
Notices

Any notice shall be sufficiently given when sent by registered or
certified mail to the other party at the address of such party set forth below
or at such other address as such party may from time to time specify in writing
to the other party.

If to the Trust:

100 Fillmore Street, Suite 300
Denver, Colorado 80206
Attention: David C. Tucker, Esq.

If to the Company:

1 Kemper Drive
Long Grove, Illinois 60049
Attention: General Counsel

If to the Adviser:

100 Fillmore Street, Suite 300
Denver, Colorado 80206
Attention: David C. Tucker, Esq.

ARTICLE VIII.
Miscellaneous

8.1. 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.

8.2. This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.

8.3. 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.

8.4. This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of State of Colorado.

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<PAGE> 15

8.5. The parties to this Agreement acknowledge and agree that all
liabilities of the Trust arising, directly or indirectly, under this Agreement,
of any and every nature whatsoever, shall be satisfied solely out of the assets
of the Trust and that no Trustee, officer, agent or holder of shares of
beneficial interest of the Trust shall be personally liable for any such
liabilities.

8.6. Each party 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 such authorities
reasonable access to its books and records in connection with any investigation
or inquiry relating to this Agreement or the transactions contemplated hereby.

8.7. 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.

8.8. The parties to this Agreement acknowledge and agree that this
Agreement shall not be exclusive in any respect.

8.9. Neither this Agreement nor any rights or obligations hereunder
may be assigned by either party without the prior written approval of the other
party.

8.10. No provisions of this Agreement may be amended or modified in
any manner except by a written agreement properly authorized and executed by
both parties.

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<PAGE> 16

IN WITNESS WHEREOF, the parties have caused their duly authorized
officers to execute this Participation Agreement as of the date and year first
above written.

KEMPER INVESTORS
LIFE INSURANCE COMPANY

By: /s/ Otis R. Heldman, Jr.
---------------------------
Name: Otis R. Heldman, Jr.
---------------------------
Title: Marketing Officer
---------------------------

JANUS ASPEN SERIES

By: /s/ Deborah E. Bielicke
---------------------------
Name: Deborah E. Bielicke
---------------------------
Title: Assistant Vice President
---------------------------

JANUS CAPITAL CORPORATION

By: /s/ Stephen L. Stieneker
---------------------------
Name: Stephen L. Stieneker
---------------------------
Title: Assistant Vice President
---------------------------

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<PAGE> 17

Schedule A
Separate Accounts and Associated Contracts

Name of Separate Account and Contracts Funded
Date Established by Board of Directors By Separate Account

KILICO Variable Annuity Kemper Advantage III
Separate Account established
May 29, 1981

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<PAGE> 1

EXHIBIT 13.2

SCHEDULES FOR COMPUTATION OF PERFORMANCE CALCULATIONS
This exhibit reflects the calculation of certain
performance figures that appear under "Performance"
in Appendix A of the Part B.

A. TOTAL RETURN

Formula. The total return performance of the Janus Growth, Janus
Aggressive Growth, Janus Worldwide Growth, Janus Balanced, Janus Short-Term
Bond, Lexington Natural Resources and Lexington Emerging Markets Subaccounts
for a specified period equals the change in the value of a hypothetical initial
purchase payment of $10,000 ("Purchase Payment") from the beginning of the
period to the end of the period. The total return performance is calculated
assuming the change in the value of the Purchase Payment fully allocated to
each subaccount and the deduction of all expenses and fees, including a
prorated portion of the $36 annual policy fee. This proration is based on the
total number of contract holders. No withdrawals are assumed. Total Return
may be expressed either as a dollar value or as a percentage change. The
percentage change in the value of the Purchase Payment for the period is
calculated by subtracting the initial Purchase Payment from the ending value
and dividing the remainder by the beginning value:

EV - P
Percentage Change = ------
P

P = Purchase Payment

The decimal return is converted to a percentage by multiplying by 100.

B. AVERAGE ANNUAL TOTAL RETURN

Formula. The average annual total return (AATR) performance of the above
Subaccounts for a specified period equals the change in the value of a
hypothetical initial purchase payment of $1,000 ("Purchase Payment") from the
beginning of the period to the end of the period. The AATR performance is
calculated assuming the change in the value of the Purchase Payment fully
allocated to each subaccount and the deduction of all expenses and fees,
including a prorated portion of the $36 annual policy fee. This proration is
based on the total number of contract holders. At the end of the specified
period, it is assumed that a full surrender is taken. The AATR for a specific
period is found by taking a hypothetical $1,000 Purchase Payment and computing
the redeemable value at the end of the period after all fees and surrender
charges. The Ending Redeemable Value (ERV) is then divided by the
<PAGE> 2

Purchase Payment, and this quotient is taken to the Nth root (N representing
the number of years in the period) and 1 is subtracted from the result, which
is then expressed as a percentage. Thus, the following formula applies:

(ERV)
Average Annual Total Return = (---) 1/N - 1
( P )

ERV = Ending Redeemable Value
P = Purchase Payment
N = Number of years
The decimal return is converted to a percentage by multiplying by 100
<PAGE> 3

YIELD CALCULATION

The yield for the Janus Short-Term Bond Subaccount is computed in
accordance with a standard method prescribed by rules of the Securities and
Exchange Commission. Yield is a measure of the net dividend and interest
income earned over a specific one month or 30-day period. The yield quotations
are based on a 30-day (or one month) period and computed by dividing that net
investment income per accumulation unit earned during the period by the maximum
offering price per unit on the last day of the period according to the
following formula;

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

WHERE:

a = net investment income earned during the period by the
portfolio attributable to shares owned by 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 maximum offering price per accumulation unit on the last
day of the period.

<PAGE> 1

[KEMPER LIFE INSURANCE COMPANIES LETTERHEAD]

EXHIBIT 16

September 13, 1995

Securities and Exchange Commission
450 Fifth Street, N. W.
Washington, DC 20549

Re: KILICO Variable Annuity Separate Account
File Nos. 2-72671 and 811-3199

Commissioners:

I am an attorney at law admitted to the Bar of the state of Illinois. I am
Assistant General Counsel of Kemper Investors Life Insurance Company. I provide
legal counsel for the KILICO Variable Annuity Separate Account. In such
capacity, I have reviewed the KILICO Variable Annuity Separate Account's
Post-Effective Amendment No. 23 to Form N-4 filed pursuant to Rule 485(b) under
the Securities Act of 1933 and represent that such Amendment does not contain
disclosure which would render it ineligible to become effective pursuant to Rule
485(b).

Yours truly,

/s/ Frank J. Julian
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Frank J. Julian
Assistant General Counsel

FJJ/id