<PAGE> 1
KEMPER ADVANTAGE III
PROSPECTUS--MAY 1, 1996
Includes Prospectuses for:
Kemper Investors Fund
Fidelity Variable Insurance Products Funds
Janus Aspen Series
Lexington Emerging Markets Fund
Lexington Natural Resources Trust
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> 2
PROSPECTUS--MAY 1, 1996
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PERIODIC PAYMENT
VARIABLE ANNUITY CONTRACTS
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KEMPER ADVANTAGE III
ISSUED BY
KEMPER INVESTORS LIFE INSURANCE COMPANY
IN CONNECTION WITH
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
HOME OFFICE: 1 KEMPER DRIVE, LONG GROVE, ILLINOIS 60049 (847) 550-5500
The types of 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
options under which Contract values accumulate on either a variable or fixed
basis. These options consist of the twenty-six 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 funds: the Kemper
Investors Fund ("KINF"), the Janus Aspen Series ("Janus"), the Lexington Natural
Resources Trust and Lexington Emerging Markets Fund ("Lexington"), and Fidelity
Variable Insurance Products Fund and Fidelity Variable Insurance Products Fund
II ("Fidelity").
The Kemper Investors Fund currently consists of the following Portfolios: Money
Market, Total Return, High Yield, Growth (formerly "Equity"), Government
Securities, International, Small Cap Growth (formerly "Small Capitalization
Equity"), Investment Grade Bond, Value, Small Cap Value, Value+Growth, Horizon
20+, Horizon 10+, and Horizon 5. Zurich Kemper Investments, Inc. (formerly named
Kemper Financial Services, Inc.) ("ZKI"), is the investment manager of each KINF
Portfolio other than the Value and Small Cap Value Portfolios. Dreman Value
Advisors, Inc. ("DVA"), a wholly owned subsidiary of ZKI, is the investment
manager of the Value and Small Cap Value Portfolios. DVA is also the sub-adviser
for the Value+Growth, Horizon 20+, Horizon 10+, and Horizon 5 Portfolios. The
following Portfolios of the Janus Aspen Series are managed by Janus Capital
Corporation and 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 and are managed by Lexington Management Corporation. The following
Portfolios of the Fidelity Variable Insurance Products Fund are managed by
Fidelity Management & Research Company ("FMR") and are available under the
Contracts: Equity-Income and Growth. The following Portfolios of the Fidelity
Variable Insurance Products Fund II are managed by FMR and are available under
the Contracts: Asset Manager, Index 500 and Contrafund.
Subaccounts and Portfolios may be added in the future. Contract values allocated
to any of the Subaccounts will vary to reflect the investment objectives and the
attendant risks of the Funds. Contract values allocated to the Fixed
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, 1996 has been filed with the Securities and Exchange Commission and
is incorporated herein by reference. A Statement of Additional Information is
available upon request from 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 29 of this Prospectus.
THIS PROSPECTUS IS VALID ONLY IF ACCOMPANIED OR PRECEDED BY A CURRENT PROSPECTUS
FOR THE KEMPER INVESTORS FUND, JANUS ASPEN SERIES, LEXINGTON NATURAL RESOURCES
TRUST, LEXINGTON EMERGING MARKETS FUND, FIDELITY VARIABLE INSURANCE PRODUCTS
FUND AND FIDELITY VARIABLE INSURANCE PRODUCTS FUND II. ALL PROSPECTUSES SHOULD
BE READ AND RETAINED FOR FUTURE REFERENCE.
THE CONTRACTS ARE NOT INSURED BY THE FDIC. THEY ARE OBLIGATIONS OF THE ISSUING
INSURANCE COMPANY AND ARE NOT A DEPOSIT OF, OR GUARANTEED BY, ANY BANK OR
SAVINGS INSTITUTION AND ARE SUBJECT TO RISKS, INCLUDING POSSIBLE LOSS OF
PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE> 3
TABLE OF CONTENTS
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<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
DEFINITIONS................................................................................. 1
SUMMARY..................................................................................... 2
SUMMARY OF EXPENSES......................................................................... 4
CONDENSED FINANCIAL INFORMATION............................................................. 6
KILICO, THE SEPARATE ACCOUNT AND THE FUND................................................... 9
FIXED ACCUMULATION OPTION................................................................... 14
THE CONTRACTS............................................................................... 14
CONTRACT CHARGES AND EXPENSES............................................................... 18
THE ANNUITY PERIOD.......................................................................... 21
FEDERAL INCOME TAXES........................................................................ 23
DISTRIBUTION OF CONTRACTS................................................................... 26
VOTING RIGHTS............................................................................... 27
REPORTS TO CONTRACT OWNERS AND INQUIRIES.................................................... 27
DOLLAR COST AVERAGING....................................................................... 27
SYSTEMATIC WITHDRAWAL PLAN.................................................................. 28
PROVISIONS OF PRIOR CONTRACTS............................................................... 28
LEGAL PROCEEDINGS........................................................................... 30
TABLE OF CONTENTS--STATEMENT OF ADDITIONAL INFORMATION...................................... 30
</TABLE>
<PAGE> 4
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 OR FUNDS--Kemper Investors Fund, Janus Aspen Series, Lexington Natural
Resources Trust, Lexington Emerging Markets Fund, Fidelity Variable
Insurance Products Fund and Fidelity Variable Insurance Products Fund II
including any Portfolios thereunder.
GENERAL ACCOUNT--All the assets of KILICO other than those allocated to any
Separate Account. KILICO guarantees a minimum rate of interest on Purchase
Payments allocated to the General Account.
GENERAL ACCOUNT CONTRACT VALUE--The value of the Owner's Contract interest
in the General Account.
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.
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.
1
<PAGE> 5
PURCHASE PAYMENTS--Amounts paid to KILICO by or on behalf of a Contract
Owner.
QUALIFIED PLAN CONTRACT--A Contract issued in connection with a retirement
plan which receives favorable tax treatment under Section 401, 403, 408 or
457 of the Internal Revenue Code.
SEPARATE ACCOUNT--A unit investment trust registered with the Securities
and Exchange Commission under the Investment Company Act of 1940 known as
the KILICO Variable Annuity Separate Account.
SEPARATE ACCOUNT CONTRACT VALUE--The sum of the Owner's Contract interest
in the Subaccount(s).
SUBACCOUNTS--The twenty-six subdivisions of the Separate Account, the
assets of which consist solely of shares of the corresponding Portfolios.
SUBACCOUNT VALUE--The value of the Owner's Contract interest in each
Subaccount.
UNITHOLDER--The person holding the voting rights with respect to an
Accumulation or Annuity Unit.
VALUATION DATE--Each day when the New York Stock Exchange is open for
trading, as well as each day otherwise required. (See "Accumulation Unit
Value.")
VALUATION PERIOD--The interval of time between two consecutive Valuation
Dates.
VARIABLE ANNUITY--An annuity with payments varying in amount in accordance
with the investment experience of the Subaccount(s) in which the Owner's
Contract has an interest.
WITHDRAWAL CHARGE--The "contingent deferred sales charge" assessed against
certain withdrawals of Accumulation Units in their first 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
twenty-six 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 14.)
KILICO provides for variable accumulations and benefits under the Contracts by
crediting purchase payments to one or more Subaccounts of the Separate Account
as selected by the Contract Owner. Each Subaccount invests in one of the
following corresponding Portfolios: KINF Money Market, KINF Total Return, KINF
High Yield, KINF Growth, KINF Government Securities, KINF International, KINF
Small Cap Growth, KINF Investment Grade Bond, KINF Value, KINF Small Cap Value,
KINF Value+Growth, KINF Horizon 20+, KINF Horizon 10+ and KINF Horizon 5; Janus
Growth, Janus Aggressive Growth, Janus Worldwide Growth, Janus Balanced and
Janus Short-Term Bond; Lexington Natural Resources Trust; Lexington Emerging
Markets Fund; Fidelity Equity-Income, Fidelity Growth; Fidelity Asset Manager,
Fidelity Index 500, and Fidelity Contrafund. (See "The Funds" page 9.) The
Contract Values allocated to the Separate Account will vary with the investment
performance of the Portfolios and Funds selected by the Contract Owner.
KILICO 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 14.)
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.
2
<PAGE> 6
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 16 and 22, 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 19.) 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 24.)
KILICO makes charges under the Contract for assuming the mortality and expense
risk and administrative expenses under the Contract, for records maintenance,
and for any applicable premium taxes. (See "Charges Against the Separate
Account," page 18.) In addition, ZKI, DVA, Janus, Lexington, or FMR deduct
varying charges against the assets of the Funds for which they provide
investment advisory services. (See the Funds' Prospectuses for such
information.)
The Contracts may be purchased in connection with retirement plans which qualify
either under Section 401 or 403(b) of the Internal Revenue Code of 1986, as
amended (the "Code") or as individual retirement account plans established under
Section 408 of the Code. The Contracts are also available in connection with
state and municipal deferred compensation plans and other entities qualified
under Section 457 of the Code and under 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 23
and "Qualified Plans," page 24.)
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 14.)
3
<PAGE> 7
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SUMMARY OF EXPENSES
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CONTRACT OWNER TRANSACTION EXPENSES
<TABLE>
<S> <C>
Sales Load Imposed on Purchases (as a percentage of purchase payments)......................................... None
Contingent Deferred Sales Load (as a percentage of amount surrendered)*
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>
FUND ANNUAL EXPENSES
(as percentage of each Portfolio's average net assets
for the period ended December 31, 1995)
<TABLE>
<CAPTION>
KINF KINF KINF
MONEY TOTAL KINF KINF GOVERNMENT
MARKET RETURN HIGH YIELD GROWTH SECURITIES
----- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Management Fees.............. .50% .55% .60% .60% .55%
Other Expenses............... .05 .05 .05 .04 .10
--- --- --- --- ---
Total Portfolio Annual
Expenses.................... .55% .60% .65% .64% .65%
=== === === === ===
<CAPTION>
KINF KINF KINF
KINF SMALL CAP INVESTMENT KINF SMALL
INTERNATIONAL GROWTH GRADE BOND VALUE CAP VALUE
------------- --------- ---------- ----- ---------
<S> <<C> <C> <C> <C>
Management Fees.............. .75% .65% .60% .75% .75%
Other Expenses............... .17 .22 .15 .15 .15
--- --- --- --- ---
Total Portfolio Annual
Expenses.................... .92% .87% .75% .90% .90%
=== === === === ===
<CAPTION>
KINF KINF KINF KINF
VALUE+ HORIZON HORIZON HORIZON
GROWTH 20+ 10+ 5
------ ------- ------- -------
Management Fees.............. .75% .60% .60% .60%
Other Expenses............... .15 .15 .15 .15
--- --- --- ---
Total Portfolio Annual
Expenses.................... .90% .75% .75% .75%
=== === === ===
</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
for the period ended December 31, 1995)
<TABLE>
<CAPTION>
JANUS JANUS
JANUS AGGRESSIVE WORLDWIDE JANUS
GROWTH*** GROWTH*** GROWTH*** BALANCED***
--------- --------- --------- -----------
<S> <C> <C> <C> <C>
Management Fees........................ .65% .75% .68% .82%
Other Expenses......................... .13 .11 .22 .55
--- --- --- ----
Total Portfolio Annual Expenses........ .78% .86% .90% 1.37%
=== === === ====
<CAPTION>
JANUS LEXINGTON LEXINGTON
SHORT-TERM NATURAL EMERGING FIDELITY
BOND*** RESOURCES MARKETS**** EQUITY
---------- --------- ----------- --------
<S> <C> <C> <C> <C>
Management Fees........................ 0% 1.00% .85% .51%
Other Expenses......................... .70 .47 .47 .10
--- ---- --- ---
Total Portfolio Annual Expenses........ .70% 1.47% 1.32% .61%
=== ==== === ===
<CAPTION>
FIDELITY FIDELITY FIDELITY
FIDELITY ASSET INDEX CONTRA
GROWTH MANAGER 500 FUND
-------- -------- -------- --------
Management Fees........................ .61% .71% .0% .61%
Other Expenses......................... .09 .10 .28 .12
--- --- ---
--
Total Portfolio Annual Expenses........ .70% .81% .28%
.73%
=== === ===
==
</TABLE>
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* 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 charge 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.
*** The expense figures shown are net of certain fee waivers or reductions from
Janus Capital Corporation. Without such waivers, Management Fees, Other
Expenses and Total Portfolio Operating Expenses for the Portfolios for the
fiscal year ended December 31, 1995 were:.85%, .13% and .98%, respectively,
for the Growth Portfolio; .82%, .11% and .93%, respectively, for the
Aggressive Growth Portfolio; .87%, .22% and 1.09%, respectively, for the
Worldwide Growth Portfolio; 1.00%, .55% and 1.55%, respectively, for the
Balanced Portfolio; and 0.65%, 0.72% and 1.37%, 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.
**** The expense figures shown are net of certain reimbursements from Lexington
Management Corporation which agreed to voluntarily limit the total expenses
of the Lexington Emerging Markets Fund (excluding interest, taxes,
brokerage, and extraordinary expenses but including management fee and
operating expenses) to an annual rate of 1.30% of the Fund's average net
assets through April 30, 1996. Without such reimbursements, Other Expenses
and Total Portfolio Annual Expenses for the Fund were 3.24% and 4.09%,
respectively. See the prospectus and Statement of Additional Information of
Lexington Emerging Markets Fund for a description of these reimbursements.
4
<PAGE> 8
<TABLE>
<CAPTION>
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EXAMPLE
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SUBACCOUNT 1 YEAR 3 YEARS 5 YEARS 10 YEARS
---------------------------------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
If you surrender your contract at the end of the applicable KINF Money Market $ 83 $ 108 $ 134 $239
time period: KINF Total Return 83 110 137 245
You would pay the following expenses on a $1,000 KINF High Yield 84 111 139 250
investment, assuming 5% annual return on assets: KINF Growth 84 111 139 249
KINF Government Securities 84 111 139 250
KINF International 86 119 153 278
KINF Small Cap Growth 86 118 -- --
KINF Investment Grade Bond 85 125 -- --
KINF Value 86 130 -- --
KINF Small Cap Value 86 130 -- --
KINF Value+Growth 86 130 -- --
KINF Horizon 20+ 85 125 -- --
KINF Horizon 10+ 85 125 -- --
KINF Horizon 5 85 125 -- --
Janus Growth 85 115 -- --
Janus Aggressive Growth 86 118 -- --
Janus Worldwide Growth 86 119 -- --
Janus Balanced 91 132 -- --
Janus Short-Term Bond 84 113 -- --
Lexington Natural Resources 92 135 -- --
Lexington Emerging Markets 90 131 -- --
Fidelity Equity--Income 83 121 -- --
Fidelity Growth 84 124 -- --
Fidelity Asset Manager 85 127 -- --
Fidelity Index 500 80 111 -- --
Fidelity Contra 84 124 -- --
If you do not surrender your contract: KINF Money Market 21 65 111 239
You would pay the following expenses KINF Total Return 21 66 114 245
on a $1,000 investment, assuming KINF High Yield 22 68 116 250
5% annual return on assets: KINF Growth 22 68 116 249
KINF Government Securities 22 68 116 250
KINF International 25 76 130 278
KINF Small Cap Growth 24 75 -- --
KINF Investment Grade Bond 23 71 -- --
KINF Value 25 76 -- --
KINF Small Cap Value 25 76 -- --
KINF Value+Growth 25 76 -- --
KINF Horizon 20+ 23 71 -- --
KINF Horizon 10+ 23 71 -- --
KINF Horizon 5 23 71 -- --
Janus Growth 23 72 -- --
Janus Aggressive Growth 24 74 -- --
Janus Worldwide Growth 25 76 -- --
Janus Balanced 29 90 -- --
Janus Short-Term Bond 23 69 -- --
Lexington Natural Resources 30 93 -- --
Lexington Emerging Markets 29 88 -- --
Fidelity Equity--Income 22 67 -- --
Fidelity Growth 23 69 -- --
Fidelity Asset Manager 24 73 -- --
Fidelity Index 500 18 56 -- --
Fidelity Contra 23 70 -- --
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The purpose of the preceding table which includes the "SUMMARY OF EXPENSES" on
the prior page, is to assist Contract Owners in understanding the various costs
and expenses that a Contract Owner in a Subaccount will bear directly or
indirectly. The table reflects expenses of both the Separate Account and the
Fund. THE EXAMPLE SHOULD NOT BE CONSIDERED TO BE A REPRESENTATION OF PAST OR
FUTURE EXPENSES AND DOES NOT INCLUDE THE DEDUCTION OF STATE PREMIUM TAXES, WHICH
MAY BE ASSESSED BEFORE OR UPON ANNUITIZATION. "OTHER EXPENSES" IN THE "SUMMARY
OF EXPENSES" FOR THE KINF INVESTMENT GRADE BOND, KINF VALUE, KINF SMALL CAP
VALUE, KINF VALUE+GROWTH, AND KINF HORIZON PORTFOLIOS ARE BASED ON ESTIMATED
AMOUNTS FOR THE CURRENT FISCAL YEAR. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN. "Management Fees" and "Other Expenses" in the "SUMMARY OF EXPENSES"
for the Janus Portfolios, Lexington Portfolios and Fidelity Portfolios have been
provided by Janus Capital Corporation, Lexington Management Corporation and
Fidelity Management & Research Corporation, respectively, and have not been
independently verified. The Example assumes a 5% annual rate of return pursuant
to requirements of the Securities and Exchange Commission. This hypothetical
rate of return is not intended to be representative of past or future
performance of any Subaccount. The Records Maintenance Charge is a single
charge, it is not a separate charge for each Subaccount. In addition, the effect
of the Records Maintenance Charge has been reflected in the Example by applying
the percentage derived by dividing the total amounts of annual Records
Maintenance Charge collected by the total net assets of all the Subaccounts in
the Separate Account. See "Contract Charges and Expenses" for more information
regarding the various costs and expenses.
5
<PAGE> 9
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
-----------------------------------------------------------------------------------
1995**** 1994*** 1993 1992** 1991 1990 1989* 1988 1987 1986
-------- ------- ----- ------ ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
TAX QUALIFIED
Accumulation unit value at
beginning of period
KINF Money Market
Subaccount.................. $2.111 2.051 2.014 1.966 1.875 1.751 1.621 1.523 1.443 1.367
KINF Total Return
Subaccount.................. 3.796 4.236 3.816 3.790 2.776 2.669 2.174 1.960 1.967 1.726
KINF High Yield Subaccount... 4.372 4.517 3.802 3.261 2.169 2.591 2.651 2.311 2.204 1.891
KINF Growth Subaccount....... 3.345 3.520 3.102 3.025 1.916 1.923 1.515 1.524 1.513 1.399
KINF Government Securities
Subaccount*................. 1.337 1.388 1.317 1.256 1.101 1.013
KINF International
Subaccount**................ 1.234 1.293 .983 1.000
KINF Small Cap Growth
Subaccount***............... 1.033
Janus Growth****............. --
Janus Aggressive
Growth****.................. --
Janus Worldwide Growth****... --
Janus Balanced****........... --
Janus Short-Term Bond****.... --
Lexington Natural
Resources****............... --
Lexington Emerging
Markets****................. --
Accumulation unit value at
end of period
KINF Money Market
Subaccount.................. $2.208 2.111 2.051 2.014 1.966 1.875 1.751 1.621 1.523 1.443
KINF Total Return
Subaccount.................. 4.735 3.796 4.236 3.816 3.790 2.776 2.669 2.174 1.960 1.967
KINF High Yield Subaccount... 5.082 4.372 4.517 3.802 3.261 2.169 2.591 2.651 2.311 2.204
KINF Growth Subaccount....... 4.404 3.345 3.520 3.102 3.025 1.916 1.923 1.515 1.524 1.513
KINF Government Securities
Subaccount*................. 1.575 1.337 1.388 1.317 1.256 1.101 1.013
KINF International
Subaccount**................ 1.379 1.234 1.293 .983
KINF Small Cap Growth
Subaccount***............... 1.330 1.033
Janus Growth****............. 13.662
Janus Aggressive
Growth****.................. 17.132
Janus Worldwide Growth****... 15.315
Janus Balanced****........... 13.092
Janus Short-Term Bond****.... 10.201
Lexington Natural
Resources****............... 11.315
Lexington Emerging
Markets****................. 9.445
Number of accumulation units
outstanding at end of period
(000's omitted)
KINF Money Market
Subaccount.................. $ 591 733 844 1,081 1,720 2,388 2,417 3,127 4,394 4,455
KINF Total Return
Subaccount.................. 1,067 1,299 1,511 1,859 1,924 2,355 2,888 3,652 5,546 5,673
KINF High Yield Subaccount... 506 532 657 670 723 885 1,587 2,104 1,854 3,402
KINF Growth Subaccount....... 286 238 222 303 255 251 578 489 1,022 1,423
<CAPTION>
PERIODIC PAYMENT CONTRACTS
------------------------------------------------------------------------------------------
1995**** 1994*** 1993 1992** 1991 1990 1989* 1988 1987 1986
-------- ------- ------- ------ ------ ------ ------ ------ ------ ------
TAX QUALIFIED
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Accumulation unit value at
beginning of period
KINF Money Market
Subaccount.................. 2.033 1.981 1.950 1.910 1.827 1.712 1.589 1.498 1.423 1.352
KINF Total Return
Subaccount.................. 3.656 4.092 3.696 3.682 2.705 2.609 2.131 1.927 1.940 1.707
KINF High Yield Subaccount... 4.210 4.363 3.683 3.168 2.114 2.533 2.599 2.272 2.174 1.871
KINF Growth Subaccount....... 3.238 3.417 3.020 2.954 1.876 1.889 1.492 1.506 1.500 1.390
KINF Government Securities
Subaccount*................. 1.317 1.371 1.305 1.248 1.097 1.012
KINF International
Subaccount**................ 1.223 1.285 .980 1.000
KINF Small Cap Growth
Subaccount***............... 1.031
Janus Growth****............. --
Janus Aggressive
Growth****.................. --
Janus Worldwide Growth****... --
Janus Balanced****........... --
Janus Short-Term Bond****.... --
Lexington Natural
Resources****............... --
Lexington Emerging
Markets****................. --
Accumulation unit value at
end of period
KINF Money Market
Subaccount.................. 2.120 2.033 1.981 1.950 1.910 1.827 1.712 1.589 1.498 1.423
KINF Total Return
Subaccount.................. 4.546 3.656 4.092 3.696 3.682 2.705 2.609 2.131 1.927 1.940
KINF High Yield Subaccount... 4.879 4.210 4.363 3.683 3.168 2.114 2.533 2.599 2.272 2.174
KINF Growth Subaccount....... 4.250 3.238 3.417 3.020 2.954 1.876 1.889 1.492 1.506 1.500
KINF Government Securities
Subaccount*................. 1.547 1.317 1.371 1.305 1.248 1.097 1.012
KINF International
Subaccount**................ 1.363 1.223 1.285 .980
KINF Small Cap Growth
Subaccount***............... 1.323 1.031
Janus Growth****............. 13.650
Janus Aggressive
Growth****.................. 17.117
Janus Worldwide Growth****... 15.302
Janus Balanced****........... 13.081
Janus Short-Term Bond****.... 10.192
Lexington Natural
Resources****............... 11.305
Lexington Emerging
Markets****................. 9.436
Number of accumulation units
outstanding at end of period
(000's omitted)
KINF Money Market
Subaccount.................. 10,881 15,997 14,891 12,605 14,973 21,581 14,185 16,953 20,296 10,799
KINF Total Return
Subaccount.................. 100,774 110,428 108,395 100,100 81,776 70,620 68,024 63,669 68,367 47,935
KINF High Yield Subaccount... 25,327 26,546 26,749 22,202 19,861 22,623 28,032 22,281 14,320 23,972
KINF Growth Subaccount....... 60,187 58,845 50,289 42,078 28,271 22,451 19,163 17,780 17,000 10,278
</TABLE>
(Continued on next page)
6
<PAGE> 10
CONDENSED FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
FLEXIBLE PAYMENT CONTRACTS
-----------------------------------------------------------------------------------
1995**** 1994*** 1993 1992** 1991 1990 1989* 1988 1987 1986
-------- ------- ----- ------ ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
KINF Government Securities
Subaccount*................. $ 273 237 257 267 288 170 168
KINF International
Subaccount**................ 612 625 284 91
KINF Small Cap Growth
Subaccount***............... 81 14
Janus Growth****............. --
Janus Aggressive
Growth****.................. --
Janus Worldwide Growth****... --
Janus Balanced****........... --
Janus Short-Term Bond****.... --
Lexington Natural
Resources****............... --
Lexington Emerging
Markets****................. --
NON-TAX QUALIFIED
Accumulation unit value at
beginning of period
KINF Money Market
Subaccount.................. $ 2.111 2.051 2.014 1.966 1.875 1.751 1.621 1.523 1.443 1.367
KINF Total Return
Subaccount.................. 3.515 3.922 3.533 3.509 2.570 2.471 2.013 1.815 1.822 1.598
KINF High Yield Subaccount... 4.186 4.325 3.640 3.122 2.077 2.481 2.538 2.213 2.110 1.811
KINF Growth Subaccount....... 3.334 3.508 3.091 3.014 1.909 1.917 1.509 1.518 1.508 1.394
KINF Government Securities
Subaccount*................. 1.337 1.388 1.317 1.256 1.101 1.013
KINF International
Subaccount**................ 1.234 1.293 .983 1.000
KINF Small Cap Growth
Subaccount***............... 1.033
Janus Growth****............. --
Janus Aggressive
Growth****.................. --
Janus Worldwide Growth****... --
Janus Balanced****........... --
Janus Short-Term Bond****.... --
Lexington Natural Resources
Trust****................... --
Lexington Emerging
Markets****................. --
Accumulation unit value at
end of period
KINF Money Market
Subaccount.................. $ 2.208 2.111 2.051 2.014 1.966 1.875 1.751 1.621 1.523 1.443
KINF Total Return
Subaccount.................. 4.384 3.515 3.922 3.533 3.509 2.570 2.471 2.013 1.815 1.822
KINF High Yield Subaccount... 4.865 4.186 4.325 3.640 3.122 2.077 2.481 2.538 2.213 2.110
KINF Growth Subaccount....... 4.389 3.334 3.508 3.091 3.014 1.909 1.917 1.509 1.518 1.508
KINF Government Securities
Subaccount*................. 1.575 1.337 1.388 1.317 1.256 1.101 1.013
KINF International
Subaccount**................ 1.379 1.234 1.293 .983
KINF Small Cap Growth
Subaccount***............... 1.330 1.033
Janus Growth****............. 13.662
Janus Aggressive
Growth****.................. 17.132
Janus Worldwide Growth****... 15.315
Janus Balanced****........... 13.092
Janus Short-Term Bond****.... 10.201
Lexington Natural Resources
Trust****................... 11.315
<CAPTION>
PERIODIC PAYMENT CONTRACTS
---------------------------------------------------------------------------------------------
1995**** 1994*** 1993 1992** 1991 1990 1989* 1988 1987 1986
-------- ------- ------- ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
KINF Government Securities
Subaccount*................. 21,771 24,332 31,898 28,368 23,035 12,918 7,794
KINF International
Subaccount**................ 63,495 61,490 38,844 10,372
KINF Small Cap Growth
Subaccount***............... 17,371 8.304
Janus Growth****............. 168
Janus Aggressive
Growth****.................. 121
Janus Worldwide Growth****... 95
Janus Balanced****........... 132
Janus Short-Term Bond****.... 13
Lexington Natural
Resources****............... 58
Lexington Emerging
Markets****................. 80
NON-TAX QUALIFIED
Accumulation unit value at
beginning of period
KINF Money Market
Subaccount.................. 2.033 1.981 1.950 1.910 1.827 1.712 1.589 1.498 1.423 1.352
KINF Total Return
Subaccount.................. 3.406 3.812 3.444 3.431 2.520 2.431 1.986 1.796 1.808 1.591
KINF High Yield Subaccount... 4.101 4.250 3.588 3.086 2.059 2.467 2.532 2.214 2.117 1.822
KINF Growth Subaccount....... 3.233 3.412 3.015 2.949 1.873 1.887 1.490 1.503 1.498 1.388
KINF Government Securities
Subaccount*................. 1.317 1.371 1.305 1.248 1.097 1.012
KINF International
Subaccount**................ 1.223 1.285 .980 1.000
KINF Small Cap Growth
Subaccount***............... 1.031
Janus Growth****............. --
Janus Aggressive
Growth****.................. --
Janus Worldwide Growth****... --
Janus Balanced****........... --
Janus Short-Term Bond****.... --
Lexington Natural Resources
Trust****................... --
Lexington Emerging
Markets****................. --
Accumulation unit value at
end of period
KINF Money Market
Subaccount.................. 2.120 2.033 1.981 1.950 1.910 1.827 1.712 1.589 1.498 1.423
KINF Total Return
Subaccount.................. 4.236 3.406 3.812 3.444 3.431 2.520 2.431 1.986 1.796 1.808
KINF High Yield Subaccount... 4.753 4.101 4.250 3.588 3.086 2.059 2.467 2.532 2.214 2.117
KINF Growth Subaccount....... 4.244 3.233 3.412 3.015 2.949 1.873 1.887 1.490 1.503 1.498
KINF Government Securities
Subaccount*................. 1.547 1.317 1.371 1.305 1.248 1.097 1.012
KINF International
Subaccount**................ 1.363 1.223 1.285 .980
KINF Small Cap Growth
Subaccount***............... 1.323 1.031
Janus Growth****............. 13.650
Janus Aggressive
Growth****.................. 17.117
Janus Worldwide Growth****... 15.302
Janus Balanced****........... 13.081
Janus Short-Term Bond****.... 10.192
Lexington Natural Resources
Trust****................... 11.305
</TABLE>
(CONTINUED ON NEXT PAGE)
7
<PAGE> 11
CONDENSED FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
FLEXIBLE PAYMENT CONTRACTS
-----------------------------------------------------------------------------------------
1995**** 1994*** 1993 1992** 1991 1990 1989* 1988 1987 1986
-------- ------- ----- ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Lexington Emerging
Markets****............. $9.445
Number of accumulation
units outstanding at end
of period (000's
omitted)
KINF Money Market
Subaccount.............. 5,512 6,914 7,153 8,495 11,926 15,563 19,006 22,047 28,702 36,072
KINF Total Return
Subaccount.............. 5,554 6,613 8,042 8,853 9,586 10,291 12,244 15,032 20,329 21,648
KINF High Yield
Subaccount.............. 2,821 3,621 4,517 4,876 5,240 6,652 11,895 14,871 16,264 25,551
KINF Growth Subaccount... 1,276 1,370 1,671 2,032 1,773 1,955 1,931 2,890 3,890 4,469
KINF Government
Securities
Subaccount*............. 1,330 1,465 2,101 2,317 2,728 2,442 1,494
KINF International
Subaccount**............ 1,257 2,450 1,712 1,041
KINF Small Cap Growth
Subaccount***........... 874 227
Janus Growth****......... 2
Janus Aggressive
Growth****.............. --
Janus Worldwide
Growth****.............. --
Janus Balanced****....... 4
Janus Short-Term
Bond****................ 2
Lexington Natural
Resources Trust****..... --
Lexington Emerging
Markets****............. 2
<CAPTION>
PERIODIC PAYMENT CONTRACTS
----------------------------------------------------------------------------------------
1995**** 1994*** 1993 1992** 1991 1990 1989* 1988 1987 1986
-------- ------- ------ ------ ------ ------ ------ ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Lexington Emerging
Markets*****........... 9.436
Number of accumulation
units outstanding at end
of period (000's
omitted)
KINF Money Market
Subaccount.............. 4,839 7,343 6,204 9,820 10,507 11,618 9,243 7,783 7,202 6,864
KINF Total Return
Subaccount.............. 20,342 24,773 26,640 26,043 19,953 18,485 18,671 15,835 18,807 7,053
KINF High Yield
Subaccount.............. 12,047 12,416 14,735 14,424 12,799 11,858 18,281 14,589 10,186 9,306
KINF Growth Subaccount... 16,369 19,776 17,851 15,849 9,577 7,812 5,542 9,303 8,919 3,820
KINF Government
Securities
Subaccount*............. 17,939 23,487 28,787 28,286 18,252 10,338 2,109
KINF International
Subaccount**............ 12,074 14,546 15,713 3,646
KINF Small Cap Growth
Subaccount***........... 3,022 1,242
Janus Growth****......... 14
Janus Aggressive
Growth****.............. 11
Janus Worldwide
Growth****.............. 7
Janus Balanced****....... 3
Janus Short-Term
Bond****................ --
Lexington Natural
Resources Trust****..... 8
Lexington Emerging
Markets****............. 3
</TABLE>
* The Government Securities Subaccount commenced business on November 6, 1989.
** The International Subaccount commenced business on January 6, 1992.
*** The Small Cap Growth Subaccount commenced business on May 2, 1994.
**** The Janus Growth, Aggressive Growth, Worldwide Growth, Balanced, and
Short-Term Bond Subaccounts and the Lexington Natural Resources Trust and
Emerging Markets Subaccounts were available under the contracts on
September 15, 1995.
The financial statements and report of independent auditors of KILICO are also
contained in the Statement of Additional Information.
8
<PAGE> 12
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 offers annuity and
life insurance products and is admitted to do business in the District of
Columbia and all states except New York. KILICO is a wholly-owned subsidiary of
Kemper Corporation, a nonoperating holding company. Zurich Insurance Company
("Zurich"), Insurance Partners, L.P. ("I.P."), and Insurance Partners Offshore
(Bermuda), L.P. (together with IP, "Insurance Partners") indirectly and directly
own 80 percent and 20 percent, respectively, of Kemper Corporation.
THE SEPARATE ACCOUNT
KILICO originally established the KILICO Variable Annuity Separate Account (the
"Separate Account") on May 29, 1981 pursuant to Illinois law as the KILICO Money
Market Separate Account, initially registered with the Securities and Exchange
Commission ("Commission") as an open-end, diversified management investment
company under the Investment Company Act of 1940 ("1940 Act"). On November 2,
1989, Contract Owners approved a Reorganization under which the Separate Account
was restructured as a unit investment trust registered with the Commission under
the 1940 Act. Such registration does not involve supervision by the Commission
of the management, investment practices or policies of the Separate Account or
KILICO.
The Separate Account is administered and accounted for as part of the general
business of KILICO, but the income and capital gains or capital losses, whether
or not realized, for assets allocated to the Separate Account are credited to or
charged against the assets held in the Separate Account, without regard to any
other income, capital gains or capital losses of any other separate account or
arising out of any other business which KILICO may conduct. The benefits
provided under the Contracts are obligations of KILICO. The assets of the
Separate Account are not chargeable with liabilities arising out of the business
conducted by any other separate account or out of any other business KILICO may
conduct.
The Separate Account holds assets that are segregated from all of KILICO's other
assets. The Separate Account is used to support the variable annuity contracts
described herein and certain other variable annuity contracts. The obligations
to Contract Owners and beneficiaries arising under the Contracts are general
corporate obligations of KILICO.
The Separate Account is currently divided into twenty-six Subaccounts. Each
Subaccount invests exclusively in shares of one of the corresponding Portfolios
of the Funds. Additional Subaccounts may be added in the future.
The Separate Account will purchase and redeem shares from the Funds at net asset
value. KILICO will redeem shares of the Funds as necessary to provide benefits,
to deduct charges under the Contracts and to transfer assets from one Subaccount
to another as requested by Contract Owners. All dividends and capital gains
distributions received by the Separate Account from a Portfolio of a Fund will
be reinvested in such Portfolio at net asset value and retained as assets of the
corresponding Subaccount.
The Separate Account's financial statements appear in the Statement of
Additional Information.
THE FUNDS
The Separate Account invests in shares of the Kemper Investors Fund, the Janus
Aspen Series, the Lexington Natural Resources Trust, the Lexington Emerging
Markets Fund, the Fidelity Variable Insurance Products Fund and the Fidelity
Variable Insurance Products Fund II, 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.
9
<PAGE> 13
Management of the Funds has an obligation to monitor events to identify material
conflicts between such owners and determine what action, if any, should be
taken. In addition, if KILICO believes that a Fund's response to any of those
events or conflicts insufficiently protects Contract Owners, it will take
appropriate action on its own.
A Fund may consist of separate Portfolios. The assets of each Portfolio are held
separate from the assets of the other Portfolios, and each Portfolio has its own
distinct investment objective and policies. Each Portfolio operates as a
separate investment fund, and the investment performance of one Portfolio has no
effect on the investment performance of any other Portfolio. Pending regulatory
approval, the KINF Investment Grade Bond, KINF Value, KINF Small Cap Value, KINF
Value+Growth, KINF Horizon 20+, KINF Horizon 10+, KINF Horizon 5 Portfolios and
the Fidelity Portfolios are not available in California.
The twenty-six Portfolios are summarized below:
KEMPER INVESTORS FUND
MONEY MARKET PORTFOLIO seeks maximum current income to the extent consistent
with stability of principal from a portfolio of high quality money market
instruments that mature in twelve months or less.
TOTAL RETURN PORTFOLIO seeks a high total return, a combination of income and
capital appreciation, by investing in a combination of debt securities and
common stocks.
HIGH YIELD PORTFOLIO seeks to provide a high level of current income by
investing in fixed-income securities.
GROWTH PORTFOLIO seeks maximum appreciation of capital through diversification
of investment securities having potential for capital appreciation.
GOVERNMENT SECURITIES PORTFOLIO seeks high current return consistent with
preservation of capital from a portfolio composed primarily of U.S. Government
securities.
INTERNATIONAL PORTFOLIO seeks total return, a combination of capital growth and
income, principally through an internationally diversified portfolio of equity
securities.
SMALL CAP GROWTH PORTFOLIO seeks maximum appreciation of investors' capital.
INVESTMENT GRADE BOND PORTFOLIO seeks high current income by investing primarily
in a diversified portfolio of investment grade debt securities.
VALUE PORTFOLIO seeks to achieve a high rate of total return.
SMALL CAP VALUE PORTFOLIO seeks long-term capital appreciation.
VALUE+GROWTH PORTFOLIO seeks growth of capital through professional management
of a portfolio of growth and value stocks.
HORIZON 20+ PORTFOLIO, designed for investors with approximately a 20+ year
investment horizon, seeks growth of capital, with income as a secondary
objective.
HORIZON 10+ PORTFOLIO, designed for investors with approximately a 10+ year
investment horizon, seeks a balance between growth of capital and income,
consistent with moderate risk.
HORIZON 5 PORTFOLIO, designed for investors with approximately a 5 year
investment horizon, seeks income consistent with preservation of capital, with
growth of capital as a secondary objective.
JANUS ASPEN SERIES
GROWTH PORTFOLIO seeks long-term growth of capital in a manner consistent with
the preservation of capital. It is a diversified Portfolio that pursues its
objective by investing in common stocks of companies of any size. This Portfolio
generally invests in larger, more established issuers.
AGGRESSIVE GROWTH PORTFOLIO seeks long-term growth of capital. It is a
nondiversified Portfolio that pursues its investment objective by normally
investing at least 50% of its equity assets in securities issued by medium-sized
companies as described in the fund's prospectus.
WORLDWIDE GROWTH PORTFOLIO seeks long-term growth of capital in a manner
consistent with the preservation of capital. It is a diversified Portfolio that
pursues its objective primarily through investments in common stocks of foreign
and domestic issuers.
10
<PAGE> 14
BALANCED PORTFOLIO seeks long-term capital growth, consistent with preservation
of capital and balanced by current income. It is a diversified Portfolio that,
under normal circumstances, pursues its objective by investing 40-60% of its
assets in securities selected primarily for their growth potential and 40-60% of
its assets in securities selected primarily for their income potential.
SHORT-TERM BOND PORTFOLIO seeks as high a level of current income as is
consistent with preservation of capital. This Portfolio pursues its objective by
investing primarily in short- and intermediate-term fixed-income securities.
LEXINGTON NATURAL RESOURCES TRUST
This Fund seeks long-term growth of capital through investment primarily in
common stocks of companies that own or develop natural resources and other basic
commodities, or supply goods and services to such companies. Current income will
not be a factor. Total return will consist primarily of capital appreciation.
LEXINGTON EMERGING MARKETS FUND
This Fund seeks long-term growth of capital primarily through investment in
equity securities and equivalents of companies domiciled in, or doing business
in, emerging countries and emerging markets as described in the fund's
prospectus.
FIDELITY VARIABLE INSURANCE PRODUCTS FUND
EQUITY-INCOME PORTFOLIO seeks reasonable income by investing primarily in
income-producing equity securities.
GROWTH PORTFOLIO seeks to achieve capital appreciation.
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II
ASSET MANAGER PORTFOLIO seeks to obtain high total return with reduced risk over
the long-term by allocating its assets among stocks, bonds and short-term
instruments.
INDEX 500 PORTFOLIO seeks investment results that correspond to the total return
of common stocks publicly traded in the United States, as represented by the S&P
500.
CONTRAFUND PORTFOLIO seeks long-term capital appreciation.
------------------
There is no assurance that any of the Portfolios of the Funds will achieve their
objective as stated in their prospectuses. More detailed information, including
a description of risks involved in investing in each of the Subaccounts that
invest in the Funds, may be found in the corresponding prospectuses for the
Funds, which must accompany or precede this Prospectus, and the Funds'
Statements of Additional Information available upon request. Read the
prospectuses carefully before investing.
Zurich Kemper Investments, Inc. ("ZKI"), an affiliate of KILICO, is the
investment manager for the KINF Money Market, KINF Total Return, KINF High
Yield, KINF Growth, KINF Government Securities, KINF International, KINF Small
Cap Growth, KINF Investment Grade Bond, KINF Value+Growth, KINF Horizon 20+,
KINF Horizon 10+, and KINF Horizon 5 Portfolios of the Kemper Investors Fund.
Dreman Value Advisors, Inc. ("DVA"), a wholly owned subsidiary of ZKI, is the
investment manager for the KINF Value and KINF Small Cap Value Portfolios. DVA
is also the sub-adviser for the KINF Value+Growth, KINF Horizon 20+, KINF
Horizon 10+, and KINF Horizon 5 Portfolios. Under the terms of the Sub-Advisory
Agreement with ZKI, DVA will manage the value portion of each of these
Portfolios and will provide such other investment advice, research and
assistance as ZKI may from time to time, reasonably request. 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. Fidelity Management & Research Company ("FMR") is the investment adviser
for the available Portfolios of the Fidelity Variable Insurance Products Fund
and Fidelity Variable Insurance Products Fund II. 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.
11
<PAGE> 15
For their services to the Portfolios, the managers receive compensation at the
following rates:
KEMPER INVESTORS FUND
For its services, ZKI is paid a management fee based upon the average daily net
assets of such KINF Portfolios, as follows: Money Market (.50 of 1%), Total
Return (.55 of 1%), High Yield (.60 of 1%), Growth (.60 of 1%), Government
Securities (.55 of 1%), International (.75 of 1%), Small Cap Growth (.65 of 1%),
Investment Grade Bond (.60 of 1%), Value+Growth (.75 of 1%), Horizon 20+ (.60 of
1%), Horizon 10+ (.60 of 1%), and Horizon 5 (.60 of 1%). DVA serves as the
investment manager for the KINF Value and Small Cap Value Portfolios and is paid
a management fee at an annual rate of .75 of 1% of the average daily net assets
of these Portfolios. DVA also serves as sub-adviser for the KINF Value+Growth
and Horizon Portfolios. ZKI pays DVA for its services as sub-adviser for the
Value+Growth Portfolio a sub-advisory fee, payable monthly, at an annual rate of
.25 of 1% of the average daily net assets of that Portfolio. ZKI also pays DVA a
sub-advisory fee, payable monthly, at an annual rate of .25 of 1% of the portion
of the average daily net assets of each Horizon Portfolio allocated by ZKI to
DVA for management.
JANUS ASPEN SERIES
Janus Capital Corporation receives a monthly advisory fee for the Janus Growth
Portfolio, Janus Aggressive Growth Portfolio, Janus Worldwide Growth Portfolio
and Janus Balanced Portfolio based on the following schedule (expressed as an
annual rate):
<TABLE>
<CAPTION>
AVERAGE DAILY NET
ASSETS OF PORTFOLIO ANNUAL RATE
-------------------------------------- -----------
<S> <C>
First $30,000,000..................... 1.00%
Next $270,000,000..................... .75%
Next $200,000,000..................... .70%
Over $500,000,000..................... .65%
</TABLE>
However, Janus Capital Corporation has agreed to reduce each of the above
Portfolios' advisory fees to the extent that such fee exceeds the effective rate
of a fund managed by Janus Capital Corporation with similar investment objective
and policies.
Janus Capital Corporation receives a monthly advisory fee for the Janus
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.
FIDELITY VARIABLE INSURANCE PRODUCTS FUND & FIDELITY VARIABLE INSURANCE PRODUCTS
FUND II
Fidelity Management & Research Company ("FMR") receives a monthly advisory fee
for each Portfolio. The fee for the Fidelity Asset Manager Portfolio, the
Fidelity Equity-Income Portfolio, the Fidelity Contrafund Portfolio and the
Fidelity Growth Portfolio is calculated by adding a group fee rate to an
individual fund fee rate, and multiplying the result by each fund's average net
assets. The group fee rate, which is based on the average net assets of all the
mutual funds advised by FMR, cannot rise above 0.52% for each of these
portfolios, and it drops as total assets under management increase. FMR also
receives a monthly advisory fee for the Fidelity Index 500 Portfolio at the
annual rate of 0.28% of the fund's average net assets.
CHANGE OF INVESTMENTS
KILICO reserves the right, subject to applicable law, to make additions to,
deletions from, or substitutions for the shares held by the Separate Account or
that the Separate Account may purchase. KILICO reserves the right to eliminate
the shares of any of the Portfolios of the Funds and to substitute shares of
another Portfolio of the Funds or
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of another investment company, if the shares of a Portfolio are no longer
available for investment, or if in its judgment further investment in any
Portfolio becomes inappropriate in view of the purposes of the Separate Account.
KILICO will not substitute any shares attributable to a Contract Owner's
interest in a Subaccount of the Separate Account without notice to the Contract
Owner and prior approval of the Commission, to the extent required by the 1940
Act or other applicable law. Nothing contained in this Prospectus shall prevent
the Separate Account from purchasing other securities for other series or
classes of policies, or from permitting a conversion between series or classes
of policies on the basis of requests made by Contract Owners.
KILICO also reserves the right to establish additional subaccounts of the
Separate Account, each of which would invest in a new portfolio of the Funds, or
in shares of another investment company, with a specified investment objective.
New subaccounts may be established when, in the sole discretion of KILICO,
marketing needs or investment conditions warrant, and any new subaccounts may be
made available to existing Contract Owners as determined by KILICO. KILICO may
also eliminate or combine one or more subaccounts, transfer assets, or it may
substitute one subaccount for another subaccount, if, in its sole discretion,
marketing, tax, or investment conditions warrant. KILICO will notify all
Contract Owners of any such changes.
If deemed by KILICO to be in the best interests of persons having voting rights
under the Contract, the Separate Account may be: (a) operated as a management
company under the 1940 Act; (b) deregistered under that Act in the event such
registration is no longer required; or (c) combined with other KILICO separate
accounts. To the extent permitted by law, KILICO may also transfer the assets of
the Separate Account associated with the Contract to another separate account,
or to the General Account.
PERFORMANCE INFORMATION
From time to time, the Separate Account may advertise several types of
performance information for the Subaccounts. All Subaccounts may advertise
"average annual total return" and "total return." The KINF High Yield
Subaccount, KINF Government Securities Subaccount, KINF Investment Grade Bond
Subaccount and Janus Short-Term Bond Subaccount may also advertise 'yield'. The
KINF Money Market Subaccount may advertise "yield" and "effective yield." Each
of these figures is based upon historical earnings and is not necessarily
representative of the future performance of a Subaccount. Average annual total
return and total return calculations measure the net income of a Subaccount plus
the effect of any realized or unrealized appreciation or depreciation of the
underlying investments in the Subaccount for the period in question. Average
annual total return will be quoted for periods of at least one year, five years
if applicable, and the life of Subaccount, ending with the most recent calendar
quarter. Average annual total return figures are annualized and, therefore,
represent the average annual percentage change in the value of an investment in
a Subaccount over the applicable period. Total return figures are not annualized
and represent the actual percentage change over the applicable period. Yield is
a measure of the net dividend and interest income earned over a specific one
month or 30-day period (seven-day period for the KINF Money Market Subaccount)
expressed as a percentage of the value of the Subaccount's Accumulation Units.
Yield is an annualized figure, which means that it is assumed that the
Subaccount generates the same level of net income over a one year period which
is compounded on a semi-annual basis. The effective yield for the KINF Money
Market Subaccount is calculated similarly but includes the effect of assumed
compounding calculated under rules prescribed by the Securities and Exchange
Commission. The KINF Money Market Subaccount's effective yield will be slightly
higher than its yield due to this compounding effect. The Subaccounts' units are
sold at Accumulation Unit value. The Subaccounts' performance figures and
Accumulation Unit values will fluctuate. Units of the Subaccounts are redeemable
by an investor at Accumulation Unit value, which may be more or less than
original cost. The performance figures include the deduction of all expenses and
fees, including a prorated portion of the Records Maintenance Charge.
Redemptions within the first 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. In addition, the Subaccounts may provide
comparative information with regard
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to the Standard & Poor's Midcap Index, Lehman Brothers Government/Corporate 1-3
Year Bond Index, Lehman Brothers Long Government/Corporate Bond Index, Russell
2000 Index and the NASDAQ Composite Index and the Morgan Stanley International
World Index and may provide Ibbotson Associates or Micropal performance analysis
rankings. From time to time, the Separate Account may quote information from
publications such as MORNINGSTAR, INC., THE WALL STREET JOURNAL, MONEY MAGAZINE,
FORBES, BARRON'S, FORTUNE, THE CHICAGO TRIBUNE, USA TODAY, INSTITUTIONAL
INVESTOR, REGISTERED REPRESENTATIVE, INVESTMENT ADVISOR AND VARDS.
FIXED 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.
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
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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. A Contract Owner is limited to allocating Contract Value to a maximum
of 18 allocation options over the life of a Contract, including the General
Account and loan account.
The number of Accumulation Units will not change because of a subsequent change
in value. The dollar value of an Accumulation Unit will vary to reflect the
investment experience of the Subaccount and the assessment of charges against
the Subaccount other than the Records Maintenance Charge. The number of
Accumulation Units will be reduced upon assessment of the Records Maintenance
Charge.
If KILICO has not been provided with information sufficient to establish a
Contract or to properly credit such Purchase Payment, it will promptly request
that the necessary information be furnished. If the requested information is not
furnished within five (5) business days of initial receipt of the Purchase
Payment, or if KILICO determines that it cannot otherwise issue the Contract
within the five (5) day period, the Purchase Payment will be returned to the
Owner, unless the Owner specifically consents to KILICO retaining the purchase
payment until the application is made complete.
2. ACCUMULATION UNIT VALUE.
Each Subaccount has an Accumulation Unit value. When Purchase Payments or other
amounts are allocated to a Subaccount, a number of units are purchased based on
the Subaccount's Accumulation Unit value at the end of the Valuation Period
during which the allocation is made. When amounts are transferred out of or
deducted from a Subaccount, units are redeemed in a similar manner.
The Accumulation Unit value for each subsequent Valuation Period is the
investment experience factor for that period multiplied by the Accumulation Unit
value for the immediately preceding period. Each Valuation Period has a single
Accumulation Unit value which is applied to each day in the period.
Each Subaccount has its own investment experience factor. The investment
experience of the Separate Account is calculated by applying the investment
experience factor to the Accumulation Unit value in each Subaccount during a
Valuation Period.
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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. A Contract Owner is limited to allocating Contract
Value to a maximum of 18 allocation options over the life of a Contract,
including the General Account and loan account.
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 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
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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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7. LOANS.
The Owner of a Contract issued as a tax sheltered annuity under Section 403(b)
of the Code or as a qualified plan under Section 401 of the Code may request a
loan any time during the accumulation period. Loans are made from the General
Account and are limited to the General Account Contract Value minus any
withdrawal charge that would apply to the Contract Value and minus interest on
the loan for the remainder of the Contract Year. In addition, loans may not
exceed 50% of the Contract Value, or, if less, $50,000. The minimum loan is
$1,000.
For non-ERISA loans, the loan interest rate is 5.5% per year. For loans issued
under ERISA plans, the loan interest rate will vary based on current rates.
Interest that is not paid when due is added to the loan and will bear interest
at the same rate as the loan. While the loan is outstanding, the portion of the
General Account Contract Value that equals the debt will earn interest at a rate
2.5% less than the loan rate.
Loans must be repaid in substantially equal quarterly payments within 5 years.
Loans used to purchase the principal residence of the Owner must be repaid
within 30 years.
If a loan payment is not made when due, interest will continue to accrue. On
403(b) Contracts, to the extent permitted by law, the amount of the defaulted
payment plus accrued interest will be deducted from the Contract and paid to
KILICO. Any loan payment which is not made when due, plus interest, will be
treated as a distribution as permitted by law, may be taxable to the borrower,
and may be subject to early withdrawal tax penalty.
If there is an outstanding loan balance when the Contract is surrendered or
annuitized, or when a death benefit is paid, the amount payable will be reduced
by the amount of the loan outstanding plus accrued interest. Any loans made
under a Contract will be subject to administrative procedures then in effect as
reflected under the loan agreement used by KILICO.
CONTRACT CHARGES AND EXPENSES
Charges and deductions under the Contracts are made for KILICO's assumption of
mortality and expense risk and administrative expenses, and for an annual
Records Maintenance Charge. Subject to certain expense limitations, investment
management fees and other expenses of the Funds are indirectly borne by the
Contract Owner. KILICO will deduct state premium taxes from Contract Value when
paid by KILICO. Where applicable, the dollar amount of state premium taxes
previously paid or paid upon annuitization by KILICO will be charged back
against the Contract Value when and if the Contract is annuitized. Additionally,
where applicable, a Withdrawal Charge may be assessed by KILICO in the event of
early withdrawal or early annuitization.
A. CHARGES AGAINST THE SEPARATE ACCOUNT.
During the Accumulation Period and the Annuity Period, KILICO assesses that
portion of each Subaccount 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
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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.
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
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<PAGE> 23
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 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
Kemper Investors Fund, KINF investment advisers, and principal underwriter or
certain affiliated companies, or to any trust, pension, profit-sharing or other
benefit plan for such persons may be withdrawn without any Withdrawal Charge.
C. INVESTMENT MANAGEMENT FEES AND OTHER EXPENSES.
The net asset value of each of the Portfolios of the Funds reflects investment
management fees and certain general operating expenses already deducted from the
assets of the Portfolios. Subject to certain limitations, these fees and
expenses are indirectly borne by the Contract Owners. Investment management fees
are described on page 12. Further detail about fees and expenses of the
Portfolios is provided in the attached Prospectuses for the Funds and in the
Funds' Statements of Additional Information.
D. STATE PREMIUM TAXES.
Certain state and local governments impose a premium tax ranging from 0% to 3.5%
on the amount of Purchase Payments. Where applicable, the dollar amount of state
premium taxes previously paid or payable upon annuitization by KILICO may be
charged against the Contract Value if not previously assessed, when and if the
Contract is annuitized. See "Appendix--State Premium Tax Chart" in the Statement
of Additional Information.
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<PAGE> 24
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 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.
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<PAGE> 25
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.
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.
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<PAGE> 26
6. FIRST PERIODIC PAYMENT.
At the time annuity payments begin, the value of the Owner's Contract interest
is determined by multiplying the applicable Accumulation Unit values at the end
of the Valuation Period immediately preceding the date the first annuity payment
is due by the respective number of Accumulation Units credited to the Owner's
Contract interest as of the end of such Valuation Period, less the dollar amount
of premium taxes not previously deducted, if applicable, and less the amount of
the Withdrawal Charge, if applicable.
There is no withdrawal charge assessed so long as annuity payments provide for
payments under Annuity Options 2, 3 or 4 or payments under Annuity Option 1 are
scheduled to continue for at least five years.
The first annuity payment is determined by multiplying the benefit per $1,000 of
value shown in the applicable annuity table by the number of thousands of
dollars of Contract Value less deduction for Debt and premium taxes, if
applicable.
A 2.5% per annum assumed investment rate is built into the annuity tables
contained in the Contracts. If the actual net investment rate exceeds 2.5% per
annum, payments will increase at a rate equal to the amount of such excess.
Conversely, if the actual rate is less than 2.5% per annum, annuity payments
will decrease.
7. SUBSEQUENT PERIODIC PAYMENTS.
The amount of the second and subsequent annuity payments is determined by
multiplying the number of Annuity Units by the Annuity Unit value as of the
Valuation Period next preceding the date on which each annuity payment is due.
The dollar amount of the first annuity payment as determined above is divided by
the Annuity Unit value as of the Annuity Date to establish the number of Annuity
Units representing each annuity payment. The number of Annuity Units determined
for the first annuity payment remains constant for the second and subsequent
monthly payments.
8. FIXED ANNUITY PAYMENTS.
The amount of each payment under a Fixed Annuity will be determined from tables
prepared by KILICO. Such tables show the monthly payment for each $1,000 of
Contract Value allocated to provide a Fixed Annuity. Fixed Annuity payments will
not change regardless of investment, mortality or expense experience.
9. DEATH BENEFIT.
If the payee dies after the Annuity Date while the Contract is in force, the
death proceeds, if any, will depend upon the form of annuity payment in effect
at the time of death. (See "Annuity Options.")
FEDERAL INCOME TAXES
The ultimate effect of Federal income taxes on Contract Value, on annuity
payments and on the economic benefit to the Contract Owner, Annuitant or
Beneficiary depends on KILICO's tax status, the type of retirement plan for
which the Contract is purchased and upon the tax status of the individual
concerned. Each individual Contract Owner should consult a competent tax
advisor.
A. KILICO'S TAX STATUS.
KILICO is taxed as a life insurance company under the current Internal Revenue
Code. The operations of the Separate Account are taxed as part of the total
operations of KILICO. However, the determination of tax charges and credits to
the Separate Account will be independent of the tax actually paid by KILICO.
Under current interpretations of existing Federal income tax law, investment
income of the Separate Account, to the extent that it is applied to increase an
individual Contract Owner's equity, is not taxed. Thus, a Subaccount may realize
net investment income and dividends, and the Subaccount may receive and reinvest
them, all without Federal income tax consequences for the Separate Account.
B. AMOUNTS RECEIVED AS AN ANNUITY.
A fixed portion of each annuity payment is excludable from gross income as a
return of investment in the Contract and the balance is taxed as ordinary
income. For payments made on a fixed basis, the excludable amount is
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<PAGE> 27
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 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.
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.
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<PAGE> 28
3. 10-PERCENT PENALTY TAX ON PREMATURE DISTRIBUTIONS.
A 10% penalty is imposed on the taxable portion of any distribution to a
participant in a qualified pension or profit sharing plan, tax sheltered annuity
or individual retirement annuity ("IRA"), or under a Non-Qualified Plan
Contract, prior to age 59 1/2, death or disability of the participant or
Non-Qualified Plan Contract Owner.
The 10% penalty does not apply to any distribution which is part of a series of
substantially equal periodic payments (not less frequently than annually) made
for the life or life expectancy of the qualified plan participant or Non-
Qualified Plan Contract Owner, provided that there is no change in such payments
before the later of (i) the close of the 5-year period beginning on the date of
the first payment, or (ii) age 59 1/2, death or disability of such participant
or Owner. Further, the 10% penalty does not apply to any distribution from a
qualified pension or profit sharing plan or tax sheltered annuity on account of
retirement after age 55, or to any distribution from a Non-Qualified Plan
Contract: (i) attributable to investment in the Contract before August 14, 1982,
or (ii) where the Contract is an "immediate annuity" under the Internal Revenue
Code ("Code").
D. QUALIFIED PLANS.
The Contracts offered by this Prospectus are designed to be suitable for use
under Qualified Plans. Such contracts are commonly referred to as "Qualified
Plan Contracts." KILICO, in its sole discretion, reserves the right to waive
certain minimums with respect to large group contracts. Taxation of participants
in such Qualified Plans varies with the type of plan and the terms and
conditions of the specific plan. Qualified Plan Contract Owners, Annuitants and
Beneficiaries are cautioned that benefits under a Qualified Plan may be subject
to the terms and conditions of the plan regardless of the terms and conditions
of the Contracts issued pursuant to the plan. Following are general descriptions
of the types of Qualified Plans and of the use of the Contracts in connection
therewith. Purchasers intending to use the Contracts in connection with
Qualified Plans should seek competent tax advice.
(a) PENSION AND PROFIT-SHARING PLANS.
Sections 401(a) of the Code permits employers to establish qualified
retirement plans for employees. Taxation of plan participants depends on
the specific plan. Such plans are limited by law as to maximum permissible
contributions, distribution dates, non-forfeitability of interests and tax
rates applicable to distributions. In order to establish such a plan, a
plan document is adopted and implemented by the employer. Such retirement
plans may permit the purchase of the Contracts in order to provide benefits
under the plans.
(b) TAX-SHELTERED ANNUITIES.
Section 403(b) of the Code permits public school employees and employees of
certain types of charitable, educational and scientific organizations
specified in Section 501(c)(3) of the Code to purchase annuity contracts
and, subject to certain limitations, exclude the amount of purchase
payments from gross income for tax purposes. Generally, the annual
contribution limit is 20% of an employee's includible compensation times
the number of years of service, less previously excluded contributions. For
salary reduction plans the maximum contribution is $9,500. These annuity
contracts are commonly referred to as "tax-sheltered annuities."
To the extent attributable to contributions to your tax-sheltered annuity
contract under a salary reduction agreement (or to transfers of such
amounts from other contracts), contributions made or earnings credited
after December 31, 1988 may not be withdrawn until separation from service,
attainment of age 59 1/2, death or disability. Salary reduction
contributions after December 31, 1988 may also be withdrawn in the case of
hardship within the meaning of section 403(b)(11) of the Internal Revenue
Code. Further, all amounts transferred to your contract from a Section
403(b)(7) custodial account are subject to such restrictions upon
withdrawal. Under your employer's tax-sheltered annuity plan, you may be
allowed to transfer your contract value to other types of options, such as
other fixed or variable annuity contracts or Section 403(b)(7) custodial
accounts.
(c) TREATMENT OF CERTAIN DISTRIBUTIONS FROM PENSION AND PROFIT SHARING
PLANS AND TAX-SHELTERED ANNUITIES.
Distributions from Pension and Profit Sharing Plans and Tax-Sheltered
Annuities which are eligible to be rolled over to an IRA or another
employer's retirement plan are generally subject to 20% withholding, unless
the participant exercises the right to a "direct rollover." A "direct
rollover" may be accomplished when the sponsor of a participant's existing
pension or profit sharing plan or tax-sheltered annuity makes a
distribution payable to the sponsor of the new IRA or new employer plan for
the participant's benefit.
If the participant does not exercise the right to a "direct rollover," in
general, 20% will be withheld from the distribution and credited against
the participant's income taxes incurred in the taxable year of the
distribution.
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<PAGE> 29
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
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
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of the National Association of Securities Dealers, Inc. In addition to
commissions, KILICO may, from time to time, pay or allow additional promotional
incentives, in the form of cash or other compensation, to broker-dealers that
sell the Contracts. In some instances, such other incentives may be offered only
to certain licensed broker-dealers that sell or are expected to sell during
specified time periods certain minimum amounts of the Contracts or other
contracts issued by KILICO. The Contracts are distributed through the principal
underwriter for the Separate Account, which is Investors Brokerage Services,
Inc. ("IBS"), a wholly owned subsidiary of KILICO, which enters into selling
group agreements with affiliated and unaffiliated broker-dealers. All of the
investment options are not available to all Contract Owners. The investment
options are available only under Contracts that are sold or serviced by
broker-dealers that have entered into a selling group agreement that authorizes
the sale of Contracts with all of the investment options. Other distributors may
sell and service contracts with limited investment options.
VOTING RIGHTS
Proxy materials in connection with any shareholder meeting of a Fund will be
delivered to each Contract Owner with Subaccount interests invested in such Fund
as of the record date for voting at such meeting. Such proxy materials will
include an appropriate form which may be used to give voting instructions.
KILICO will vote such Fund shares held in each Subaccount in accordance with
instructions received from persons having a Subaccount interest in such Fund
shares. Fund shares as to which no timely voting instructions are received will
be voted by KILICO in proportion to the voting instructions received from all
persons in a timely manner. KILICO will also vote any Fund shares attributed to
amounts it has accumulated in the Subaccounts in the same proportion that
Contract Owners vote. A Fund is not required to hold annual shareholders'
meetings. They will, however, hold special meetings as required or deemed
desirable for such purposes as electing trustees, changing fundamental policies
or approving an investment advisory agreement.
Contract Owners of all Contracts participating in each Subaccount shall have
voting rights with respect to the Portfolio invested in by that Subaccount,
based upon each Contract Owner's proportionate interest in that Subaccount as
measured by units. The person having such voting rights will be the Contract
Owner before surrender, the Annuity Date or the death of the Annuitant, and
thereafter, the payee entitled to receive Variable Annuity payments under the
Contract. During the Annuity Period, voting rights attributable to a Contract
will generally decrease as Annuity Units attributable to an Annuitant decrease.
REPORTS TO CONTRACT OWNERS AND INQUIRIES
Immediately after each Contract anniversary, Contract Owners will be sent
statements for their own Contract showing the amount credited to each Subaccount
and to the Fixed 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 annual and semi-annual reports for the Portfolios that
correspond to the Subaccounts in which the Contract Owner is invested and a list
of the securities held in each such Portfolio, as required by the 1940 Act.
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.
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 for a specified duration 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 $100 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
27
<PAGE> 31
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
withdrawal charge (currently 10% of Contract Value) then the withdrawal 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 prior
contracts are provided in two Fixed Accumulation Options of the General Account.
Any portion of the purchase payment allocated to a Fixed 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
28
<PAGE> 32
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.
LOANS. For non-ERISA loans, the loan interest rate is 6%. While the loan is
outstanding, the portion of the General Account Contract Value that equals the
debt will earn interest at a rate 2% less than loan rate.
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 $100 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.
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 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.
29
<PAGE> 33
LEGAL PROCEEDINGS
There are no material legal proceedings pending to which the Separate Account,
KILICO or ZKI is a party.
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.
30
<PAGE> 34
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.
31
<PAGE> 35
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
32
<PAGE> 36
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> 37
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.
<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.
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> 38
GUARANTEED LUMP SUM TERMINATION OF DEFERRED FIXED AND VARIABLE ANNUITY
COMPLETELY ALLOCATED TO THE GENERAL ACCOUNT WITH 3% GUARANTEED EACH YEAR.
(TERMINATION VALUES ARE BASED ON $1,000 ANNUAL CONTRIBUTIONS AT THE BEGINNING OF
EACH YEAR.)
<TABLE>
<CAPTION>
END OF TERMINATION END OF TERMINATION END OF TERMINATION END OF TERMINATION
YEAR VALUES* YEAR VALUES* YEAR VALUES* YEAR VALUES*
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 $ 1,000 14 $17,371 27 $41,703 40 $ 77,436
- ---------------------------------------------------------------------------------------------------
2 2,000 15 18,929 28 43,991 41 80,796
- ---------------------------------------------------------------------------------------------------
3 3,038 16 20,534 29 46,348 42 84,256
- ---------------------------------------------------------------------------------------------------
4 4,130 17 22,187 30 48,775 43 87,821
- ---------------------------------------------------------------------------------------------------
5 5,264 18 23,889 31 51,275 44 91,492
- ---------------------------------------------------------------------------------------------------
6 6,442 19 25,643 32 53,850 45 95,274
- ---------------------------------------------------------------------------------------------------
7 7,665 20 27,449 33 56,503 46 99,169
- ---------------------------------------------------------------------------------------------------
8 8,932 21 29,309 34 59,235 47 103,181
- ---------------------------------------------------------------------------------------------------
9 10,236 22 31,225 35 62,048 48 107,313
- ---------------------------------------------------------------------------------------------------
10 11,580 23 33,199 36 64,947 49 111,569
- ---------------------------------------------------------------------------------------------------
11 12,965 24 35,232 37 67,932 50 115,953
- ---------------------------------------------------------------------------------------------------
12 14,390 25 37,326 38 71,007
- ---------------------------------------------------------------------------------------------------
13 15,859 26 39,482 39 74,174
- ---------------------------------------------------------------------------------------------------
</TABLE>
GUARANTEED LUMP SUM TERMINATION OF DEFERRED FIXED AND VARIABLE ANNUITY
COMPLETELY ALLOCATED TO THE GENERAL ACCOUNT WITH 3% GUARANTEED EACH YEAR.
(TERMINATION VALUES ARE BASED ON $1,000 SINGLE PREMIUM.)
<TABLE>
<CAPTION>
END OF TERMINATION END OF TERMINATION END OF TERMINATION END OF TERMINATION
YEAR VALUES* YEAR VALUES* YEAR VALUES* YEAR VALUES*
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 $ 1,000 14 $ 1,513 27 $ 2,221 40 $ 3,262
- ---------------------------------------------------------------------------------------------------
2 1,013 15 1,558 28 2,288 41 3,360
- ---------------------------------------------------------------------------------------------------
3 1,053 16 1,605 29 2,357 42 3,461
- ---------------------------------------------------------------------------------------------------
4 1,095 17 1,653 30 2,427 43 3,565
- ---------------------------------------------------------------------------------------------------
5 1,138 18 1,702 31 2,500 44 3,671
- ---------------------------------------------------------------------------------------------------
6 1,183 19 1,754 32 2,575 45 3,782
- ---------------------------------------------------------------------------------------------------
7 1,230 20 1,806 33 2,652 46 3,895
- ---------------------------------------------------------------------------------------------------
8 1,267 21 1,860 34 2,732 47 4,012
- ---------------------------------------------------------------------------------------------------
9 1,305 22 1,916 35 2,814 48 4,132
- ---------------------------------------------------------------------------------------------------
10 1,344 23 1,974 36 2,898 49 4,256
- ---------------------------------------------------------------------------------------------------
11 1,384 24 2,033 37 2,985 50 4,384
- ---------------------------------------------------------------------------------------------------
12 1,426 25 2,094 38 3,075
- ---------------------------------------------------------------------------------------------------
13 1,469 26 2,157 39 3,167
- ---------------------------------------------------------------------------------------------------
</TABLE>
* Includes applicable withdrawal charges.
35
<PAGE> 39
[ZURICH KEMPER
LIFE LOGO]
KEMPER ADVANTAGE III
A Flexible Payment Fixed and Variable Annuity from
Kemper Investors Life Insurance Company
1 Kemper Drive, Long Grove, IL 60049
Securities distributed by Investors Brokerage Services, Inc.
[RECYCLE LOGO]
PRINTED ON RECYCLED PAPER
Policy Form Series L-1000
ADV 02 (5/96) 1230
<PAGE> 40
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1996
- --------------------------------------------------------------------------------
PERIODIC PAYMENT
VARIABLE ANNUITY CONTRACTS
- --------------------------------------------------------------------------------
KEMPER ADVANTAGE III
ISSUED BY
KEMPER INVESTORS LIFE INSURANCE COMPANY
IN CONNECTION WITH
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
HOME OFFICE: 1 KEMPER DRIVE, LONG GROVE, ILLINOIS 60049 (847) 550-5500
This Statement of Additional Information is not a prospectus. This Statement of
Additional Information should be read in conjunction with the Prospectus of the
Separate Account dated May 1, 1996. The Prospectus may be obtained from Kemper
Investors Life Insurance Company by writing or calling the address or telephone
number listed above.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Services to the Separate Account....................................... B-1
Performance Information of Subaccounts................................. B-1
State Regulation....................................................... B-10
Experts................................................................ B-10
Financial Statements................................................... B-11
</TABLE>
ADV-02B
<PAGE> 41
SERVICES TO THE SEPARATE ACCOUNT
Kemper Investors Life Insurance Company ("KILICO") maintains the books and
records of the KILICO Variable Annuity Separate Account (the "Separate
Account"). KILICO holds the assets of the Separate Account. The assets are kept
segregated and held separate and apart from the general funds of KILICO. KILICO
maintains records of all purchases and redemptions of shares of each Fund by
each of the Subaccounts. All expenses incurred in the operations of the Separate
Account, except the charge for mortality and expense risk and administrative
expenses, and records maintenance charge (as described in the Prospectus) are
borne by KILICO.
The independent auditors for the Separate Account are KPMG Peat Marwick LLP,
Chicago, Illinois. The firm performs an annual audit of the financial statements
of the Separate Account and KILICO.
The Contracts are sold by licensed insurance agents, where the Contracts may be
lawfully sold, who are registered representatives of broker-dealers which are
registered under the Securities Exchange Act of 1934 and are members of the
National Association of Securities Dealers, Inc. The Contracts are distributed
through the principal underwriter for the Separate Account, Investors Brokerage
Services, Inc. ("IBS"), a wholly owned subsidiary of KILICO, which enters into
selling group agreements with affiliated and unaffiliated broker-dealers.
Subject to the provisions of the Contracts, units of the Subaccounts under the
Contract are offered on a continuous basis.
KILICO pays commissions to the seller which may vary but are not anticipated to
exceed in the aggregate an amount equal to six percent (6%) of Purchase
Payments. During 1995, 1994, and 1993, KILICO incurred gross commissions payable
of approximately $10,006,000, $13,085,000, and $15,143,000, respectively, to
licensed insurance agents.
PERFORMANCE INFORMATION OF SUBACCOUNTS
As described in the prospectus, a Subaccount's historical performance may be
shown in the form of "average annual total return" and "total return"
calculations in the case of all Subaccounts; "yield" information may be provided
in the case of the KINF High Yield Subaccount, KINF Investment Grade Bond
Subaccount, the KINF Government Securities Subaccount and the Janus Short-Term
Bond Subaccount; and "yield" and "effective yield" information may be provided
in the case of the KINF Money Market Subaccount. These various measures of
performance are described below.
A Subaccount's average annual total return quotation is computed in accordance
with a standard method prescribed by rules of the Securities and Exchange
Commission. The average annual total return for a Subaccount for a specific
period is found by first taking a hypothetical $1,000 investment in each of the
Subaccount's units on the first day of the period at the maximum offering price,
which is the Accumulation Unit value per unit ("initial investment") and
computing the ending redeemable value ("redeemable value") of that investment at
the end of the period. The redeemable value reflects the effect of the
applicable Withdrawal Charge that may be imposed at the end of the period as
well as all other recurring charges and fees applicable under the Contract to
all Contract Owner accounts. Premium taxes are not included in the term charges.
The redeemable value is then divided by the initial investment and this quotient
is taken to the Nth root (N represents the number of years in the period) and 1
is subtracted from the result, which is then expressed as a percentage. Average
annual total return quotations for various periods are set forth in the table
below.
No standard formula has been prescribed for calculating total return
performance. Total return performance for a specific period is calculated by
first taking an investment (assumed to be $10,000 below) in each Subaccount's
units on the first day of the period at the maximum offering price, which is the
Accumulation Unit Value per unit ("initial investment") and computing the ending
value ("ending value") of that investment at the end of the period. The ending
value does not include the effect of the applicable Withdrawal Charge that may
be imposed at the end of the period, and thus may be higher than if such charge
were deducted. The total return percentage is then determined by subtracting the
initial investment from the ending value and dividing the remainder by the
initial investment and expressing the result as a percentage. An assumed
investment of $10,000 was chosen because that approximates the size of a typical
account. The account size used affects the performance figure because the
Records Maintenance Charge is a fixed per account charge. Total return
quotations for various periods are set forth in the table below.
The yield for the KINF High Yield Subaccount, the KINF Investment Grade Bond
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. The yields for the KINF High
Yield Subaccount and the KINF Government Securities Subaccount, based upon the
one month period ended
B-1
<PAGE> 42
March 31, 1996 were 8.07% and 4.95%, respectively. The yield quotation is
computed by dividing the net investment income per unit earned during the
specified one month or 30-day period by the accumulation unit values on the last
day of the period, according to the following formula that assumes a semi-annual
reinvestment of income:
<TABLE>
<S><C> a - b
YIELD = 2[( ------- +1)(6) - 1
cd
</TABLE>
a = net dividends and interest earned during the period by the Fund attributable
to the Subaccount
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of Accumulation Units outstanding during the period
d = the Accumulation Unit value per unit on the last day of the period
The yield of each Subaccount reflects the deduction of all recurring fees and
charges applicable to each Subaccount, but does not reflect the deduction of
withdrawal charges or premium taxes.
The KINF Money Market Subaccount's yield is computed in accordance with a
standard method prescribed by rules of the Securities and Exchange Commission.
Under that method, the current yield quotation is based on a seven-day period
and computed as follows: the net change in the Accumulation Unit Value during
the period is divided by the Accumulation Unit Value at the beginning of the
period ("base period return") and the result is divided by 7 and multiplied by
365 and the current yield figure carried to the nearest one-hundredth of one
percent. Realized capital gains or losses and unrealized appreciation or
depreciation of the Account's portfolio are not included in the calculation. The
KINF Money Market Subaccount's yield for the seven-day period ended March 31,
1996 was 3.48% and average portfolio maturity was 43 days.
The KINF Money Market Subaccount's effective yield is determined by taking the
base period return (computed as described above) and calculating the effect of
assumed compounding. The formula for the effective yield is: (base period return
+1) (3)65 / (7) - 1. The KNIF Money Market Subaccount's effective yield for the
seven day period ended March 31, 1996 was 3.55%.
In computing yield, the Separate Account follows certain standard accounting
practices specified by Securities and Exchange Commission rules. These practices
are not necessarily consistent with the accounting practices that the Separate
Account uses in the preparation of its annual and semi-annual financial
statements.
A Subaccount's performance quotations are based upon historical earnings and are
not necessarily representative of future performance. The Subaccount's units are
sold at Accumulation Unit value. Performance figures and Accumulation Unit value
will fluctuate. Factors affecting a Subaccount's performance include general
market conditions, operating expenses and investment management. Units of a
Subaccount are redeemable at Accumulation Unit value, which may be more or less
than original cost. The performance figures include the deduction of all
expenses and fees, including a prorated portion of the Records Maintenance
Charge. Redemptions within the first 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 KINF Money Market Subaccount, KINF Total Return Subaccount
and KINF High Yield Subaccount and for periods from December 9, 1983 (inception)
for the KINF Growth Subaccount to December 31, 1995. 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 KINF Fund. In addition, on that date the KINF
Government Securities Subaccount was added to the Separate Account to invest in
the KINF Fund's Government Securities Portfolio. For the KINF Government
Securities Subaccount, performance figures will reflect investment experience as
if the KINF Government Securities Subaccount had been available under the
Contracts since September 3, 1987, the inception date of the KINF Government
Securities Portfolio. For the Janus Growth Subaccount, Janus Aggressive Growth
Subaccount, Janus Worldwide Growth Subaccount, Janus Balanced Subaccount, Janus
Short-Term Bond Subaccount, Lexington Natural Resources Subaccount and Lexington
Emerging Markets Subaccount, the figures below show performance information for
the period from September 15, 1995, the date these Subaccounts were available
under the contracts. 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
B-2
<PAGE> 43
the year ended December 31, 1995. The total return performance of each
Subaccount is calculated for a specified period of time by assuming an initial
Purchase Payment of $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.
Comparative information for certain Subaccounts with respect to the Dow Jones
Industrial Average, the Standard & Poor's 500 Stock Index, the Consumer Price
Index, the CDA Certificate of Deposit Index, the Lehman Brothers Government and
Corporate Bond Index, the Salomon Brothers High Grade Corporate Bond Index and
the Merrill Lynch Government/Corporate Master Index is also included.
Comparative information may be shown for the KINF International Subaccount with
respect to the CDA Mutual Fund International Index and the Morgan Stanley
Capital International Europe Australia Far East Index. The KINF Total Return,
KINF Growth, KINF Horizon 20+, KINF Horizon 10+, KINF Value, KINF Value+Growth,
KINF Small Cap Growth, KINF Small Cap Value Subaccounts, the Lexington Natural
Resources Trust and Lexington Emerging Markets Subaccount, the Janus
Subaccounts, excluding the Short-Term Bond Subaccount, and the Fidelity
Subaccounts are compared to, and the KINF International Subaccount may be
compared to, the Dow Jones Industrial Average and the Standard & Poor's 500
Stock Index because these indices are generally considered representative of the
U. S. stock market in general. The Consumer Price Index is generally considered
to be a measure of inflation and thus the performance of the KINF Money Market,
KINF Total Return, KINF High Yield, KINF Growth, KINF Small Cap Growth, KINF
Government Securities, KINF Horizon 20+, KINF Horizon 10+, KNIF Horizon 5, KINF
Value, KINF Value+Growth, KINF Small Cap Value, and KINF Investment Grade Bond
Subaccounts, the Janus Subaccounts, the Lexington Subaccounts and the Fidelity
Subaccounts is compared to, and the KINF International Subaccount may be
compared to, that index. The KINF High Yield, KINF Government Securities and
KINF Investment Grade Bond Subaccounts and the Janus Short-Term Bond Subaccount
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 KINF Money Market Subaccount is also compared to the CDA
Certificate of Deposit Index because certificates of deposit represent an
alternative current income producing product. The KINF International Subaccount
may be compared to the CDA Mutual Fund--International Index because the index is
a weighted performance average of other mutual funds that invest primarily in
securities of foreign issuers. The KINF International Subaccount also may be
compared to the Morgan Stanley Capital International Europe Australia Far East
Index because the index is an unmanaged index that is considered to be generally
representative of major non-United States stock markets. The Janus Growth, Janus
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 Index. In addition, the Janus Worldwide Growth Subaccount's
performance may also be compared to the Morgan Stanley International World
Index. The Fidelity Contrafund Subaccount's performance may be compared to the
Standard & Poor's Midcap Index. Please note the differences and similarities
between the investments which a Subaccount may purchase and the investments
measured by the indexes which are described below. In particular, it should be
noted that certificates of deposit may offer fixed or variable yields and
principal is guaranteed and may be insured. The units of the Subaccounts are not
insured. Also, the value of the Subaccounts will fluctuate.
B-3
<PAGE> 44
<TABLE>
<CAPTION>
VALUES OF INITIAL $10,000 INVESTMENT IN
SUBACCOUNTS--AS OF DECEMBER 31, 1995
-------------------------------------------------- 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>
KINF GROWTH SUBACCOUNT
Life of Subaccount(4).......... 42,330 323.30% 42,269 322.67% 524.07% 459.33% 51.51% 524.14%
Ten years...................... 30,405 204.05 30,407 204.07 360.85 299.55 40.45 269.21
Five years..................... 22,532 125.32 22,532 125.32 124.49 115.19 14.72 58.92
One year....................... 13,100 31.00 13,100 31.00 36.94 37.53 2.54 11.55
KINF TOTAL RETURN SUBACCOUNT
Life of Subaccount(5).......... 45,056 350.56% 41,953 319.53% 950.50% 794.16% 62.26% 728.88%
Ten years...................... 26,335 163.35 26,335 163.35 360.85 299.55 40.45 269.21
Five years..................... 16,650 66.50 16,650 66.50 124.49 115.19 14.72 58.92
One year....................... 12,401 24.01 12,401 24.01 36.94 37.53 2.54 11.55
KINF INTERNATIONAL SUBACCOUNT
Life of Subaccount(14)......... 13,559 35.59% 13,559 35.59% 80.68% 65.02% 11.31% 41.27%
One year....................... 11,119 11.19 11,119 11.19 36.94 37.53 2.54 11.55
KINF SMALL CAP GROWTH SUBACCOUNT
Life of Subaccount(15)......... 13,208 32.08% 13,208 32.08% 45.33% 42.99% 4.14% 11.64%
One Year....................... 12,823 28.23 12,823 28.23 36.44 37.53 2.54 11.55
</TABLE>
<TABLE>
<CAPTION>
COMPARED TO
VALUES OF INITIAL $10,000 INVESTMENT IN --------------------------------------------------------------
SUBACCOUNTS--AS OF DECEMBER 31, 1995 SALOMON
----------------------------------------------- BROS. LEHMAN MERRILL
NON- NON- HIGH GRADE BROS. LYNCH
QUALIFIED QUALIFIED QUALIFIED QUALIFIED CONSUMER CDA CERT. CORP. GOVT./CORP. GOVT./CORP.
TOTAL 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>
KINF MONEY
MARKET
SUBACCOUNT
Life of
Subaccount(10)... 21,001 110.01% 21,001 110.01% 62.26% N/A* 561.41% 385.19% 474.22%
Ten years.... 15,536 55.36 15,536 55.36 40.45 N/A* 192.35 151.19 170.74
Five years... 11,488 14.88 11,488 14.88 14.72 22.0% 77.99 59.60 69.97
One year..... 10,399 3.99 10,399 3.99 2.54 5.2 27.20 19.24 21.23
KINF HIGH YIELD
SUBACCOUNT
Life of
Subaccount(11)... 48,576 385.76% 47,315 359.35% 62.26% N/A* 561.41% 385.19% 474.22%
Ten years.... 25,906 159.06 25,906 159.06 40.45 N/A* 192.35 151.19 170.74
Five years... 22,961 129.61 22,961 129.61 14.72 22.0% 77.99 59.60 69.97
One year..... 11,564 15.64 11,564 15.64 2.54 5.2 27.20 19.24 21.23
KINF GOVERNMENT SECURITIES
SUBACCOUNT
Life of
Subaccount(12)... 17,511 75.11% 17,511 75.11% 34.18% 55.9% 154.47% 119.94% 136.86%
Five years... 13,999 39.99 13,999 39.99 14.72 22.0 77.99 59.60 69.97
One year..... 11,722 17.22 11,722 17.22 2.54 5.2 27.20 19.24 21.23
</TABLE>
B-4
<PAGE> 45
<TABLE>
<CAPTION>
VALUES OF INITIAL $10,000 INVESTMENT IN COMPARED TO
SUBACCOUNTS--AS OF DECEMBER 31, 1995 ------------------------------------------------------------
-------------------------------------------- MORGAN LEHMAN LEHMAN
NON- NON- STANLEY STANDARD BROS. LONG BROS.
TOTAL QUALIFIED QUALIFIED QUALIFIED QUALIFIED INTERNAT. & POOR'S GOVT./CORP. GOVT./CORP. RUSSELL
RETURN ENDING PERCENTAGE ENDING PERCENTAGE WORLD MIDCAP BOND 1-3 YR. BOND 2000
TABLE VALUE INCREASE VALUE INCREASE INDEX(17) INDEX(18) INDEX(19) INDEX(20) INDEX(21)
--------- --------- --------- ---------- --------- ---------- --------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
JANUS GROWTH
Life of the
Subaccount(16)....... 10,327 3.27% 10,327 3.27% -- .53% 4.66% 2.47% .53%
JANUS AGGRESSIVE
GROWTH Life of
the Subaccount(16)... 10,552 5.52% 10,552 5.52% -- .53% 4.66% 2.47% .53%
JANUS WORLDWIDE GROWTH
Life of the
Subaccount(16)....... 10,425 4.25% 10,425 4.25% 5.34% .53% 4.66% 2.47% .53%
JANUS BALANCED
Life of the
Subaccount(16)....... 10,547 5.47% 10,547 5.47% -- .53% 4.66% 2.47% .53%
JANUS SHORT-TERM BOND
Life of the
Subaccount(16)....... 10,236 2.36% 10,236 2.36% -- .53% 4.66% 2.47% .53%
LEXINGTON NATURAL
RESOURCES
Life of the
Subaccount(16)....... 10,032 .32% 10,032 .32% -- .53% 4.66% 2.47% .53%
LEXINGTON EMERGING
MARKETS
Life of the
Subaccount(16)....... 9,547 (4.53)% 9,547 (4.53)% -- .53% 4.66% 2.47% .53%
<CAPTION>
TOTAL
RETURN NASDAQ
TABLE COMPOS.(22)
--------- ---------
<S> <C>
JANUS GROWTH
Life of the
Subaccount(16)....... .10%
JANUS AGGRESSIVE
GROWTH Life of
the Subaccount(16)...
JANUS WORLDWIDE GROWTH
Life of the
Subaccount(16)....... .10%
JANUS BALANCED
Life of the
Subaccount(16)....... .10%
JANUS SHORT-TERM BOND
Life of the
Subaccount(16)....... .10%
LEXINGTON NATURAL
RESOURCES
Life of the
Subaccount(16)....... .10%
LEXINGTON EMERGING
MARKETS
Life of the
Subaccount(16)....... .10%
</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>
KINF GROWTH SUBACCOUNT
Life of Subaccount(4).................................... 12.37% 12.36% 16.48% 15.43% 3.52% 16.49%
Ten years................................................ 11.22 11.22 16.51 14.86 3.46 13.95
Five years............................................... 16.04 16.04 17.55 16.56 2.79 9.71
One year................................................. 21.57 21.57 36.94 37.53 2.54 11.55
KINF TOTAL RETURN SUBACCOUNT
Life of Subaccount(5).................................... 10.92% 10.29% 18.53% 17.16% 3.56% 16.52%
Ten years................................................ 9.01 9.01 16.51 14.86 3.46 13.95
Five years............................................... 8.41 8.41 17.55 16.56 2.79 9.71
One year................................................. 14.36 14.36 36.94 37.53 2.54 11.55
KINF INTERNATIONAL SUBACCOUNT
Life of Subaccount(14)................................... 5.98% 5.98% 15.94% 13.34% 2.72% 9.02%
One year................................................. 3.50 3.50 36.94 37.53 2.54 11.55
KINF SMALL CAP GROWTH SUBACCOUNT
Life of Subaccount(15)................................... 13.78% 13.78% 25.14% 23.93% 2.46% 6.83%
One year................................................. 19.81 19.81 36.94 37.53 2.54 11.55
</TABLE>
B-5
<PAGE> 46
<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>
KINF HIGH YIELD SUBACCOUNT
Life of Subaccount(11).......... 11.88% 11.66% 3.56% 14.63% 12.09% 13.47%
Ten years....................... 9.28 9.28 3.46 11.32 9.65 10.47
Five years...................... 16.51 16.51 2.79 12.22 9.80 11.19
One year........................ 7.22 7.22 2.54 27.20 19.24 21.23
KINF GOVERNMENT SECURITIES
SUBACCOUNT
Life of Subaccount(12).......... 6.00% 6.00% 3.59% 11.86% 9.92% 10.90%
Five years...................... 5.22 5.22 2.79 12.22 9.80 11.19
One year........................ 8.84 8.84 2.54 27.20 19.24 21.23
</TABLE>
<TABLE>
<CAPTION>
COMPARED TO
----------------------------------------------------------------------------
AVERAGE ANNUAL LEHMAN
TOTAL RETURN MORGAN LEHMAN BROS.
(BASED ON $1,000 STANLEY STANDARD BROS. LONG GOVT./CORP.
INVESTMENT) INTERNAT. & POOR'S GOVT./CORP. 1-3 YR. RUSSELL
AVERAGE ANNUAL TOTAL ------------------------- WORLD MIDCAP BOND BOND 2000 NASDAQ
RETURN TABLE QUALIFIED NON-QUALIFIED INDEX(17) INDEX(18) INDEX(19) INDEX(20) INDEX(21) COMPOS.(22)
- ------------------------ --------- ------------- --------- --------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
JANUS GROWTH
Life of the
Subaccount(16)...... (9.28)% (9.28)% -- .53% 4.66% 2.47% .53% .10%
JANUS AGGRESSIVE GROWTH
Life of the
Subaccount(16)...... (2.79)% (2.79)% -- .53% 4.66% 2.47% .53% .10%
JANUS WORLDWIDE GROWTH
Life of the
Subaccount(16)...... (6.26)% (6.26)% 5.34% .53% 4.66% 2.47% .53% .10%
JANUS BALANCED
Life of the
Subaccount(16)...... (1.54)% (1.54)% -- .53% 4.66% 2.47% .53% .10%
JANUS SHORT-TERM BOND
Life of the
Subaccount(16)...... (12.14)% (12.14)% -- .53% 4.66% 2.47% .53% .10%
LEXINGTON NATURAL
RESOURCES
Life of the
Subaccount(16)...... (18.32)% (18.32)% -- .53% 4.66% 2.47% .53% .10%
LEXINGTON EMERGING
MARKETS
Life of the
Subaccount(16)...... (30.21)% (30.21)% -- .53% 4.66% 2.47% .53% .10%
</TABLE>
<TABLE>
<CAPTION>
YIELD INFORMATION QUALIFIED AND NON-QUALIFIED
- --------------------------------------------------------------------------------------------- ---------------------------
<S> <C>
KINF HIGH YIELD SUBACCOUNT
30 day period ended 3/31/96................................................................ 8.07%
KINF GOVERNMENT SECURITIES SUBACCOUNT
30 day period ended 3/31/96................................................................ 4.95%
KINF MONEY MARKET SUBACCOUNT
7 day period ended 3/31/96................................................................. 3.48%
</TABLE>
* N/A Not Available
Information for the indices used for comparisons have been provided by the Funds
and has not been independently verified.
(1) The Dow Jones Industrial Average is an unmanaged unweighted average of
thirty blue chip industrial corporations listed on the New York Stock Exchange.
Assumes reinvestment of dividends.
(2) The Standard & Poor's 500 Stock Index is an unmanaged weighted average of
500 stocks, over 95% of which are listed on the New York Stock Exchange. Assumes
reinvestment of dividends.
(3) The Consumer Price Index, published by the U.S. Bureau of Labor Statistics,
is a statistical measure of change, over time, in the prices of goods and
services in major expenditure groups.
(4) From December 9, 1983 to December 31, 1995.
(5) From March 5, 1982 to December 31, 1995.
B-6
<PAGE> 47
(6) The CDA Certificate of Deposit Index is provided by CDA Investment
Technologies, Inc., Silver Spring, Maryland, and is based upon a statistical
sampling of the yield of 30-day certificates of deposit of major commercial
banks. Yield is based upon a monthly compounding of interest.
(7) The Salomon Brothers High Grade Corporate Bond Index is on a total return
basis with all dividends reinvested and is comprised of high grade long-term
industrial and utility bonds rated in the top two rating categories.
(8) The Lehman Brothers Government/Corporate Bond Index is on a total return
basis and is comprised of all publicly issued, non-convertible, domestic debt of
the U.S. Government or any agency thereof, quasi-Federal corporation, or
corporate debt guaranteed by the U.S. Government and all publicly issued,
fixed-rate, non-convertible, domestic debt of the three major corporate
classifications: industrial, utility, and financial. Only notes and bonds with a
minimum outstanding principal amount of $1,000,000 and a minimum of one year are
included. Bonds included must have a rating of at least Baa by Moody's Investors
Service, BBB by Standard & Poor's Corporation or in the case of bank bonds not
rated by either Moody's or Standard & Poor's, BBB by Fitch Investors Service.
(9) The Merrill Lynch Government/Corporate Master Index is based upon the total
return with all dividends reinvested of 4,000 corporate and 300 government bonds
issued with an intermediate average maturity and an average quality rating of Aa
(Moody's Investors Service, Inc.) /AA (Standard & Poor's Corporation).
(10) From March 5, 1982 to December 31, 1995.
(11) From March 5, 1982 to December 31, 1995.
(12) From September 3, 1987 to December 31, 1995.
(13) EAFE is the Morgan Stanley Capital International Europe, Australia, Far
East index. This index is an unmanaged index that is considered to be generally
representative of major non-United States stock markets.
(14) From January 6, 1992 to December 31, 1995.
(15) From May 2, 1994 to December 31, 1995.
(16) From September 15, 1995 to December 31, 1995.
(17) The Morgan Stanley International World Index is an arithmetic, market
value-weighted average of the performance of over 1,470 securities listed on the
stock exchanges of Australia, Austria, Belgium, Canada, Denmark, Finland,
France, Germany, Hong Kong, Italy, Japan, Netherlands, New Zealand, Norway,
Singapore/Malaysia, South Africa Gold, Spain, Switzerland, United Kingdom, and
the United States. The Index is calculated on a total return basis, which
includes reinvestment of gross dividends before deduction of withholding taxes.
The index covers about 60% of the issues listed on the exchanges of the
countries included.
(18) The Standard & Poor's Midcap 400 Index is a capitalization-weighted index
that measures the performance of the mid-range sector of the U.S. stock market
where the median market capitalization is approximately $700 million. The index
was developed with a base level of 100 as of December 31, 1990.
(19) The Lehman Brothers Long Government/Corporate Bond Index is composed of all
bonds covered by the Lehman Brothers Government/Corporate Bond Index with
maturities of 10 years or greater. Total return comprises price
appreciation/depreciation and income as a percentage of the original investment.
Indexes are balanced monthly by market capitalization.
(20) The Lehman Brothers Government/Corporate 1-3 Year Bond Index is composed of
all bonds covered by the Lehman Brothers Government/Corporate Bond Index with
maturities between one and three years.
(21) The Russell 2000 Index is comprised of the smallest 2000 companies in the
Russell 3000 Index, representing approximately 11% of the Russell 3000 total
market capitalization. The index was developed with a base value of 135.00 as of
December 31, 1986.
(22) The NASDAQ Composite Index is a broad-based capitalization-weighted index
of all NASDAQ stocks. The index was developed with a base level of 100 as of
February 5, 1971.
B-7
<PAGE> 48
The following tables illustrate an assumed $10,000 investment in shares of
certain Subaccounts. The ending value does not include the effect of the
applicable Withdrawal Charge that may be imposed at the end of the period, and
thus may be higher than if such charge were deducted. Each table covers the
period from commencement of operations of the Subaccount to December 31, 1995.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
KINF TOTAL RETURN SUBACCOUNT
NON-
YEAR QUALIFIED QUALIFIED
ENDED TOTAL TOTAL
12/31 VALUE VALUE
- ----- -------- ---------
<S> <C> <C>
1982 .................... $12,336 $11,769
1983 .................... 14,313 13,211
1984 .................... 13,427 12,508
1985 .................... 17,019 15,853
1986 .................... 19,328 18,003
1987 .................... 19,188 17,872
1988 .................... 21,207 19,752
1989 .................... 25,945 24,164
1990 .................... 26,889 25,043
1991 .................... 36,583 34,069
1992 .................... 36,703 34,179
1993 .................... 40,598 37,805
1994 .................... 36,253 33,758
1995 .................... 45,056 41,953
------- -------
<CAPTION>
KINF 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
1995 .................... 48,576 47,315
------- -------
<CAPTION>
KINF INTERNATIONAL SUBACCOUNT
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ----- --------
<S> <C>
1992 .................... $ 9,803
1993 .................... 12,836
1994 .................... 12,187
1995 .................... 13,559
-------
<CAPTION>
KINF SMALL CAP GROWTH SUBACCOUNT
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ----- --------
<S> <C>
1994 .................... $10,296
1995 .................... 13,208
-------
</TABLE>
<TABLE>
<CAPTION>
KINF GROWTH 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
1995 .................... 42,330 42,269
------- -------
<CAPTION>
KINF 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
1995 .................... 21,001
-------
<CAPTION>
KINF 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
1995 .................... 17,511
-------
</TABLE>
B-8
<PAGE> 49
<TABLE>
<CAPTION>
JANUS GROWTH*
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ----- --------
<C> <S> <C>
1995 ................................ 10,327
<CAPTION>
JANUS WORLDWIDE GROWTH*
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ----- --------
<C> <S> <C>
1995 ................................ 10,425
<CAPTION>
JANUS SHORT-TERM BOND*
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ----- --------
<C> <S> <C>
1995 ................................ 10,236
<CAPTION>
LEXINGTON EMERGING MARKETS*
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ----- --------
<C> <S> <C>
1995 ................................ 9,547
</TABLE>
<TABLE>
<CAPTION>
JANUS AGGRESSIVE GROWTH*
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ----- --------
<C> <S> <C>
1995 ................................ 10,552
<CAPTION>
JANUS BALANCED*
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ----- --------
<C> <S> <C>
1995 ................................ 10,547
<CAPTION>
LEXINGTON NATURAL RESOURCES*
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ----- --------
<C> <S> <C>
1995 ................................ 10,032
</TABLE>
- ---------------
* Commencement of operations September 15, 1995.
The following table compares the performance of the Subaccounts over various
periods with that of other variable annuity funds within the categories
described below according to data reported by Lipper Analytical Services, Inc.
("Lipper"), New York, New York, mutual fund reporting service. Lipper rankings
are based on changes in net asset value, with all income and capital gain
dividends reinvested. Such calculations do not include the effect of any sales
charges and include the deduction of mortality and expense risk charges and
other asset based charges. Future performance cannot be guaranteed. Lipper
publishes performance analyses on a regular basis from which the following
rankings were derived.
<TABLE>
<CAPTION>
LIPPER VARIABLE ANNUITY
PERFORMANCE ANALYSIS
-----------------------
2/28/95 2/28/91
TO TO
SUBACCOUNT 2/29/96 2/29/96
------------------------------------------------------------------------- -------- -------
<S> <C> <C>
KINF Total Return (Q).................................................... 22.38 54.77
KINF Total Return (NQ)................................................... 22.38 54.77
KINF High Yield (Q)...................................................... 14.31 102.58
KINF High Yield (NQ)..................................................... 14.31 102.60
KINF Growth (Q).......................................................... 30.49 108.35
KINF Growth (NQ)......................................................... 30.49 108.35
KINF Money Market (Q).................................................... 4.27 15.69
KINF Money Market (NQ)................................................... 4.27 15.69
KINF Government Securities (Q & NQ)...................................... 10.40 36.99
KINF International (Q & NQ).............................................. 20.99 --
KINF Small Cap Growth (Q & NQ)........................................... 29.35 --
</TABLE>
The KINF Total Return Subaccount, KINF High Yield Subaccount, KINF Growth
Subaccount, KINF Money Market Subaccount, KINF International Subaccount, KINF
Government Securities Subaccount and KINF Small Cap Growth Subaccount are ranked
by Lipper in the Flexible Portfolio, High Current Yield, Capital Appreciation,
Money Market,
B-9
<PAGE> 50
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
RETIREMENT ANNUITY ANNUITY CONVENTIONAL
SAVINGS PLAN
BEFORE-TAX CONTRIBUTIONS AFTER-TAX CONTRIBUTIONS
AND TAX-DEFERRED EARNINGS. AND TAX-DEFERRED EARNINGS. AFTER-TAX
-------------------------------- -------------------------------- CONTRIBUTIONS
TAXABLE LUMP TAXABLE LUMP AND TAXABLE
NO WITHDRAWALS SUM WITHDRAWAL NO WITHDRAWALS SUM WITHDRAWAL EARNINGS.
-------------- -------------- -------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
10 Years................ $ 36,256 $ 25,017 $ 25,017 $ 22,395 $ 21,974
20 Years................ 114,532 79,027 79,027 64,795 59,581
30 Years................ 283,522 195,630 195,630 150,385 123,940
</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% federal
marginal tax rate, representative of the target market, 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. The chart does not reflect the following charges and expenses under
Kemper Advantage III: 1.00% mortality and expense risk; .30% administration
charges; 6% maximum deferred withdrawal charge; and $36 annual records
maintenance charge. The tax-deferred accumulation would be reduced if these
charges were reflected. No implication is intended by the use of these
assumptions that the return shown is guaranteed in any way or that the return
shown represents an average or expected rate of return over the period of the
Contracts. [IMPORTANT--THIS IS NOT AN ILLUSTRATION OF YIELD OR RETURN]
Unlike savings plans, contributions to 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 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.
B-10
<PAGE> 51
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-11
<PAGE> 52
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS
KEMPER INVESTORS LIFE INSURANCE COMPANY:
We have audited the accompanying combined statement of assets and liabilities
and contract owners' equity of the KILICO Variable Annuity Separate Account as
of December 31, 1995, and the related combined statement of operations for the
year then ended, and the combined statements of changes in contract owners'
equity for the years ended December 31, 1995 and 1994. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
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, 1995, and the combined
results of its operations for the year then ended, and the combined changes in
its contract owners' equity for the years ended December 31, 1995 and 1994, in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Chicago, Illinois
February 16, 1996
B-12
<PAGE> 53
------------------
THIS PAGE INTENTIONALLY
LEFT BLANK
------------------
B-13
<PAGE> 54
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
COMBINED STATEMENT OF ASSETS AND LIABILITIES AND CONTRACT OWNERS' EQUITY
DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
KEMPER INVESTORS FUND
---------------------------------------------------------------------------------------------------
MONEY MONEY TOTAL HIGH GOVERNMENT SMALL CAP
MARKET MARKET RETURN YIELD GROWTH SECURITIES INTERNATIONAL GROWTH
COMBINED SUBACCOUNT SUBACCOUNT #2 SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ACCOUNT
---------- ---------- ------------- ---------- ---------- ---------- ---------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Investments, at
current
value........ $1,656,002 57,768 2,309 657,336 255,289 412,608 91,084 134,482 35,373
Dividends and
other
receivables... 631 152 6 41 16 45 5 18 1
---------- ------ ----- ------- ------- ------- ------ ------- ------
Total
assets... 1,656,633 57,920 2,315 657,377 255,305 412,653 91,089 134,500 35,374
---------- ------ ----- ------- ------- ------- ------ ------- ======
LIABILITIES AND
CONTRACT
OWNERS' EQUITY
Liabilities:
Mortality and
expense
risk and
administrative
charges.... 1,796 68 -- 710 271 436 96 143 37
Other........ 32 18 -- -- -- -- -- 14 --
---------- ------ ----- ------- ------- ------- ------ ------- ------
Total
liabilities... 1,828 86 -- 710 271 436 96 157 37
---------- ------ ----- ------- ------- ------- ------ ------- ------
Contract
owners'
equity....... $1,654,805 57,834 2,315 656,667 255,034 412,217 90,993 134,343 35,337
========== ====== ===== ======= ======= ======= ====== ======= ======
ANALYSIS OF
CONTRACT
OWNERS' EQUITY
Excess
(deficiency)
of proceeds
from units
sold over
payments for
units
redeemed..... $ 894,179 (6,607) 1,755 332,260 105,433 241,971 63,856 115,774 30,009
Accumulated net
investment
income
(loss)....... 435,924 64,441 560 169,606 140,747 39,981 20,768 205 (451)
Accumulated net
realized gain
(loss) on
sales of
investments... 85,973 -- -- 49,493 (3,430) 35,726 1,040 2,960 184
Unrealized
appreciation
(depreciation)
of
investments... 238,729 -- -- 105,308 12,284 94,539 5,329 15,404 5,595
---------- ------ ----- ------- ------- ------- ------ ------- ------
Contract
owners'
equity....... $1,654,805 57,834 2,315 656,667 255,034 412,217 90,993 134,343 35,337
========== ====== ===== ======= ======= ======= ====== ======= ======
</TABLE>
See accompanying notes to combined financial statements.
B-14
<PAGE> 55
<TABLE>
<CAPTION>
JANUS ASPEN SERIES LEXINGTON FUNDS
---------------------------------------------------------------------- ----------------------------
SHORT-TERM AGGRESSIVE WORLDWIDE NATURAL EMERGING
BOND GROWTH GROWTH GROWTH BALANCED RESOURCES MARKETS
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ---------- ---------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
151 2,493 2,266 1,528 1,775 750 790
6 105 8 90 130 -- 8
--- ----- ----- ----- ----- --- ---
157 2,598 2,274 1,618 1,905 750 798
--- ----- ----- ----- ----- --- ---
-- 10 6 7 8 2 2
-- -- -- -- -- -- --
--- ----- ----- ----- ----- --- ---
-- 10 6 7 8 2 2
--- ----- ----- ----- ----- --- ---
157 2,588 2,268 1,611 1,897 748 796
=== ===== ===== ===== ===== === ===
156 2,531 2,155 1,555 1,827 725 779
3 39 6 1 11 1 6
-- -- -- -- -- -- --
(2) 18 107 55 59 22 11
--- ----- ----- ----- ----- --- ---
157 2,588 2,268 1,611 1,897 748 796
=== ===== ===== ===== ===== === ===
</TABLE>
B-15
<PAGE> 56
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
KEMPER INVESTORS FUND
-----------------------------------------------------------------------------------
MONEY MONEY TOTAL GOVERNMENT
MARKET MARKET RETURN HIGH YIELD GROWTH SECURITIES
COMBINED SUBACCOUNT SUBACCOUNT #2 SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
-------- ---------- ------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Dividends and capital
gains distributions.... $ 79,466 3,896 140 18,674 22,075 25,653 5,951
Expenses:
Mortality and expense
risk and
administrative
charges.............. 21,615 911 -- 8,840 3,384 4,999 1,293
-------- ----- --- ------- ------ ------ ------
Net investment income
(loss)................. 57,851 2,985 140 9,834 18,691 20,654 4,658
-------- ----- --- ------- ------ ------ ------
Net realized and
unrealized gain (loss)
on investments:
Net realized gain
(loss) on sales of
investments.......... 13,441 -- -- 5,320 1,290 5,966 (1)
Change in unrealized
appreciation
(depreciation) of
investments.......... 230,075 -- -- 119,468 15,252 67,323 10,500
-------- ----- --- ------- ------ ------ ------
Net realized and
unrealized gain (loss)
on investments......... 243,516 -- -- 124,788 16,542 73,289 10,499
-------- ----- --- ------- ------ ------ ------
Net increase in contract
owners' equity
resulting
from operations........ $301,367 2,985 140 134,622 35,233 93,943 15,157
======== ===== === ======= ====== ====== ======
<CAPTION>
SMALL CAP
INTERNATIONAL GROWTH
SUBACCOUNT SUBACCOUNT
------------- --------------
<S> <<C> <C>
Dividends and capital
gains distributions.... 2,910 76
Expenses:
Mortality and expense
risk and
administrative
charges.............. 1,798 366
------ -----
Net investment income
(loss)................. 1,112 (290)
------ -----
Net realized and
unrealized gain (loss)
on investments:
Net realized gain
(loss) on sales of
investments.......... 605 261
Change in unrealized
appreciation
(depreciation) of
investments.......... 11,955 5,307
------ -----
Net realized and
unrealized gain (loss)
on investments......... 12,560 5,568
------ -----
Net increase in contract
owners' equity
resulting
from operations........ 13,672 5,278
====== =====
</TABLE>
- ---------------
(a) For the period from September 15, 1995 (commencement of operations) to
December 31, 1995.
See accompanying notes to combined financial statements.
B-16
<PAGE> 57
<TABLE>
<CAPTION>
JANUS ASPEN SERIES LEXINGTON FUNDS
- ------------------------------------------------------------------------------------- -------------------------------
SHORT-TERM AGGRESSIVE WORLDWIDE NATURAL EMERGING
BOND GROWTH GROWTH GROWTH BALANCED RESOURCES MARKETS
SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A)
- ------------- ------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
3 45 13 5 14 3 8
-- 6 7 4 3 2 2
-- -- --- -- -- -- --
3 39 6 1 11 1 6
-- -- -- -- -- -- --
-- -- --- -- -- -- --
(2) 18 107 55 59 22 11
-- -- --- -- -- -- --
(2) 18 107 55 59 22 11
-- -- --- -- -- -- --
1 57 113 56 70 23 17
== == === == == == ==
</TABLE>
B-17
<PAGE> 58
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
COMBINED STATEMENTS OF CHANGES IN CONTRACT OWNERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
KEMPER INVESTORS FUND
----------------------------------------------------------------------------------------------
MONEY MONEY TOTAL GOVERNMENT
MARKET MARKET RETURN HIGH YIELD GROWTH SECURITIES INTERNATIONAL
COMBINED SUBACCOUNT SUBACCOUNT #2 SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ---------- ------------- ---------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operations:
Net investment
income
(loss)........... $ 57,851 2,985 140 9,834 18,691 20,654 4,658 1,112
Net realized gain
(loss) on sales
of investments... 13,441 -- -- 5,320 1,290 5,966 (1) 605
Change in
unrealized
appreciation
(depreciation) of
investments...... 230,075 -- -- 119,468 15,252 67,323 10,500 11,955
---------- ------- ------ ------- ------- ------- ------- -------
Net increase in
contract
owners' equity
resulting from
operations..... 301,367 2,985 140 134,622 35,233 93,943 15,157 13,672
---------- ------- ------ ------- ------- ------- ------- -------
Account unit
transactions:
Proceeds from units
sold............. 144,565 7,440 1,994 47,745 21,167 35,473 5,546 17,837
Net transfers (to)
from affiliate
and
subaccounts...... (14,959) (14,703) (3,412) (21,697) 13,859 1,693 (6,225) (6,157)
Payments for units
redeemed......... (207,322) (16,838) (92) (87,868) (32,713) (39,162) (14,994) (13,593)
---------- ------- ------ ------- ------- ------- ------- -------
Net increase
(decrease) in
contract
owners' equity
from account
unit
transactions... (77,716) (24,101) (1,510) (61,820) 2,313 (1,996) (15,673) (1,913)
---------- ------- ------ ------- ------- ------- ------- -------
Total increase
(decrease) in
contract owners'
equity............. 223,651 (21,116) (1,370) 72,802 37,546 91,947 (516) 11,759
Contract owners'
equity:
Beginning of
period........... 1,431,154 78,950 3,685 583,865 217,488 320,270 91,509 122,584
---------- ------- ------ ------- ------- ------- ------- -------
End of period...... $1,654,805 57,834 2,315 656,667 255,034 412,217 90,993 134,343
========== ======= ====== ======= ======= ======= ======= =======
<CAPTION>
SMALL CAP
GROWTH
SUBACCOUNT
--------------
<S> <C>
Operations:
Net investment
income
(loss)........... (290)
Net realized gain
(loss) on sales
of investments... 261
Change in
unrealized
appreciation
(depreciation) of
investments...... 5,307
------
Net increase in
contract
owners' equity
resulting from
operations..... 5,278
------
Account unit
transactions:
Proceeds from units
sold............. 6,412
Net transfers (to)
from affiliate
and
subaccounts...... 12,876
Payments for units
redeemed......... (2,032)
------
Net increase
(decrease) in
contract
owners' equity
from account
unit
transactions... 17,256
------
Total increase
(decrease) in
contract owners'
equity............. 22,534
Contract owners'
equity:
Beginning of
period........... 12,803
------
End of period...... 35,337
======
</TABLE>
- ---------------
(a) For the period from September 15, 1995 (commencement of operations) to
December 31, 1995.
See accompanying notes to combined financial statements.
B-18
<PAGE> 59
<TABLE>
<CAPTION>
JANUS ASPEN SERIES LEXINGTON FUNDS
------------------------------------------------------------------------------------- -------------------------------
SHORT-TERM AGGRESSIVE WORLDWIDE NATURAL EMERGING
BOND GROWTH GROWTH GROWTH BALANCED RESOURCES MARKETS
SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A)
------------- ------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
3 39 6 1 11 1 6
-- -- -- -- -- -- --
(2) 18 107 55 59 22 11
--- ----- ----- ----- ----- --- ---
1 57 113 56 70 23 17
--- ----- ----- ----- ----- --- ---
1 304 198 186 182 57 23
155 2,234 1,957 1,375 1,650 680 756
-- (7) -- (6) (5) (12) --
--- ----- ----- ----- ----- --- ---
156 2,531 2,155 1,555 1,827 725 779
--- ----- ----- ----- ----- --- ---
157 2,588 2,268 1,611 1,897 748 796
-- -- -- -- -- -- --
--- ----- ----- ----- ----- --- ---
157 2,588 2,268 1,611 1,897 748 796
=== ===== ===== ===== ===== === ===
</TABLE>
B-19
<PAGE> 60
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
COMBINED STATEMENTS OF CHANGES IN CONTRACT OWNERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
KEMPER INVESTORS FUND
---------------------------------------------------------------------------------------------------------------
MONEY MONEY TOTAL GOVERNMENT SMALL CAP
MARKET MARKET RETURN HIGH YIELD GROWTH SECURITIES INTERNATIONAL GROWTH
COMBINED SUBACCOUNT SUBACCOUNT #2 SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT(A)
-------- ---------- ------------- ---------- ---------- ---------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Operations:
Net investment
income (loss)...... $ 85,162 2,574 152 49,815 16,158 10,723 6,316 (415) (161)
Net realized gain
(loss) on sales
of investments..... 11,105 -- -- 878 3,164 5,853 (726) 2,013 (77)
Change in unreal-
ized appreciation
(depreciation)
of investments..... (199,366) -- -- (121,752) (27,264) (32,435) (10,070) (8,133) 288
---------- ------- ----- -------- ------- ------- ------- -------- ------
Net increase
(decrease) in
contract owners'
equity resulting
from operations.. (103,099) 2,574 152 (71,059) (7,942) (15,859) (4,480) (6,535) 50
---------- ------- ----- -------- ------- ------- ------- -------- ------
Account unit
transactions:
Proceeds from units
sold................ 254,411 19,971 6,673 89,169 34,261 52,913 15,214 32,734 3,476
Net transfers (to)
from affiliate and
subaccounts........ 3,471 16,310 (6,297) (16,297) (15,720) 25,150 (24,188) 15,006 9,507
Payments for units
redeemed........... (152,336) (24,064) (68) (58,032) (24,877) (24,735) (12,918) (7,412) (230)
---------- ------- ----- -------- ------- ------- ------- -------- ------
Net increase
(decrease) in
contract owners'
equity from
account unit
transactions..... 105,546 12,217 308 14,840 (6,336) 53,328 (21,892) 40,328 12,753
---------- ------- ----- -------- ------- ------- ------- -------- ------
Total increase
(decrease) in
contract owners'
equity.............. 2,447 14,791 460 (56,219) (14,278) 37,469 (26,372) 33,793 12,803
Contract owners'
equity:
Beginning of
period.............. 1,428,707 64,159 3,225 640,084 231,766 282,801 117,881 88,791 --
---------- ------- ----- -------- ------- ------- ------- -------- ------
End of period....... $1,431,154 78,950 3,685 583,865 217,488 320,270 91,509 122,584 12,803
========== ======= ===== ======== ======= ======= ======= ======== ======
</TABLE>
- ---------------
(a) For the period from May 2, 1994 (commencement of operations) to December 31,
1994.
See accompanying notes to combined financial statements.
B-20
<PAGE> 61
<TABLE>
<CAPTION>
JANUE ASPEN SERIES LEXINGTON FUNDS
---------------------------------------------------------------------- -------------------------
SHORT-TERM AGGRESSIVE WORLDWIDE NATURAL EMERGING
BOND GROWTH GROWTH GROWTH BALANCED RESOURCES MARKETS
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
-- -- -- -- -- --
-- -- -- -- -- --
--
-- -- -- -- -- --
--
-- -- -- -- -- -- --
-- -- -- -- -- --
--
-- -- -- -- -- -- --
-- -- -- -- -- -- --
-- -- -- -- -- --
--
-- -- -- -- -- --
--
-- -- -- -- -- -- --
-- -- -- -- -- --
--
-- -- -- -- -- -- --
-- -- -- -- -- --
--
-- -- -- -- -- --
--
-- -- -- -- -- -- --
-- -- -- -- -- -- --
============ ============ ============ ============ ============ ============ ============
</TABLE>
B-21
<PAGE> 62
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
NOTES TO COMBINED FINANCIAL STATEMENTS
(1) GENERAL INFORMATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
KILICO Variable Annuity Separate Account (the "Separate Account") is a unit
investment trust registered under the Investment Company Act of 1940, as
amended, established by Kemper Investors Life Insurance Company ("KILICO").
KILICO is owned by Kemper Corporation which was acquired by an investor group
led by Zurich Insurance Company ("Zurich") on January 4, 1996.
The Separate Account is used to fund contracts or certificates (collectively
referred to as "contracts") for ADVANTAGE III periodic and flexible payment
variable annuity contracts and PASSPORT individual and group variable and market
value adjusted deferred annuity contracts. The Separate Account is divided into
Subaccounts. For the ADVANTAGE III contracts, up to fourteen Subaccounts may be
available to Contract Owners depending upon their respective Contracts. Each
Subaccount invests exclusively in a corresponding portfolio of one of the
underlying investment funds; the Kemper Investors Fund, the Janus Aspen Series,
the Lexington Natural Resources Trust and the Lexington Emerging Markets Fund.
For the PASSPORT contracts, eight Subaccounts are available to Contract Owners
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, 1995.
SECURITY TRANSACTIONS AND INVESTMENT INCOME
Security transactions are accounted for on the trade date (date the order to buy
or sell is executed). Dividends and capital gains distributions are recorded as
income on the ex-dividend date. Realized gains and losses from security
transactions are reported on an identified cost basis.
ACCUMULATION UNIT VALUATION
On each day the New York Stock Exchange (the "Exchange") is open for trading,
the accumulation unit value is determined as of the earlier of 3:00 p.m.
(Chicago time) or the close of the Exchange by dividing the total value of each
Subaccount's investments and other assets, less liabilities, by the number of
accumulation units outstanding in the respective Subaccount.
FEDERAL INCOME TAXES
The operations of the Separate Account are included in the Federal income tax
return of KILICO. Under existing Federal income tax law, investment income and
realized capital gains and losses of the Separate Account increase liabilities
under the contract and are, therefore, not taxed. Thus the Separate Account may
realize net investment income and capital gains and losses without Federal
income tax consequences.
B-22
<PAGE> 63
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(2) SUMMARY OF INVESTMENTS
Investments, at cost, at December 31, 1995, are as follows (in thousands):
<TABLE>
<CAPTION>
SHARES
OWNED COST
------- ----------
<S> <C> <C>
INVESTMENTS
KEMPER INVESTORS FUND:
Money Market Portfolio (Money Market and Money Market #2 Subaccounts)............................. 60,077 $ 60,077
Total Return Portfolio............................................................................ 254,906 552,028
High Yield Portfolio.............................................................................. 202,799 243,005
Growth Portfolio.................................................................................. 126,496 318,069
Government Securities Portfolio................................................................... 71,762 85,755
International Portfolio........................................................................... 98,119 119,078
Small Cap Growth Portfolio........................................................................ 26,283 29,778
JANUS ASPEN SERIES FUND:
Short-Term Bond Portfolio......................................................................... 15 153
Growth Portfolio.................................................................................. 185 2,475
Aggressive Growth Portfolio....................................................................... 133 2,159
Worldwide Growth Portfolio........................................................................ 100 1,473
Balanced Portfolio................................................................................ 136 1,716
LEXINGTON FUNDS:
Natural Resources Portfolio....................................................................... 66 728
Emerging Markets Portfolio........................................................................ 84 779
----------
TOTAL INVESTMENTS......................................................................... $1,417,273
==========
</TABLE>
The underlying investments and significant industry concentrations of the Fund's
portfolios are summarized below.
KEMPER INVESTORS FUND
MONEY MARKET PORTFOLIO: This Portfolio invests primarily in short-term
obligations of major banks and corporations. The Money Market Subaccount
represents the ADVANTAGE III Money Market Subaccount and the PASSPORT Money
Market Subaccount #1. Money Market Subaccount #2 represents funds allocated by
the owner of a contract to the dollar cost averaging program. Under the dollar
cost averaging program, an owner may predesignate a portion of the Subaccount
value to be automatically transferred on a monthly basis to one or more of the
other Subaccounts. This option is only available to PASSPORT individual and
group variable and market value adjusted deferred annuity contracts. At December
31, 1995, no industry exceeded 20% of the Portfolio's assets.
TOTAL RETURN PORTFOLIO: This Portfolio's investments will normally consist of
fixed-income and equity securities. Fixed-income securities will include bonds
and other debt securities and preferred stocks. Equity investments normally will
consist of common stocks and securities convertible into or exchangeable for
common stocks, however, the Portfolio may also make private placement
investments (which are normally restricted securities). At December 31, 1995,
the Portfolio had 21.9% of its assets invested in U.S. Government Obligations.
No other industry exceeded 20% of the Portfolio's assets.
HIGH YIELD PORTFOLIO: This Portfolio invests in fixed-income securities, a
substantial portion of which are high yielding fixed-income securities. These
securities ordinarily will be in the lower rating categories of recognized
rating agencies or will be non-rated, and generally will involve more risk than
securities in the higher rating categories. At December 31, 1995, the Portfolio
had 21.4% of its assets invested in the broadcasting, cable systems and
publishing industry. No other industry exceeded 20% of the Portfolio's assets.
GROWTH PORTFOLIO (FORMERLY "EQUITY"): This Portfolio's investments normally will
consist of common stocks and securities convertible into or exchangeable for
common stocks, however, it may also make private placement investments (which
are normally restricted securities). At December 31, 1995, no industry exceeded
20% of the Portfolio's assets.
B-23
<PAGE> 64
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(2) SUMMARY OF INVESTMENTS (CONTINUED)
GOVERNMENT SECURITIES PORTFOLIO: This Portfolio invests primarily in U.S.
Government securities. The Portfolio will also invest in fixed-income securities
other than U.S. Government securities and will engage in options and financial
futures transactions. At December 31, 1995, the Portfolio had 84.2% of its
assets invested in U.S. Government obligations. No other industry exceeded 20%
of the Portfolio's assets.
INTERNATIONAL PORTFOLIO: This Portfolio's investments will normally consist of
equity securities of non-United States issuers, however, it may also invest in
convertible and debt securities of non-United States issuers and foreign
currencies. At December 31, 1995, the Portfolio had 23.5% of its assets invested
in Japan. No other industry or country exceeded 20% of the Portfolio's assets.
SMALL CAP GROWTH PORTFOLIO (FORMERLY "SMALL CAPITALIZATION EQUITY"): This
Portfolio's investments will consist primarily of common stocks and securities
convertible into or exchangeable for common stocks and to a limited degree in
preferred stocks and debt securities. At least 65% of the Portfolio's total
assets will be invested in equity securities of companies having a market
capitalization of $1 billion or less at the time of initial investment. At
December 31, 1995 no industry exceeded 20% of the Portfolio's assets.
JANUS ASPEN SERIES
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. At
December 31, 1995, 45.8% of the Portfolio's assets were invested in U.S.
Government Obligations. No other industry exceeded 20% of the Portfolio's
assets.
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. At December 31, 1995, no industry exceeded 20% of the
Portfolio's assets.
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. At December 31, 1995, no
industry exceeded 20% of the Portfolio's assets.
WORLDWIDE GROWTH PORTFOLIO: This Portfolio seeks long-term growth of capital by
investing primarily in common stocks of foreign and domestic companies. At
December 31, 1995, no industry exceeded 20% of the Portfolio's assets.
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. At December 31, 1995, 21.0% of the Portfolio's assets were invested
in U.S. Government Obligations. No other industry exceeded 20% of the
Portfolio's assets.
LEXINGTON FUNDS
LEXINGTON NATURAL RESOURCES PORTFOLIO: This Portfolio 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. At December 31, 1995, no industry exceeded
20% of the Portfolio's assets.
LEXINGTON EMERGING MARKETS PORTFOLIO: This Portfolio 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. At December
31, 1995, no industry or country exceeded 20% of the Portfolio's assets.
B-24
<PAGE> 65
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(3) TRANSACTIONS WITH AFFILIATES
KILICO assumes mortality risks associated with the annuity contracts and incurs
all expenses involved in administering the contracts. In return, KILICO assesses
that portion of each Subaccount representing assets under the ADVANTAGE III
flexible payment contracts with a daily charge for mortality and expense risk
and administrative costs which amounts to an aggregate of one percent (1.00%)
per annum. KILICO also assesses that portion of each Subaccount representing
assets under the ADVANTAGE III periodic payment contracts with a daily asset
charge for mortality and expense risk and administrative costs which amounts to
an aggregate of one and three-tenths percent (1.30%) per annum. KILICO assesses
that portion of each Subaccount representing assets under PASSPORT individual
and group variable and market value adjusted deferred annuity contracts with a
daily asset charge for mortality and expense risk and administrative costs which
amounts to an aggregate of one and one-quarter percent (1.25%) per annum. The
PASSPORT DCA Money Market Subaccount #2, available for participation in the
dollar cost averaging program, has no daily asset charge deduction.
KILICO also assesses against each ADVANTAGE III contract participating in one or
more of the Subaccounts at any time during the year a records maintenance
charge. For contracts purchased prior to June 1, 1993, the charge is $25 and is
assessed on December 31st of each calendar year. For contracts purchased June 1,
1993 and subsequent, the charge is $36 and is assessed ratably every quarter of
each calendar year, except in those states which have yet to approve these
contract changes. The charge is assessed whether or not any purchase payments
have been made during the year. KILICO also assesses against each PASSPORT
contract participating in one or more of the Subaccounts a records maintenance
charge of $30 at the end of each contract year.
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, 1995, no such payment was made.
Proceeds payable on the redemption of units are reduced by the amount of any
applicable contingent deferred sales charge due to KILICO. During the year ended
December 31, 1995, KILICO received contingent deferred sales charges of
$2,474,658.
Zurich Kemper Investments, Inc. ("ZKI") (formerly named Kemper Financial
Services, Inc.), an affiliated company, is the investment manager of the
Portfolios of the Fund which serve as the underlying investments of the Separate
Accounts. In connection with the acquisition of Kemper Corporation on January 4,
1996, Zurich also acquired 100% of ZKI.
Janus Capital Corporation is the investment manager of the Janus Aspen Series
Fund Portfolios and Lexington Management Corporation is the investment manager
for the Lexington Fund Portfolios.
(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-25
<PAGE> 66
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Contract owners' equity at December 31, 1995, is as follows (in thousands,
except unit value; differences are due to rounding):
<TABLE>
<CAPTION>
CONTRACT
NUMBER UNIT OWNERS'
OF UNITS VALUE EQUITY
-------- ------- ----------
<S> <C> <C> <C>
ADVANTAGE III SUBACCOUNT
KEMPER INVESTORS FUND
MONEY MARKET
Flexible Payment, Qualified........................... 629 $ 2.208 $ 1,389
Flexible Payment, Nonqualified........................ 5,567 2.208 12,292
Periodic Payment, Qualified........................... 10,998 2.120 23,316
Periodic Payment, Nonqualified........................ 5,193 2.120 11,010
----------
48,007
----------
TOTAL RETURN
Flexible Payment, Qualified........................... 1,083 4.735 5,128
Flexible Payment, Nonqualified........................ 5,628 4.384 24,673
Periodic Payment, Qualified........................... 101,033 4.546 459,296
Periodic Payment, Nonqualified........................ 20,394 4.236 86,388
----------
575,485
----------
HIGH YIELD
Flexible Payment, Qualified........................... 508 5.082 2,582
Flexible Payment, Nonqualified........................ 2,866 4.865 13,943
Periodic Payment, Qualified........................... 25,429 4.879 124,068
Periodic Payment, Nonqualified........................ 12,101 4.753 57,518
----------
198,111
----------
GROWTH
Flexible Payment, Qualified........................... 286 4.404 1,260
Flexible Payment, Nonqualified........................ 1,363 4.389 5,982
Periodic Payment, Qualified........................... 60,275 4.250 256,169
Periodic Payment, Nonqualified........................ 16,415 4.244 69,664
----------
333,075
----------
GOVERNMENT SECURITIES
Flexible Payment, Qualified........................... 273 1.575 430
Flexible Payment, Nonqualified........................ 1,408 1.575 2,218
Periodic Payment, Qualified........................... 21,866 1.547 33,827
Periodic Payment, Nonqualified........................ 18,000 1.547 27,846
----------
64,321
----------
INTERNATIONAL
Flexible Payment, Qualified........................... 612 1.379 844
Flexible Payment, Nonqualified........................ 1,257 1.379 1,733
Periodic Payment, Qualified........................... 63,561 1.363 86,634
Periodic Payment, Nonqualified........................ 12,091 1.363 16,480
----------
105,691
----------
SMALL CAP GROWTH
Flexible Payment, Qualified........................... 81 1.330 108
Flexible Payment, Nonqualified........................ 874 1.330 1,162
Periodic Payment, Qualified........................... 17,405 1.323 23,027
Periodic Payment, Nonqualified........................ 3,024 1.323 4,001
----------
28,298
----------
</TABLE>
B-26
<PAGE> 67
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
CONTRACT
NUMBER UNIT OWNERS'
OF UNITS VALUE EQUITY
-------- ------- ----------
<S> <C> <C> <C>
JANUS ASPEN SERIES FUND
SHORT-TERM BOND
Flexible Payment, Qualified........................... -- $ -- $ --
Flexible Payment, Nonqualified........................ 2 10.201 21
Periodic Payment, Qualified........................... 13 10.192 136
Periodic Payment, Nonqualified........................ -- -- --
----------
157
----------
GROWTH
Flexible Payment, Qualified........................... -- -- --
Flexible Payment, Nonqualified........................ 7 13.662 98
Periodic Payment, Qualified........................... 168 13.650 2,299
Periodic Payment, Nonqualified........................ 14 13.650 191
----------
2,588
----------
AGGRESSIVE GROWTH
Flexible Payment, Qualified........................... -- -- --
Flexible Payment, Nonqualified........................ -- -- --
Periodic Payment, Qualified........................... 122 17.117 2,088
Periodic Payment, Nonqualified........................ 10 17.117 180
----------
2,268
----------
WORLDWIDE GROWTH
Flexible Payment, Qualified........................... -- -- --
Flexible Payment, Nonqualified........................ 4 15.315 57
Periodic Payment, Qualified........................... 94 15.302 1,446
Periodic Payment, Nonqualified........................ 7 15.302 108
----------
1,611
----------
BALANCED
Flexible Payment, Qualified........................... -- -- --
Flexible Payment, Nonqualified........................ 10 13.092 135
Periodic Payment, Qualified........................... 131 13.081 1,725
Periodic Payment, Nonqualified........................ 3 13.081 37
----------
1,897
----------
LEXINGTON FUNDS
NATURAL RESOURCES
Flexible Payment, Qualified........................... -- -- --
Flexible Payment, Nonqualified........................ -- -- --
Periodic Payment, Qualified........................... 58 11.305 659
Periodic Payment, Nonqualified........................ 8 11.305 89
----------
748
----------
EMERGING MARKETS
Flexible Payment, Qualified........................... -- -- --
Flexible Payment, Nonqualified........................ 2 9.445 18
Periodic Payment, Qualified........................... 80 9.436 752
Periodic Payment, Nonqualified........................ 3 9.436 26
----------
796
----------
TOTAL ADVANTAGE III CONTRACT OWNERS' EQUITY............. $1,363,053
----------
</TABLE>
B-27
<PAGE> 68
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
CONTRACT
NUMBER UNIT OWNERS'
OF UNITS VALUE EQUITY
-------- ------- ----------
<S> <C> <C> <C>
PASSPORT SUBACCOUNT
MONEY MARKET #1
Qualified............................................. 2,873 $ 1.112 $ 3,193
Nonqualified.......................................... 5,967 1.112 6,634
----------
Total.............................................. 9,827
----------
MONEY MARKET #2
Qualified............................................. 455 1.168 532
Nonqualified.......................................... 1,526 1.168 1,783
----------
Total.............................................. 2,315
----------
TOTAL RETURN
Qualified............................................. 17,019 1.234 21,002
Nonqualified.......................................... 48,768 1.234 60,180
----------
Total.............................................. 81,182
----------
HIGH YIELD
Qualified............................................. 9,285 1.515 14,076
Nonqualified.......................................... 28,256 1.515 42,847
----------
Total.............................................. 56,923
----------
GROWTH
Qualified............................................. 16,145 1.436 23,185
Nonqualified.......................................... 38,980 1.436 55,957
----------
Total.............................................. 79,142
----------
GOVERNMENT SECURITIES
Qualified............................................. 5,105 1.247 6,366
Nonqualified.......................................... 16,284 1.247 20,306
----------
Total.............................................. 26,672
----------
INTERNATIONAL
Qualified............................................. 6,194 1.365 8,459
Nonqualified.......................................... 14,790 1.365 20,193
----------
Total.............................................. 28,652
----------
SMALL CAP GROWTH
Qualified............................................. 1,637 1.324 2,168
Nonqualified.......................................... 3,679 1.324 4,871
----------
Total.............................................. 7,039
----------
TOTAL PASSPORT CONTRACT OWNERS' EQUITY.................. 291,752
----------
TOTAL CONTRACT OWNERS' EQUITY........................... $1,654,805
==========
</TABLE>
B-28
<PAGE> 69
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
THE BOARD OF DIRECTORS
KEMPER INVESTORS LIFE INSURANCE COMPANY:
We have audited the consolidated balance sheet of Kemper Investors Life
Insurance Company and subsidiaries as of December 31, 1995 and 1994, and the
related consolidated statements of operations, stockholder's equity and cash
flows for each of the years in the three-year period ended December 31, 1995.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on the consolidated
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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Kemper Investors
Life Insurance Company and subsidiaries at December 31, 1995 and 1994, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1995, in conformity with generally accepted
accounting principles.
As discussed in the notes to the consolidated financial statements, effective
January 1, 1994, the Company changed its method of accounting for investment
securities to adopt the provisions of the Financial Accounting Standards Board's
Statement of Financial Accounting Standards ("SFAS") 115, ACCOUNTING FOR CERTAIN
INVESTMENTS IN DEBT AND EQUITY SECURITIES. Also, as discussed in the notes,
effective January 1, 1993, the Company changed its method of accounting for
impairment of loans receivable to adopt the provisions of SFAS 114, ACCOUNTING
BY CREDITORS FOR IMPAIRMENT OF A LOAN, and changed its method of accounting for
income taxes to adopt the provisions of SFAS 109, ACCOUNTING FOR INCOME TAXES.
KPMG PEAT MARWICK LLP
Chicago, Illinois
March 15, 1996
B-29
<PAGE> 70
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in thousands, except share data)
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------
1995 1994
---------- ----------
<S> <C> <C>
ASSETS
Fixed maturities, available for sale, at fair value (cost: 1995,
$3,643,985; 1994, $3,707,356)..................................... $3,752,325 $3,463,732
Short-term investments.............................................. 372,515 204,164
Joint venture mortgage loans........................................ 120,359 351,359
Third-party mortgage loans.......................................... 144,450 318,682
Other real estate-related investments............................... 34,780 237,242
Policy loans........................................................ 289,390 277,743
Other invested assets............................................... 29,809 40,527
---------- ----------
Total investments......................................... 4,743,628 4,893,449
Cash................................................................ 25,811 23,189
Accrued investment income........................................... 104,402 125,543
Deferred insurance acquisition costs................................ 318,636 310,465
Federal income tax receivable....................................... 112,646 25,656
Reinsurance recoverable............................................. 502,836 642,801
Other assets and receivables........................................ 12,617 7,993
Assets held in separate accounts.................................... 1,761,110 1,507,984
---------- ----------
Total assets.............................................. $7,581,686 $7,537,080
========== ==========
LIABILITIES
Future policy benefits.............................................. $4,573,212 $4,843,690
Ceded future policy benefits........................................ 502,836 642,801
Other accounts payable and liabilities.............................. 25,943 67,261
Deferred income taxes............................................... 112,709 41,364
Liabilities related to separate accounts............................ 1,761,110 1,507,984
---------- ----------
Total liabilities......................................... 6,975,810 7,103,100
---------- ----------
Commitments and contingent liabilities
STOCKHOLDER'S EQUITY
Capital stock--$10 par value,
authorized 300,000 shares; outstanding 250,000 shares............. 2,500 2,500
Additional paid-in capital.......................................... 491,994 491,994
Unrealized gain (loss) on investments............................... 68,502 (236,443)
Retained earnings................................................... 42,880 175,929
---------- ----------
Total stockholder's equity................................ 605,876 433,980
---------- ----------
Total liabilities and stockholder's equity................ $7,581,686 $7,537,080
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
B-30
<PAGE> 71
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
REVENUE
Net investment income...................................... $ 348,448 $ 353,084 $ 339,274
Realized investment losses................................. (318,700) (54,557) (27,584)
Fees and other income...................................... 38,337 31,950 25,687
--------- -------- --------
Total revenue.................................... 68,085 330,477 337,377
--------- -------- --------
BENEFITS AND EXPENSES
Benefits and interest credited to policyholders............ 245,615 248,494 275,689
Commissions, taxes, licenses and fees...................... 31,793 26,910 33,875
Operating expenses......................................... 20,837 25,324 24,383
Deferral of insurance acquisition costs.................... (36,870) (31,852) (31,781)
Amortization of insurance acquisition costs................ 14,423 20,809 12,376
--------- -------- --------
Total benefits and expenses...................... 275,798 289,685 314,542
--------- -------- --------
Income (loss) before income tax expense (benefit) and
cumulative effect of change in accounting principle...... (207,713) 40,792 22,835
Income tax expense (benefit)............................... (74,664) 14,431 11,142
--------- -------- --------
Income (loss) before cumulative effect of change
in accounting principle........................ (133,049) 26,361 11,693
Cumulative effect of change in accounting principle........ -- -- 2,350
--------- -------- --------
Net income (loss)................................ $(133,049) $ 26,361 $ 14,043
========= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
B-31
<PAGE> 72
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
(in thousands)
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
CAPITAL STOCK, beginning and end of year................ $ 2,500 $ 2,500 $ 2,500
--------- --------- --------
ADDITIONAL PAID-IN CAPITAL, beginning of year........... 491,994 409,423 310,237
Capital contributions from parent....................... -- 82,500 90,000
Transfer of limited partnership interest to parent...... -- 71 9,186
--------- --------- --------
End of year................................... 491,994 491,994 409,423
--------- --------- --------
UNREALIZED GAIN (LOSS) ON INVESTMENTS, beginning of
year.................................................. (236,443) 93,096 39,872
Unrealized gain (loss) on revaluation of investments,
net................................................... 304,945 (329,539) 53,224
--------- --------- --------
End of year................................... 68,502 (236,443) 93,096
--------- --------- --------
RETAINED EARNINGS, beginning of year.................... 175,929 149,568 136,055
Net income (loss)....................................... (133,049) 26,361 14,043
Dividend of limited partnership interest to parent...... -- -- (530)
--------- --------- --------
End of year................................... 42,880 175,929 149,568
--------- --------- --------
Total stockholder's equity.................... $ 605,876 $ 433,980 $ 654,587
========= ========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
B-32
<PAGE> 73
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------------
1995 1994 1993
--------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)................................... $(133,049) $ 26,361 $ 14,043
Reconcilement of net income (loss) to net cash
provided:
Realized investment losses....................... 318,700 54,557 27,584
Interest credited and other charges.............. 237,984 242,591 269,766
Deferred insurance acquisition costs............. (22,447) (11,043) (19,405)
Amortization of discount and premium on
investments.................................... 4,586 (1,383) (203)
Deferred income taxes............................ 38,423 20,809 14,596
Federal income tax receivable.................... (86,990) 809 (10,110)
Other, net....................................... (29,905) (14,161) 40,258
--------- ----------- -----------
Net cash provided from operating
activities................................ 327,302 318,540 336,529
--------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash from investments sold or matured:
Fixed maturities held to maturity................ 320,143 144,717 187,949
Fixed maturities sold prior to maturity.......... 297,637 910,913 1,652,119
Mortgage loans, policy loans and other invested
assets......................................... 450,573 536,668 881,505
Cost of investments purchased or loans originated:
Fixed maturities................................. (549,867) (1,447,393) (2,322,085)
Mortgage loans, policy loans and other invested
assets......................................... (131,966) (281,059) (443,445)
Short-term investments, net......................... (168,351) 198,299 (214,999)
Net change in receivable and payable for securities
transactions..................................... (1,397) (16,553) 39,078
Net reductions in other assets...................... 1,996 2,678 8,062
--------- ----------- -----------
Net cash provided by (used in) investing
activities................................ 218,768 48,270 (211,816)
--------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Policyholder account balances:
Deposits......................................... 247,778 215,034 246,219
Withdrawals...................................... (755,917) (652,513) (516,340)
Capital contributions from parent................... -- 82,500 90,000
Other............................................... (35,309) 3,871 16,776
--------- ----------- -----------
Net cash used in financing activities....... (543,448) (351,108) (163,345)
--------- ----------- -----------
Net increase (decrease) in cash........ 2,622 15,702 (38,632)
CASH, beginning of period............................. 23,189 7,487 46,119
--------- ----------- -----------
CASH, end of period................................... $ 25,811 $ 23,189 $ 7,487
========= =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
B-33
<PAGE> 74
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Kemper Investors Life Insurance Company and subsidiaries (the "Company") issues
fixed and variable annuity products and interest-sensitive life insurance
products marketed primarily through a network of financial institutions,
nonaffiliated and affiliated securities brokerage firms, insurance agents and
financial planners. The Company is licensed in the District of Columbia and all
states except New York. The Company is a wholly-owned subsidiary of Kemper
Corporation ("Kemper"). On January 4, 1996, an investors group comprised of
Zurich Insurance Company ("Zurich"), Insurance Partners, L.P. ("IP") and
Insurance Partners Offshore (Bermuda), L.P. (together with IP, "Insurance
Partners") acquired all of the issued and outstanding common stock of Kemper. As
a result of the change in control, Zurich and Insurance Partners indirectly and
directly own 80 percent and 20 percent, respectively, of Kemper and therefore
the Company. The consolidated financial statements of the Company as of December
31, 1995 have been prepared on a historical cost basis and have not been
adjusted to reflect the fair values of the Company's assets and liabilities as
of the date of the acquisition by Zurich and Insurance Partners.
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles. The statements include the accounts of
the Company on a consolidated basis. All significant intercompany balances and
transactions have been eliminated.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
could affect the reported amounts of assets and liabilities as well as the
disclosure of contingent assets or liabilities at the date of the financial
statements. As a result, actual results reported as revenue and expenses could
differ from the estimates reported in the accompanying financial statements. As
further discussed in the accompanying notes to the consolidated financial
statements, significant estimates and assumptions affect deferred insurance
acquisition costs, provisions for real estate-related losses and reserves, other
than temporary declines in values for fixed maturities, the valuation allowance
for deferred income taxes and the calculation of fair value disclosures for
certain financial instruments.
LIFE INSURANCE REVENUE AND EXPENSES
Revenue for annuities and interest-sensitive life insurance products consists of
investment income, and policy charges such as mortality, expense and surrender
charges. Expenses consist of benefits and interest credited to contracts, policy
maintenance costs and amortization of deferred insurance acquisition costs. Also
reflected in fees and other income is a ceding commission experience adjustment
received in 1995 as a result of certain reinsurance transactions entered into by
the Company during 1992. (See the note captioned "Reinsurance".)
DEFERRED INSURANCE ACQUISITION COSTS
The costs of acquiring new business, principally commission expense and certain
policy issuance and underwriting expenses, have been deferred to the extent they
are recoverable from estimated future gross profits on the related contracts and
policies. The deferred insurance acquisition costs for annuities, separate
account business and interest-sensitive life insurance products are being
amortized over the estimated contract life in relation to the present value of
estimated gross profits. Beginning in 1994, deferred insurance acquisition costs
reflect the estimated impact of unrealized gains or losses on fixed maturities
held as available for sale in the investment portfolio, through a credit or
charge to stockholder's equity, net of income tax.
FUTURE POLICY BENEFITS
Liabilities for future policy benefits related to annuities and
interest-sensitive life contracts reflect net premiums received plus interest
credited during the contract accumulation period and the present value of future
payments for contracts that have annuitized. Current interest rates credited
during the contract accumulation period range from 4 percent to 8.35 percent.
Future minimum guaranteed interest rates vary from 4 percent to 8.35 percent for
periods ranging from a portion of 1996 up to a portion of 1998 and are generally
3 percent to 4.5 percent
B-34
<PAGE> 75
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
thereafter. For contracts that have annuitized, interest rates used in
determining the present value of future payments range principally from 3
percent to 11.25 percent.
INVESTED ASSETS AND RELATED INCOME
Investments in fixed maturities are carried at fair value. Short-term
investments are carried at cost, which approximates fair value. (See the note
captioned "Fair Value of Financial Instruments".)
Mortgage loans are carried at their unpaid balance net of unamortized discount
and any applicable reserves or write-downs. Other real estate-related
investments net of any applicable reserve and write-downs include certain bonds
issued by real estate finance or development companies; notes receivable from
real estate ventures; investments in real estate ventures carried at cost,
adjusted for the equity in the operating income or loss of such ventures; and
real estate owned carried primarily at fair value.
Real estate reserves are established when declines in collateral values,
estimated in light of current economic conditions and calculated in conformity
with Statement of Financial Accounting Standards ("SFAS") 114, ACCOUNTING BY
CREDITORS FOR IMPAIRMENT OF A LOAN, indicate a likelihood of loss. Prior to
year-end 1995, the Company evaluated its real estate-related assets (including
accrued interest) by estimating the probabilities of loss utilizing various
projections that included several factors relating to the borrower, property,
term of the loan, tenant composition, rental rates, other supply and demand
factors and overall economic conditions. Generally, at that time, the reserve
was based upon the excess of the loan amount over the estimated future cash
flows from the loan discounted at the loan's contractual rate of interest taking
into consideration the effects of recourse to, and subordination of loans held
by, affiliated non-life realty companies. At year-end 1995, reflecting the
Company's change in strategy with respect to its real estate portfolio, and the
disposition thereof, real estate-related investments were valued using an
estimate of the investments observable market price, net of estimated costs to
sell.
SFAS 114 defines "impaired loans" as loans in which it is probable that a
creditor will be unable to collect all amounts due according to the contractual
terms of the loan agreement. In the fourth quarter of 1994, the Company adopted
SFAS 118, ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN--INCOME RECOGNITION
AND DISCLOSURES. SFAS 118 amends SFAS 114, providing clarification of income
recognition issues and requiring additional disclosures relating to impaired
loans. The adoption of SFAS 118 had no effect on the Company's financial
position or results of operations at or for the year ended December 31, 1994.
Realized gains or losses on sales of investments, determined on the basis of
identifiable cost on the disposition of the respective investment, recognition
of other-than-temporary declines in value and changes in real estate-related
reserves and write-downs are included in revenue. Unrealized gains or losses on
revaluation of investments are credited or charged to stockholder's equity. Such
unrealized gains are recorded net of deferred income tax expense, while
unrealized losses are not tax benefitted.
The amortized cost of fixed maturities is adjusted for amortization of premiums
and accretion of discounts to maturity, or in the case of mortgage-backed
securities, over the estimated life of the security. Such amortization is
included in net interest income. Amortization of the discount or premium from
mortgage-backed securities is recognized using a level effective yield method
which considers the estimated timing and amount of prepayments of the underlying
mortgage loans and is adjusted to reflect differences which arise between the
prepayments originally anticipated and the actual prepayments received and
currently anticipated. To the extent that the estimated lives of mortgage-backed
securities change as a result of changes in prepayment rates, the adjustment is
also included in net investment income. The Company does not accrue interest
income on fixed maturities deemed to be impaired on an other-than-temporary
basis, or on mortgage loans, real estate-related bonds and other real estate
loans where the likelihood of collection of interest is doubtful.
Policy loans are carried at their unpaid balance. Other invested assets consist
primarily of venture capital investments and a leveraged lease and are carried
at cost. Other invested assets also included equity securities which are carried
at fair value.
B-35
<PAGE> 76
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SEPARATE ACCOUNT BUSINESS
The assets and liabilities of the separate accounts represent segregated funds
administered and invested by the Company for purposes of funding variable
annuity and variable life insurance contracts for the exclusive benefit of
variable annuity and variable life insurance contract holders. The Company
receives fees from the separate account and retains varying amounts of
withdrawal charges to cover expenses in the event of early withdrawals by
contract holders. The assets and liabilities of the separate accounts are
carried at fair value.
INCOME TAX
The operations of the Company have been included in the consolidated Federal
income tax return of Kemper. Income taxes receivable or payable have been
determined on a separate return basis, and payments have been received from or
remitted to Kemper pursuant to a tax allocation arrangement between Kemper and
its subsidiaries, including the Company. The Company generally had received a
tax benefit for losses to the extent such losses can be utilized in Kemper's
Federal consolidated tax return.
Under SFAS 109, ACCOUNTING FOR INCOME TAXES, deferred taxes are provided on the
temporary differences between the tax and financial statement basis of assets
and liabilities.
(2) CASH FLOW INFORMATION
The Company defines cash as cash in banks and money market accounts. Federal
income tax paid to (refunded by) Kemper under the tax allocation arrangement for
the years ended December 31, 1995, 1994 and 1993 amounted to $(25.2 million),
$(10.7 million) and $4.2 million, respectively.
Not reflected in the statement of cash flows are rollovers of mortgage loans,
other loans and investments totaling approximately $57.0 million and $146.0
million in 1994 and 1993, respectively.
The Company also transferred its equity ownership interests in two limited
partnerships during 1994 and 1993. (See the note captioned "Related-Party
Transactions".)
(3) INVESTED ASSETS AND RELATED INCOME
The Company is carrying its fixed maturity investment portfolio at estimated
fair value as fixed maturities are considered available for sale, depending upon
certain economic and business conditions. The carrying value
B-36
<PAGE> 77
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) INVESTED ASSETS AND RELATED INCOME (CONTINUED)
(estimated fair value) of fixed maturities compared with amortized cost,
adjusted for other-than-temporary declines in value, at December 31, 1995 and
1994, were as follows:
<TABLE>
<CAPTION>
ESTIMATED UNREALIZED
CARRYING AMORTIZED ---------------------
(in thousands) VALUE COST GAINS LOSSES
---------- ---------- -------- ---------
<S> <C> <C> <C> <C>
1995
U.S. treasury securities and obligations of U.S.
government agencies and authorities.............. $ 215,637 $ 212,494 $ 3,163 $ (20)
Obligations of states and political subdivisions,
special revenue and nonguaranteed................ 24,241 22,469 1,772 --
Debt securities issued by foreign governments...... 139,361 134,715 5,120 (474)
Corporate securities............................... 1,698,270 1,638,178 65,075 (4,983)
Mortgage-backed securities......................... 1,674,816 1,636,129 40,278 (1,591)
---------- ---------- -------- ---------
Total fixed maturities...................... $3,752,325 $3,643,985 $115,408 $ (7,068)
========== ========== ======== =========
1994
U.S. treasury securities and obligations of U.S.
government agencies and authorities.............. $ 10,682 $ 10,998 $ 24 $ (340)
Obligations of states and political subdivisions,
special revenue and nonguaranteed................ 25,021 25,691 -- (670)
Debt securities issued by foreign governments...... 109,624 120,950 50 (11,376)
Corporate securities............................... 1,679,428 1,805,933 7,027 (133,532)
Mortgage-backed securities......................... 1,638,977 1,743,784 -- (104,807)
---------- ---------- -------- ---------
Total fixed maturities...................... $3,463,732 $3,707,356 $ 7,101 $(250,725)
========== ========== ======== =========
</TABLE>
Upon default or indication of potential default by an issuer of fixed maturity
securities, the Company-owned issue(s) of such issuer would be placed on
nonaccrual status and, since declines in fair value would no longer be
considered by the Company to be temporary, would be analyzed for possible
write-down. Any such issue would be written down to its net realizable value
during the fiscal quarter in which the impairment was determined to have become
other than temporary. Thereafter, each issue on nonaccrual status is regularly
reviewed, and additional write-downs may be taken in light of later
developments.
The Company's computation of net realizable value involves judgments and
estimates, so such value should be used with care. Such value determination
considers such factors as the existence and value of any collateral security;
the capital structure of the issuer; the level of actual and expected market
interest rates; where the issue ranks in comparison with other debt of the
issuer; the economic and competitive environment of the issuer and its business;
the Company's view on the likelihood of success of any proposed issuer
restructuring plan; and the timing, type and amount of any restructured
securities that the Company anticipates it will receive.
The Company's $300 million real estate portfolio consists of joint venture and
third-party mortgage loans and other real estate-related investments.
At December 31, 1995 and 1994, total impaired loans amounted to $21.9 million
and $75.9 million, respectively. Impaired loans with reserves were $21.9 million
and $67.6 million with corresponding reserves of $6.5 million and $18.8 million
at December 31, 1995 and 1994, respectively. The Company had an average balance
of $124.2 million and $93.9 million in impaired loans for 1995 and 1994,
respectively. Cash payments received on impaired loans are generally applied to
reduce the outstanding loan balance. At December 31, 1995 and 1994,
B-37
<PAGE> 78
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) INVESTED ASSETS AND RELATED INCOME (CONTINUED)
loans on nonaccrual status amounted to $3.5 million and $274.6 million,
respectively. Impaired loans are generally included in the Company's nonaccrual
loans.
At December 31, 1995, securities carried at approximately $5.9 million were on
deposit with governmental agencies as required by law.
Proceeds from sales of investments in fixed maturities prior to maturity were
$297.6 million, $910.9 million and $1.7 billion during 1995, 1994 and 1993,
respectively. Gross gains of $21.2 million, $6.0 million and $80.4 million and
gross losses of $4.7 million, $55.9 million and $37.8 million were realized on
sales of fixed maturities in 1995, 1994 and 1993, respectively.
The following table sets forth the maturity aging schedule of fixed maturity
investments at December 31, 1995:
<TABLE>
<CAPTION>
CARRYING AMORTIZED
(in thousands) VALUE COST VALUE
---------- ----------
<S> <C> <C>
One year or less........................................................ $ 25,617 $ 25,202
Over one year through five.............................................. 576,138 562,374
Over five years through ten............................................. 1,248,675 1,200,157
Over ten years.......................................................... 227,079 220,123
Securities not due at a single maturity date(1)......................... 1,674,816 1,636,129
---------- ----------
Total fixed maturities........................................... $3,752,325 $3,643,985
========== ==========
</TABLE>
- ---------------
(1) Weighted average maturity of 5.4 years.
The sources of net investment income were as follows:
<TABLE>
<CAPTION>
(in thousands) 1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Interest and dividends on fixed maturities.................. $269,934 $274,231 $221,144
Dividends on equity securities.............................. 681 1,751 3,084
Income from short-term investments.......................... 13,159 10,668 12,155
Income from mortgage loans.................................. 40,494 41,713 82,028
Income from policy loans.................................... 19,658 18,517 16,826
Income from other real estate-related investments........... 15,565 21,239 11,755
Income from other loans and investments..................... 1,555 3,533 8,008
-------- -------- --------
Total investment income.............................. 361,046 371,652 355,000
Investment expense.......................................... (12,598) (18,568) (15,726)
-------- -------- --------
Net investment income................................ $348,448 $353,084 $339,274
======== ======== ========
</TABLE>
Realized gains (losses) for the years ended December 31, 1995, 1994 and 1993,
were as follows:
<TABLE>
<CAPTION>
REALIZED GAINS (LOSSES)
-------------------------------------------
(in thousands) 1995 1994 1993
--------- -------- --------
<S> <C> <C> <C>
Real estate-related................................... $(325,611) $(41,720) $(79,652)
Fixed maturities...................................... 9,336 (49,857) 36,234
Equity securities..................................... (346) 28,243 17,086
Other................................................. (2,079) 8,777 (1,252)
--------- -------- --------
Realized investment losses before income tax
benefit.......................................... (318,700) (54,557) (27,584)
Income tax benefit.................................... (111,545) (19,095) (7,917)
--------- -------- --------
Net realized investment losses...................... $(207,155) $(35,462) $(19,667)
========= ======== ========
</TABLE>
B-38
<PAGE> 79
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) INVESTED ASSETS AND RELATED INCOME (CONTINUED)
Unrealized gains (losses) are computed below as follows: fixed maturities--the
difference between fair value and amortized cost, adjusted for
other-than-temporary declines in value; equity securities and other--the
difference between fair value and cost. The change in unrealized investment
gains (losses) by class of investment for the years ended December 31, 1995,
1994 and 1993 were as follows:
<TABLE>
<CAPTION>
CHANGE IN UNREALIZED GAINS (LOSSES)
------------------------------------------
(in thousands) 1995 1994 1993
-------- --------- -------
<S> <C> <C> <C>
Fixed maturities...................................... $351,964 $(351,646) $60,258
Equity securities..................................... 180 (32,710) 19,882
Adjustment to deferred insurance acquisition costs.... (14,277) 11,325 --
-------- --------- -------
Unrealized gain (loss) before income tax expense
(benefit)........................................ 337,867 (373,031) 80,140
Income tax expense (benefit).......................... 32,922 (43,492) 26,916
-------- --------- -------
Net unrealized gain (loss) on investments...... $304,945 $(329,539) $53,224
======== ========= =======
</TABLE>
(4) UNCONSOLIDATED INVESTEES
At December 31, 1995, the Company, along with other Kemper subsidiaries,
directly held partnership interests or options to acquire equity interests (or
has made loans with additional interest features) in a number of real estate
joint ventures. The Company's direct and indirect real estate joint venture
investments are accounted for utilizing the equity method, with the Company
recording its share of the operating results of the respective partnerships. The
Company, as an equity owner, has the ability to fund, and historically has
elected to fund, operating requirements of certain of the joint ventures.
Consolidation accounting methods are not utilized as the Company, in most
instances, does not own more than 50 percent in the aggregate, and in any event,
major decisions of the partnership must be made jointly by all partners.
As of December 31, 1995 and 1994, the Company's net equity investment in
unconsolidated investees amounted to $17.1 million and $45.4 million,
respectively. The Company's share of net losses related to such unconsolidated
investees amounted to $453 thousand and $6.3 million for the years ended
December 31, 1995 and 1994, respectively.
Also at December 31, 1995, the Company had joint venture-related loans totaling
$21.8 million before reserves to partnerships in which Lumbermens Mutual
Casualty Company, an affiliate until August 1993 ("Lumbermens"), and Fidelity
Life Association ("FLA"), an affiliated mutual insurance company, had equity
interests. These joint venture-related loans totaled $37.5 million before
reserves at December 31, 1994. (See the note captioned "Financial
Instruments--Off-Balance-Sheet Risk".)
(5) CONCENTRATION OF CREDIT RISK
The Company generally strives to maintain a diversified invested asset
portfolio; however, certain concentrations of credit risk exist in
mortgage-backed securities and real estate.
Approximately 45.7 percent of the Company's investment-grade fixed maturities at
December 31, 1995 were mortgage-backed securities, down from 49.2 percent at
December 31, 1994. These investments consist primarily of marketable mortgage
pass-through securities issued by the Government National Mortgage Association,
the Federal National Mortgage Association or the Federal Home Loan Mortgage
Corporation and other investment-grade securities collateralized by mortgage
pass-through securities issued by these entities. The Company has not made any
investments in interest-only or other similarly volatile tranches of
mortgage-backed securities. The Company's mortgage-backed investments are
generally of AAA credit quality, and the markets for these investments have been
and are expected to remain liquid. The Company plans to continue to reduce its
holding of such investments over time.
Future investment income from mortgage-backed securities may be affected by the
timing of principal payments and the yields on reinvestment alternatives
available at the time of such payments. Due to the fact that the Company's
investments in mortgage-backed securities were predominately made since 1992,
the current interest
B-39
<PAGE> 80
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) CONCENTRATION OF CREDIT RISK (CONTINUED)
rate environment is not expected to cause any material extension of the average
maturities of these investments. With the exception of many of the Company's
September 1994 purchases of such investments, most of these investments were
purchased by the Company at discounts. Prepayment activity on securities
purchased at a discount is not expected to result in any material losses to the
Company because prepayments would generally accelerate the reporting of the
discounts as investment income. Prepayment activity resulting from a decline in
interest rates on such securities purchased at a premium would accelerate the
amortization of the premiums which would result in reductions of investment
income related to such securities. At December 31, 1995, the Company had
unamortized discounts and premiums of $17.0 million and $11.0 million,
respectively, related to mortgage-backed securities. Given the credit quality,
liquidity and anticipated payment characteristics of 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>
<CAPTION>
GEOGRAPHIC DISTRIBUTION AS OF DECEMBER 31, 1995 DISTRIBUTION BY PROPERTY TYPE AS OF DECEMBER 31, 1995
<S> <C> <C> <C>
California................... 28.7% Hotel........................ 34.3%
Illinois..................... 24.4 Office....................... 30.2
Texas........................ 10.2 Land......................... 17.2
Oregon....................... 7.4 Residential.................. 4.8
Colorado..................... 6.5 Retail....................... 4.5
Hawaii....................... 6.2 Industrial................... 3.0
Washington................... 5.7 Other........................ 6.0
Florida...................... 4.8 -----
Ohio......................... 2.9 Total.............. 100.0%
Other(1)..................... 3.2 =====
-----
Total.............. 100.0%
=====
</TABLE>
- ---------------
(1) No other single location exceeded 2.0 percent.
Real estate markets have been depressed in recent periods in areas where most of
the Company's real estate portfolio is located. California real estate market
conditions have continued to be worse than in many other areas of the country.
Real estate markets in northern California and Illinois show some stabilization
and improvement.
Undeveloped land represented approximately 17.2 percent of the Company's real
estate portfolio at December 31, 1995. To maximize the value of certain land and
other projects, additional development has been proceeding or has been planned.
Such development of existing projects would continue to require funding, either
from the Company or third parties. In the present real estate markets,
third-party financing can require credit enhancing arrangements (e.g., standby
financing arrangements and loan commitments) from the Company. The values of
development projects are dependent on a number of factors, including Kemper's
and the Company's plans with respect thereto, obtaining necessary permits and
market demand for the permitted use of the property. The values of certain
development projects have been written down as of December 31, 1995, reflecting
changes in plans in connection with the Zurich-led acquisition of Kemper. There
can be no assurance that such permits will be obtained as planned or at all, nor
that such expenditures will occur as scheduled, nor that Kemper's and the
Company's plans with respect to such projects may not change substantially.
The majority of the Company's real estate loans are on properties or projects
where the Company, Kemper, or their affiliates have taken ownership positions in
joint ventures with a small number of partners. (See the note captioned
"Unconsolidated Investees".)
At December 31, 1995, loans to and investments in joint ventures in which
Patrick M. Nesbitt or his affiliates ("Nesbitt") have interests constituted
approximately $99.7 million, or 33.3 percent, of the Company's real estate
B-40
<PAGE> 81
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) CONCENTRATION OF CREDIT RISK (CONTINUED)
portfolio. The Nesbitt ventures primarily consist of eleven hotel properties. At
December 31, 1995, the Company did not have any Nesbitt-related
off-balance-sheet legal funding commitments outstanding.
At December 31, 1995, loans to and investments in a master limited partnership
(the "MLP") between subsidiaries of Kemper and subsidiaries of Lumbermens,
constituted approximately $66.0 million, or 22.0 percent, of the Company's real
estate portfolio. The Company's interest in the MLP is a less than one percent
limited partnership interest, and Kemper's interest is 75 percent at December
31, 1995. Prior to 1995, Kemper's interest was 50 percent. At December 31, 1995,
MLP-related commitments accounted for approximately $29.8 million of the
Company's off-balance-sheet legal commitments, of which the Company expects to
fund $17.0 million.
At December 31, 1995, the Company's loans to and investments in projects with
the Prime Group, Inc. or its affiliates totaled approximately $24.8 million, or
8.3 percent, of the Company's real estate portfolio. Prime Group-related
commitments accounted for $165.6 million of the off-balance-sheet legal
commitments at December 31, 1995, of which the Company expects to fund $15.0
million.
(6) INCOME TAXES
Income tax expense (benefit) was as follows for the years ended December 31,
1995, 1994 and 1993:
<TABLE>
<CAPTION>
(in thousands) 1995 1994 1993
--------- -------- --------
<S> <C> <C> <C>
Current.................................................... $(113,087) $ (6,898) $ (5,773)
Deferred................................................... 38,423 21,329 16,915
--------- ------- -------
Total............................................ $ (74,664) $ 14,431 $ 11,142
========= ======= =======
</TABLE>
Included in the current tax benefit is the recognition of a net operating loss
carryover at December 31, 1995 which will be utilized against taxable income on
Kemper's consolidated short period Federal income tax return for the January 1
through January 4, 1996 tax year. Beginning January 5, 1996, the Company will
file a stand alone Federal income tax return. Previously, the Company had filed
a consolidated Federal income tax return with Kemper. In the first quarter of
1996, the Company and Kemper settled the outstanding balances for the short
period under the tax allocation agreement with Kemper making a payment to the
Company of approximately $30 million. The Company's receivable from Kemper for
all remaining balances under the tax allocation agreement, after adjusting for
the $30 million payment, totaled approximately $82.6 million at December 31,
1995. Such remaining amounts are expected to be settled in the fourth quarter of
1996.
The actual income tax expense (benefit) for 1995, 1994 and 1993 differed from
the "expected" tax expense (benefit) for those years as displayed below.
"Expected" tax expense (benefit) was computed by applying the U.S. Federal
corporate tax rate of 35 percent in 1995, 1994, and 1993 to income (loss) before
income tax expense (benefit) and cumulative effect of change in accounting
principle.
<TABLE>
<CAPTION>
(in thousands) 1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Computed expected tax expense (benefit)..................... $(72,700) $ 14,277 $ 7,992
Difference between "expected" and actual tax expense
(benefit):
State taxes............................................... (1,370) 645 332
Foreign tax credit........................................ (183) (155) 358
Change in tax rate........................................ -- -- 1,441
Change in valuation allowance............................. -- -- 701
Other, net................................................ (411) (336) 318
-------- ------- -------
Total actual tax expense (benefit)................ $(74,664) $ 14,431 $ 11,142
======== ======= =======
</TABLE>
Under SFAS 109 ACCOUNTING FOR INCOME TAXES, deferred tax assets and liabilities
are generally determined based on the difference between the financial statement
and tax bases of assets and liabilities using enacted tax rates in effect
B-41
<PAGE> 82
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) INCOME TAXES (CONTINUED)
for the year in which the differences are expected to reverse. Under SFAS 109,
the effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. SFAS 109
allows recognition of deferred tax assets if future realization of the tax
benefit is more likely than not, with a valuation allowance for the portion that
is not likely to be realized.
The implementation of SFAS 109 in 1993 resulted in a one-time increase to
earnings of $2.4 million.
Under SFAS 109, a valuation allowance is established to reduce the deferred
Federal tax asset related to real estate and other investments to the amount
that, based upon available evidence, is, in management's judgment, more likely
than not to be realized. Any reversals of the valuation allowance are contingent
upon the recognition of future capital gains in Kemper's Federal income tax
return or a change in circumstances which causes the recognition of the benefits
to become more likely than not. During 1995 and 1994, the change in the
valuation allowance related solely to the change in the net deferred Federal tax
asset or liability from unrealized gains or losses on investments.
The tax effects of temporary differences that give rise to significant portions
of the Company's net deferred Federal tax liability were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------
(in thousands) 1995 1994 1993
--------- --------- --------
<S> <C> <C> <C>
Deferred Federal tax assets:
Unrealized losses on investments....................... $ -- $ 85,331 $ --
Life policy reserves................................... 42,512 51,519 60,446
Real estate-related.................................... 21,920 39,360 45,851
Other investment-related............................... 1,725 7,435 12,498
Other.................................................. 6,864 6,415 5,804
--------- --------- --------
Total deferred Federal tax assets................... 73,021 190,060 124,599
Valuation allowance.................................... (15,201) (100,532) (15,201)
--------- --------- --------
Total deferred Federal tax assets after valuation
allowance......................................... 57,820 89,528 109,398
--------- --------- --------
Deferred Federal tax liabilities:
Deferred insurance acquisition costs................... 111,523 108,663 100,834
Unrealized gains on investments........................ 37,919 -- 49,193
Depreciation and amortization.......................... 18,767 18,878 21,367
Other.................................................. 2,320 3,351 2,049
--------- --------- --------
Total deferred Federal tax liabilities.............. 170,529 130,892 173,443
--------- --------- --------
Net deferred Federal tax liabilities..................... $(112,709) $ (41,364) $(64,045)
========= ========= ========
</TABLE>
The valuation allowance is subject to future adjustments based on, among other
items, Kemper's estimates of future operating earnings and capital gains.
The tax returns through the year 1986 have been examined by the Internal Revenue
Service ("IRS"). Changes proposed are not material to the Company's financial
position. The tax returns for the years 1987 through 1990 are currently under
examination by the IRS.
(7) RELATED-PARTY TRANSACTIONS
The Company received cash capital contributions of $82.5 million and $90.0
million during 1994 and 1993, respectively.
In 1994 and 1993, the Company transferred the majority of its deficit equity
ownership interest in two limited partnerships to another Kemper subsidiary
resulting in an increase of the Company's additional paid-in capital of $71
thousand and $9.2 million, respectively. The Company also paid a non-cash
dividend of $530 thousand in December 1993, which represented the positive
equity ownership interests of the majority of one of its limited
B-42
<PAGE> 83
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(7) RELATED-PARTY TRANSACTIONS (CONTINUED)
partnerships. Net losses associated with the Company's ownership interests in
these limited partnerships amounted to $0.4 million, $1.4 million and $5.4
million in 1995, 1994 and 1993, respectively, and are included in the Company's
consolidated statement of operations.
The Company has loans to joint ventures, consisting primarily of mortgage loans
on real estate, in which the Company and/or one of its affiliates has an
ownership interest. At December 31, 1995 and 1994, joint venture mortgage loans
totaled $120 million and $351 million, respectively, and during 1995, 1994 and
1993, the Company earned interest income on these joint venture loans of $19.6
million, $22.0 million and $63.1 million, respectively.
All of the Company's personnel are employees of Federal Kemper Life Assurance
Company ("FKLA"), an affiliated company. The Company is allocated expenses for
the utilization of FKLA employees and facilities, the investment management
services of Zurich Kemper Investments, Inc. ("ZKI"), an affiliated company, and
the information systems of Kemper Service Company ("KSvC"), a ZKI subsidiary,
based on the Company's share of administrative, legal, marketing, investment
management, information systems and operation and support services. During 1995,
1994 and 1993, expenses allocated to the Company from ZKI and KSvC amounted to
$4.4 million, $6.5 million and $3.1 million, respectively. The Company also paid
to ZKI investment management fees of $3.4 million, $6.0 million and $6.7 million
during 1995, 1994 and 1993, respectively. In addition, expenses allocated to the
Company from FKLA during 1995, 1994 and 1993 amounted to $14.3 million, $11.1
million and $13.1 million, respectively.
During 1995, 1994 and 1993, the Company sold certain mortgages and real
estate-related investments, net of reserves, amounting to approximately $3.5
million, $154.0 million and $343.7 million respectively, to KFC Portfolio Corp.,
an affiliated non-life realty company, in exchange for cash. No gain or loss was
recognized on these sales. The Company also paid KFC Portfolio Corp. $1.8
million in 1995 related to the management of the Company's real estate
portfolio.
(8) REINSURANCE
In the ordinary course of business, the Company enters into reinsurance
agreements to diversify risk and limit its overall financial exposure to certain
blocks of fixed-rate annuities. The Company generally cedes 100 percent of the
related annuity liabilities under the terms of the reinsurance agreements.
Although these reinsurance agreements contractually obligate the reinsurers to
reimburse the Company, they do not discharge the Company from its primary
liabilities and obligations to policyholders. As such, these amounts paid or
deemed to have been paid are recorded on the Company's consolidated balance
sheet as reinsurance recoverables and ceded future policy benefits.
In 1992 and 1991, the Company entered into 100 percent indemnity reinsurance
agreements ceding $515.7 million and $416.3 million, respectively, of its
fixed-rate annuity liabilities to FLA. FLA is a mutual insurance company that
shares common management with the Company and FKLA and common board members with
the Company, FKLA and Kemper. As of December 31, 1995, the reinsurance
recoverable related to the fixed-rate annuity liabilities ceded to FLA amounted
to approximately $503 million. During 1995 the Company recorded income of $4.4
million related to a ceding commission experience adjustment from the 1992
reinsurance agreement.
(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.
B-43
<PAGE> 84
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (CONTINUED)
The discount rate used in determining the allocated postretirement benefit
obligation was 7.25 percent and 8 percent for 1995 and 1994, respectively. The
assumed health care trend rate used was based on projected experience for 1995
and 1996, 10 percent in 1997, gradually declining to 6 percent by the year 2000
and remaining at that level thereafter.
The status of the plan as of December 31, 1995 and 1994, was as follows:
Accumulated postretirement benefit obligation:
<TABLE>
<CAPTION>
(in thousands) 1995 1994
---- ----
<S> <C> <C>
Retirees.......................................................................... $234 $206
Fully eligible active plan participants........................................... 111 58
Other active plan participants.................................................... 427 101
Unrecognized gain (loss) from actuarial experience................................ (85) 314
---- ----
Accrued liability....................................................... $687 $679
==== ====
</TABLE>
Components of the net periodic postretirement benefit cost:
<TABLE>
<CAPTION>
(in thousands) 1995 1994
---- ----
<S> <C> <C>
Service cost-benefits attributed to service during the period..................... $ 58 $ 31
Interest cost on accumulated postretirement benefit obligations................... 41 43
Amortization of unrecognized actuarial gain....................................... (19) (35)
---- ----
Total................................................................... $ 80 $ 39
===== =====
</TABLE>
A one percentage point increase in the assumed health care cost trend rate for
each year would increase the accumulated postretirement benefit obligation as of
December 31, 1995 and 1994 by $146 thousand and $48 thousand, respectively, and
the net postretirement health care interest and service costs for the years
ended December 31, 1995 and 1994 by $24 thousand and $14 thousand, respectively.
During 1994, the Company adopted certain severance-related policies to provide
benefits, generally limited in time, to former or inactive employees after
employment but before retirement. The effect of adopting these policies was
immaterial.
(10) COMMITMENTS AND CONTINGENT LIABILITIES
The Company is involved in various legal actions for which it establishes
liabilities where appropriate. In the opinion of the Company's management, based
upon the advice of legal counsel, the resolution of such litigation is not
expected to have a material adverse effect on the consolidated financial
statements.
Although none of the Company or its joint venture projects have been identified
as a "potentially responsible party" under Federal environmental guidelines,
inherent in the ownership of or lending to real estate projects is the
possibility that environmental pollution conditions may exist on or near or
relate to properties owned or previously owned on properties securing loans.
Where the Company has presently identified remediation costs, they have been
taken into account in determining the cash flows and resulting valuations of the
related real estate assets. Based on the Company's receipt and review of
environmental reports on most of the projects in which it is involved, the
Company believes its environmental exposure would be immaterial to its
consolidated results of operations. However, the Company may be required in the
future to take actions to remedy environmental exposures, and there can be no
assurance that material environmental exposures will not develop or be
identified in the future. The amount of future environmental costs is impossible
to estimate due to, among other factors, the unknown magnitude of possible
exposures, the unknown timing and extent of corrective actions that may be
required, the determination of the Company's liability in proportion to others
and the extent such costs may be covered by insurance or various environmental
indemnification agreements.
See the note captioned "Financial Instruments--Off-Balance-Sheet Risk" below for
the discussion regarding the Company's loan commitments and standby financing
agreements.
B-44
<PAGE> 85
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(10) COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
The Company is liable for guaranty fund assessments related to certain
unaffiliated insurance companies that have become insolvent during the years
1995 and prior. The Company's financial statements include provisions for all
known assessments that are expected to be levied against the Company as well as
an estimate of amounts (net of estimated future premium tax recoveries) that the
Company believes it will be assessed in the future for which the life insurance
industry has estimated the cost to cover losses to policyholders. Assessments
levied against the Company and charged to expense in 1995, 1994 and 1993
amounted to $5.8 million, $0.0 million and $5.8 million, respectively. Such
amounts relate to accrued guaranty fund assessments of $5.0 million and $4.0
million at December 31, 1995 and 1994, respectively. The Company is also
contingently liable for any future guaranty fund assessments related to
insolvencies of unaffiliated insurance companies, for which the life insurance
industry has been unable to estimate the cost to cover losses to policyholders.
No specific amount can be reasonably estimated for such insolvencies as of
December 31, 1995.
(11) FINANCIAL INSTRUMENTS--OFF-BALANCE-SHEET RISK
At December 31, 1995, the Company had loan commitments and stand-by financing
agreements totaling $248.2 million to support the financing needs of various
real estate investments. To the extent these arrangements are called upon,
amounts loaned would be secured by assets of the joint ventures, including first
mortgage liens on the real estate. The Company's criteria in making these
arrangements are the same as for its mortgage loans and other real estate
investments. The Company presently expects to fund approximately $56.4 million
of these arrangements. These commitments are included in the Company's analysis
of real estate-related reserves and write-downs. The fair values of loan
commitments and standby financing agreements are estimated in conjunction with
and using the same methodology as the fair value estimates of mortgage loans and
other real estate-related investments.
(12) DERIVATIVE FINANCIAL INSTRUMENTS
The Company is party to derivative financial instruments in the normal course of
business for other than trading purposes to hedge exposures in foreign currency
fluctuations related to certain foreign fixed maturity securities held by the
Company. The following table summarizes various information regarding these
derivative financial instruments as of December 31, 1995 and 1994:
<TABLE>
<CAPTION>
WEIGHTED
WEIGHTED AVERAGE
AVERAGE REPRICING
(in thousands) NOTIONAL CARRYING ESTIMATED YEARS TO FREQUENCY
1995 AMOUNT VALUE FAIR VALUE EXPIRATION (DAYS)
- ---- -------- -------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Non-trading foreign exchange forward options..................... $ 43,754 $112 $112 .32 30
1994
- ----
Non-trading foreign exchange forward options..................... 34,541 18 18 .25 30
</TABLE>
The Company's hedges relating to foreign currency exposure are implemented using
forward contracts on foreign currencies. These are generally short duration
contracts with U.S. money-center banks. The Company records realized and
unrealized gains and losses on such investments in net income on a current
basis. The amounts of gain (loss) included in net income during 1995, 1994 and
1993 totaled $(1.0 million), $6.4 million and $(2.8 million), respectively.
(13) FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates are made at specific points in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from offering
for sale at one time the Company's entire holdings of a particular financial
instrument. A significant portion of the Company's financial instruments are
carried at fair value. (See the note captioned "Invested Assets and Related
Income".) Fair value estimates for financial instruments not carried at fair
value are generally determined using discounted cash flow models and assumptions
that are based on judgments regarding current and future economic conditions and
the risk characteristics of the investments. Although fair value estimates are
calculated
B-45
<PAGE> 86
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(13) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
using assumptions that management believes are appropriate, changes in
assumptions could significantly affect the estimates and such estimates should
be used with care.
Fair value estimates are determined for existing on- and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and certain liabilities that are not
considered financial instruments. Accordingly, the aggregate fair value
estimates presented do not represent the underlying value of the Company. For
example, the Company's subsidiaries are not considered financial instruments,
and their value has not been incorporated into the fair value estimates. In
addition, tax ramifications related to the realization of unrealized gains and
losses can have a significant effect on fair value estimates and have not been
considered in any of the estimates.
The following methods and assumptions were used by the Company in estimating the
fair value of its financial instruments:
Fixed maturities and equity securities: Fair values for fixed maturity
securities and for equity securities were determined by using market quotations,
or independent pricing services that use prices provided by market makers or
estimates of fair values obtained from yield data relating to instruments or
securities with similar characteristics, or fair value as determined in good
faith by the Company's portfolio manager, ZKI.
Cash and short-term investments: The carrying amounts reported in the
consolidated balance sheet for these instruments approximate fair values.
Mortgage loans and other real estate-related investments: Fair values for
mortgage loans and other real estate-related investments for year-end 1994 were
estimated on a project-by-project basis. Generally, the projected cash flows of
the collateral were discounted using a discount rate of 10 to 12 percent. The
resulting collateral estimates were then used to determine the value of the
Company's real estate-related investments. Fair values for mortgage loans and
other real estate-related investments for year-end 1995 were estimated based
upon the investments observable market price, net of estimated costs to sell.
The estimates of fair value should be used with care given the inherent
difficulty of estimating the fair value of real estate due to the lack of a
liquid quotable market.
Other loans and investments: The carrying amounts reported in the consolidated
balance sheet for these instruments approximate fair values. The fair values of
policy loans were estimated by discounting the expected future cash flows using
an interest rate charged on policy loans for similar policies currently being
issued.
Life policy benefits: Fair values of the life policy benefits regarding
investment contracts (primarily deferred annuities) and universal life contracts
were estimated by discounting gross benefit payments, net of contractual
premiums, using the average crediting rate currently being offered in the
marketplace for similar contracts with maturities consistent with those
remaining for the contracts being valued. The Company had projected its future
average crediting rate in 1995 and 1994 to be 4.5 percent and 5.5 percent,
respectively, while the assumed average market crediting rate was 5.5 percent in
1995 and 6.5 percent in 1994.
B-46
<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, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------------------------------
1995 1994
------------------------ ------------------------
CARRYING FAIR CARRYING FAIR
(in thousands) VALUE VALUE VALUE VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Financial instruments recorded as assets:
Fixed maturities(1).......................... $3,752,325 $3,752,325 $3,463,732 $3,463,732
Cash and short-term investments.............. 398,326 398,326 227,353 227,353
Mortgage loans and other real estate-related
assets.................................... 299,589 299,589 907,283 804,867
Policy loans................................. 289,390 289,390 277,743 277,743
Other invested assets........................ 29,809 21,043 40,527 40,527
Financial instruments recorded as liabilities:
Life policy benefits......................... 4,573,212 4,488,297 4,843,690 4,709,561
</TABLE>
- ---------------
(1) Includes $112 and $18 carrying value and fair value for 1995 and 1994,
respectively, of derivative securities used to hedge the foreign currency
exposure on certain specific foreign fixed maturity investments.
(14) STOCKHOLDER'S EQUITY--RETAINED EARNINGS
The maximum amount of dividends which can be paid by insurance companies
domiciled in the State of Illinois to shareholders without prior approval of
regulatory authorities is restricted. The maximum amount of dividends which can
be paid by the Company without prior approval in 1996, assuming that there is
sufficient statutory earned surplus, is $38.3 million. The Company paid no cash
dividends in 1995, 1994 or 1993.
The Company's net income (loss) and stockholder's equity as determined in
accordance with statutory accounting principles were as follows:
<TABLE>
<CAPTION>
(in thousands) 1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Net income (loss).............................................. $(64,707) $ 44,491 $(36,178)
======== ======== ========
Statutory surplus.............................................. $383,374 $416,243 $329,430
======== ======== ========
</TABLE>
B-47
<PAGE> 88
APPENDIX
STATE PREMIUM TAX CHART
<TABLE>
<CAPTION>
RATE OF TAX
---------------------------
QUALIFIED NON-QUALIFIED
STATE PLANS PLANS
----- ------ ------
<S> <C> <C>
California...................................................... .50 % 2.35 %*
District of Columbia............................................ 2.25 % 2.25 %*
Kansas.......................................................... -- 2.00 %*
Kentucky........................................................ 2.00 %* 2.00 %*
Maine........................................................... -- 2.00 %
Nevada.......................................................... -- 3.50 %*
South Dakota.................................................... -- 1.25 %
West Virginia................................................... 1.00 % 1.00 %
Wyoming......................................................... -- 1.00 %
</TABLE>
* Taxes become due when annuity benefits commence, rather than when the
premiums are collected. At the time of annuitization, the premium tax
payable will be charged against the Contract Value.
B-48
