KILICO VARIABLE ANNUITY SEPARATE ACCOUNT, 485BPOS, 1997-04-28

KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
485BPOS, 1997-04-28

Previous: KILICO VARIABLE ANNUITY SEPARATE ACCOUNT, 485BPOS, 1997-04-28

Next: CAPITAL REALTY INVESTORS LTD, 10-Q, 1997-04-28

<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 28, 1997

COMMISSION FILE NOS. 33-43501
811-3199
================================================================================

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM N-4

<TABLE>
<S> <C>
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933 [ ]
Pre-Effective Amendment No. _ [ ]
Post-Effective Amendment No. 10 [X]
and
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940 [ ]
Amendment No. 39 [X]
</TABLE>

KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
(EXACT NAME OF REGISTRANT)

KEMPER INVESTORS LIFE INSURANCE
COMPANY
(NAME OF INSURANCE COMPANY)

<TABLE>
<C> <C>
1 Kemper Drive, Long Grove, Illinois 60049
(Address of Insurance Company's Principal Executive Offices) (Zip Code)
Insurance Company's Telephone Number, including Area Code: (847) 550-5500
</TABLE>

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

Copies to:

<TABLE>
<C> <C>
Frank Julian, Esq. Joan E. Boros, Esq.
Kemper Investors Life Insurance Company Katten Muchin & Zavis
1 Kemper Drive 1025 Thomas Jefferson Street, N.W.
Long Grove, Illinois 60049 Washington, D.C. 20007
</TABLE>

APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: CONTINUOUS

It is proposed that this filing will become effective (check
appropriate box)
[ ] immediately upon filing pursuant to paragraph (b) of
Rule 485

[X] on May 1, 1997 pursuant to paragraph (b) of Rule 485

[ ] 60 days after filing pursuant to paragraph (a)(i) of
Rule 485
[ ] on (date) pursuant to paragraph (a)(i) of Rule 485
[ ] 75 days after filing pursuant to paragraph (a)(ii)
[ ] on (date) pursuant to paragraph (a)(ii) of Rule 485
If appropriate, check the following box:
[ ] This post-effective amendment designates a new
effective date for a
previously filed post-effective amendment.
------------------

AN INDEFINITE AMOUNT OF THE SECURITIES BEING OFFERED HAS BEEN REGISTERED
PURSUANT TO A DECLARATION UNDER RULE 24F-2 UNDER THE INVESTMENT COMPANY ACT OF
1940, SET OUT IN THE REGISTRATION CONTAINED IN FILE NO. 2-72671. THE REGISTRANT
FILED ITS RULE 24F-2 NOTICE FOR THE YEAR ENDED DECEMBER 31, 1996 ON FEBRUARY 27,
1997.

================================================================================
<PAGE> 2

CROSS-REFERENCE SHEET
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT

REGISTRATION STATEMENT ON FORM N-4

<TABLE>
<CAPTION>
N-4 ITEM NO. LOCATION IN PROSPECTUS
------------ ----------------------
<S> <C> <C>
PART A
Item 1. Cover Page................................... Cover Page
Item 2. Definitions.................................. Definitions
Item 3. Synopsis..................................... Summary; Summary of Expenses;
Example
Item 4. Condensed Financial Information.............. Condensed Financial Information
Item 5. General Description of Registrant, Depositor
and Portfolio Companies.................... KILICO, the MVA Option, the Separate
Account and the Fund; Voting Rights
Item 6. Deductions and Expenses...................... Certificate Charges and Expenses
Item 7. General Description of Variable
Annuity Contracts.......................... The Certificates; The Accumulation
Period
Item 8. Annuity Period............................... The Annuity Period
Item 9. Death Benefit................................ The Annuity Period; The Accumulation
Period
Item 10. Purchases and Contract Value................. KILICO, the MVA Option, the Separate
Account and the Fund; The
Certificates; The Accumulation
Period
Item 11. Redemptions.................................. The Accumulation Period
Item 12. Taxes........................................ Federal Income Taxes
Item 13. Legal Proceedings............................ Legal Proceedings
Item 14. Table of Contents of the Statement of
Additional Information..................... Table of Contents

PART B
Item 15. Cover Page................................... Cover Page
Item 16. Table of Contents............................ Table of Contents
Item 17. General Information and History.............. Not Applicable
Item 18. Services..................................... Services to the Separate Account
Item 19. Purchase of Securities Being Offered......... Not Applicable
Item 20. Underwriters................................. Services to the Separate Account
Item 21. Calculation of Performance Data.............. Performance Information of
Subaccounts
Item 22. Annuity Payments............................. Not Applicable
Item 23. Financial Statements......................... Financial Statements

PART C
</TABLE>

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

PROSPECTUS--MAY 1, 1997

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

INDIVIDUAL AND GROUP VARIABLE AND MARKET VALUE
ADJUSTED DEFERRED ANNUITY CONTRACTS
- --------------------------------------------------------------------------------

KEMPER PASSPORT
ISSUED BY
KEMPER INVESTORS LIFE INSURANCE COMPANY
HOME OFFICE: 1 KEMPER DRIVE, LONG GROVE, ILLINOIS 60049 (847) 550-5500

The types of Individual and Group Variable and Market Value Adjusted Deferred
Annuity Contracts ("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. Depending upon particular state
requirements, participation in a group contract will be accounted for by the
issuance of a certificate and participation in an individual contract will be
accounted for by the issuance of an individual annuity contract. The certificate
and individual annuity contract and values thereunder are hereafter both
referred to in terms of the "Certificate."

Purchase payments for the Certificates may be allocated to one or more of the
investment options under which Certificate values accumulate on either a
variable basis or fixed basis subject to a market value adjustment. These
options consist of the seventeen Subaccounts of the Separate Account and the
Market Value Adjustment Option ("MVA Option"). The Subaccounts invest in the
portfolios of the Investors Fund Series (formerly Kemper Investors Fund) (the
"Fund"). The 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+, Horizon 5 (collectively Horizon 20+, Horizon 10+ and Horizon 5 are
referred to herein as Horizon), Blue Chip and Global Income. Zurich Kemper
Investments, Inc. (formerly named Kemper Financial Services, Inc.) ("ZKI"), is
the investment manager of each Portfolio other than the Value and Small Cap
Value Portfolios and provides each with continuous professional investment
supervision. Dreman Value Advisors, Inc. ("DVA"), a wholly owned subsidiary of
ZKI, is the investment manager of the Value and Small Cap Value Portfolios and
provides each with continuous professional investment supervision. DVA is also
the sub-advisor for the Value+Growth, Horizon 20+, Horizon 10+, and Horizon 5
Portfolios. Under the terms of its 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. ZKI uses the services of Zurich Investment Management
Limited ("ZIML"), an affiliate of ZKI, as a sub-adviser for the Total Return,
High Yield, Growth, International, Small Cap Growth, Investment Grade Bond,
Value+Growth, Horizon, Blue Chip and Global Income Portfolios. Under the terms
of the Sub-Advisory Agreement between ZIML and ZKI for these Portfolios, ZIML
renders investment advisory and management services with regard to that portion
of a Portfolio's assets that may be allocated by ZKI to ZIML from time to time
for management of foreign securities. Subaccounts and Portfolios may be added in
the future. Certificate values allocated to any of the Subaccounts will vary to
reflect the investment performance of the corresponding Portfolio. The
accompanying Prospectus for the Fund describes the investment objectives and the
attendant risks of the Portfolios of the Fund. Certificate values allocated to
one or more Guarantee Periods of the MVA Option will accumulate on a fixed
basis.

This Prospectus is designed to provide you with certain essential information
that you should know before investing. A Statement of Additional Information
dated May 1, 1997 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 Kemper Investors Life Insurance Company by writing
or calling the address or telephone number listed above. A table of contents for
the Statement of Additional Information is on page 68 of this Prospectus.

THIS PROSPECTUS IS VALID ONLY IF ACCOMPANIED OR PRECEDED BY A CURRENT PROSPECTUS
FOR THE INVESTORS FUND SERIES. 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 OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE> 4

TABLE OF CONTENTS
================================================================================

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DEFINITIONS................................................. 1
SUMMARY..................................................... 3
SUMMARY OF EXPENSES......................................... 6
CONDENSED FINANCIAL INFORMATION............................. 8
KILICO, THE MVA OPTION, THE SEPARATE ACCOUNT AND THE FUND... 9
THE CERTIFICATES............................................ 14
THE ACCUMULATION PERIOD..................................... 15
CERTIFICATE CHARGES AND EXPENSES............................ 22
THE ANNUITY PERIOD.......................................... 26
FEDERAL TAX MATTERS......................................... 29
DISTRIBUTION OF CONTRACTS AND CERTIFICATES.................. 37
VOTING RIGHTS............................................... 37
REPORTS TO OWNERS AND INQUIRIES............................. 37
DOLLAR COST AVERAGING....................................... 38
SYSTEMATIC WITHDRAWAL PLAN.................................. 39
EXPERTS..................................................... 39
LEGAL MATTERS............................................... 39
SPECIAL CONSIDERATIONS...................................... 39
AVAILABLE INFORMATION....................................... 40
BUSINESS.................................................... 41
PROPERTIES.................................................. 46
LEGAL PROCEEDINGS........................................... 46
SELECTED FINANCIAL DATA..................................... 47
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 48
DIRECTORS AND EXECUTIVE OFFICERS OF KILICO.................. 61
EXECUTIVE COMPENSATION...................................... 65
TABLE OF CONTENTS--STATEMENT OF ADDITIONAL INFORMATION...... 68
FINANCIAL STATEMENTS........................................ 68
APPENDICES.................................................. 93
</TABLE>

<PAGE> 5

DEFINITIONS

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

ACCUMULATED GUARANTEE PERIOD VALUE--The sum of an Owner's Guarantee Period
Values.

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

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

ALLOCATION OPTION--The seventeen Subaccounts and the MVA Option available
under the Certificate for allocation of Purchase Payments, or transfers of
Certificate Value during the Accumulation Period.

ANNUITANT--The person designated to receive or who is actually receiving
annuity payments 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
Certificate upon the death of the Annuitant or the Owner prior to the
Annuity Period.

CERTIFICATE--An individual certificate of participation issued by KILICO to
each Owner in a group as evidence of his or her rights and benefits under
the Contract or an individual contract issued by KILICO to an Owner.

CERTIFICATE VALUE--The sum of the values of the Owner's Accumulated
Guarantee Period Value and Separate Account Value during the Accumulation
Period.

CERTIFICATE YEAR--Period between anniversaries of the Date of Issue of a
Certificate.

CONTRACT--The Variable and Market Value Adjusted Deferred Annuity Contracts
offered on an individual or group basis by this Prospectus.

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

DVA--Dreman Value Advisors, Inc., whose Home Office is at 10 Exchange
Place, 20th floor, Jersey City, New Jersey 07302.

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--Investors Fund Series (formerly Kemper Investors Fund), an open-end
management investment company consisting of sixteen portfolios in which the
Separate Account invests.

GENERAL ACCOUNT--All the assets of KILICO other than those allocated to any
legally segregated Separate Account.

GUARANTEED INTEREST RATE--The rate of interest established by KILICO for a
given Guarantee Period.

GUARANTEE PERIOD--A period of time during which an amount is to be credited
with a Guaranteed Interest Rate. Guarantee Period options may have
durations of from one (1) to ten (10) years, as elected by the Owner.

1
<PAGE> 6

GUARANTEE PERIOD VALUE--The Guarantee Period Value is the sum of the
Owner's: (1) Purchase Payment allocated or amount transferred to a
Guarantee Period; plus (2) interest credited; minus (3) withdrawals,
previously assessed Withdrawal Charges and transfers; and (4) as adjusted
for any applicable Market Value Adjustment previously made.

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

MARKET ADJUSTED VALUE--A Guarantee Period Value adjusted by the market
value adjustment formula on any date prior to the end of a Guarantee
Period.

MARKET VALUE ADJUSTMENT--An adjustment of values under a Guarantee Period
in accordance with the market value adjustment formula prior to the end of
that Guarantee Period. The adjustment reflects the change in the value of
the Guarantee Period Value due to changes in interest rates since the date
the Guarantee Period commenced. The adjustment is computed using the market
value adjustment formula stated in the Certificate.

NON-QUALIFIED PLAN CERTIFICATE--A Certificate 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.

OWNER--The person designated in the Certificate as having the privileges of
ownership defined in the Certificate.

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

QUALIFIED PLAN CERTIFICATE--A Certificate 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 VALUE--The sum of the Owner's Subaccount values.

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

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

VALUATION DATE--Each day when the New York Stock Exchange is open for
trading, as well as each day otherwise required.

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
Certificate has an interest.

WITHDRAWAL CHARGE--The "contingent deferred sales charge" assessed against
certain withdrawals of Certificate Value in the first six Certificate Years
after a Purchase Payment is made or against certain annuitizations of
Certificate Value in the first six Certificate Years after a Purchase
Payment is made.

ZIML--Zurich Investment Management Limited, whose Home Office is 1 Fleet
Place, London, U.K. EC4M7RQ.

ZKI--Zurich Kemper Investments, Inc., (formerly named Kemper Financial
Services, Inc.), whose Home Office is at 222 South Riverside Plaza,
Chicago, Illinois 60606.

2
<PAGE> 7

SUMMARY

The following summary should be read in conjunction with the detailed
information appearing elsewhere in this Prospectus. Any significant variations
from the information appearing in the Prospectus which may be required due to
differing state law requirements are contained in supplements to this Prospectus
or in amendments to the Certificates, as appropriate.

The Certificates 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 Certificate has
been purchased. The Prospectus offers Certificates designed for use in
connection with both Non-Qualified Plans and Qualified Plans. KILICO makes
several underlying investment options, including seventeen Subaccounts and up to
ten durations of Guarantee Periods, available for the Owner to pursue his or her
investment objectives.

The minimum initial Purchase Payment for each Certificate is $2,000. Subsequent
Purchase Payments of at least $500 each will be accepted at any time while the
Certificate is in force. (See "The Accumulation Period" page 15.)

KILICO provides for variable accumulations and benefits under the Certificate by
crediting purchase payments to one or more Subaccounts of the Separate Account
as selected by the Owner. The Subaccounts invest in one of the sixteen
corresponding Portfolios (the "Portfolios") of the Investors Fund Series
(formerly Kemper Investors Fund) (the "Fund"), a series mutual fund. (See "The
Fund," page 11.) Zurich Kemper Investments, Inc. (formerly named Kemper
Financial Services, Inc.) ("ZKI"), is the investment manager of each Portfolio
other than the Value and Small Cap Value Portfolios and provides each with
continuous professional investment supervision. Dreman Value Advisors, Inc.
("DVA"), a wholly owned subsidiary of ZKI, is the investment manager of the
Value and Small Cap Value Portfolios and provides each with continuous
professional investment supervision. DVA is also the sub-adviser for the
Value+Growth, Horizon 20+, Horizon 10+, and Horizon 5 Portfolios. Under the
terms of its 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. ZKI
uses the services of Zurich Investment Management Limited ("ZIML"), an affiliate
of ZKI, as a sub-adviser for the Total Return, High Yield, Growth,
International, Small Cap Growth, Investment Grade Bond, Value+Growth, Horizon,
Blue Chip and Global Income Portfolios. Under the terms of the Sub-Advisory
Agreement between ZIML and ZKI for these Portfolios, ZIML renders investment
advisory and management services with regard to that portion of a Portfolio's
assets that may be allocated by ZKI to ZIML from time to time for management of
foreign securities. The Certificate Value allocated to the Separate Account will
vary with the investment performance of the Portfolios selected by the Owner.

KILICO also provides for fixed accumulations under the Certificates in the MVA
Option. The MVA Option is only available during the Accumulation Period. An
Owner may allocate amounts to one or more Guarantee Periods available under the
MVA Option with durations of from one to ten years. KILICO may, in its
discretion, offer additional Guarantee Periods or, limit for new Certificates
the number of Guarantee Period options available to no less than three (3).
KILICO will credit interest daily at a rate declared by KILICO in its sole
discretion to amounts allocated to the MVA Option and guarantees these amounts
at various interest rates ("Guaranteed Interest Rates") for the duration of the
Guarantee Period selected by the Owner, subject to any applicable withdrawal
charge, Market Value Adjustment or records maintenance charge. KILICO may not
change a Guaranteed Interest Rate for the duration of the Guarantee Period;
however, Guaranteed Interest Rates for subsequent Guarantee Periods will be
determined at the sole discretion of KILICO. At the end of any Owner's Guarantee
Period, a subsequent Guarantee Period automatically renews for the same duration
as the terminating Guarantee Period unless the Owner elects

3
<PAGE> 8

another Guarantee Period during the designated period before and after the end
of the Guarantee Period. The interests under the Certificate relating to the MVA
Option are registered under the Securities Act of 1933 but are not registered
under the Investment Company Act of 1940. (See "The MVA Option," page 9.)

Transfers between and among Subaccounts and Guarantee Periods during the
Accumulation Period are permitted subject to certain limitations. A transfer
from a Guarantee Period is subject to a Market Value Adjustment unless effected
within 15 days before or 15 days after the existing Guarantee Period ends.
Transfers between the Subaccounts are permitted during the Annuity Period after
the first year of annuitization subject to certain limitations. (See "Transfer
During Accumulation Period" and "Transfer During Annuity Period," pages 18 and
28.)

An Owner may withdraw up to 15% of the Certificate Value in any Certificate Year
without assessment of a Withdrawal Charge. If the Owner withdraws an amount in
excess of 15% of the Certificate Value in any Certificate Year, the amount
withdrawn in excess of 15% is subject to a Withdrawal Charge.

The Withdrawal Charge is assessed on withdrawals attributable to Purchase
Payments and all related accumulations during the first six Certificate Years
after the Purchase Payments are made. The Withdrawal Charge starts at 6% in the
Certificate Year in which the Purchase Payment is made (the first "Contribution
Year") and remains at 6% in the second Contribution Year; reduces to 5% in the
third and fourth Contribution Years; reduces to 4% in the fifth and sixth
Contribution Years and reduces to 0% thereafter. However, in no event shall the
aggregate Withdrawal Charges assessed against a Certificate exceed 9% of the
aggregate Purchase Payments made under the Certificate. Please note that adverse
tax consequences may occur with respect to certain withdrawals. Withdrawals are
permitted from Certificates issued in connection with Section 403(b) Qualified
Plans only under limited circumstances. (See "Federal Tax Matters," page 29)

A Market Value Adjustment also applies to any withdrawal (except during the
"free look" period), transfer, purchase of an annuity option and to death
benefit payments made more than 15 days before or 15 days after the end of a
Guarantee Period in the MVA Option. The Market Value Adjustment is applied to
the amount being withdrawn before deduction of any applicable Withdrawal
Charges. (See "The Certificates," page 14.)

KILICO deducts a charge for mortality and expense risks and administrative costs
at an annual rate of 1.25% of the daily net assets of the Separate Account. At
the end of each Certificate Year, on surrender of a Certificate, and on
surrender upon annuitization, KILICO deducts a records maintenance charge
("Record Maintenance Charge") of $30 from the Owner's account. The Records
Maintenance Charge will not be deducted during the Annuity Period. The Records
Maintenance Charge will also be waived for Certificates with a Certificate Value
exceeding $50,000 on the date of assessment. KILICO also deducts state premium
taxes from the Owner's account when paid by KILICO or upon annuitization. (See
"Certificate Charges and Expenses," page 22.) In addition, ZKI is paid a
management fee based upon the average daily net assets of the Portfolios for
which it serves as investment manager. DVA serves as the investment manager for
the 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.
ZKI pays DVA for DVA's services as sub-adviser for the Value+Growth and Horizon
Portfolios. (See "The Fund," page 11 and the Fund prospectus.)

The Certificates 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 Certificates 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

4
<PAGE> 9

other retirement plans which may not qualify for similar tax advantages. (See
"Taxation of Annuities in General," page 30.)

An Owner has the right within the "free look" period (generally ten days,
subject to state variation) after receiving the Certificate to cancel the
Certificate by delivering or mailing it to KILICO. Upon receipt by KILICO, the
Certificate will be cancelled and a refund will be made. The amount of the
refund will depend on the state in which the Certificate is issued; however, it
will be an amount at least equal to the Separate Account Value plus amounts
allocated to the Guarantee Periods which will not be subject to the Market Value
Adjustment. (See "The Certificates," page 14.)

5
<PAGE> 10

- --------------------------------------------------------------------------------
SUMMARY OF EXPENSES
- --------------------------------------------------------------------------------
CERTIFICATE OWNER TRANSACTION EXPENSES

<TABLE>
<S> <C> <C>
Sales Load Imposed on Purchases (as a percentage of purchase payments)................................. None
Contingent Deferred Sales Load (as a percentage of amount surrendered)*
Certificate Year of Withdrawal
First year.................................. 6%
Second year................................. 6%
Third year.................................. 5%
Fourth year................................. 5%
Fifth year.................................. 4%
Sixth year.................................. 4%
Seventh year and following.................. 0%
Surrender Fees (in addition to Withdrawal Charge)**.................................................... None
Exchange Fee........................................................................................... None
ANNUAL CONTRACT FEE (Records Maintenance Charge)***.................................................... $30
</TABLE>

<TABLE>
<CAPTION>
SEPARATE ACCOUNT ANNUAL
EXPENSES
(as a percentage of average daily
account value)
<S> <C>
Mortality and
Expense
Risk............. 1.10%
Administration... .15%
Account Fees
and Expenses... 0%
Total Separate
Account
Annual
Expenses....... 1.25%
</TABLE>

<TABLE>
<CAPTION>
FUND ANNUAL EXPENSES
(as percentage of each Portfolio's average net assets for the period ended December 31, 1996)
INVESTMENT
MONEY TOTAL GOVERNMENT SMALL CAP GRADE
MARKET RETURN HIGH YIELD GROWTH SECURITIES INTERNATIONAL GROWTH BOND
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO+
--------- --------- ---------- --------- ---------- ------------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees... .50% .55% .60% .60% .55% .75% .65% .60%
Other Expenses.... .10 .04 .05 .04 .11 .21 .10 .25
-- -- -- -- -- -- --
Total Portfolio
Annual
Expenses... .60% .59% .65% .64% .66% .96% .75% .85%
== == == == == == ==
</TABLE>

<TABLE>
<CAPTION>
SMALL CAP VALUE+ BLUE GLOBAL
VALUE VALUE GROWTH HORIZON 20+ HORIZON 10+ HORIZON 5 CHIP INCOME
PORTFOLIO+ PORTFOLIO+ PORTFOLIO+ PORTFOLIO+ PORTFOLIO+ PORTFOLIO+ PORTFOLIO+ PORTFOLIO+
---------- ---------- ---------- ----------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees... .75% .75% .75% .60% .60% .60% .65% .75%
Other Expenses.... .20 .20 .20 .25 .20 .30 .30 .30
-- -- -- -- -- -- -- ---
Total Portfolio
Annual
Expenses... .95% .95% .95% .85% .80% .90% .95% 1.05%
== == == == == == == ===
</TABLE>

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

<TABLE>
<CAPTION>
SUBACCOUNT 1 YEAR 3 YEARS 5 YEARS 10 YEARS
---------- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C>
If you surrender your contract at the
end of the applicable time period:
You would pay the following expenses
on a $1,000 investment, assuming 5%
annual return on assets:
Money Market #1++ $81 $114 $149 $222
Total Return 81 114 149 221
High Yield 82 116 152 227
Growth 82 116 151 226
Government Securities 82 116 152 228
International 85 125 167 260
Small Cap Growth 83 119 157 238
Investment Grade Bond 84 122
Value 85 125
Small Cap Value 85 125
Value+Growth 85 125
Horizon 20+ 84 122
Horizon 10+ 83 120
Horizon 5 84 123
Blue Chip 85 125
Global Income 85 128
If you do not surrender your contract:
You would pay the following expenses
on a $1,000 investment, assuming 5%
annual return on assets:
Money Market #1++ $19 $ 60 $103 $222
Total Return 19 59 102 221
High Yield 20 61 105 227
Growth 20 61 105 226
Government Securities 20 62 106 228
International 23 71 121 260
Small Cap Growth 21 64 110 238
Investment Grade Bond 22 67
Value 23 70
Small Cap Value 23 70
Value+Growth 23 70
Horizon 20+ 22 67
Horizon 10+ 21 66
Horizon 5 22 69
Blue Chip 23 70
Global Income 24 74
</TABLE>

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

6
<PAGE> 11

The purpose of the preceding table is to assist Owners in understanding the
various costs and expenses that a Owner in a Subaccount will bear directly or
indirectly. The table reflects expenses of both the Separate Account and the
Fund but not the MVA Option. See "Certificate Charges and Expenses" and "The MVA
Option" for more information regarding the various costs and expenses. THE
EXAMPLE SHOULD NOT BE CONSIDERED TO BE A REPRESENTATION OF PAST OR FUTURE
EXPENSES AND DOES NOT INCLUDE THE DEDUCTION OF STATE PREMIUM TAXES, WHICH MAY BE
ASSESSED BEFORE OR UPON ANNUITIZATION. ACTUAL EXPENSES MAY BE GREATER OR LESS
THAN THOSE SHOWN. The example assumes a 5% annual rate of return pursuant to
requirements of the Securities and Exchange Commission. This hypothetical rate
of return is not intended to be representative of past or future performance of
any Subaccount. The Records Maintenance Charge is a single charge, it is not a
separate charge for each Subaccount. In addition, the effect of the Records
Maintenance Charge has been reflected by applying the percentage derived by
dividing the total amounts of annual Records Maintenance Charge collected by the
total net assets of all the Subaccounts in the Separate Account.

* A Certificate Owner may withdraw up to 15% of the Separate Account Value
plus Market Adjusted Value in any Certificate Year without assessment of any
charge. Under certain circumstances the contingent deferred sales load may
be reduced or waived, including when certain annuity options are selected.

** Surrenders and other withdrawals from the MVA Option are subject to a Market
Value Adjustment unless made within 15 days before or 15 days after the end
of a Guarantee Period. The Market Value Adjustment may increase or reduce
the Guarantee Period Value.

*** Under certain circumstances the annual Records Maintenance Charge may be
reduced or waived. The annual Records Maintenance Charge will be waived for
Certificates with a Certificate Value exceeding $50,000 on the date of
assessment.

+ Other Expenses are estimates for the current year.

++ Money Market Subaccount #2 is not shown because it is available only for
dollar cost averaging that will deplete an Owner's Subaccount Value entirely
at least by the end of the third Certificate Year.

7
<PAGE> 12

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

Selected data for accumulation units outstanding as of the year ended December
31, 1996:

<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
ACCUMULATION UNIT VALUE AT BEGINNING OF PERIOD* ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Money Market Subaccount #1 1.112 1.065 1.037 1.021 1.000
Money Market Subaccount #2 1.168 1.105 1.063 1.034 1.000
Total Return Subaccount 1.234 .991 1.109 1.002 1.000
High Yield Subaccount 1.515 1.308 1.354 1.143 1.000
Growth Subaccount 1.436 1.093 1.153 1.018 1.000
Government Securities Subaccount 1.247 1.061 1.104 1.050 1.000
International Subaccount 1.365 1.225 1.287 .981 1.000
Small Cap Growth Subaccount** 1.324 1.031
Investment Grade Bond Subaccount***
Value Subaccount***
Small Cap Value Subaccount***
Value+Growth Subaccount***
Horizon 20+ Subaccount***
Horizon 10+ Subaccount***
Horizon 5 Subaccount***
</TABLE>

<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
ACCUMULATION UNIT VALUE AT END OF PERIOD ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Money Market Subaccount #1 1.153 1.112 1.065 1.037 1.021
Money Market Subaccount #2 1.227 1.168 1.105 1.063 1.034
Total Return Subaccount 1.423 1.234 .991 1.109 1.002
High Yield Subaccount 1.708 1.515 1.308 1.354 1.143
Growth Subaccount 1.724 1.436 1.093 1.153 1.018
Government Securities Subaccount 1.263 1.247 1.061 1.104 1.050
International Subaccount 1.571 1.365 1.225 1.287 .981
Small Cap Growth Subaccount** 1.675 1.324 1.031
Investment Grade Bond Subaccount*** 1.027
Value Subaccount*** 1.164
Small Cap Value Subaccount*** 1.010
Value+Growth Subaccount*** 1.137
Horizon 20+ Subaccount*** 1.144
Horizon 10+ Subaccount*** 1.105
Horizon 5 Subaccount*** 1.087
</TABLE>

<TABLE>
<CAPTION>
NUMBER OF ACCUMULATION UNITS OUTSTANDING AT END OF PERIOD 1996 1995 1994 1993 1992
(000'S OMITTED) ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Money Market Subaccount #1 12,271 8,710 14,423 5,757 3,037
Money Market Subaccount #2 6,923 1,981 3,333 3,033 6,561
Total Return Subaccount 73,747 65,648 68,207 51,444 27,355
High Yield Subaccount 49,626 37,502 28,545 22,109 6,519
Growth Subaccount 59,737 55,059 55,308 37,678 19,693
Government Securities Subaccount 21,355 21,288 24,760 28,414 16,647
International Subaccount 27,660 20,930 21,035 12,503 4,699
Small Cap Growth Subaccount** 10,280 5,316 2,637
Investment Grade Bond Subaccount*** 1,381
Value Subaccount*** 11,193
Small Cap Value Subaccount*** 8,113
Value+Growth Subaccount*** 7,220
Horizon 20+ Subaccount*** 2,586
Horizon 10+ Subaccount*** 4,162
Horizon 5 Subaccount*** 1,818
</TABLE>

- --------------------------------------------------------------------------------
* Commencement of Offering on January 6, 1992.
** Commencement of Offering on May 2, 1994 at initial accumulation unit value
of 1.000.

*** Commencement of Offering on May 1, 1996 at initial accumulation unit value
of 1.000.

NOTE: No condensed financial information is included for the Blue Chip and
Global Income Subaccounts because neither of these Subaccounts commenced
operations until May 1, 1997.

8
<PAGE> 13

KILICO, THE MVA OPTION, 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. ("IP") and Insurance Partners Offshore
(Bermuda), L.P. (together with IP, "Insurance Partners") indirectly and directly
own 80 percent and 20 percent, respectively, of Kemper Corporation.

THE MVA OPTION

An Owner may allocate amounts in the MVA Option to one or more Guarantee Periods
with durations of one (1) to ten (10) years during the Accumulation Period.
KILICO may, at its discretion, offer additional Guarantee Periods or limit, for
new Certificates, the number of durations of Guarantee Periods available to no
less than three (3).

The amounts allocated to the MVA Option under the Contracts are invested in
accordance with the standards applicable to KILICO's general account. Assets
supporting the amounts allocated to MVA Periods under the Contracts are held in
a "non-unitized" separate account of KILICO. However, all of KILICO's general
account assets are available to fund benefits under the Contracts. A
non-unitized separate account is a separate account in which the Owner does not
participate in the performance of the assets through unit values. There are no
discrete units for this separate account. The assets of the non-unitized
separate account are held as reserves for the guaranteed obligations of KILICO.
The assets of the separate account are not chargeable with liabilities arising
out of the business conducted by any other separate account or out of any other
business KILICO may conduct.

State insurance laws concerning the nature and quality of investments regulate
KILICO's investments for its general account and any non-unitized separate
account. Within specified limits and subject to certain standards, these laws
generally permit investment in federal, state and municipal obligations,
preferred and common stocks, corporate bonds, real estate mortgages, real estate
and certain other investments. (See "Management's Discussion and
Analysis--INVESTMENTS" and "FINANCIAL STATEMENTS" for information on KILICO's
investments.) Assets of KILICO's general account are managed by Zurich Kemper
Investments, Inc. ("ZKI") an affiliate of KILICO and a wholly owned subsidiary
of ZKI Holding Corporation. ZKI Holding Corp. is a more than 90% owned
subsidiary of Zurich Holding Company of America, which is a wholly-owned
subsidiary of Zurich.

KILICO intends to consider the return available on the instruments in which it
intends to invest the proceeds from the Certificates when it establishes
Guaranteed Interest Rates. Such return is only one of many factors considered in
establishing the Guaranteed Interest Rates. (See "The Accumulation Period--D.
Establishment of Guaranteed Interest Rates.")

KILICO's investment strategy for this non-unitized separate account is generally
to invest in debt instruments that it uses to match its liabilities with regard
to a Guarantee Period. This is done, in KILICO's sole discretion, by investing
in any type of instrument that is authorized under applicable state law. KILICO
expects to invest a substantial portion of the Purchase Payments received in
debt instruments as follows: (1) securities issued by the United States
Government or its agencies or instrumentalities, which issues may or may not be
guaranteed by the United States Government; (2) debt securities which have an
investment

9
<PAGE> 14

grade, at the time of purchase, within the four (4) highest grades assigned by
Moody's Investors Services, Inc. ("Moody's") (Aaa, Aa, A or Baa), Standard &
Poor's Corporation ("Standard & Poor's") (AAA, AA, A or BBB), or any other
nationally recognized rating service; and (3) other debt instruments including,
but not limited to, issues of or guaranteed by banks or bank holding companies
and corporations, which obligations, although not rated by Moody's or Standard &
Poor's, are deemed by KILICO's management to have an investment quality
comparable to securities which may be purchased as stated above. In addition,
KILICO may engage in options and futures transactions on fixed income
securities.

KILICO's invested assets portfolio at December 31, 1996 included approximately
86.8 percent in U.S. Treasuries, investment grade corporate, foreign and
municipal bonds, and commercial paper, .3 percent in below investment grade
(high risk) bonds, 5.9 percent in mortgage loans and other real estate-related
investments and 7.0 percent in all other investments. (See "Management's
Discussion and Analysis--INVESTMENTS.")

KILICO is not obligated to invest the amounts allocated to the MVA Option
according to any particular strategy, except as may be required by applicable
state insurance laws. (See "Management's Discussion and Analysis--INVESTMENTS.")

THE SEPARATE ACCOUNT

KILICO originally established the KILICO Variable Annuity Separate Account (the
"Separate Account") on May 29, 1981 pursuant to Illinois law as the KILICO Money
Market Separate Account, 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 multi-subaccount 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 and Certificates 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 during both the Accumulation Period and Annuity Period and
certain other variable annuity contracts. The obligations to Owners and
beneficiaries arising under the Contracts and Certificates are general corporate
obligations of KILICO.

The Separate Account is divided into Subaccounts, including the seventeen
Subaccounts currently offered under the Certificates. Each Subaccount invests
exclusively in shares of one of the corresponding Portfolios of the Fund.
Additional Subaccounts may be added in the future.

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

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

10
<PAGE> 15

THE FUND

The Separate Account invests in shares of the Investors Fund Series (formerly
Kemper Investors Fund), a series type mutual fund registered with the Commission
as an open-end, management investment company. Registration of the Fund does not
involve supervision of its management, investment practices or policies by the
Commission. The Fund is designed to provide an investment vehicle for variable
annuity contracts and variable life insurance. Shares of the Fund are sold only
to insurance company separate accounts. In addition to selling shares to
variable annuity and variable life separate accounts of KILICO and its
affiliates (currently, the Separate Account and KILICO Variable Separate
Account), shares of the Fund may be sold to variable life insurance and variable
annuity separate accounts of insurance companies not affiliated with KILICO. It
is conceivable that in the future it may be disadvantageous for variable life
insurance separate accounts and variable annuity separate accounts of companies
unaffiliated with KILICO, or for both variable life insurance separate accounts
and variable annuity separate accounts, to invest simultaneously in the Fund.
Currently, neither KILICO nor the Fund foresees any such disadvantages to either
variable life insurance or variable annuity owners. Management of the Fund has
an obligation to monitor events to identify material conflicts between such
owners and determine what action, if any, should be taken. In addition, if
KILICO believes that the Fund's response to any of those events or conflicts
insufficiently protects the Owners, it will take appropriate action on its own.

The Fund currently consists of the following Portfolios: Money Market, Total
Return, High Yield, Growth, Government Securities, International, Small Cap
Growth, Investment Grade Bond, Value, Small Cap Value, Value+Growth, Horizon
20+, Horizon 10+, Horizon 5, Blue Chip and Global Income. 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.
Each Portfolio is diversified except the Global Income Portfolio. Pending
regulatory approval, the Blue Chip and Global Income Portfolios are not
available in California.

The sixteen Portfolios of the Fund are summarized below:

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.

11
<PAGE> 16

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.

BLUE CHIP PORTFOLIO seeks growth of capital and of income.

GLOBAL INCOME PORTFOLIO seeks to provide high current income consistent with
prudent total return asset management.

There is no assurance that any of the Portfolios of the Fund will achieve its
objective as stated in the Fund's prospectus. More detailed information,
including a description of risks involved in investing in each of the
Portfolios, may be found in the prospectus for the Fund, which must accompany or
precede this Prospectus, and the Fund's Statement of Additional Information
available upon request from Kemper Investors Life Insurance Company, 1 Kemper
Drive, Long Grove, Illinois 60049 or Zurich Kemper Investments, Inc., 222 South
Riverside Plaza, Chicago, Illinois 60606. Read the prospectus carefully before
investing.

Responsibility for overall management of the Fund rests with the Board of
Trustees and officers of the Fund. Zurich Kemper Investments, Inc. (formerly
named Kemper Financial Services, Inc.) ("ZKI"), is the investment manager of
each Portfolio other than the Value and Small Cap Value Portfolios and provides
each with continuous professional investment supervision. Dreman Value Advisors,
Inc. ("DVA"), a wholly owned subsidiary of ZKI, is the investment manager of the
Value and Small Cap Value Portfolios and provides each with continuous
professional investment supervision. DVA is also the sub-adviser for the
Value+Growth, Horizon 20+, Horizon 10+, and Horizon 5 Portfolios. Under the
terms of its 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. ZKI
uses the services of Zurich Investment Management Limited ("ZIML"), an affiliate
of ZKI, as a sub-adviser for the Total Return, High Yield, Growth,
International, Small Cap Growth, Investment Grade Bond, Value+Growth, Horizon,
Blue Chip and Global Income Portfolios. Under the terms of the Sub-Advisory
Agreement between ZIML and ZKI for the Total Return, High Yield, Growth, Small
Cap Growth, Investment Grade Bond, Value+Growth, Horizon and Blue Chip
Portfolios, ZIML renders investment advisory and management services with regard
to that portion of a Portfolio's assets as may be allocated by ZKI to ZIML from
time to time for management of foreign securities, including foreign currency
transactions and related investments. Under the terms of the Sub-Advisory
Agreement between ZIML and ZKI for the International and Global Income
Portfolios, ZIML renders investment advisory and management services with regard
to that portion of the Portfolio's assets as may be allocated by ZKI to ZIML
from time to time for management, including services related to foreign
securities, foreign currency transactions and related investments.

For its services, ZKI is paid a management fee based upon the average daily net
assets of such 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+

12
<PAGE> 17

(.60 of 1%), Horizon 5 (.60 of 1%), Blue Chip (.65 of 1%) and Global Income (.75
of 1%). DVA serves as the investment manager of the 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 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. ZKI pays ZIML for its services
a sub-advisory fee, payable monthly at the following annual rates applied to the
portion of the average daily net assets of the applicable Portfolio allocated by
ZKI to ZIML for management: .35% for the Growth, International, Small Cap
Growth, Total Return, Value+Growth, Horizon and Blue Chip Portfolios; and .30%
for the High Yield, Investment Grade Bond and Global Income Portfolios.

CHANGE OF INVESTMENTS

KILICO reserves the right, subject to applicable law, to make additions to,
deletions from, or substitutions for the shares held by the Separate Account or
that the Separate Account may purchase. KILICO reserves the right to eliminate
the shares of any of the portfolios of the Fund and to substitute shares of
another portfolio of the Fund or of another investment company, if the shares of
a portfolio are no longer available for investment, or if in its judgment
further investment in any portfolio becomes inappropriate in view of the
purposes of the Separate Account. KILICO will not substitute any shares
attributable to an Owner's interest in a Subaccount of the Separate Account
without notice to the 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 Owners.

KILICO also reserves the right to establish additional subaccounts of the
Separate Account, each of which would invest in a new portfolio of the Fund, or
in shares of another investment company, with a specified investment objective.
New subaccounts may be established when, in the sole discretion of KILICO,
marketing needs or investment conditions warrant, and any new subaccounts may be
made available to existing 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 Owners
of any such changes.

If deemed by KILICO to be in the best interests of persons having voting rights
under the Certificate, 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 Certificate to another separate
account, or to the General Account.

PERFORMANCE INFORMATION

From time to time, the Separate Account may advertise several types of
performance information for the Subaccounts. All Subaccounts may advertise
"average annual total return" and "total return," except "average annual total
return" is not shown for Money Market Subaccount #1 and Money Market Subaccount
#2 (collectively, the "Money Market Subaccounts"). The High Yield Subaccount,
Investment Grade Bond Subaccount, the Government Securities Subaccount and the
Global Income Subaccount may also advertise "yield." The Money Market
Subaccounts may each advertise "yield" and "effective yield."

13
<PAGE> 18

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 the 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 each of the Money
Market Subaccounts) expressed as a percentage of the value of the Subaccounts'
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
each of the Money Market Subaccounts is calculated similarly but includes the
effect of assumed compounding calculated under rules prescribed by the
Securities and Exchange Commission. The Money Market Subaccounts effective
yields will be slightly higher than their yields due to this compounding effect.
The Subaccounts' units are sold at Accumulation Unit value. The Subaccounts'
performance figures and Accumulation Unit values will fluctuate. Units of the
Subaccount are redeemable by an 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 9.0% of
aggregate Purchase Payments under the Certificate. Yield, effective yield and
total return figures do not include the effect of any Withdrawal Charge that may
be imposed upon the redemption of units, and thus may be higher than if such
charges were deducted. Average annual total return figures include the effect of
the applicable Withdrawal Charge that may be imposed at the end of the period in
question. Additional information concerning a Subaccount's performance appears
in the Statement of Additional Information. The Subaccounts may provide
comparative information with regard to the Dow Jones Industrial Average, the
Standard & Poor's 500 Stock Index, the Consumer Price Index, the CDA Certificate
of Deposit Index, the Lehman Brothers Government and Corporate Bond Index, the
Salomon Brothers High Grade Corporate Bond Index and the Merrill Lynch
Government/Corporate Master Index, the CDA Mutual Fund--International Index, and
the Morgan Stanley Capital International Europe, Australia, Far East Index, and
may provide Lipper Analytical Services, Inc., the VARDS Report and Morningstar,
Inc. performance analysis rankings. From time to time, the Separate Account may
quote information from publications such as MORNINGSTAR, INC., THE WALL STREET
JOURNAL, MONEY MAGAZINE, FORBES, BARRON'S, FORTUNE, THE CHICAGO TRIBUNE, USA
TODAY, INSTITUTIONAL INVESTOR, REGISTERED REPRESENTATIVE, VARDS AND INVESTMENT
ADVISOR.

THE CERTIFICATES

The Prospectus offers Certificates for use in connection with both Qualified
Plans and Non-Qualified Plans. The minimum initial Purchase Payment for a
Certificate is $2,000. Subsequent Purchase Payments of at least $500 will be
accepted at any time while the Certificate is in force. The prior approval of
KILICO is required before it will accept a Purchase Payment in excess of
$1,000,000. The maximum amount of Purchase Payments may also be limited by the
provisions of the retirement plan pursuant to which the Certificate has been
purchased.

KILICO may at any time amend the Contract and Certificate in accordance with
changes in the law, including applicable tax laws, regulations or rulings, and
for other purposes.

14
<PAGE> 19

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

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

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 Certificate. If
a Beneficiary is not named, or if no named Beneficiary survives the Annuitant,
the Beneficiary shall be the Owner's estate upon the death of the Owner, or the
Annuitant's estate upon the death of the Annuitant who is not the Owner.

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

THE ACCUMULATION PERIOD

A. APPLICATION OF PURCHASE PAYMENTS.

An eligible member of a group or an individual to which a Certificate has been
issued may participate by submitting to KILICO for approval a completed
enrollment application form along with the required initial Purchase Payment.
KILICO issues a Certificate upon acceptance of the application and receipt of
the Purchase Payment. Purchase Payments are confirmed to an Owner in writing.
Purchase Payments are allocated to the Subaccount(s) or Guarantee Period(s) as
selected by the Owner, subject to a minimum of $1,000 in each Subaccount and
Guarantee Period.

KILICO will issue a Certificate without having previously received a signed
application from the applicant in the following circumstances. A dealer may
inform KILICO of an applicant's answers to the questions in the application by
submitting an unsigned application and cause the initial Purchase Payment to be
paid to KILICO. If the information is in good order, KILICO will issue the
Certificate with a copy of the completed application. The Certificate will be
delivered to the owner with a letter requesting the Owner to sign and return to
KILICO a copy of the application in confirmation of the correctness of the
information on the application.

The amount of each Purchase Payment credited to a Subaccount will be based on
the next computed value of an Accumulation Unit following receipt of payment in
proper form by KILICO. The value of an Accumulation Unit is determined when the
net asset values of the Portfolios of the Fund are calculated, which is
generally at 3:00 p.m. Chicago time on each day that the New York Stock Exchange
is open for trading. Purchase Payments allocated to a Guarantee Period will
begin earning interest one day after receipt in proper form. However, with
respect to initial Purchase Payments allocated to either Subaccount(s) or

15
<PAGE> 20

Guarantee Period(s), the amount will be credited only after an affirmative
determination by KILICO to issue the Certificate, but no later than the second
day following receipt of the Purchase Payment. Wired funds received before 3:00
p.m. (CST) will be credited that day. Wired funds received after 3:00 p.m. (CST)
will be credited the next business day. After the initial purchase, the number
of Accumulation Units credited is determined by dividing the Purchase Payment
amount allocated to a Subaccount by the Accumulation Unit value which is next
computed following receipt by KILICO of any Purchase Payment in good funds.
Purchase Payments will not be received except on those days when the New York
Stock Exchange is open for trading.

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

If KILICO has not been provided with information sufficient to establish a
Certificate 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
Certificate 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.

B. ACCUMULATION UNIT VALUE.

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

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

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

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

(1) is the net result of:

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

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

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

16
<PAGE> 21

(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 Certificate for the number of days
in the valuation period.

C. GUARANTEE PERIODS OF THE MVA OPTION.

An Owner may select, on the application form, one or more Guarantee Periods with
durations of one (1) to ten (10) years. Any subsequently permitted Purchase
Payments are allocated to Guarantee Periods as selected by the Owner. The
Guarantee Period, for each Purchase Payment or portion thereof, selected by the
Owner determines the Guaranteed Interest Rate. KILICO pays interest at the
Guaranteed Interest Rates in effect at the time the Purchase Payment is
received. The Guaranteed Interest Rate applies for the entire duration of the
Guarantee Period for that Purchase Payment remaining in the Guarantee Period.
Interest is credited daily at a rate equivalent to the effective annual rate.

Set forth below is an illustration of how KILICO will credit interest during a
Guarantee Period. For the purpose of this example, certain assumptions were made
as indicated.

EXAMPLE OF GUARANTEED INTEREST RATE ACCUMULATION

Purchase Payment: $40,000

Guarantee Period: 5 Years

Guaranteed Interest Rate: 4.0% Effective Annual Rate

<TABLE>
<CAPTION>
INTEREST CREDITED CUMULATIVE
YEAR DURING YEAR INTEREST CREDITED
---- ----------------- -----------------
<S> <C> <C>
1 ......................................... $1,600.00 $1,600.00
2 ......................................... 1,664.00 3,264.00
3 ......................................... 1,730.56 4,994.56
4 ......................................... 1,799.78 6,794.34
5 ......................................... 1,871.77 8,666.11
</TABLE>

Accumulated Value at the end of 5 years is:

$40,000 + $8,666.11 = $48,666.11

NOTE: THIS EXAMPLE ASSUMES NO WITHDRAWALS OF ANY AMOUNT DURING THE ENTIRE
FIVE-YEAR PERIOD. A MARKET VALUE ADJUSTMENT AND A WITHDRAWAL CHARGE APPLY TO ANY
INTERIM WITHDRAWAL OR TRANSFER (SEE, "WITHDRAWAL DURING ACCUMULATION PERIOD" AND
"TRANSFER DURING ACCUMULATION PERIOD.") THE HYPOTHETICAL INTEREST RATES ARE
ILLUSTRATIVE ONLY AND ARE NOT INTENDED TO PREDICT FUTURE INTEREST RATES TO BE
GUARANTEED UNDER THE CERTIFICATE. ACTUAL INTEREST RATES GUARANTEED FOR ANY GIVEN
TIME MAY BE MORE OR LESS THAN THOSE SHOWN.

At the end of any Guarantee Period, a subsequent Guarantee Period begins. KILICO
provides written notification of the beginning of a subsequent Guarantee Period.
The subsequent Guarantee Period automatically renews for the same duration as
the terminating Guarantee Period unless the Owner elects another Guarantee
Period within 15 days before or 15 days after the end of the terminating
Guarantee Period. The Owner may choose a different Guarantee Period by
preauthorized telephone instructions or written notification to KILICO within 15
days before or 15 days after the beginning of the subsequent Guarantee Period
(or such longer period as stated in KILICO's notification). An Owner should not
select a

17
<PAGE> 22

subsequent Guarantee Period that would extend beyond the Annuity Date then in
effect for that Certificate as the Guarantee Period Amount available for
annuitization in such Guarantee Period would be subject to a Market Value
Adjustment and any applicable Withdrawal Charge. (See "Market Value Adjustment"
below.)

The amount reinvested at the beginning of any subsequent Guarantee Period is
equal to the Guarantee Period Value in the Guarantee Period just ended. The
Guaranteed Interest Rate in effect when the subsequent Guarantee Period begins
applies for the entire duration of the subsequent Guarantee Period.

An Owner may call 1-800-621-5001 or write to KILICO, 1 Kemper Drive, Long Grove,
Illinois 60049 for the subsequent Guaranteed Interest Rates.

D. ESTABLISHMENT OF GUARANTEED INTEREST RATES.

KILICO declares the Guaranteed Interest Rates for each of the ten durations of
Guarantee Periods from time to time as market conditions dictate, but once
established, rates will be guaranteed for the duration of the respective
Guarantee Periods. KILICO advises an Owner of the Guaranteed Interest Rate for a
chosen Guarantee Period at the time a Purchase Payment is received, a transfer
is effectuated or a Guarantee Period renews. Any portion of an Owner's
Accumulated Guarantee Period Value withdrawn from the MVA Option will be subject
to any applicable Withdrawal Charge and Records Maintenance Charge and may be
subject to a Market Value Adjustment. (See "Market Value Adjustment" below.)

KILICO has no specific formula for establishing the Guaranteed Interest Rates
for the Guarantee Periods. The determination may be influenced by, but not
necessarily correspond to, interest rates generally available on the types of
investments acquired with the Purchase Payments received under the Certificates.
(See "The MVA Option".) KILICO, in determining Guaranteed Interest Rates, may
also consider, among other factors, the duration of a Guarantee Period,
regulatory and tax requirements, sales commissions and administrative expenses
borne by KILICO, and general economic trends.

KILICO'S MANAGEMENT MAKES THE FINAL DETERMINATION OF THE GUARANTEED INTEREST
RATES TO BE DECLARED. KILICO CANNOT PREDICT OR GUARANTEE THE LEVEL OF FUTURE
GUARANTEED INTEREST RATES.

E. CERTIFICATE VALUE.

Separate Account 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 interest in each Subaccount in which the
Certificate is participating. That amount, when added to the Owner's Accumulated
Guarantee Period Value in the MVA Option, equals the Certificate Value.

F. TRANSFER DURING ACCUMULATION PERIOD.

During the Accumulation Period, an Owner may transfer all or part of Certificate
Value to one or more Subaccounts or Guarantee Periods subject to the following
provisions: (i) an Owner is limited to allocating Certificate Value to a maximum
of 16 allocation options (all Guarantee Periods are considered one allocation
option) including 40 Guarantee Periods under the MVA Option; (ii) no transfer
can be made until the initial Purchase Payment has been in a Subaccount or
Guarantee Period for fifteen days; (iii) once all or part of the Owner's
Certificate Value has been transferred to or from a Subaccount or Guarantee
Period another transfer may not be made within the next fifteen day period; (iv)
the amount being transferred must be at least $1,000, unless the total
Certificate Value attributable to a Subaccount or

18
<PAGE> 23

Guarantee Period is being transferred; and (v) the Certificate Value remaining
in a Subaccount or Guarantee Period must be at least $1,000. In addition,
transfers of all or a portion of Guarantee Period Value will be subject to the
Market Value Adjustment described below unless the transfer is effective within
15 days before or 15 days after the end of the applicable Guarantee Period.
Because a transfer before the end of a Guarantee Period is subject to a Market
Value Adjustment, the amount actually transferred from the Guarantee Period may
be more or less than the requested specific dollar amount.

KILICO will make transfers pursuant to proper written or telephone instructions
which specify in detail the requested changes. Before telephone transfer
instructions will be honored by KILICO, a telephone transfer authorization must
be completed by the Owner. A transfer request generally is effective on the day
the request is received by KILICO. Transfers involving a Subaccount will be
based upon the Accumulation Unit values next determined following receipt of
valid, complete transfer instructions by KILICO. Under current law, there is no
tax liability to the Owner upon transfer. 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 Certificate
Owner would bear the risk of loss in the event of a fraudulent telephone
transfer.

G. WITHDRAWAL DURING ACCUMULATION PERIOD.

The Owner may redeem all or a portion of the Certificate Value less the Record
Maintenance Charge and previous withdrawals, plus or minus any applicable Market
Value Adjustment, and less any contingent deferred sales charge ("Withdrawal
Charge"). Owners should be aware that such withdrawals may, under certain
circumstances, be subject to adverse tax consequences under the Internal Revenue
Code. (See "Taxation of Partial and Full Withdrawals.") A withdrawal of the
entire Certificate Value is called a surrender.

ALL WITHDRAWALS OF ANY GUARANTEE PERIOD VALUE, EXCEPT THOSE EFFECTED DURING THE
"FREE LOOK" PERIOD AND THOSE EFFECTED WITHIN 15 DAYS BEFORE OR 15 DAYS AFTER THE
END OF THE APPLICABLE GUARANTEE PERIOD, WILL BE SUBJECT TO THE MARKET VALUE
ADJUSTMENT.

The Withdrawal Charge is assessed on withdrawals attributable to Purchase
Payments and all related accumulations during the first six Certificate Years
after the Purchase Payments are made. The Withdrawal Charge starts at 6% in the
Certificate Year in which the Purchase Payment is made (the first "Contribution
Year") and remains at 6% in the second Contribution Year; reduces to 5% in the
third and fourth Contribution Years; reduces to 4% in the fifth and sixth
Contribution Years and reduces to 0% thereafter. However, in no event shall the
aggregate Withdrawal Charges assessed against a Certificate exceed 9% of the
aggregate Purchase Payments made under the Certificate. Please note that adverse
tax consequences may occur with respect to certain withdrawals. (See "Tax
Treatment of Withdrawals and Assignments.")

In the case of a Certificate invested other than solely in one Subaccount or
Guarantee Period, an Owner requesting a partial withdrawal must specify what
portion of the Certificate Value is to be redeemed. If an Owner does not specify
what portion of the Certificate Value is to be redeemed, KILICO will redeem

19
<PAGE> 24

Certificate Value from all Subaccounts and Guarantee Periods in which the Owner
has an interest. The number of Accumulation Units redeemed from each Subaccount
and the amount redeemed from each Guarantee Period will be in approximately the
proportion which the Owner's interest in each Subaccount and in each Guarantee
Period bears to the total Certificate Value.

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

(1) The amount requested must be at least $1,000 (before application of the
Market Value Adjustment) or the Owner's entire interest in the Subaccount
or Guarantee Period from which the withdrawal is requested.

(2) The Owner's remaining interest in the Subaccount or Guarantee Period
from which the withdrawal is requested, if not zero, must be at least
$1,000 after the withdrawal is completed and the minimum Certificate Value
must be $2,500.

(3) A Purchase Payment must be made more than 30 days before a partial
withdrawal of such Purchase Payment is permitted except for purchases made
by wire which may be withdrawn immediately.

KILICO, upon request, will inform the Owner of the amounts that would be payable
in the event of a full surrender or partial withdrawal.

Election to withdraw shall be made in writing to KILICO at its home office at 1
Kemper Drive, Long Grove, Illinois 60049. 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. A withdrawal 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 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 of amounts withdrawn from the Subaccounts 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 Subaccounts 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 Owners. For withdrawal requests from the MVA Option, KILICO may
defer any payment for the period permitted by the law of the appropriate state
of jurisdiction, but in no event for more than six (6) months after the written
request is received by KILICO. During the period of deferral, interest at the
current Guaranteed Interest Rate for the same Guarantee Period as declared by
KILICO will continue to be credited.

Withdrawals are permitted from Certificates issued in connection with Section
403(b) Qualified Plans only under limited circumstances. (See "Federal Tax
Matters.")

H. MARKET VALUE ADJUSTMENT.

Any withdrawal, transfer or any annuitization of Guarantee Period Value other
than if effected during the "free look" period or within 15 days before or 15
days after a Guarantee Period terminates, may be adjusted up or down by the
application of a Market Value Adjustment. The Market Value Adjustment is applied
to the amount being withdrawn before deduction of any applicable Withdrawal
Charge. The Market Value Adjustment will also apply to the death benefit payable
upon the death of the Owner or the Annuitant. (See "Death Benefit".)

20
<PAGE> 25

The Market Value Adjustment reflects the relationship between (a) the currently
established interest rate ("Current Interest Rate") for a Guarantee Period equal
to the remaining length of the Guarantee Period, rounded to the next higher
number of complete years, and (b) the Guaranteed Interest Rate applicable to the
amount being withdrawn. Generally, if the Guaranteed Interest Rate is the same
or lower than the applicable Current Interest Rate, then the application of the
Market Value Adjustment results in a reduced Market Adjusted Value and hence a
lower payment upon withdrawal. Thus, it is possible that the amount available on
withdrawal could be less than the original Purchase Payment or the original
amount allocated to a Guarantee Period if interest rates increase. Conversely,
if the Guaranteed Interest Rate is higher than the applicable Current Interest
Rate, the application of the Market Value Adjustment results in an increased
Market Adjusted Value and, hence, a higher payment upon withdrawal.

The Market Value Adjustment (MVA) is determined by the application of the
following formula:

(1 + I) t/365
MVA = GPV X [ [ ------------------- ] -1 ]
(1 + J + .005)

Where I is the Guaranteed Interest Rate being credited to the Guarantee
Period Value (GPV) subject to the Market Value Adjustment,

J is the Current Interest Rate declared by KILICO, as of the effective date
of the application of the Market Value Adjustment, for current allocations
to a Guarantee Period the length of which is equal to the balance of the
Guarantee Period for the Guarantee Period Value subject to the Market Value
Adjustment, rounded to the next higher number of complete years, and

t is the number of days remaining in the Guarantee Period.

The .005 Market Value Adjustment factor can be changed in the future, at the
discretion of KILICO on newly issued Certificates.

For an illustration showing an upward and a downward adjustment, see Appendix A.

I. DEATH BENEFIT.

A death benefit shall be paid prior to the annuity date in the event of: (1) the
death of the Owner who is also the Annuitant; (2) the death of either the
Annuitant or the Owner when the Annuitant is not the Owner; (3) the death of a
joint Owner; or (4) the death of the surviving joint Annuitant when joint
Annuitants are named and they are not the Owners.

If there is a joint Owner (permitted only under a Non-Qualified Plan
Certificate), the Owner's death will occasion payment of the death benefit
unless the joint Owner is the Owner's spouse, and the spouse has been named
beneficiary. In that case, the surviving spouse becomes the new Owner.

If a death benefit becomes payable by reason of the death of an Owner, it must
be fully paid out within five (5) years of the Owner's death, unless it is
payable to the named beneficiary over his or her life or life expectancy,
beginning no more than one (1) year after the Owner's death. The death benefit
proceeds applied to the annuity must be $4,000 or more. If a death benefit
becomes payable by reason of the death of an Owner, and the beneficiary is the
Owner's surviving spouse, the surviving spouse may become the new Owner under
the Certificate.

21
<PAGE> 26

If the death benefit becomes payable by reason of the death of the Annuitant or
joint Annuitant, it will be paid in the manner selected by the named
beneficiary, including a lump sum withdrawal or Annuity Option, provided, in the
case of an annuity option, that the death benefit proceeds are $4,000 or more.

The death benefit payable under the Certificate depends upon issue age of the
Owner except in the case of a Certificate issued where the Owner differs from
the Annuitant, the death benefit issue age will be based on the age of the Owner
or Annuitant, whichever is older.

For a Certificate issued to an Owner prior to attaining age 66, the death
benefit payable during the first six Certificate Years will be Market Adjusted
Value plus Separate Account Value as of the date KILICO receives due proof of
death and return of the Certificate, or the sum of all Purchase Payments (minus
withdrawals and withdrawal charges) accumulated at 5% annually per Certificate
Year, whichever is greater. The death benefit payable at the end of the sixth
Certificate Year is the greater of Market Adjusted Value plus Separate Account
Value as of the date KILICO receives due proof of death and return of the
Certificate, or the sum of all Purchase Payments (minus withdrawals and
withdrawal charges) accumulated at 5% annually per Certificate Year ("Minimum
Death Benefit Value"). From the seventh Certificate Year to the twelfth
Certificate Year, the death benefit payable during the Accumulation Period is
the Market Adjusted Value plus Separate Account Value as of the date KILICO
receives due proof of death and return of the Certificate, or Minimum Death
Benefit Value at the end of year six plus subsequent Purchase Payments minus
withdrawals and withdrawal charges, whichever is greater. Every six years after
the end of the twelfth Certificate Year the Minimum Death Benefit Value plus
subsequent Purchase Payments minus withdrawals and withdrawal charges is
compared to Market Adjusted Value plus Separate Account Value and whichever is
greater determines the new Current Minimum Death Benefit Value for the next six
Certificate Years.

For a Certificate issued to an Owner age 66 and over, the death benefit payable
during the Accumulation Period for the first six Certificate Years is Market
Adjusted Value plus Separate Account Value, or the sum of all Purchase Payments
(minus withdrawals and withdrawal charges), whichever is greater. At the end of
the sixth Certificate Year, the Minimum Death Benefit Payable will be set for
the remainder of the Accumulation Period at the greater of Market Adjusted Value
plus Separate Account Value, or the sum of all Purchase Payments (minus
withdrawals and withdrawal charges). For the remainder of the Accumulation
Period, the beneficiary will receive the greater of Market Adjusted Value plus
Separate Account Value or the Minimum Death Benefit Value plus subsequent
Purchase Payments minus withdrawals and withdrawal charges.

The death benefit is payable upon the receipt by KILICO at its Home Office of
due proof of death and return of the Certificate, election of the method of
payment, and sufficient information about the beneficiary to make payment. The
beneficiary may receive a lump sum benefit, defer receipt of the benefit for up
to five (5) years or select an available Annuity Option if the proceeds are
$4,000 or more.

CERTIFICATE CHARGES AND EXPENSES

Charges and deductions under the Certificates are made against the Separate
Account for KILICO's assumption of mortality and expense risk and administrative
expenses. In addition, a deduction is made from the Owner's account for a
Records Maintenance Charge of $30 at the end of each Certificate Year, on
surrender of a Certificate and on surrender upon annuitization. Investment
management fees and other expenses of the Fund are indirectly borne by the
Owner. These fees and other expenses are described in the Fund's Prospectus and
Statement of Additional Information. KILICO will deduct state premium taxes from
Certificate Value when paid by KILICO. Additionally, where applicable, a
Withdrawal Charge may be assessed by KILICO in the event of early withdrawal or
early annuitization.

22
<PAGE> 27

A. CHARGES AGAINST THE SEPARATE ACCOUNT.

During both the Accumulation Period and the Annuity Period, KILICO assesses that
portion of each Subaccount representing Certificate Value with a daily asset
charge for mortality and expense risks and administrative costs, which amounts
to an aggregate of one and one-quarter percent (1.25%) per annum (consisting of
approximately .80% for mortality risks, approximately .30% for expense risks and
approximately .15% for administrative costs). The administrative charge is
intended to cover the average anticipated administrative expenses to be incurred
over the period the Certificates are in force. With an administrative charge
based on a percentage of assets, however, there is not necessarily a direct
relationship between the amount of the charge and the administrative costs of a
particular account. Additionally, KILICO deducts an annual Records Maintenance
Charge of $30 for each Certificate as described below. The Records Maintenance
Charge is not assessed during the Annuity Period.

These charges may be decreased by KILICO without notice. The Records Maintenance
Charge and the daily asset charge for mortality and expense risks are guaranteed
not to increase. The daily asset charge for administrative costs may be
increased provided that the increase will apply only to Certificates issued
after the effective date of such increase.

1. MORTALITY RISK.

Variable Annuity payments reflect the investment performance 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 Owner or of the Annuitant prior to the
Annuity Date, KILICO will return to the Beneficiary the guaranteed and
increasing death benefit described above. 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 Certificate and relieves the Annuitant from
the risk of outliving the amounts accumulated for retirement.

2. EXPENSE RISK.

KILICO also assumes the risk that all actual expenses involved in administering
the Certificates including Certificate 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.

3. ADMINISTRATIVE COSTS.

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

B. RECORDS MAINTENANCE CHARGE.

KILICO will assess a Records Maintenance Charge of $30 during the Accumulation
Period against each Owner's account at the end of each Certificate Year, on
surrender of a Certificate and on surrender upon

23
<PAGE> 28

annuitization. This charge is to reimburse KILICO for expenses incurred in
establishing and maintaining the records relating to an Owner's account. The
imposition of the Records Maintenance Charge will constitute a reduction in
Separate Account Value or in Guarantee Period Value. Under certain
circumstances, the Records Maintenance Charge may be waived or reduced by KILICO
to reflect differences in costs or services, provided that it does not unfairly
discriminate against any person. The Records Maintenance Charge will be waived
for Certificates with a Certificate Value exceeding $50,000 on the date of
assessment.

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
Certificate is participating and a number of Accumulation Units sufficient to
equal the proper portion of the charge will be redeemed from each Subaccount to
meet the assessment. If the Owner has no Certificate Value allocated to the
Separate Account, the Records Maintenance Charge is deducted from the Guarantee
Period closest to maturity and shortest in original duration.

C. WITHDRAWAL CHARGE.

No sales charge is deducted from any Purchase Payment. However, a contingent
deferred sales charge ("Withdrawal Charge") may be assessed on withdrawals
attributable to Purchase Payments and all related accumulations during the first
six Certificate Years after the Purchase Payments are made. The Withdrawal
Charge will be used to cover expenses relating to the sale of the Certificates,
including commissions paid to sales personnel, the costs of preparation of sales
literature and other promotional costs and other acquisition expenses. During
the first six Certificate Years after a Purchase Payment is made, a Withdrawal
Charge applies even if the withdrawal occurs at the end of a Guarantee Period.

The Withdrawal Charge is computed as a percentage of the total amount withdrawn,
after application of any Market Value Adjustment. When a partial withdrawal is
requested, the recipient will receive a check in the amount requested. To the
extent that any Withdrawal Charge is applicable, the Certificate Value will be
reduced by the amount of the Withdrawal Charge in addition to the actual dollar
amount sent to the Owner. In no event shall the aggregate Withdrawal Charges
assessed against a Certificate exceed 9% of the aggregate Purchase Payments made
under the Certificate. (For additional details, see "Withdrawal During
Accumulation Period.") Withdrawals may be subject to certain adverse tax
consequences. (See "Taxation of Partial and Full Withdrawals.")

24
<PAGE> 29

Subject to state approval, a nursing care or hospitalization waiver endorsement
will be issued under the Certificate. The endorsement provides that subject to
certain exceptions withdrawal charges will not be assessed on withdrawals:

1. after an Owner has been confined in a hospital or skilled health care
facility for at least thirty days and the Owner remains confined at the
time of the request; or

2. within thirty days following an Owner's discharge from a hospital or
skilled health care facility after a confinement of at least thirty
days.

Restrictions and provisions related to the nursing care or hospitalization
waiver are more fully described in the endorsement.

The Withdrawal Charges are intended to compensate KILICO for expenses in
connection with distribution of the Certificates. 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 will also apply upon annuitization to Purchase Payments
made within six Certificate Years of annuitization and all related accumulations
unless 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.

The Withdrawal Charge may be reduced or eliminated to particular classes of
Owners, but only to the extent KILICO applies such variations in Withdrawal
Charges uniformly to the class and informs existing and prospective Owners of
such variations. Units of a Subaccount sold to officers, directors and employees
of KILICO and the Fund, the Fund's investment adviser, and principal underwriter
or certain affiliated companies, or to any trust, pension, profit-sharing or
other benefit plan for such persons may be withdrawn without any Withdrawal
Charge.

D. FUND INVESTMENT MANAGEMENT FEE AND OTHER EXPENSES.

The net asset value of each of the Portfolios of the Fund reflects investment
management fees and certain general operating expenses already deducted from the
assets of the Portfolios. These fees and expenses are indirectly borne by the
Owners. Investment management fees are described on page 10. Further detail
about fees and expenses of the Portfolios is provided in the prospectus for the
Fund and in the Fund's Statement of Additional Information.

E. STATE PREMIUM TAXES.

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

25
<PAGE> 30

THE ANNUITY PERIOD

Certificates may be annuitized under one of several Annuity Options, which are
available either on a fixed or variable basis. 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 Certificate, (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. Upon annuitization, a
Withdrawal Charge will apply to Purchase Payments made within six Certificate
Years of annuitization and all related accumulations. 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 Owner may elect to have annuity payments made under any one of the Annuity
Options specified in the Certificate and described below. However, all available
options are not described below. For example, additional options are available
under contracts issued prior to June 1, 1993 and other options may be made
available by KILICO. The 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 Certificate, 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 Certificate, 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 $4,000, KILICO shall have the right to pay the annuity in one lump sum. In
addition, if the first payment provided would be less than $50, 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 $50.

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 the older the payee,
the shorter the life expectancy and the larger the payments. Finally, if the
Owner participates in a Subaccount with higher investment performance, it is
likely the Owner will receive a higher periodic payment.

For Non-Qualified Plan Certificates, 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

26
<PAGE> 31

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. Payees under Option
1 by written notice to KILICO may cancel all or part of the remaining variable
annuity payments due and receive that part of the remaining value of the
Certificate less any applicable Withdrawal Charge.

OPTION 2--LIFE INCOME.

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

OPTION 3--LIFE INCOME WITH INSTALLMENTS GUARANTEED.

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

OPTION 4--JOINT AND SURVIVOR ANNUITY.

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

3. ALLOCATION OF ANNUITY.

The Owner may elect to have payments made on a fixed or variable basis, or a
combination of both. An Owner should exercise the transfer privilege during the
Accumulation Period for the purposes of such allocation. Any Guarantee Period
Value will be annuitized on a fixed basis. Any Separate Account Value will be
annuitized on a variable basis. Transfers during the Annuity Period are
permitted subject to stated limitations. The MVA Option is not available during
the Annuity Period.

27
<PAGE> 32

4. TRANSFER DURING ANNUITY PERIOD.

During the Annuity Period, the payee may transfer the value of the payee's
Certificate 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 Certificate'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 4% per annum which is assumed in the annuity tables contained in the
Certificate.

The net investment factor for each Subaccount for any 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

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 Certificate for the number of days
in the valuation period.

28
<PAGE> 33

6. FIRST PERIODIC PAYMENT.

At the time annuity payments begin, the value of the Owner's Certificate
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 Certificate 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 shall be 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 Certificate Value less deduction for premium taxes and Withdrawal
Charge, if applicable.

A 4% assumed investment rate is built into the annuity tables contained in the
Certificates. If the actual net investment rate exceeds 4%, payments will
increase at a rate equal to the amount of such excess. Conversely, if the actual
rate is less than 4%, 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
Certificate Value net of any applicable premium tax 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, the death proceeds, if any, will
depend upon the form of annuity payment in effect at the time of death. (See
"Annuity Options.")

FEDERAL TAX MATTERS

A. INTRODUCTION

The following discussion of the federal income tax treatment of the Certificate
is not exhaustive, does not purport to cover all situations, and is not intended
as tax advice. A qualified tax adviser should always be consulted with regard to
the application of law to individual circumstances. This discussion is based on
the Internal Revenue Code of 1986, as amended (the "Code"), Treasury Department
regulations, and

29
<PAGE> 34

interpretations existing on the date of this Prospectus. These authorities,
however, are subject to change by Congress, the Treasury Department, and
judicial decisions.

This discussion does not address state or local tax consequences associated with
the purchase of a Certificate. In addition, KILICO MAKES NO GUARANTEE REGARDING
ANY TAX TREATMENT--FEDERAL, STATE, OR LOCAL--OF ANY CERTIFICATE OR OF ANY
TRANSACTION INVOLVING A CERTIFICATE.

B. KILICO'S TAX STATUS

KILICO is taxed as a life insurance company under the Code. Since the operations
of the Separate Account are a part of, and are taxed with, the operations of
KILICO, the Separate Account is not separately taxed as a "regulated investment
company" under the Code. Under existing federal income tax laws, investment
income and capital gains of the Separate Account are not taxed to the extent
they are applied under a Certificate. KILICO does not anticipate that it will
incur any federal income tax liability attributable to such income and gains of
the Separate Account, and therefore KILICO does not intend to make provision for
any such taxes. If KILICO is taxed on investment income or capital gains of the
Separate Account, then KILICO may impose a charge against the Separate Account
in order to make provision for such taxes.

C. TAXATION OF ANNUITIES IN GENERAL

1. TAX DEFERRAL DURING ACCUMULATION PERIOD

Under existing provisions of the Code, except as described below, any increase
in the Certificate Value of a Non-Qualified Plan Certificate is generally not
taxable to the Owner or Annuitant until received, either in the form of annuity
payments, as contemplated by the Certificate, or in some other form of
distribution. However, certain requirements must be satisfied in order for this
general rule to apply, including: (1) the Certificate must be owned by an
individual (or treated as owned by an individual), (2) the investments of the
Separate Account must be "adequately diversified" in accordance with Treasury
Department regulations, (3) KILICO, rather than the Owner, must be considered
the owner of the assets of the Separate Account for federal tax purposes, and
(4) the Certificate must provide for appropriate amortization, through annuity
payments, of the Certificate's Purchase Payments and earnings, e.g., the Annuity
Date must not occur at too advanced an age.

NON-NATURAL OWNER. As a general rule, deferred annuity contracts held by
"non-natural persons" such as a corporation, trust or other similar entity, as
opposed to a natural person, are not treated as annuity contracts for federal
tax purposes. The investment income on Certificates is taxed as ordinary income
that is received or accrued by the Owner during the taxable year. There are
several exceptions to this general rule for non-natural Owners. First,
Certificates will generally be treated as held by a natural person if the
nominal owner is a trust or other entity which holds the Certificate as an agent
for a natural person. However, this special exception will not apply in the case
of any employer who is the nominal owner of a Certificate under a non-qualified
deferred compensation arrangement for its employees.

In addition, exceptions to the general rule for non-natural Owners will apply
with respect to (1) Certificates acquired by an estate of a decedent by reason
of the death of the decedent, (2) certain Qualified Certificates, (3) certain
Certificates purchased by employers upon the termination of certain qualified
plans, (4) certain Certificates used in connection with structured settlement
agreements, and (5) Certificates purchased with a single premium when the
annuity starting date (as defined in the tax law) is no later than a year from
purchase of the Certificate and substantially equal periodic payments are made,
not less frequently than annually, during the annuity period.

30
<PAGE> 35

DIVERSIFICATION REQUIREMENTS. For a Certificate to be treated as an annuity for
federal income tax purposes, the investments of the Separate Account must be
"adequately diversified" in accordance with Treasury Department Regulations. The
Secretary of the Treasury has issued regulations which prescribe standards for
determining whether the investments of the Separate Account are "adequately
diversified." If the Separate Account failed to comply with these
diversification standards, a Certificate would not be treated as an annuity
contract for federal income tax purposes and the Certificate Owner would
generally be taxable currently on the excess of the Certificate Value over the
Purchase Payments paid for the Certificate.

Although KILICO does not control the investments of the Fund, it expects that
the Fund will comply with such regulations so that the Separate Account will be
considered "adequately diversified."

OWNERSHIP TREATMENT. In certain circumstances, a variable annuity contract owner
may be considered the owner, for federal income tax purposes, of the assets of
the separate account used to support his or her contract. In those
circumstances, income and gains from such separate account assets would be
includible in the contract owner's gross income. The Internal Revenue Service
(the "Service") has stated in published rulings that a variable contract owner
will be considered the owner of separate account assets if the owner possesses
incidents of ownership in those assets, such as the ability to exercise
investment control over the assets. In addition, the Treasury Department
announced, in connection with the issuance of regulations concerning investment
diversification, that those regulations "do not provide guidance concerning the
circumstances in which investor control of the investments of a segregated asset
account may cause the investor, rather than the insurance company, to be treated
as the owner of the assets in the account." This announcement also stated that
guidance would be issued by way of regulations or rulings on the "extent to
which policyholders may direct their investments to particular sub-accounts [of
a separate account] without being treated as owners of the underlying assets."
As of the date of this Prospectus, no such guidance has been issued.

The ownership rights under this Certificate are similar to, but different in
certain respects from, those described by the Service in rulings in which it was
determined that contract owners were not owners of separate account assets. For
example, the Owner of this Certificate has the choice of many more investment
options to which to allocate Purchase Payments and Certificate Values, and may
be able to transfer among investment options more frequently than in such
rulings. These differences could result in the Owner being treated as the owner
of the assets of the Separate Account and thus subject to current taxation on
the income and gains from those assets. In addition, KILICO does not know what
standards will be set forth in the regulations or rulings which the Treasury
Department has stated it expects to issue. KILICO therefore reserves the right
to modify the Certificate as necessary to attempt to prevent the Owner from
being considered the owner of the assets of the Separate Account.

DELAYED ANNUITY DATES. If the Certificate's Annuity Date occurs (or is scheduled
to occur) at a time when the Annuitant has reached an advanced age, E.G., past
age 85, it is possible that the Certificate would not be treated as an annuity
for federal income tax purposes. In that event, the income and gains under the
Certificate could be currently includible in the Owner's income.

The remainder of this discussion assumes that the Certificate will be treated as
an annuity Certificate for federal income tax purposes and that KILICO will be
treated as the owner of the Separate Account assets.

2. TAXATION OF PARTIAL AND FULL WITHDRAWALS

In the case of a partial withdrawal from a Non-Qualified Certificate, amounts
received are includible in income to the extent the Certificate Value before the
withdrawal exceeds the "investment in the contract." In the case of a full
withdrawal, amounts received are includible in income to the extent they exceed
the

31
<PAGE> 36

"investment in the contract." For these purposes, the investment in the contract
at any time equals the total of the Purchase Payments made under the Certificate
to that time (to the extent such payments were neither deductible when made nor
excludible from income as, for example, in the case of certain employer
contributions to Qualified Plan Certificates) less any amounts previously
received from the Certificate which were not included in income.

Other than in the case of certain Qualified Plan Certificates, any assignment or
pledge (or agreement to assign or pledge) any portion of the Certificate Value,
is treated as a withdrawal of such amount or portion. (Assignments and pledges
are permitted only in limited circumstances under Qualified Plan Certificates.)
The investment in the contract is increased by the amount includible in income
with respect to such assignment or pledge, though it is not affected by any
other aspect of the assignment or pledge (including its release). If an
individual transfers a Certificate without adequate consideration to a person
other than the owner's spouse (or to a former spouse incident to divorce), the
owner will be taxed on the difference between the Certificate Value and the
"investment in the contract" at the time of transfer. In such case, the
transferee's investment in the Certificate will be increased to reflect the
increase in the transferor's income.

The Certificate provides a death benefit that in certain circumstances may
exceed the greater of the Purchase Payments and the Certificate Value. As
described elsewhere in this Prospectus, KILICO imposes certain charges with
respect to the death benefit. It is possible that those charges (or some portion
thereof) could be treated for federal income tax purposes as a partial
withdrawal from the Certificate.

There may be special income tax issues present in situations where the Owner and
the Annuitant are not the same person and are not married to one another. A tax
advisor should be consulted in those situations.

3. TAXATION OF ANNUITY PAYMENTS

Normally, the portion of each annuity payment taxable as ordinary income is
equal to the excess of the payment over the exclusion amount. In the case of
variable annuity payments, the exclusion amount is the "investment in the
contract" (defined above) allocated to the variable annuity option, adjusted for
any period certain or refund feature, when payments begin to be made divided by
the number of payments expected to be made (determined by Treasury Department
regulations which take into account the annuitant's life expectancy and the form
of annuity benefit selected). In the case of fixed annuity payments, the
exclusion amount is the amount determined by multiplying (1) the payment by (2)
the ratio of the investment in the contract allocated to the fixed annuity
option, adjusted for any period certain or refund feature, to the total expected
value of annuity payments for the term of the contract (determined under
Treasury Department regulations).

Once the total amount of the investment in the contract is excluded using these
ratios, annuity payments will be fully taxable. If annuity payments cease
because of the death of the Annuitant and before the total amount of the
investment in the contract is recovered, the unrecovered amount generally will
be allowed as a deduction to the annuitant in his or her last taxable year.

4. TAXATION OF DEATH BENEFIT PROCEEDS

Amounts may be distributed from a Certificate because of the death of an Owner
or the Annuitant. Prior to the Annuity Date, such death benefit proceeds are
includible in income as follows: (1) if distributed in a lump sum, they are
taxed in the same manner as a full withdrawal, as described above, or (2) if
distributed under an annuity option, they are taxed in the same manner as
annuity payments, as described above. After the Annuity Date, where a guaranteed
period exists under an annuity option and the Annuitant dies before the end of
that period, payments made to the Beneficiary for the remainder of that period
are includible in

32
<PAGE> 37

income as follows: (1) if received in a lump sum, they are includible in income
to the extent that they exceed the unrecovered investment in the contract at
that time, or (2) if distributed in accordance with the existing annuity option
selected, they are fully excludable from income until the remaining investment
in the contract is deemed to be recovered, and all annuity payments thereafter
are fully includible in income.

5. PENALTY TAX ON PREMATURE DISTRIBUTIONS

There is a 10% penalty tax on the taxable amount of any payment from a
Non-Qualified Plan Certificate unless the payment is: (a) received on or after
the Owner reaches age 59 1/2; (b) attributable to the Owner's becoming disabled
(as defined in the tax law); (c) made to a Beneficiary on or after the death of
the Owner or, if the Owner is not an individual, on or after the death of the
primary Annuitant (as defined in the tax law); (d) made as a series of
substantially equal periodic payments (not less frequently than annually) for
the life (or life expectancy) of the Annuitant or for the joint lives (or joint
life expectancies) of the Annuitant and designated Beneficiary (as defined in
the tax law); (e) made under a Certificate purchased with a single premium when
the annuity starting date (as defined in the tax law) is no later than a year
from purchase of the annuity and substantially equal periodic payments are made,
not less frequently than annually, during the annuity period; or (f) made with
respect to certain annuities issued in connection with structured settlement
agreements. (A similar penalty tax, applicable to distributions from certain
Qualified Plan Certificates, is discussed below.)

6. AGGREGATION OF CERTIFICATES

In certain circumstances, the amount of an Annuity Payment or a withdrawal from
a Non-Qualified Plan Certificate that is includible in income may be determined
by combining some or all of the Non-Qualified Plan Certificates owned by an
individual. For example, if a person purchases a Certificate offered by this
Prospectus and also purchases at approximately the same time an immediate
annuity, the Service may treat the two contracts as one contract. In addition,
if a person purchases two or more deferred annuity contracts from the same
insurance company (or its affiliates) during any calendar year, all such
contracts will be treated as one contract. The effects of such aggregation are
not clear; however, it could affect the amount of a withdrawal or an annuity
payment that is taxable and the amount which might be subject to the penalty tax
described above.

D. QUALIFIED PLANS

The Certificates are also designed for use in connection with retirement plans
which receive favorable treatment under sections 401, 403, 408, or 457 of the
Code ("Qualified Plans"). Such Certificates are referred to as "Qualified Plan
Certificates." Numerous special tax rules apply to the participants in Qualified
Plans and to Qualified Plan Certificates. Therefore, no attempt is made in this
Prospectus to provide more than general information about use of the Certificate
with the various types of Qualified Plans.

The tax rules applicable to Qualified Plans vary according to the type of plan
and the terms and conditions of the plan itself. For example, for both
withdrawals and annuity payments under certain Qualified Plan Certificates,
there may be no "investment in the contract" and the total amount received may
be taxable. Both the amount of the contribution that may be made, and the tax
deduction or exclusion that the Owner may claim for such contribution, are
limited under Qualified Plans. If this Certificate is used in connection with a
Qualified Plan, the Owner and Annuitant must be the same individual. If a joint
Annuitant is named, all distributions made while the Annuitant is alive must be
made to the Annuitant. Also, if a joint Annuitant is named who is not the
Annuitant's spouse, the annuity options which are available may be limited,
depending on the difference in ages between the Annuitant and joint Annuitant.
Furthermore, the length of

33
<PAGE> 38

any guarantee period may be limited in some circumstances to satisfy certain
minimum distribution requirements under the Code.

In addition, special rules apply to the time at which distributions must
commence under a Qualified Plan Certificate and the form in which the
distributions must be paid. For example, failure to comply with minimum
distribution requirements applicable to Qualified Plans will result in the
imposition of an excise tax. This excise tax generally equals 50% of the amount
by which a minimum required distribution exceeds the actual distribution from
the Qualified Plan. In the case of "Individual Retirement Annuities" ("IRAs"),
distributions of minimum amounts (as specified in the tax law) must generally
commence by April 1 of the calendar year following the calendar year in which
the owner attains age 70 1/2. In the case of certain other Qualified Plans,
distributions of such minimum amounts must generally commence by the later of
this date or April 1 of the calendar year following the calendar year in which
the employee retires.

There is also a 10% penalty tax on the taxable amount of any payment from
certain Qualified Plan Certificates (but not section 457 plan Certificates).
(The amount of the penalty tax is 25% of the taxable amount of any payment
received from a "SIMPLE retirement account" during the 2 year period beginning
on the date the individual first participated in any qualified salary reduction
arrangement (as defined in the tax law) maintained by the individual's
employer.) There are exceptions to this penalty tax which vary depending on the
type of Qualified Plan. In the case of an IRA, including a "SIMPLE IRA,"
exceptions provide that the penalty tax does not apply to a payment (a) received
on or after the Owner reaches age 59 1/2, (b) received on or after the Owner's
death or because of the Owner's disability (as defined in the tax law), or (c)
made as a series of substantially equal periodic payments (not less frequently
than annually) for the life (or life expectancy) of the Owner or for the joint
lives (or joint life expectancies) of the Owner and designated beneficiary (as
defined in the tax law). These exceptions, as well as certain others not
described herein, generally apply to taxable distributions from other Qualified
Plan Certificates (although, in the case of plans qualified under sections 401
and 403, exception "c" above for substantially equal periodic payments applies
only if the Owner has separated from service).

When issued in connection with a Qualified Plan, a Certificate will be amended
as generally necessary to conform to the requirements of the plan. However,
Owners, Annuitants, and Beneficiaries are cautioned that the rights of any
person to any benefits under Qualified Plans may be subject to the terms and
conditions of the plans themselves, regardless of the terms and conditions of
the Certificate. In addition, KILICO shall not be bound by terms and conditions
of Qualified Plans to the extent such terms and conditions contradict the
Certificate, unless KILICO consents.

1. QUALIFIED PLAN TYPES

Following are brief descriptions of the various types of Qualified Plans in
connection with which KILICO may issue a Certificate.

INDIVIDUAL RETIREMENT ANNUITIES. Section 408 of the Code permits eligible
individuals to contribute to an individual retirement program known as an
"Individual Retirement Annuity" or "IRA." IRAs are subject to limits on the
amounts that may be contributed, the persons who may be eligible and on the time
when distributions may commence. Also, distributions from certain other types of
Qualified Plans may be "rolled over" on a tax-deferred basis into an IRA.

IRAs generally may not provide life insurance coverage, but they may provide a
death benefit that equals the greater of the premiums paid and the Certificate
Value. The Certificate provides a death benefit that in certain circumstances
may exceed the greater of the Purchase Payments and the Certificate Value. It is
possible that

34
<PAGE> 39

the Certificate's death benefit could be viewed as violating the prohibition on
investment in life insurance contracts with the result that the Certificate
would not be viewed as satisfying the requirements of an IRA.

SIMPLIFIED EMPLOYEE PENSIONS (SEP-IRAS). Section 408(k) of the Code allows
employers to establish simplified employee pension plans for their employees,
using the employees' IRAs for such purposes, if certain criteria are met. Under
these plans the employer may, within specified limits, make deductible
contributions on behalf of the employees to IRAs. As discussed above (see
Individual Retirement Annuities), there is some uncertainty regarding the
treatment of the Certificate's death benefit for purposes of the tax rules
governing IRAs (which would include SEP-IRAs). Employers and employees intending
to use the Certificate in connection with such plans should seek competent
advice.

SIMPLE IRAS. Section 408(p) of the Code permits certain small employers to
establish "SIMPLE retirement accounts," including SIMPLE IRAs, for their
employees. Under SIMPLE IRAs, certain deductible contributions are made by both
employees and employers. SIMPLE IRAs are subject to various requirements,
including limits on the amounts that may be contributed, the persons who may be
eligible, and the time when distributions may commence. As discussed above (see
Individual Retirement Annuities), there is some uncertainty regarding the proper
characterization of the Certificate's death benefit for purposes of the tax
rules governing IRAs (which would include SIMPLE IRAs). Employers and employees
intending to use the Certificate in connection with such plans should seek
competent advice.

CORPORATE AND SELF-EMPLOYED ("H.R. 10" AND "KEOGH") PENSION AND PROFIT-SHARING
PLANS. Sections 401(a) and 403(a) of the Code permit corporate employers to
establish various types of tax-favored retirement plans for employees. The
Self-Employed Individuals' Tax Retirement Act of 1962, as amended, commonly
referred to as "H.R. 10" or "Keogh", permits self-employed individuals also to
establish such tax-favored retirement plans for themselves and their employees.
Such retirement plans may permit the purchase of the Certificates in order to
provide benefits under the plans. The Certificate provides a death benefit that
in certain circumstances may exceed the greater of the Purchase Payments and the
Certificate Value. It is possible that such death benefit could be characterized
as an incidental death benefit. There are limitations on the amount of
incidental benefits that may be provided under pension and profit sharing plans.
In addition, the provision of such benefits may result in current taxable income
to participants. Employers intending to use the Certificate in connection with
such plans should seek competent advice.

TAX-SHELTERED ANNUITIES. Section 403(b) of the Code permits public school
employees and employees of certain types of charitable, educational and
scientific organizations specified in section 501(c)(3) of the Code to have
their employers purchase annuity Certificates for them and, subject to certain
limitations, to exclude the amount of purchase payments from gross income for
tax purposes. These annuity Certificates are commonly referred to as
"tax-sheltered annuities". Purchasers of the Certificates for such purposes
should seek competent advice as to eligibility, limitations on permissible
amounts of purchase payments and other tax consequences associated with the
Certificates. In particular, purchasers should consider that the Certificate
provides a death benefit that in certain circumstances may exceed the greater of
the Purchase Payments and the Certificate Value. It is possible that such death
benefit could be characterized as an incidental death benefit. If the death
benefit were so characterized, this could result in currently taxable income to
purchasers. In addition, there are limitations on the amount of incidental
benefits that may be provided under a tax-sheltered annuity. Even if the death
benefit under the Certificate were characterized as an incidental death benefit,
it is unlikely to violate those limits unless the Certificate Owner also
purchases a life insurance contract as part of his or her tax-sheltered annuity
plan.

Tax-sheltered annuity Certificates must contain restrictions on withdrawals of
(i) contributions made pursuant to a salary reduction agreement in years
beginning after December 31, 1988, (ii) earnings on those

35
<PAGE> 40

contributions, and (iii) earnings after 1988 on amounts attributable to salary
reduction contributions (and earnings on those contributions) held as of the
last day of the year beginning before January 1, 1989. These amounts can be paid
only if the employee has reached age 59 1/2, separated from service, died, or
become disabled (within the meaning of the tax law), or in the case of hardship
(within the meaning of the tax law). Amounts permitted to be distributed in the
event of hardship are limited to actual contributions; earnings thereon cannot
be distributed on account of hardship. Amounts subject to the withdrawal
restrictions applicable to section 403(b)(7) custodial accounts may be subject
to more stringent restrictions. (These limitations on withdrawals do not apply
to the extent KILICO is directed to transfer some or all of the Certificate
Value to the issuer of another tax-sheltered annuity or into a section 403(b)(7)
custodial account.)

DEFERRED COMPENSATION PLANS OF STATE AND LOCAL GOVERNMENTS AND TAX-EXEMPT
ORGANIZATIONS. Section 457 of the Code permits employees of state and local
governments and tax-exempt organizations to defer a portion of their
compensation without paying current taxes. The employees must be participants in
an eligible deferred compensation plan. Generally, a Certificate purchased by a
state or local government or a tax-exempt organization will not be treated as an
annuity contract for federal income tax purposes. Those who intend to use the
Certificates in connection with such plans should seek competent advice.

2. DIRECT ROLLOVERS

If the Certificate is used in connection with a retirement plan that is
qualified under sections 401(a), 403(a), or 403(b) of the Code, any "eligible
rollover distribution" from the Certificate will be subject to "direct rollover"
and mandatory withholding requirements. An eligible rollover distribution
generally is any taxable distribution from such a qualified retirement plan,
excluding certain amounts such as (i) minimum distributions required under
section 401(a)(9) of the Code, and (ii) certain distributions for life, life
expectancy, or for 10 years or more which are part of a "series of substantially
equal periodic payments."

Under these requirements, federal income tax equal to 20% of the eligible
rollover distribution will be withheld from the amount of the distribution.
Unlike withholding on certain other amounts distributed from the Certificate,
discussed below, the Owner cannot elect out of withholding with respect to an
eligible rollover distribution. However, this 20% withholding will not apply if,
instead of receiving the eligible rollover distribution, the distributee elects
to have it directly transferred to certain Qualified Plans. Prior to receiving
an eligible rollover distribution, a notice will be provided explaining
generally the direct rollover and mandatory withholding requirements and how to
avoid the 20% withholding by electing a direct rollover.

E. FEDERAL INCOME TAX WITHHOLDING

KILICO will withhold and remit to the U.S. Government a part of the taxable
portion of each distribution made under a Certificate unless the distributee
notifies KILICO at or before the time of the distribution that he or she elects
not to have any amounts withheld. In certain circumstances, KILICO may be
required to withhold tax. The withholding rates applicable to the taxable
portion of periodic annuity payments are the same as the withholding rates
generally applicable to payments of wages. In addition, the withholding rate
applicable to the taxable portion of non-periodic payments (including
withdrawals prior to the maturity date) is 10%. As discussed above, the
withholding rate applicable to eligible rollover distributions is 20%.

36
<PAGE> 41

DISTRIBUTION OF CONTRACTS AND CERTIFICATES

The Contracts and Certificates are sold by licensed insurance agents, where the
Contracts and Certificates may be lawfully sold, who are registered
representatives of broker-dealers which are registered under the Securities
Exchange Act of 1934 and are members of the National Association of Securities
Dealers, Inc. KILICO generally pays a maximum commission of 6% on sales based on
Purchase Payments. KILICO reserves the right to pay additional commissions based
on the value in an Owner's account. 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 and
Certificates. 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 and Certificates
or other contracts issued by KILICO. The Contracts and Certificates are
distributed through the principal underwriter for the Separate Account, which is
Investors Brokerage Services, Inc. ("IBS"), a wholly owned subsidiary of KILICO.

VOTING RIGHTS

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

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

REPORTS TO OWNERS AND INQUIRIES

Immediately after each Certificate anniversary, Owners will be sent statements
for their own Certificate showing the number and value of Accumulation Units
credited to each Subaccount and the Guarantee Period Value for each Guarantee
Period. It will also show the interest rate(s) that KILICO is crediting upon
amounts then held in each Guarantee Period. In addition, Owners transferring
amounts among the Subaccounts and Guarantee Periods or making additional
payments will receive written confirmation of such transactions. Upon request,
any Owner will be sent a current statement in a form similar to that of the
annual statement described above. Each Owner will also be sent an annual and a
semi-annual report for the Fund and a list of the securities held in each
Portfolio of the Fund, as required by the 1940 Act. In addition, KILICO will
calculate for an Owner, the portion of a total amount that must be invested in a
selected Guarantee Period so that the portion grows to equal the original total
amount at the expiration of the Guarantee Period.

37
<PAGE> 42

An Owner may direct inquiries to the individual who sold him or her the
Certificate 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

KILICO offers two different dollar cost averaging programs whereby an Owner may
predesignate a portion of Subaccount Value under a Certificate to be
automatically transferred on a monthly basis to one or more of the other
Subaccounts during the Accumulation Period. The first dollar cost averaging
program is available only for initial Purchase Payments and an Owner must enroll
in the program at the time the Certificate is issued. An Owner may allocate all
or a portion of the initial Purchase Payment to Money Market Subaccount #2,
which is the only Subaccount with no deduction for the 1.25% daily asset-based
charge for mortality and expense risks and administrative costs. The Owner must
transfer all of the Subaccount Value out of Money Market Subaccount #2 to one or
more of the other Subaccounts within three years from the initial Purchase
Payment. If an Owner terminates dollar cost averaging or does not deplete all
Certificate Value in Money Market Subaccount #2 within three years, KILICO will
automatically transfer any remaining Subaccount Value in Money Market Subaccount
#2 to Money Market Subaccount #1.

The other dollar cost averaging program is available for Purchase Payments and
for Certificate Value transferred into Money Market Subaccount #1 or Government
Securities Subaccount. An Owner may predesignate a portion of Subaccount Value
to be automatically transferred on a monthly basis to one or more of the other
Subaccounts. An 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").

Under each program, transfers will be made in the amounts designated by the
Owner and must be at least $500 per Subaccount. The total Certificate Value in
the applicable Subaccount at the time Dollar Cost Averaging is elected must be
at least equal to the amount designated to be transferred on each Transfer Date
multiplied by the duration selected. Dollar Cost Averaging will cease
automatically if the Certificate 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 value of the Accumulation Units
attributable to the applicable Subaccount is insufficient to complete the next
transfer, (iii) the Owner requests termination in writing and such writing is
received by KILICO at its home office at least two (2) business days prior to
the next Transfer Date in order to cancel the transfer scheduled to take effect
on such date, or (iv) the Certificate is surrendered or annuitized.

An Owner may initiate, reinstate or change Dollar Cost Averaging from Money
Market Subaccount #1 or Government Securities Subaccount or change existing
Dollar Cost Averaging terms for Money Market Subaccount #2 by properly
completing the new enrollment form and returning it to KILICO at its home office
at least five (5) business days prior to the next Transfer Date such transfer is
to be made.

When utilizing Dollar Cost Averaging an Owner must be invested in Money Market
Subaccount #1, Money Market Subaccount #2, or Government Securities Subaccount
and may be invested in any other Subaccounts at any given time. Election of
Dollar Cost Averaging is not available during the Annuity Period.

38
<PAGE> 43

SYSTEMATIC WITHDRAWAL PLAN

KILICO administers a Systematic Withdrawal Plan ("SWP") which allows certain
Owners to pre-authorize periodic withdrawals during the accumulation period.
Owners entering into a SWP agreement instruct KILICO to withdraw selected
amounts from any of the Subaccounts or Guarantee Periods on a monthly,
quarterly, semi-annual or annual basis. Currently the SWP is available to Owners
who request a minimum $100 periodic payment. A MARKET VALUE ADJUSTMENT WILL
APPLY TO ANY WITHDRAWALS UNDER THE SWP FROM A GUARANTEE PERIOD UNLESS EFFECTED
WITHIN 15 DAYS BEFORE OR 15 DAYS AFTER THE GUARANTEE PERIOD ENDS. IF THE AMOUNTS
DISTRIBUTED UNDER THE SWP EXCEED THE AMOUNT FREE OF WITHDRAWAL CHARGE (CURRENTLY
15% OF CERTIFICATE VALUE) THEN THE WITHDRAWAL CHARGE WILL BE APPLIED ON ANY
AMOUNTS EXCEEDING THE 15% FREE WITHDRAWAL. WITHDRAWALS TAKEN UNDER THE SWP MAY
BE SUBJECT TO THE 10% FEDERAL TAX PENALTY ON EARLY WITHDRAWALS AND TO INCOME
TAXES AND MAY BE SUBJECT TO 20% WITHHOLDING. SEE "FEDERAL INCOME TAXES." Owners
interested in SWP may obtain an application 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 Owner or KILICO.

EXPERTS

The consolidated balance sheets of KILICO as of December 31, 1996 and January 4,
1996 and the related consolidated statements of operations, stockholder's
equity, and cash flows for the periods from January 4, 1996 to December 31, 1996
and for each of the years in the two year period ended December 31, 1995 have
been included herein and in the registration statement in reliance upon the
report of KPMG Peat Marwick LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing. The report of KPMG Peat Marwick LLP covering KILICO's
financial statements contains an explanatory paragraph that states as a result
of the acquisition of its parent, Kemper Corporation, the consolidated financial
information for the periods after the acquisition is presented on a different
cost basis than that for the periods before the acquisition and, therefore, is
not comparable.

LEGAL MATTERS

Legal matters with respect to the organization of KILICO, its authority to issue
annuity contracts and the validity of the Contract, have been passed upon by
Debra P. Rezabek, Senior Vice President, General Counsel, and Corporate
Secretary for KILICO. Katten Muchin & Zavis, Washington, D.C., has advised
KILICO on certain legal matters concerning federal securities laws applicable to
the issue and sale of the Certificates.

SPECIAL CONSIDERATIONS

KILICO reserves the right to amend the Contract and Certificates to meet the
requirements of any applicable federal or state laws or regulations. KILICO will
notify the Owner in writing of any such amendments.

An Owner's rights under a Certificate may be assigned as provided by applicable
law. An assignment will not be binding upon KILICO until it receives a written
copy of the assignment. The Owner is solely responsible for the validity or
effect of any assignment. The Owner, therefore, should consult a qualified tax
advisor regarding the tax consequences, as an assignment may be a taxable event.

39
<PAGE> 44

AVAILABLE INFORMATION

KILICO is subject to the informational requirements of the Securities Exchange
Act of 1934 and in accordance therewith files reports and other information with
the Securities and Exchange Commission (the "Commission"). Such reports and
other information can be inspected and copied at the public reference facilities
of the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. and 500
West Madison, Suite 1400, Northwestern Atrium Center, Chicago, Illinois. Copies
of such materials also can be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates.

KILICO has filed registration statements (the "Registration Statements") with
the Commission under the Securities Act of 1933 relating to the Contracts and
Certificates offered by this Prospectus. This Prospectus has been filed as a
part of the Registration Statements and does not contain all of the information
set forth in the Registration Statements, and reference is hereby made to such
Registration Statements for further information relating to KILICO and the
Contracts and Certificates. The Registration Statements may be inspected and
copied, and copies can be obtained at prescribed rates in the manner set forth
in the preceding paragraph.

40
<PAGE> 45

BUSINESS

CORPORATE STRUCTURE

KEMPER INVESTORS LIFE INSURANCE COMPANY ("KILICO"), founded in 1947, is
incorporated under the insurance laws of the State of Illinois. KILICO is
licensed in the District of Columbia and all states except New York. KILICO is a
wholly-owned subsidiary of Kemper Corporation ("Kemper"), a nonoperating holding
company.

CORPORATE CONTROL EVENTS

On January 4, 1996 (the acquisition date), an investor group comprised of Zurich
Insurance Company ("Zurich"), Insurance Partners, L.P. ("IP") and Insurance
Partners Offshore (Bermuda), L.P. (together with IP, "Insurance Partners")
acquired all of the issued and outstanding common stock of Kemper. As a result
of the change in control, Zurich and Insurance Partners own 80 percent and 20
percent, respectively, of Kemper and therefore KILICO.

The acquisition of KILICO was accounted for using the purchase method of
accounting. The consolidated financial statements of KILICO prior to January 4,
1996, were prepared on a historical cost basis and have been labeled as
"preacquisition" throughout this Prospectus.

Under purchase accounting, KILICO's assets and liabilities have been marked to
their relative fair market values as of the acquisition date. The difference
between the allocated cost of $745.6 million of acquiring KILICO and the net
fair market values of KILICO's assets and liabilities as of the acquisition date
resulted in $254.9 million of goodwill. KILICO is amortizing goodwill on a
straight-line basis over twenty-five years. KILICO has presented January 4, 1996
(the acquisition date) as the opening purchase accounting balance sheet for
comparative purposes throughout this Prospectus.

Purchase accounting adjustments primarily affected the recorded historical
values of fixed maturities, mortgage loans, other invested assets, deferred
insurance acquisition costs, future policy benefits and deferred income taxes.
(See note captioned "Summary of Significant Accounting Policies" in the notes to
the consolidated financial statements below.)

STRATEGIC INITIATIVES

Since late 1991, KILICO has intensified the management of its real
estate-related investments due to adverse market conditions. KILICO also
successfully implemented strategies over the last several years to reduce both
its joint venture operating losses and the level of its real estate-related
investments. These strategies included individual property sales, refinancings
and restructurings, as well as bulk sale transactions completed in December 1995
in anticipation of the 1996 change in control. As a result of these strategies,
KILICO reduced its holdings of real estate-related investments from 36.2 percent
of its total invested assets and cash at year-end 1991 to 5.9 percent at
year-end 1996.

Further addressing the quality of its investment portfolio, KILICO has reduced
its holdings of below investment-grade securities to 0.3 percent of its total
invested assets and cash at year-end 1996.

The management, operations and strategic directions of KILICO were integrated
during 1992 and 1993 with those of another Kemper subsidiary, Federal Kemper
Life Assurance Company ("FKLA"). The integration was designed to streamline
management, control costs, improve profitability, increase operating
efficiencies and productivity, and to expand both companies' distribution
capabilities. Headquartered in Long Grove, Illinois, FKLA markets term and
interest-sensitive life insurance, as well as certain annuity products through

41
<PAGE> 46

brokerage general agents and other independent distributors. As described below,
KILICO has emphasized different products and distribution methods.

NARRATIVE DESCRIPTION OF BUSINESS

KILICO offers both individual fixed-rate (general account) and individual and
group variable (separate account) annuity contracts, as well as individual term
life, universal life and variable life insurance products through various
distribution channels. KILICO offers investment-oriented products, guaranteed
returns or a combination of both, to help policyholders meet multiple insurance
and financial objectives. Financial institutions, securities brokerage firms,
insurance agents and financial planners are important distribution channels for
KILICO's products. In 1996, INVEST Financial Corporation, an affiliated company
until June 28, 1996 and EVEREN Securities, Inc., an affiliated company until
September 13, 1995, accounted for approximately 24 percent and 12 percent,
respectively, of KILICO's first-year sales, compared with 37 percent and 21
percent, respectively, in 1995. KILICO's sales mainly consist of deposits
received on certain long duration annuity contracts as well as reinsurance
assumed from FKLA during 1996. (See note captioned "Reinsurance" in the notes to
the consolidated financial statements and see the table captioned "Sales"
below.)

Annuities have accounted for approximately 98 percent of KILICO's sales in
recent years. KILICO's annuities generally have surrender charges that are a
specified percentage of policy values and decline as the policy ages. General
account annuity and interest-sensitive life policies are guaranteed to
accumulate at specified interest rates but allow for periodic crediting rate
changes.

Over the last several years, in part reflecting the current interest rate
environment, KILICO has increased its emphasis on marketing its separate account
products. Unlike the fixed-rate annuity business where KILICO manages spread
revenue, variable annuities pose minimal investment risk for KILICO, as
policyholders invest in one or more of several underlying investment funds.
KILICO, in turn, receives administrative fee revenue. KILICO's separate account
assets totaled $2.1 billion at December 31, 1996, compared with $1.8 billion and
$1.5 billion at December 31, 1995 and 1994, respectively. KILICO's sales of its
separate account annuities were $254.8 million in 1996, $151.1 million in 1995
and $250.8 million in 1994. Despite KILICO's strategy to emphasize the sale of
variable annuities, such sales declined in 1995, compared with 1994, due to
competitive conditions in certain distribution channels, in part reflecting
KILICO's financial strength and performance ratings and uncertainty concerning
KILICO's ownership during this period. Rating improvements in 1996 (see
"Rankings and ratings" below) and the 1996 change in control helped to increase
KILICO's sales in 1996, compared with 1995.

In order to increase variable annuity sales, KILICO introduced Kemper PASSPORT
in 1992. Kemper PASSPORT is a variable and market value adjusted annuity
featuring a choice of investment portfolios, an increasing estate benefit,
tax-free transfers and guaranteed rates for a variety of terms. In 1994, KILICO
changed Kemper PASSPORT from a single premium annuity to one with a flexible
premium structure and also added a small capitalization equity subaccount as
another investment portfolio option. In 1995 and 1996, KILICO also added several
new subaccounts and new investment managers as investment portfolio choices for
certain purchasers of the Kemper Advantage III variable annuity product. During
late 1996, KILICO also introduced POWER V, a flexible premium variable life
insurance product.

Current crediting rates, a conservative investment strategy and the interest
rate environment have impacted general account annuity sales for KILICO during
1996. Beginning in the second half of 1994 and in early 1995, KILICO began
raising crediting rates on certain of its existing and new general account
products, reflecting both competitive conditions and a rising interest rate
environment. As a result of these actions, sales of general account annuities
increased and represented 62.0 percent of KILICO's total sales in 1995,

42
<PAGE> 47

compared with 46.0 percent in 1994. During late 1995, as interest rates fell,
KILICO began reducing crediting rates on certain of its existing and new general
account products reflecting both competitive conditions and the falling interest
rate environment. As a result of these events, as well as a strong stock and
bond market during 1996, which influenced potential buyers of fixed annuity
products to purchase variable annuity products, sales of general account
annuities decreased to 34.8 percent of KILICO's total sales in 1996.

Beginning in 1995, KILICO began to sell term life insurance products in order to
balance its product mix and asset-liability structure. In December 1996, KILICO
also assumed $7.3 million of term life insurance premiums from FKLA. Excluding
the amounts assumed from FKLA, KILICO's total term life sales, including new and
renewal premiums, amounted to $565 thousand in 1996, compared with $236 thousand
in 1995.

NAIC RATIOS

The National Association of Insurance Commissioners (the "NAIC") annually
calculates certain statutory financial ratios for most insurance companies in
the United States. These calculations are known as the Insurance Regulatory
Information System ("IRIS") ratios. There presently are twelve IRIS ratios. The
primary purpose of the ratios is to provide an "early warning" of any negative
developments. The NAIC reports the ratios to state regulators who may then
contact the companies if three or more ratios fall outside the NAIC's "usual
ranges".

Based on statutory financial data as of December 31, 1996, KILICO had only one
ratio outside the usual ranges. KILICO's change in reserving ratio reflected the
level of interest-sensitive life surrenders and withdrawals during 1996 as well
as the 1996 reinsurance agreement with FKLA. Other than certain states
requesting quarterly financial reporting and/or explanations of the underlying
causes for certain ratios, no state regulators have taken any action due to
KILICO's IRIS ratios for 1996 or earlier years.

GUARANTY ASSOCIATION ASSESSMENTS

From time to time, mandatory assessments are levied on KILICO by life and health
guaranty associations of most states in which KILICO is licensed, to cover
losses to policyholders of insolvent or rehabilitated insurance companies. These
associations levy assessments (up to prescribed limits) on all member insurers
in a particular state, in order to pay claims on the basis of the proportionate
share of premiums written by member insurers in the lines of business in which
the insolvent or rehabilitated insurer engaged. These assessments may be
deferred or forgiven in certain states if they would threaten an insurer's
financial strength, and, in some states, these assessments can be partially
recovered through a reduction in future premium taxes.

In the early 1990s, there were a number of failures of life insurance companies.
KILICO's financial statements include provisions for all known assessments that
will be levied against KILICO by various state guaranty associations as well as
an estimate of amounts (net of estimated future premium tax recoveries) that
KILICO believes will be assessed in the future for failures which have occurred
to date and for which the life insurance industry has estimated the cost to
cover losses to policyholders. Assessments levied against KILICO and charged to
expense in 1996, 1995 and 1994 amounted to $601 thousand, $5.8 million and zero,
respectively. Such amounts relate to accrued guaranty fund assessments of $5.8
million, $5.0 million and $4.0 million at December 31, 1996, 1995 and 1994,
respectively. No assessments were charged to expense during 1994 as KILICO had
established adequate accruals for all known insolvencies where an estimate of
the cost to cover losses to policyholders was available as of December 31, 1994.
Additional assessments

43
<PAGE> 48

charged to expense in 1996 and 1995 reflect accruals for the life insurance
industry's new or revised loss estimates for certain insolvent insurance
companies.

RISK-BASED CAPITAL

Since the early 1990s, reflecting a recessionary environment and the
insolvencies of a few large life insurance companies, both state and federal
legislators have increased scrutiny of the existing insurance regulatory
framework. While various initiatives, such as a new model investment law and the
codification of statutory accounting principles, are being considered for future
implementation by the NAIC, it is not presently possible to predict the future
impact of potential regulatory changes on KILICO.

Under asset adequacy and risk-based capital rules in Illinois, state regulators
may mandate remedial action for inadequately reserved or inadequately
capitalized companies. The new asset adequacy rules are designed to assure that
reserves and assets are adequate to cover liabilities under a variety of
economic scenarios. The focus of the new capital rules is a risk-based formula
that applies prescribed factors to various risk elements in an insurer's
business and investments to develop a minimum capital requirement designed to be
proportional to the amount of risk assumed by the insurer. KILICO has capital
levels substantially exceeding any which would mandate action under the
risk-based capital rules and is in compliance with applicable asset adequacy
rules.

RESERVES AND REINSURANCE

The following table provides a breakdown of KILICO's reserves for future policy
benefits by product type (in millions):

<TABLE>
<CAPTION>
PREACQUISITION
---------------------------
DECEMBER 31 JANUARY 4 DECEMBER 31 DECEMBER 31
1996 1996 1995 1994
----------- --------- ----------- -----------
<S> <C> <C> <C> <C>
General account annuities................ $3,507 $3,805 $3,794 $4,010
Interest-sensitive life insurance........ 743 780 779 833
Term life reserves....................... 7 -- -- --
Ceded future policy benefits............. 427 503 503 643
------ ------ ------ ------
Total.......................... $4,684 $5,088 $5,076 $5,486
====== ====== ====== ======
</TABLE>

Ceded future policy benefits shown above reflect coinsurance (indemnity
reinsurance) transactions in which KILICO insured liabilities of approximately
$516 million in 1992 and $416 million in 1991 with Fidelity Life Association
("FLA"), an affiliated mutual insurance company. FLA shares directors,
management, operations and employees with FKLA pursuant to an administrative and
management services agreement. FLA produces whole life policies not produced by
FKLA or KILICO as well as other policies similar to certain FKLA policies. At
December 31, 1996, KILICO's reinsurance recoverable from FLA related to these
coinsurance transactions totaled approximately $427.0 million. KILICO remains
primarily liable to its policyholders for this amount. Utilizing FKLA's
employees, KILICO is the servicing company for this coinsured business and is
reimbursed by FLA for the related servicing expenses. Excluding this
coinsurance, KILICO, because it is primarily an annuity company, reinsures only
a very limited portion of its business. During December 1996, KILICO assumed on
a yearly renewable term basis approximately $14.4 billion (face amount) of term
life insurance from FKLA. As a result of this transaction, KILICO recorded
premiums and reserves of approximately $7.3 million. (See the note captioned
"Reinsurance" in the notes to the consolidated financial statements below.)

44
<PAGE> 49

COMPETITION

KILICO is in a highly competitive business and competes with a large number of
other stock and mutual life insurance companies, many of which are larger
financially, although none is truly dominant in the industry. KILICO, with its
emphasis on annuity products, also competes for savings dollars with securities
brokerage and investment advisory firms as well as other institutions that
manage assets, produce financial products or market other types of investment
products.

KILICO's principal methods of competition continue to be innovative products,
often designed for selected distribution channels and economic conditions, as
well as appropriate product pricing, careful underwriting, expense control and
the quality of services provided to policyholders and agents. Certain of
KILICO's financial strength ratings and claims-paying/performance ratings,
however, were lower in 1994 and 1995 than in earlier years, and were under
review in 1994 and 1995, due to uncertainty with respect to Kemper's and
KILICO's ownership. These ratings impacted sales efforts in certain markets;
however, increases in KILICO's financial strength ratings and
claims-paying/performance ratings in January 1996 favorably impacted variable
annuity sales during 1996 and should continue to favorably impact future sales.

To address its competition, KILICO has adopted certain business strategies.
These include systematic reductions of investment risk and strengthening of its
capital position; continued focus on existing and new variable annuity and
variable life insurance products; distribution through diversified channels; and
ongoing efforts to continue as a low-cost provider of insurance products and
high-quality services to agents and policyholders through the use of technology.

RANKINGS AND RATINGS

According to BEST'S AGENTS GUIDE TO LIFE INSURANCE COMPANIES, 1996, as of
December 31, 1995, KILICO ranked 70th of 1,273 life insurers by admitted assets;
443rd of 1,089 by insurance in force; and 167th of 1,179 by net premiums
written.

Following the January 1996 change in control, certain of KILICO's financial
strength ratings and claims-paying ability ratings were upgraded. KILICO's
ratings are as follows:

<TABLE>
<CAPTION>
CURRENT RATING PRIOR RATING
--------------- ---------------
<S> <C> <C>
A.M. Best Company............................ A (Excellent) A- (Excellent)
Moody's Investors Service.................... Aa3 (Excellent) Baa1 (Adequate)
Duff & Phelps Credit Rating Co............... AA (Very High) A+ (High)
Standard & Poor's............................ AA- (Excellent) Aq (Good)
</TABLE>

EMPLOYEES

At December 31, 1996, KILICO utilized the services of approximately 514
employees of FKLA, which are also shared with FLA. On January 1, 1996,
approximately 160 employees of Zurich Life Insurance Company of America
("ZLICA"), an affiliated company, became employees of FKLA in connection with
the integration of ZLICA's operations with those of FKLA's. On January 5, 1996,
KILICO, FKLA, FLA and ZLICA began to operate under the trade name Zurich Kemper
Life. On July 1, 1996, Kemper acquired 100 percent of the issued and outstanding
common stock of ZLICA from Zurich.

45
<PAGE> 50

REGULATION

KILICO is generally subject to regulation and supervision by the insurance
departments of Illinois and other jurisdictions in which KILICO is licensed to
do business. These departments enforce laws and regulations designed to assure
that insurance companies maintain adequate capital and surplus, manage
investments according to prescribed character, standards and limitations and
comply with a variety of operational standards. The departments also make
periodic examinations of individual companies and review annual and other
reports on the financial condition of each company operating within their
respective jurisdictions. Regulations, which often vary from state to state,
cover most aspects of the life insurance business, including market practices,
forms of policies and accounting and financial reporting procedures.

Insurance holding company laws enacted in many states grant additional powers to
state insurance commissioners to regulate acquisition of and by domestic
insurance companies, to require periodic disclosure of relevant information and
to regulate certain transactions with related companies. These laws also impose
prior approval requirements for certain transactions with affiliates and
generally regulate dividend distributions by an insurance subsidiary to its
holding company parent.

In addition, variable life insurance and annuities offered by KILICO, and the
related separate accounts, are subject to regulation by the Securities and
Exchange Commission (the "SEC").

KILICO believes it is in compliance in all material respects with all applicable
regulations.

INVESTMENTS

A changing marketplace has affected the life insurance industry and to
accommodate customers' increased preference for safety over higher yields,
KILICO has systematically reduced its investment risk and strengthened its
capital position.

KILICO's cash flow is carefully monitored and its investment program is
regularly and systematically planned to provide funds to meet all obligations
and to optimize investment return. For securities, portfolio management is
handled by an affiliated company, Zurich Kemper Investments, Inc. ("ZKI"), and
its subsidiaries and affiliates, with KILICO's real estate-related investments
being handled by a Kemper real estate subsidiary. Investment policy is directed
by KILICO's board of directors. KILICO's investment strategies take into account
the nature of each annuity and life insurance product, the respective crediting
rates and the estimated future policy benefit maturities. (See "INVESTMENTS"
below.)

PROPERTIES

KILICO shares 99,000 sq. ft. of office space leased by FKLA from Lumbermens
Mutual Casualty Company, a former affiliate, ("Lumbermens"), located in Long
Grove, Illinois.

LEGAL PROCEEDINGS

KILICO has been named as defendant in certain lawsuits incidental to its
insurance business. Based upon the advice of legal counsel, KILICO's management
believes that the resolution of these various lawsuits will not result in any
material adverse effect on KILICO's consolidated financial position.

46
<PAGE> 51

SELECTED FINANCIAL DATA

The following table sets forth selected financial information for KILICO for the
five years ended December 31, 1996 and for the opening balance sheet as of the
acquisition date, January 4, 1996. Such information should be read in
conjunction with KILICO's consolidated financial statements and notes thereto
included in this Prospectus. All amounts are shown in millions.

<TABLE>
<CAPTION>
PREACQUISITION
-----------------------------------------------
DECEMBER 31
DECEMBER 31 JANUARY 4 -----------------------------------------------
1996 1996 1995 1994 1993 1992
----------- --------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
TOTAL REVENUE................ $ 356.2 $ -- $ 68.1(1) $ 330.5 $ 337.4 $ 353.6
======== ======== ======== ======== ======== ========
NET INCOME EXCLUDING REALIZED
INVESTMENT RESULTS......... $ 25.6 $ -- $ 74.2 $ 61.9 $ 33.7 $ 10.3
======== ======== ======== ======== ======== ========
NET INCOME (LOSS)............ $ 34.4 $ -- $ (133.0)(1) $ 26.4 $ 14.0 $ (51.9)
======== ======== ======== ======== ======== ========
FINANCIAL SUMMARY
Total separate account
assets..................... $2,127.2 $1,761.1 $1,761.1 $1,508.0 $1,499.5 $1,140.3
======== ======== ======== ======== ======== ========
Total assets................. $7,717.9 $7,682.7 $7,581.7 $7,537.1 $8,113.7 $6,845.9
======== ======== ======== ======== ======== ========
Future policy benefits....... $4,256.5 $4,585.1 $4,573.2 $4,843.7 $5,040.0 $5,040.7
======== ======== ======== ======== ======== ========
Stockholder's equity......... $ 751.0 $ 745.6 $ 605.9 $ 434.0 $ 654.6 $ 488.7
======== ======== ======== ======== ======== ========
</TABLE>

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

(1) Total revenue and net income (loss) for 1995 were adversely impacted by real
estate-related investment losses. Such losses reflect a change in KILICO's
strategy with respect to its real estate-related investments in connection
with the January 4, 1996 acquisition of Kemper by the Zurich-led investor
group. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations".

47
<PAGE> 52

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

As discussed in the note captioned "Summary of Significant Accounting Policies"
in the notes to the consolidated financial statements, Kemper, and therefore
KILICO, were acquired on January 4, 1996, by an investor group led by Zurich. In
connection with the acquisition, KILICO's assets and liabilities were marked to
their respective fair market values as of the acquisition date in conformity
with the purchase accounting method required under generally accepted accounting
principles.

KILICO's financial statements as of January 4, 1996, and as of and for the year
ended December 31, 1996, have been adjusted to reflect the effects of such
purchase accounting adjustments. KILICO's financial statements for the years
ended December 31, 1995 and 1994 have been prepared on a historical cost basis
and do not reflect such purchase accounting adjustments.

RESULTS OF OPERATIONS

KILICO recorded net income of $34.4 million in 1996, compared with net loss of
$133.0 million in 1995 and net income of $26.4 million in 1994. The increase in
net income in 1996, compared with 1995 and 1994, was primarily due to a decrease
in the level of real estate-related realized investment losses. KILICO's
strategy with respect to its real estate-related investments changed
dramatically as of year-end 1995 in connection with the Zurich-led investor
group's acquisition of Kemper. This change, as further discussed below, resulted
in significant reductions in real estate-related investments and significant
realized capital losses in the second half of 1995.

The following table reflects the components of net income (loss):

NET INCOME (LOSS)

(in millions)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------
PREACQUISITION
-----------------
1996 1995 1994
----- ------- ------
<S> <C> <C> <C>
Operating earnings........... $25.6 $ 74.2 $ 61.9
Net realized investment gains
(losses)................... 8.8 (207.2) (35.5)
----- ------- ------
Net income
(loss)........... $34.4 $(133.0) $ 26.4
===== ======= ======
</TABLE>

48
<PAGE> 53

The following table reflects the major components of realized investment results
included in net income (loss) above. (See "INVESTMENTS" below, and the note
captioned "Invested Assets and Related Income" in the notes to the consolidated
financial statements.)

REALIZED INVESTMENT RESULTS, AFTER TAX

(in millions)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------
PREACQUISITION
-----------------
1996 1995 1994
----- ------- ------
<S> <C> <C> <C>
Real estate-related gains
(losses)................... $11.4 $(211.6) $(27.1)
Fixed maturity write-downs... (.9) (4.7) --
Other gains (losses), net.... (1.7) 9.1 (8.4)
----- ------- ------
Total.............. $ 8.8 $(207.2) $(35.5)
===== ======= ======
</TABLE>

The higher level of real estate-related losses in 1995, compared with both 1996
and 1994, reflected realized capital losses predominately from real
estate-related bulk sale transactions in December 1995, as well as a higher
level of write-downs on real estate-related investments. These sales and
write-downs in 1995, reflect Zurich's and Insurance Partners' strategies,
adopted by KILICO, with respect to the disposition of real estate-related
investments. Other realized investment gains and losses for 1996, 1995 and 1994
relate primarily to the sale of fixed maturity investments. The fixed maturity
losses generated in 1996 and 1994 arose primarily from the sale of fixed
maturity investments, consisting of lower yielding U.S. Treasury bonds and
collateralized mortgage obligations in 1996 and investment-grade corporate
securities and collateralized mortgage obligations in 1994, related to
repositionings of KILICO's fixed maturity investment portfolio. The proceeds
from the repositionings, together with cash and short-term investments, were
reinvested into higher yielding corporate bonds and asset-backed securities in
1996 and U.S. government and agency guaranteed mortgage pass-through securities
issued by the Government National Mortgage Association and the Federal National
Mortgage Association in 1994. (See "INVESTMENTS" below.)

Operating earnings decreased to $25.6 million in 1996, compared with $74.2
million and $61.9 million in 1995 and 1994, respectively, primarily due to
purchase accounting adjustments which reduced investment income and increased
expenses. Operating income increased in 1995, compared with 1994, primarily due
to an increase in fees and other income, reductions in operating expenses and an
increase in the net deferral of insurance acquisition costs, partially offset by
an increase in commissions, taxes, licenses and fees.

Investment income was lower in 1996, compared with both 1995 and 1994, primarily
reflecting purchase accounting adjustments related to the amortization of
premiums on fixed maturity investments. Under purchase accounting, the market
value of KILICO's fixed maturity investments as of January 4, 1996 became
KILICO's new cost basis in such investments. The difference between the new cost
basis and original par is then amortized against investment income over the
remaining effective lives of the fixed maturity investments. As a result of the
interest rate environment as of January 4, 1996, the market value of KILICO's
fixed maturity investments was approximately $133.9 million greater than
original par. The amortization of such premiums reduced investment income by
approximately $22.7 million in 1996, compared with 1995 and 1994.

Investment income and interest credited also declined in 1996, compared with
1995 and 1994, as a result of a decrease in total invested assets and future
policy benefits. Such decreases were the result of surrender and withdrawal
activity over the last three years.

49
<PAGE> 54

Investment income was also negatively impacted during 1996, compared with 1995
and 1994, by a higher level of cash and short-term investments held in the first
quarter of 1996. The increase in cash and short-term investments in the first
quarter of 1996 was caused in part by the cash proceeds received from bulk sales
of real estate-related investments in late December 1995. The reduction in real
estate-related investments reflects KILICO's current strategy to continue to
reduce its investments in, and overall exposure to, real estate-related
investments.

Investment income was positively impacted in 1996, 1995 and 1994 from the
benefits of capital contributions to KILICO and from reductions in the level of
nonperforming real estate-related investments, primarily from the sales of
certain real estate-related investments to affiliated non-life realty companies.
These sales totaled $3.5 million in 1995 and $154.0 million in 1994 and resulted
in no realized gain or loss to KILICO. Investment income in 1996 and 1995 also
benefitted from the above-mentioned repositionings of KILICO's investment
portfolio, however, the full benefits of KILICO's 1996 repositioning will not
occur until 1997.

The following table reflects KILICO's sales.

SALES

(in millions)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------
PREACQUISITION
------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Annuities:
General account................. $140.6 $247.6 $214.2
Separate account................ 254.8 151.1 250.8
------ ------ ------
Total annuities.............. 395.4 398.7 465.0
------ ------ ------
Life Insurance:
Term life....................... 7.8 .2 --
Interest-sensitive life......... .6 .2 .8
------ ------ ------
Total life................... 8.4 .4 .8
------ ------ ------
Total sales........ $403.8 $399.1 $465.8
====== ====== ======
</TABLE>

Sales of annuity products consist of total deposits received. The decrease in
1996 general account (fixed annuity) sales, compared with 1995, and the increase
in general account annuity sales in 1995, compared with 1994, is reflective of
the fluctuating interest rate environments and the stock and bond markets during
1996 and 1995, respectively, which made variable annuities more attractive to
consumers in 1996, and fixed annuities more attractive to consumers during 1995.
The increase in separate account (variable sales) in 1996, compared with 1995
and 1994, was in part due to improvements in KILICO's financial strength and
performance ratings in January 1996, the addition of new separate account
investment fund options, new investment fund managers and a strong underlying
stock and bond market. Sales of variable annuities not only increase
administrative fees earned but they also pose minimal investment risk for
KILICO, as policyholders invest in one or more of several underlying investment
funds which invest in stocks and bonds. Separate account sales declined in 1995,
compared with 1994, due to competitive conditions in certain distribution
channels, in part reflecting KILICO's financial strength and performance ratings
which were lower in 1995 and 1994, compared with 1996, and uncertainty
concerning KILICO's ownership. KILICO believes that the increase in its
financial strength and performance ratings in January 1996 together with
KILICO's association with Zurich, will continue to assist in KILICO's future
sales efforts.

50
<PAGE> 55

Beginning in 1995, KILICO began to sell low-cost term life insurance products
offering initial level premiums for 5, 10, 15 and 20 years in order to balance
its product mix and asset-liability structure. In December 1996, KILICO also
assumed $7.3 million of term life insurance premiums from FKLA. (See the note
captioned "Reinsurance" in the notes to the consolidated financial statements.)
Excluding the amounts assumed from FKLA, KILICO's total term life sales,
including new and renewal premiums, amounted to $565 thousand in 1996, compared
with $236 thousand in 1995. Face amount of new business issued during 1996 and
1995 amounted to approximately $319 million and $120 million, respectively.

Included in fees and other income are administrative fees received from KILICO's
separate account products of $25.3 million in 1996, compared with $21.9 million
and $20.8 million in 1995 and 1994, respectively. Administrative fee revenue
increased in each of the last three years due to growth in average separate
account assets. Other income also included surrender charge revenue of $5.4
million in 1996, compared with $7.7 million and $7.4 million in 1995 and 1994,
respectively, as total general account and separate account policyholder
surrenders and withdrawals decreased in 1996, compared with 1995. The decrease
in surrender charge revenue also reflects that 57 percent of KILICO's fixed and
variable annuity liabilities are subject to minimal (5 percent or less) or no
surrender charges, compared with 56 percent in 1995 and 43 percent in 1994. Also
included in other income in 1995 is a ceding commission experience adjustment
which resulted in income of $4.4 million related to certain reinsurance
transactions entered into by KILICO during 1992. (See the note captioned
"Reinsurance" in the notes to the consolidated financial statements.)

POLICYHOLDER SURRENDERS AND WITHDRAWALS

(in millions)

<TABLE>
<CAPTION>
PREACQUISITION
---------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
General account................ $652.0 $755.9 $652.5
Separate account............... 196.7 205.6 150.3
------ ------ ------
Total..................... $848.7 $961.5 $802.8
====== ====== ======
</TABLE>

Reflecting the current interest rate environment and other competitive market
factors, KILICO adjusts its crediting rates on interest-sensitive products over
time in order to manage spread revenue and policyholder surrender and withdrawal
activity. KILICO can also improve spread revenue over time by increasing
investment income. Beginning in late 1994, as a result of rising interest rates
and other competitive market factors, KILICO began to increase crediting rates
on certain interest-sensitive products which adversely impacted spread income.
The declines in interest rates during the last three quarters of 1995, however,
and the current interest rate environment during 1996, have mitigated at
present, competitive pressures to increase existing renewal crediting rates
further.

Policyholder withdrawals increased during 1995, compared with 1994, due to
planned reductions in fixed annuity crediting rates, a rising interest rate
environment during the last half of 1994 and early 1995, uncertainty regarding
KILICO's ownership and KILICO's financial strength ratings and claims-
paying/performance ratings. KILICO's crediting rate increases in late 1994 and
in early 1995 were designed to reduce the level of future withdrawals. As a
result of increases in renewal crediting rates and declining interest rates in
the last three quarters of 1995, policyholder surrenders and withdrawals in 1996
declined from the level of surrenders and withdrawals in 1995. KILICO expects
that the level of surrender and withdrawal activity experienced should remain at
a similar level in 1997 given current projections for relatively stable interest
rates.

51
<PAGE> 56

Commissions, taxes, licenses and fees were lower in 1996, compared with 1995,
but were higher in 1995, compared with 1994, primarily reflecting the level of
guaranty fund assessments in each of those years. Expenses for such assessments
totaled $601 thousand, $5.8 million, and zero in 1996, 1995 and 1994,
respectively. (See "Guaranty association assessments" "Business" above.)

Operating expenses declined in 1995, compared with 1994, primarily as a result
of a decrease in personnel. Personnel declined during 1995 as a result of
uncertainty concerning KILICO's ownership. Operating expenses increased in 1996,
compared with 1995, as a result of restaffing after the completion of the
merger.

Operating earnings were negatively impacted by the net deferral of insurance
acquisition costs and the amortization of the value of business acquired in
1996, compared with the net deferral of insurance acquisition costs in 1995 and
1994. Deferred insurance acquisition costs, and the related amortization
thereof, for policies sold prior to January 4, 1996 have been replaced under
purchase accounting by the value of business acquired. The value of business
acquired reflects the present value of the right to receive future cash flows
from insurance contracts existing at the date of acquisition. The amortization
of the value of business acquired is calculated assuming an interest rate equal
to the liability or contract rate on the value of the business acquired. (See
note captioned "Summary of Significant Accounting Policies" in the notes to the
consolidated financial statements.) Deferred insurance acquisition costs are
established on all new policies sold after January 4, 1996.

The net amortization of the value of business acquired in 1996 was adversely
affected by net realized capital gains in 1996, while the net deferral of
insurance acquisition costs in 1995 and 1994 was positively affected by realized
capital losses, partially offset by the level of policyholder surrenders and
withdrawals in 1995 and 1994. Net realized capital gains and policyholder
surrenders tend to accelerate the amortization of both the value of business
acquired and deferred insurance acquisition costs as they tend to decrease
KILICO's projected future estimated gross profits. Net realized capital losses
tend to defer such amortization into future periods as they tend to increase
KILICO's projected future estimated gross profits.

The higher level of deferral of policy acquisition costs in 1995, compared with
1994, reflected an increase in the amount of imputed interest capitalized due to
improvements in projected future revenue streams primarily as a result of the
decline in the level of nonperforming real estate-related investments. The
amortization of policy acquisition costs was favorably impacted during 1995 due
to real estate-related capital losses. Excluding the effects of the real
estate-related capital losses, the amortization of policy acquisition costs
increased in 1995, compared with 1994, primarily as a result of improved net
operating earnings during 1995.

The difference between the cost of acquiring KILICO and the net fair market
value of KILICO's assets and liabilities as of January 4, 1996 was recorded as
goodwill. The amortization of goodwill increased expenses by $10.2 million in
1996, compared with 1995 and 1994. KILICO is amortizing goodwill on a
straight-line basis over twenty-five years.

52
<PAGE> 57

INVESTMENTS

KILICO's principal investment strategy is to maintain a balanced,
well-diversified portfolio supporting the insurance contracts written. KILICO
makes shifts in its investment portfolio depending on, among other factors, its
evaluation of risk and return in various markets, consistency with KILICO's
business strategy and investment guidelines approved by the board of directors,
the interest rate environment, liability durations and changes in market and
business conditions. In addition, as previously discussed, KILICO's strategy
with respect to its real estate-related investments changed dramatically by
year-end 1995.

INVESTED ASSETS AND CASH

(in millions)

<TABLE>
<CAPTION>
DECEMBER 31 JANUARY 4
1996 1996
--------------- ---------------
<S> <C> <C> <C> <C>
Cash and short-term investments.......................... $ 74 1.6% $ 398 8.4%
Fixed maturities:
Investment-grade:
NAIC(1) Class 1..................................... 3,231 71.5 3,096 65.2
NAIC(1) Class 2..................................... 621 13.7 570 12.0
Below investment grade:
Performing.......................................... 13 .3 78 1.6
Nonperforming....................................... 1 -- 5 .1
Joint venture mortgage loans............................. 111 2.4 110 2.3
Third-party mortgage loans............................... 107 2.4 145 3.1
Other real estate-related investments.................... 50 1.1 34 .7
Policy loans............................................. 288 6.4 289 6.1
Other.................................................... 24 .6 20 .5
------ ----- ------ -----
Total(2)....................................... $4,520 100.0% $4,745 100.0%
====== ===== ====== =====
</TABLE>

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

(1) National Association of Insurance Commissioners ("NAIC").

-- Class 1 = A- and above

-- Class 2 = BBB- through BBB+

(2) See the note captioned "Financial Instruments--Off-Balance-Sheet Risk" in
the notes to the consolidated financial statements.

FIXED MATURITIES

KILICO is carrying its fixed maturity investment portfolio, which it considers
available for sale, at estimated fair value, with the aggregate unrealized
appreciation or depreciation being recorded as a separate component of
stockholder's equity, net of any applicable income tax expense. The aggregate
unrealized depreciation on fixed maturities at December 31, 1996 was $63.2
million, compared with no unrealized appreciation or depreciation, at January 4,
1996 as a result of purchase accounting adjustments. KILICO does not record a
net deferred tax benefit for the aggregate unrealized depreciation on
investments. Fair values are sensitive to movements in interest rates and other
economic developments and can be expected to fluctuate, at times significantly,
from period to period.

At December 31, 1996, investment-grade fixed maturities and cash and short-term
investments accounted for 86.8 percent of KILICO's invested assets and cash,
compared with 85.6 percent at January 4, 1996. Approximately 58.4 percent of
KILICO's NAIC Class 1 bonds were rated AAA or equivalent at year-end 1996,
compared with 66.0 percent at January 4, 1996.

53
<PAGE> 58

Approximately 36.4 percent of KILICO's investment-grade fixed maturities at
December 31, 1996 were mortgage-backed securities, down from 45.7 percent at
January 4, 1996, due to sales and paydowns during 1996. These investments
consist primarily of marketable mortgage pass-through securities issued by the
Government National Mortgage Association, the Federal National Mortgage
Association or the Federal Home Loan Mortgage Corporation and other
investment-grade securities collateralized by mortgage pass-through securities
issued by these entities. KILICO has not made any investments in interest-only
or other similarly volatile tranches of mortgage-backed securities. KILICO's
mortgage-backed investments are generally of AAA credit quality, and the markets
for these investments have been and are expected to remain liquid. KILICO plans
to continue to reduce its holding of such investments over time.

As a result of the previously discussed 1996 repositioning of KILICO's fixed
maturity portfolio, approximately 8.8 percent of KILICO's investment-grade fixed
maturities at December 31, 1996 consisted of corporate asset-backed securities.
The majority of KILICO's investments in asset-backed securities were backed by
manufactured housing loans, auto loans and home equity loans.

Future investment income from mortgage-backed securities and other asset-backed
securities may be affected by the timing of principal payments and the yields on
reinvestment alternatives available at the time of such payments. As a result of
purchase accounting adjustments to fixed maturities, most of KILICO's
mortgage-backed securities are carried at a premium over par. Prepayment
activity resulting from a decline in interest rates on such securities purchased
at a premium would accelerate the amortization of the premiums which would
result in reductions of investment income related to such securities. At
December 31, 1996, KILICO had unamortized premiums and discounts of $24.7
million and $5.7 million, respectively, related to mortgage-backed and
asset-backed securities. KILICO believes that as a result of the purchase
accounting adjustments and the current interest rate environment, anticipated
prepayment activity is expected to result in reductions to future investment
income similar to those reductions experienced by KILICO in 1996.

Amortization of the discount or premium from mortgage-backed and asset-backed
securities is recognized using a level effective yield method which considers
the estimated timing and amount of prepayments of the underlying loans and is
adjusted to reflect differences which arise between the prepayments originally
anticipated and the actual prepayments received and currently anticipated. To
the extent that the estimated lives of such securities change as a result of
changes in prepayment rates, the adjustment is also included in net investment
income.

The table below provides information about KILICO's mortgage-backed and
asset-backed securities that are sensitive to changes in interest rates. The
expected maturity dates have been calculated on a security by

54
<PAGE> 59

security basis using prepayment assumptions obtained from a survey conducted by
a securities information service. These assumptions are consistent with the
current interest rate and economic environment.

<TABLE>
<CAPTION>
CARRYING FAIR VALUE
VALUE AT EXPECTED MATURITY DATE AT
DECEMBER 31, ------------------------------------------------------- DECEMBER 31,
(IN MILLIONS) 1996 1997 1998 1999 2000 2001 THEREAFTER TOTAL 1996
------------- ------------ ---- ---- ---- ---- ---- ---------- ----- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed Maturities:.....
Mortgage-backed
bonds............. $1,402.0 $161.4 $239.0 $261.4 $166.1 $ 61.8 $512.3 $1,402.0 $1,402.0
Average yield..... 6.83% 6.83% 6.83% 6.83% 6.83% 6.83% 6.83% 6.83% 6.83%
Asset-backed
bonds............. $ 339.3 $ 31.4 $ 38.1 $ 36.6 $ 44.4 $ 51.0 $137.8 $ 339.3 $ 339.3
Average yield..... 6.82% 6.82% 6.82% 6.82% 6.82% 6.82% 6.82% 6.82% 6.82%
-------- -------- --------
$1,741.3 $1,741.3 $1,741.3
======== ======== ========
</TABLE>

The current weighted average maturity of the mortgage-backed and asset-backed
securities at December 31, 1996, is 4.6 years. A 200 basis point increase in
interest rates would extend the weighted average maturity by approximately 1.7
years, while a 200 basis point decrease in interest rates would decrease the
weighted average maturity by approximately 1.3 years.

Below investment-grade securities holdings (NAIC classes 3 through 6),
representing securities of 8 issuers at December 31, 1996, totaled 0.3 percent
of cash and invested assets at December 31, 1996, compared with 1.7 percent at
January 4, 1996. (See note captioned "Invested Assets and Related Income" in the
notes to the consolidated financial statements.) Below investment-grade
securities are generally unsecured and often subordinated to other creditors of
the issuers. These issuers may have relatively higher levels of indebtedness and
be more sensitive to adverse economic conditions than investment-grade issuers.
KILICO has significantly reduced its exposure to below investment-grade
securities since 1991. This strategy takes into account the more conservative
nature of today's consumer and the resulting demand for higher-quality
investments in the life insurance and annuity marketplace.

REAL ESTATE-RELATED INVESTMENTS

The $267.7 million real estate-related portfolio held by KILICO, consisting of
joint venture and third-party mortgage loans and other real estate-related
investments, constituted 5.9 percent of cash and invested assets at December 31,
1996, compared with $288.9 million, or 6.1 percent, at January 4, 1996. The
decrease in real estate-related investments during 1996 was primarily due to
asset sales.

As reflected in the "Real estate portfolio" table below, KILICO has continued to
fund both existing projects and legal commitments. The future legal commitments
were $197.4 million at December 31, 1996. This amount represented a net decrease
of $50.8 million since January 4, 1996, primarily due to sales and fundings in
1996. As of December 31, 1996, KILICO expects to fund approximately $39.6
million of these legal commitments, along with providing capital to existing
projects. The disparity between total legal commitments and the amount expected
to be funded relates principally to standby financing arrangements that provide
credit enhancements to certain tax-exempt bonds, which KILICO does not presently
expect to fund. The total legal commitments, along with estimated working
capital requirements, are considered in KILICO's evaluation of reserves and
write-downs. (See note captioned "Financial Instruments--Off-Balance-Sheet Risk"
in the notes to the consolidated financial statements.)

55
<PAGE> 60

Generally, at the inception of a real estate loan, KILICO anticipated that it
would roll over the loan and reset the interest rate at least one time in the
future, although KILICO is not legally committed to do so. KILICO anticipates
that as certain mortgages mature they could be rolled over, restructured or
foreclosed if not earlier disposed of.

Excluding the $7.5 million of real estate owned and $11.7 million of net equity
investments in joint ventures, KILICO's real estate loans totaled $248.5 million
at December 31, 1996, after reserves and write-downs. Of this amount, $210.3
million are on accrual status with a weighted average interest rate of
approximately 8.6 percent. Of these accrual loans, 17.0 percent have terms
requiring current periodic payments of their full contractual interest, 58.2
percent require only partial payments or payments to the extent of cash flow of
the borrowers, and 24.8 percent defer all interest to maturity.

The equity investments in real estate at December 31, 1996 consisted of KILICO's
other equity investments in joint ventures. These equity investments include
KILICO's share of periodic operating results. KILICO, as an equity owner or
affiliate thereof, has the ability to fund, and historically has elected to
fund, operating requirements of certain joint ventures.

REAL ESTATE PORTFOLIO

(in millions)

<TABLE>
<CAPTION>
OTHER REAL ESTATE-RELATED
MORTGAGE LOANS INVESTMENTS
---------------- ------------------------------------
JOINT THIRD- OTHER REAL ESTATE EQUITY
VENTURE PARTY LOANS(2) OWNED INVESTMENTS TOTAL
------- ------ -------- ----------- ----------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 4, 1996................ $110.2 $144.5 $ 22.3 $ .5 $11.4 $288.9(1)
Additions (deductions):
Fundings.................................. 9.6 2.5 -- 15.0 -- 27.1
Interest added to principal............... 4.5 3.1 -- -- -- 7.6
Sales/paydowns/distributions.............. (13.1) (36.8) (10.1) (16.1) (2.6) (78.7)
Purchases from affiliated realty
companies............................... 4.8 1.3 16.5 -- -- 22.6
Operating gain............................ -- -- -- -- .3 .3
Transfers to real estate owned............ -- -- -- 1.5 (1.5) --
Realized investments gains (losses)....... (2.9) 2.9 6.3 7.1 4.1 17.5
Other transactions, net................... (2.1) (10.9) (4.1) (.5) -- (17.6)
------ ------ ------ ------ ----- ------
Balance at December 31, 1996.............. $111.0 $106.6 $ 30.9 $ 7.5 $11.7 $267.7(3)
====== ====== ====== ====== ===== ======
</TABLE>

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

(1) Net of $15.5 million reserve and write-downs. Excludes $5.6 million of real
estate-related accrued interest.

(2) The other real estate loans were notes receivable evidencing financing,
primarily to joint ventures. These loans were issued by KILICO generally to
provide financing for Kemper's or KILICO's joint ventures for various
purposes.

(3) Net of $11.8 million reserve and write-downs. Excludes $9.7 million of real
estate-related accrued interest.

REAL ESTATE CONCENTRATIONS

KILICO's real estate portfolio is distributed by geographic location and
property type. However, KILICO has concentration exposures in certain states and
in certain types of properties. In addition to these exposures, KILICO also has
exposures to certain real estate developers and partnerships. (See notes

56
<PAGE> 61

captioned "Unconsolidated Investors" and "Concentration of Credit Risk" in the
notes to the consolidated financial statements.)

REAL ESTATE OUTLOOK

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

TROUBLED REAL ESTATE-RELATED INVESTMENTS

(BEFORE RESERVES AND WRITE-DOWNS, EXCEPT FOR REAL ESTATE OWNED)

(in millions)

<TABLE>
<CAPTION>
DECEMBER 31 JANUARY 4
1996 1996
----------- ---------
<S> <C> <C>
Potential problem loans(1)............. $ 3.2 $17.9
Past due loans(2)...................... -- --
Nonaccrual loans(3).................... 43.5 3.5
Restructured loans (currently
performing)(4)....................... -- .2
Real estate owned...................... 7.5 .5
----- -----
Total........................ $54.2 $22.1
===== =====
</TABLE>

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

(1) These are real estate-related investments where KILICO, based on known
information, has serious doubts about the borrowers' abilities to comply
with present repayment terms and which KILICO anticipates may go into
nonaccrual, past due or restructured status.

(2) Interest more than 90 days past due but not on nonaccrual status.

(3) KILICO does not accrue interest on real estate-related investments when it
judges that the likelihood of collection of interest is doubtful. Loans on
nonaccrual status after reserves and write-downs amounted to $38.2 million
and $3.5 million at December 31, 1996 and January 4, 1996, respectively.

(4) KILICO defines a "restructuring" of debt as an event whereby KILICO, for
economic or legal reasons related to the debtor's financial difficulties,
grants a concession to the debtor it would not otherwise consider. Such
concessions either stem from an agreement between KILICO and the debtor or
are imposed by law or a court. By this definition, restructured loans do not
include any loan that, upon the expiration of its term, both repays its
principal and pays interest then due from the proceeds of a new loan that
KILICO, at its option, may extend (roll over).

KILICO evaluates its real estate-related investments (including accrued
interest) using an estimate of the investments' observable market price, net of
estimated costs to sell. (See note captioned "Summary of Significant Accounting
Policies" in the notes to the consolidated financial statements.) Real
estate-related reserves amounted to $9.5 million and $15.4 million at December
31, 1996 and January 4, 1996, respectively. Because KILICO's real estate review
process includes estimates, there can be no assurance that current estimates
will prove accurate over time due to changing economic conditions and other
factors.

KILICO's real estate-related investments are expected to continue to decline
further through future sales. Although the real estate-related investments have
been valued using an estimate of the investment's observable market price, net
of estimated costs to sell, KILICO's net income could be materially reduced in
future periods if real estate market conditions worsen in areas where KILICO's
portfolio is located or if Kemper's and KILICO's plans with respect to certain
projects change.

57
<PAGE> 62

The increase in nonaccrual loans at December 31, 1996, compared with January 4,
1996, reflects certain negative developments in January 1997 related to the
zoning of undeveloped land in Hawaii. As a result of the uncertainty related to
the zoning process, KILICO placed the related real estate-related investments on
nonaccrual status at December 31, 1996 and increased its real estate-related
reserves by $5.3 million.

KILICO continues to devote significant attention to its real estate portfolio,
enhancing monitoring of the portfolio and formulating specific action plans
addressing nonperforming and potential problem loans. KILICO is continuing to
analyze various potential transactions designed to further reduce both its joint
venture operating losses and the amount of its real estate-related investments.
Specific types of transactions under consideration (and previously utilized)
include loan sales, property sales and mortgage refinancings. However, there can
be no assurance that such efforts will result in continued improvements in the
performance of KILICO's real estate portfolio.

NET INVESTMENT INCOME

KILICO's pre-tax net investment income totaled $299.7 million in 1996, compared
with $348.4 million in 1995 and $353.1 million in 1994. Included in pre-tax net
investment income is KILICO's share of the operating losses from equity
investments in real estate consisting of other income less depreciation,
interest and other expenses. Such operating results exclude interest expense on
loans by KILICO which are on nonaccrual status. As previously discussed,
KILICO's net investment income in 1996, compared with 1995 and 1994, has been
negatively impacted by purchase accounting adjustments.

KILICO's total foregone investment income before tax on both nonperforming fixed
maturity investments and nonaccrual real estate-related investments was as
follows:

FOREGONE INVESTMENT INCOME

(dollars in millions)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------
PREACQUISITION
-----------------
1996 1995 1994
---- ----- -----
<S> <C> <C> <C>
Fixed maturities........................ $ .7 $ .4 $--
Real estate-related investments......... .5 20.5 28.4
---- ----- -----
Total............................ $1.2 $20.9 $28.4
==== ===== =====
Basis points............................ 3 43 55
==== ===== =====
</TABLE>

Foregone investment income from the nonaccrual of real estate-related
investments is net of KILICO's share of interest expense on these loans excluded
from KILICO's share of joint venture operating results. Based on the level of
nonaccrual real estate-related investments at December 31, 1996, KILICO
estimates foregone investment income in 1997 will increase compared with the
1996 level. Any increase in nonperforming securities, and either worsening or
stagnant real estate conditions, would increase the expected adverse effect on
KILICO's future investment income and realized investment results.

Future net investment income, results of operations and cash flow will reflect
KILICO's current levels of investments in investment-grade securities, real
estate fundings treated as equity investments, nonaccrual real estate loans and
joint venture operating losses. KILICO expects, however, that any adverse
effects should be offset, to some extent, by certain advantages that it expects
to realize over time from its other investment strategies, its product mix and
its continuing cost-control measures. Other mitigating factors include

58
<PAGE> 63

marketing advantages that could result from KILICO having lower levels of
investment risk, higher financial strength and claims-paying ability ratings and
earnings improvements from KILICO's ability to adjust crediting rates on
annuities and interest-sensitive life products over time.

REALIZED INVESTMENT RESULTS

Reflected in net income (loss) are after-tax realized investment gains of $8.8
million in 1996, compared with after-tax realized investment losses of $207.2
million and $35.5 million in 1995 and 1994, respectively. (See note captioned
"Invested Assets and Related Income" in the notes to the consolidated financial
statements.)

Unrealized gains and losses on fixed maturity investments are not reflected in
KILICO's net income (loss). These changes in unrealized value are included
within a separate component of stockholder's equity, net of any applicable
income taxes. If and to the extent a fixed maturity investment suffers an
other-than-temporary decline in value, however, such security is written down to
net realizable value, and the write-down adversely impacts net income.

KILICO regularly monitors its investment portfolio and as part of this process
reviews its assets for possible impairments of carrying value. Because the
review process includes estimates, there can be no assurance that current
estimates will prove accurate over time due to changing economic conditions and
other factors.

A valuation allowance has been established, and is evaluated as of each reported
period end, to reduce the deferred tax asset for investment losses to the amount
that, based upon available evidence, is in management's judgment more likely
than not to be realized. (See note captioned "Income Taxes" in the notes to the
consolidated financial statements.)

INTEREST RATES

In 1994, rapidly rising short-term interest rates resulted in a much flatter
yield curve as the Federal Reserve Board raised rates five times during the year
and once during first-quarter 1995. Interest rates subsequently declined through
the remainder of 1995. In 1996, however, interest rates again began to rise.

When maturing or sold investments are reinvested at lower yields in a low
interest rate environment, KILICO can adjust its crediting rates on fixed
annuities and other interest-bearing liabilities. However, competitive
conditions and contractual commitments do not always permit the reduction in
crediting rates to fully or immediately reflect reductions in investment yield,
which can result in narrower spreads.

The rising interest rate environment in 1996 contributed to an increase in net
investment income as well as to both realized and unrealized fixed maturity
investment losses. Also, lower renewal crediting rates on annuities, compared
with competitors' higher new money crediting rates, influenced certain annuity
holders to seek alternative products. KILICO mitigates this risk somewhat by
charging surrender fees which decrease over time when annuity holders withdraw
funds prior to maturity on certain annuity products. Approximately 57 percent of
KILICO's fixed and variable annuity liabilities as of December 31, 1996,
however, were no longer subject to significant surrender fees.

As interest rates rose during 1996, KILICO's capital resources were adversely
impacted by unrealized loss positions from its fixed maturity investments.

59
<PAGE> 64

LIQUIDITY AND CAPITAL RESOURCES

KILICO carefully monitors cash and short-term investments to maintain adequate
balances for timely payment of policyholder benefits, expenses, taxes and
policyholder's account balances. In addition, regulatory authorities establish
minimum liquidity and capital standards. The major ongoing sources of KILICO's
liquidity are deposits for fixed annuities, investment income, other operating
revenue and cash provided from maturing or sold investments. (See the
Policyholder surrenders and withdrawals table and related discussion and
"INVESTMENTS" above.)

RATINGS

Ratings are an important factor in establishing the competitive position of life
insurance companies. Rating organizations continue to review the financial
performance and condition of life insurers and their investment portfolios,
including those of KILICO. Any reductions in KILICO's claims-paying ability or
financial strength ratings could result in its products being less attractive to
consumers. Any reductions in KILICO's parent's ratings could also adversely
impact KILICO's financial flexibility.

Ratings reductions for Kemper or its subsidiaries and other financial events can
also trigger obligations to fund certain real estate-related commitments to take
out other lenders. In such events, those lenders can be expected to renegotiate
their loan terms, although they are not contractually obligated to do so.

Each rating is subject to revision or withdrawal at any time by the assigning
organization and should be evaluated independently of any other rating. (See
"Ranking and ratings" above.)

STOCKHOLDER'S EQUITY

Stockholder's equity totaled $751.0 million at December 31, 1996, compared with
$745.6 million at January 4, 1996. The 1996 increase in stockholder's equity was
primarily due to net income of $34.4 million and an $18.4 million capital
contribution, offset by a $47.4 million decrease in stockholder's equity related
to the change in the unrealized loss position of KILICO's fixed maturity
investment portfolio due to rising interest rates during 1996.

60
<PAGE> 65

DIRECTORS AND EXECUTIVE OFFICERS OF KILICO

<TABLE>
<CAPTION>
NAME AND AGE
POSITION WITH KILICO
YEAR OF ELECTION OTHER BUSINESS EXPERIENCE DURING PAST 5 YEARS OR MORE
-------------------- -----------------------------------------------------
<S> <C>
John B. Scott (52) Chief Executive Officer, President and Director of Federal
Chief Executive Officer since Kemper Life Assurance Company (FKLA) and Fidelity Life
February 1992. President since Association (FLA) since 1988. Chief Executive Officer,
November 1993. Director since 1992. President and Director of Zurich Life Insurance Company of
America (ZLICA) and Zurich Direct, Inc. (ZD) since March
1996. Chairman of the Board and Director of Investors
Brokerage Services, Inc. (IBS) and Investors Brokerage
Services Insurance Agency, Inc. (IBSIA) since 1993. Chairman
of the Board of FKLA and FLA from April 1988 to January
1996. Chairman of the Board of KILICO from February 1992 to
January 1996. Executive Vice President and Director of
Kemper Corporation (Kemper) from January 1994 and March
1996, respectively. Executive Vice President of Kemper
Financial Companies, Inc. from January 1994 to January 1996
and Director from 1992 to January 1996.
Jerome J. Cwiok (49) Executive Vice President of FKLA and FLA since 1995.
Executive Vice President since 1995. Executive Vice President of ZLICA and ZD since March 1996.
Director of IBS and IBSIA since 1994. Director of FKLA from
October 1995 to January 1996. Senior Vice President of
KILICO, FKLA and FLA from November 1993 to March 1995. Vice
President of FKLA, KILICO and FLA since 1993. Executive Vice
President of Academy Insurance Group from 1986 to 1993.
Eliane C. Frye (49) Executive Vice President of FKLA and FLA since 1995.
Executive Vice President since 1995. Executive Vice President of ZLICA and ZD since March 1996.
Director of IBS and IBSIA since 1995. Senior Vice President
of KILICO, FKLA and FLA from 1993 to 1995. Vice President of
FKLA and FLA from 1988 to 1993.
Frederick L. Blackmon (45) Senior Vice President and Chief Financial Officer of FKLA
Senior Vice President and Chief since December 1995. Senior Vice President and Chief
Financial Officer since December Financial Officer of FLA since January 1996. Senior Vice
1995. President and Chief Financial Officer of ZLICA since March
1996. Senior Vice President, Chief Financial Officer and
Director of ZD since March 1996. Treasurer and Chief
Financial Officer of Kemper since January 1996. Chief
Financial Officer of Alexander Hamilton Life Insurance
Company from April 1989 to November 1995.
James C. Harkensee (38) Senior Vice President of FKLA and FLA since January 1996.
Senior Vice President since January Senior Vice President of ZLICA since 1995. Senior Vice
1996. President of ZD since 1995. Vice President of ZLICA from
1992 to 1995. Chief Actuary of ZLICA from 1991 to 1994.
Assistant Vice President of ZLICA from 1990 to 1992. Vice
President of ZD from 1994 to 1995.
</TABLE>

61
<PAGE> 66

<TABLE>
<CAPTION>
NAME AND AGE
POSITION WITH KILICO
YEAR OF ELECTION OTHER BUSINESS EXPERIENCE DURING PAST 5 YEARS OR MORE
-------------------- -----------------------------------------------------
<S> <C>
James E. Hohmann (41) Senior Vice President and Chief Actuary of FKLA since
Senior Vice President and Chief December 1995. Senior Vice President and Chief Actuary of
Actuary since December 1995. FLA since January 1996. Senior Vice President and Chief
Actuary of ZLICA since March 1996. Senior Vice President,
Chief Actuary and Director of ZD since March 1996. Managing
Principal (Partner) of Tillinghast-Towers Perrin from
January 1991 to December 1995. Consultant/Principal
(Partner) of Tillinghast-Towers Perrin from November 1986 to
January 1991.

Edward K. Loughridge (42) Senior Vice President and Corporate Development Officer of
Senior Vice President and Corporate FKLA and FLA since January 1996. Senior Vice President and
Development Officer since January Corporate Development Officer for ZLICA and ZD since March
1996. 1996. Senior Vice President of Human Resources of
Zurich-American Insurance Group from February 1992 to March
1996.

Debra P. Rezabek (41) Senior Vice President of FKLA and FLA since March 1996.
Senior Vice President since 1996. Corporate Secretary of FKLA and FLA since January 1996. Vice
General Counsel since 1992. Corporate President of KILICO, FKLA and FLA since 1995. General
Secretary since January 1996. Counsel and Director of Government Affairs of FKLA and FLA
since 1992 and of KILICO since 1993. Senior Vice President,
General Counsel and Corporate Secretary of ZLICA since March
1996. Senior Vice President, General Counsel, Corporate
Secretary and Director of ZD since March 1996. Secretary of
IBS and IBSIA since 1993. Director of IBS and IBSIA from
1993 to 1996. Assistant General Counsel of FKLA and FLA from
1988 to 1992. General Counsel and Assistant Secretary of
KILICO, FKLA and FLA from 1992 to 1996. Assistant Secretary
of Kemper since January 1996.

George Vlaisavljevich (54) Senior Vice President of FKLA, FLA and ZLICA since October
Senior Vice President since October 1996. Director of IBS and IBSIA since October 1996.
1996. Executive Vice President of The Copeland Companies from
April 1983 to September 1996.

Loren J. Alter (58) Director of FKLA, FLA and Zurich Kemper Investments, Inc.
Director since January 1996. (ZKI) since January 1996. Director of ZLICA since May 1979.
Executive Vice President of Zurich Insurance Company since
1979. President, Chief Executive Officer and Director of
K-Corp. since January 1996.
</TABLE>

62
<PAGE> 67

<TABLE>
<CAPTION>
NAME AND AGE
POSITION WITH KILICO
YEAR OF ELECTION OTHER BUSINESS EXPERIENCE DURING PAST 5 YEARS OR MORE
-------------------- -----------------------------------------------------
<S> <C>
William H. Bolinder (53) Chairman of the Board and Director of FKLA and FLA since
Chairman of the Board and Director January 1996. Chairman of the Board of ZLICA and ZD since
since January 1996. March 1995. Chairman of the Board of Kemper since January
1996. Vice Chairman and Director of ZKI since January 1996.
Member of the Corporate Executive Board of Zurich Insurance
Group since October 1994. Chairman of the Board of American
Guarantee and Liability Insurance Company, Zurich American
Insurance Company of Illinois, American Zurich Insurance
Company and Steadfast Insurance Company since 1995. Chief
Executive Officer of American Guarantee and Liability
Insurance Company, Zurich American Insurance Company of
Illinois, American Zurich Insurance Company and Steadfast
Insurance Company from 1986 to June 1995. President of
Zurich Holding Company of America since 1986. Manager of
Zurich Insurance Company, U.S. Branch since 1986.
Underwriter for Zurich American Lloyds since 1986.

Daniel L. Doctoroff (38) Director of FKLA, FLA and Kemper since January 1996.
Director since January 1996. Director of ZLICA since March 1996. Managing Partner of
Insurance Partners Advisors, L.P. since February 1994. Vice
President of Keystone, Inc. since October 1992. Managing
Director of Rosecliff Inc./Oak Hill Partners, Inc. since
August 1987. Director of Bell & Howell Company since 1989;
Specialty Foods Corporation since 1993; and Capstar Hotel
Company since 1995.

Steven M. Gluckstern (45) Director of FKLA, FLA and K-Corp. since January 1996.
Vice Chairman and Director since Director of ZLICA since March 1996. Vice Chairman of FKLA
January 1996. and FLA since January 1996. Member of the Corporate
Executive Board of Zurich Insurance Group since March 1997.
Chairman of the Board and Director of ZKI since January
1996. Chairman of the Board and Chief Executive Officer of
Zurich Reinsurance Centre, Inc. since May 1993. President of
Centre Re, Bermuda from December 1986 to May 1993.

Markus Rohrbasser (42) Director of FKLA, FLA and ZLICA since May 1997. Chief
Director since May 1997. Financial Officer and Member of the Corporate Executive
Board of Zurich Insurance Company since January 1997. Member
of Enlarged Corporate Executive Board and Chief Executive
Officer of Union Bank of Switzerland (North America) from
1992 to 1997.
</TABLE>

63
<PAGE> 68

<TABLE>
<CAPTION>
NAME AND AGE
POSITION WITH KILICO
YEAR OF ELECTION OTHER BUSINESS EXPERIENCE DURING PAST 5 YEARS OR MORE
-------------------- -----------------------------------------------------
<S> <C>
Michael P. Stramaglia (37) Director of FKLA and FLA since January 1996. Director of
Director since January 1996. ZLICA since March 1996. President of Zurich Life Insurance
Company of Canada (ZLICC) since June 1994. Chief Operating
Officer of ZLICC since March 1997. President of KEZMO,
L.L.C. and President of KEZLI, L.L.C. since 1995. Chief
Executive Officer of ZLICC from June 1994 to March 1997.
Executive Vice President and Chief Operating Officer of
ZLICC from June 1993 to June 1994. Senior Vice President of
the Corporate Division of ZLICC from January 1990 to June
1993. Director of ZLICC, Zurich Life of Canada Holdings
Limited, Zurich Indemnity Company of Canada, Zurich Canadian
Holdings Limited, and Zurmex Canada Holdings Limited.

Paul H. Warren (41) Director of FKLA , FLA and Kemper since January 1996.
Director since January 1996. Director of ZLICA since March 1996. Partner of Insurance
Partners Advisors, L.P. since March 1994. Managing Director
of International Insurance Advisors since March 1992. Vice
President of J.P. Morgan from June 1986 to March 1992.
Director of Unionamerica Holdings plc since June 1993;
Unionamerica Insurance Company since September 1993; Tarquin
plc since November 1994; Chairman Underwriting Agencies Ltd.
since November 1994; and Corporate Health Dimensions since
March 1997.
</TABLE>

64
<PAGE> 69

EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
--------------------------------------------------------------------
(A) (B) (C) (D) (E) (F) (G)
OTHER RESTRICTED
ANNUAL STOCK OPTIONS/ LONG TERM ALL OTHER
NAME AND COMPENSATION AWARD(S) SARS INCENTIVE PLAN COMPENSATION
PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) ($)(2) ($)(3) (#)(4) PAYOUTS ($) ($)(5)(6)(7)
- ------------------------------------------------------------------------------------------------------------------
John B. Scott.............. 1996 $212,500 $ 94,000 $ -- $ -- $ -- $212,500 $142,498
Chief Executive Officer(1) 1995 172,800 129,600 20,035 -- 15,360 260,106
1994 163,200 160,800 396,801 125,280 16,080 256,915
Jerome J. Cwiok............ 1996 112,500 46,000 -- -- -- 74,750 32,882
Executive Vice President(1) 1995 95,000 67,500 23,381 -- 9,000 28,357
1994 84,896 59,000 113,926 40,600 2,000 9,922
Eliane C. Frye............. 1996 105,000 41,750 -- -- -- 69,750 58,520
Executive Vice President(1) 1995 91,200 67,200 9,261 -- 10,560 41,546
1994 73,800 58,560 57,525 38,976 1,920 57,913
James E. Hohmann........... 1996 113,333 56,750 -- -- -- 81,500 11,333
Senior Vice President and
Chief Actuary(1)
Frederick L. Blackmon...... 1996 100,583 47,000 27,924 -- -- 71,250 11,226
Senior Vice President and
Chief Financial
Officer(1)
</TABLE>

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

(1) Also served in same positions for FKLA, ZLICA and FLA. An allocation of the
time devoted to duties as executive officer of KILICO has been made. All
compensation items reported in the Summary Compensation Table reflect this
allocation.

(2) The amounts disclosed in this column include:

(a) Amounts paid as non-preferential dividend equivalents on shares of
restricted stock and phantom stock units.

(b) The cash value of shares of Kemper common stock when awarded under the
Kemper Anniversary Award Plan. Employees were awarded shares on an
increasing scale beginning with their 10th year of employment and every 5
years thereafter, with a pro rata award at retirement.

(c) The taxable benefit from personal use of an employer-provided automobile
and certain estate planning services facilitated for executives.

(d) Relocation expense reimbursements of $109,760 in 1994 and $15,474 in
1995 for Mr. Cwiok and $21,437 in 1996 for Mr. Blackmon.

(e) Compensation income reported in 1994 of $384,822 for Mr. Scott and
$55,974 for Ms. Frye, based on the market value on the vesting date of
restricted stock awarded under Kemper's long-term incentive plans.

65
<PAGE> 70

(3) Due to the June 1994 vesting of all outstanding shares of restricted stock
granted in 1992 or earlier and the cancellation of shares awarded in 1993
and 1994, no shares of restricted stock were held by any of the named
executive officers on or after December 31, 1995.

(4) Options were granted under Kemper stock option plans maintained for selected
officers and employees of Kemper and its subsidiaries.

(5) The amounts in this column include:

(a) The amounts of employer contributions allocated to the accounts of the
named persons under profit sharing plans or under supplemental plans
maintained to provide benefits in excess of applicable ERISA limitations.

(b) Distributions from the Kemper and FKLA supplemental plans.

(6) Pursuant to the Conseco Merger Agreement, the restricted stock awards for
1993 and 1994 were cancelled. To replace these awards, on June 30, 1994, the
Committee, under the Kemper Bonus Restoration Plan and in its sole
discretion, granted cash awards to the named executive officers and other
affected executives entitling each of them to receive an amount in cash
immediately prior to the effective time of the then-planned Conseco merger
equal to the product of the number of shares of restricted stock previously
granted to such individual under the 1993 Senior Executive Long-Term
Incentive Plan multiplied by the consideration payable in the merger. As a
result of the termination of the Conseco Merger Agreement, no cash awards
were paid pursuant to the Kemper Bonus Restoration Plan.

In January 1995, the board of directors, upon the advice of the Committee,
approved the adoption of the Kemper 1995 Executive Incentive Plan under
which active employee holders of the previously cancelled shares of
restricted stock were granted phantom stock units by the Committee equal to
the number of shares cancelled plus an added amount representing 20 percent
of the aggregate cancelled shares. The 20 percent supplement was awarded in
recognition of the imposition of new vesting periods on the phantom awards
(to the extent the restricted stock held prior to cancellation would
otherwise have vested in June 1994 had stockholder approval of the affected
restricted stock plan been obtained as earlier anticipated).

By their terms, the phantom stock units associated with cancelled shares of
restricted stock originally awarded in 1993, as supplemented, would have
vested on December 31, 1995 and entitle the holders to a cash payment (net
of any required tax withholding) determined by the value of Kemper's common
stock based on an average trading range to December 31, 1995, and those
phantom stock units associated with the cancelled restricted stock
originally awarded in 1994 could similarly have vested and been paid on
December 31, 1996, subject to ongoing employment to the respective vesting
dates. Notwithstanding these vesting provisions, the phantom stock units
earlier vested and entitled payment upon the consummation of a "change of
control" of Kemper. Dividend equivalents were payable to holders of the
phantom stock units as compensation income when and as dividends were paid
on Kemper's outstanding common stock, and the Executive Incentive Plan
provided for standard anti-dilution adjustments.

Phantom units awarded to the named executive officers subject to vesting on
December 31, 1995 and December 31, 1996, were Mr. Scott 5,400 and 12,600
phantom units, respectively, Ms. Frye 1,680 and 1,680 phantom units,
respectively, and Mr. Cwiok 0 and 1,680 phantom units, respectively. All
phantom stock units vested and were paid immediately prior to the
effectiveness of the January 4, 1996 acquisition of Kemper by Zurich and
Insurance Partners. Messrs. Scott and Cwiok and Ms. Frye received allocated
cash out payments of $430,272, $41,832 and $80,317, respectively, in 1996.

66
<PAGE> 71

(7) Pursuant to the terms of a Termination Protection Agreement with Kemper
dated March 17, 1994, Mr. Scott received payments in 1995 and 1996. These
payments were made by Kemper and no portion of the payments were allocated
to KILICO.

AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR

AND FY-END OPTION/SAR VALUES

<TABLE>
<CAPTION>
(A) (B) (C) (D) (E)
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS/SARS AT IN-THE-MONEY OPTIONS/
FY-END (#)(1) SARS AT FY-END ($)(1)
SHARES ACQUIRED ON
NAME EXERCISE (#) VALUE REALIZED ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
John B. Scott(2).................. 133,325 $1,525,185 -- --
</TABLE>

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

(1) All unexercised Kemper stock options were cancelled immediately prior to the
January 4, 1996 effectiveness of the acquisition of Kemper by Zurich and
Insurance Partners. Optionees were paid the spread between their option
exercise price and $49.80 per share. Mr. Cwiok and Ms. Frye received $84,150
and $112,370, respectively, in 1996 as a result of such payments.

(2) Includes options granted related to service for FKLA.

67
<PAGE> 72

TABLE OF CONTENTS--STATEMENT OF ADDITIONAL INFORMATION

The Statement of Additional Information, Table of Contents is: Services to the
Separate Account; Performance Information of Subaccounts; State Regulation;
Experts; Financial Statements; Independent Auditors' Report, Financial
Statements of the Separate Account. The Statement of Additional Information
should be read in conjunction with this Prospectus.

FINANCIAL STATEMENTS

The financial statements of KILICO that are included in this Prospectus should
be considered primarily as bearing on the ability of KILICO to meet its
obligations under the Certificates. The Certificates are not entitled to
participate in earnings, dividends or surplus of KILICO.

68
<PAGE> 73

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

The Board of Directors and Stockholder

Kemper Investors Life Insurance Company:

We have audited the accompanying consolidated balance sheets of Kemper Investors
Life Insurance Company and subsidiaries as of December 31, 1996 and as of
January 4, 1996, and the related consolidated statements of operations,
stockholder's equity, and cash flows for the periods from January 4, 1996 to
December 31, 1996 (post-acquisition), and for each of the years in the two-year
period ended December 31, 1995 (pre-acquisition). In connection with our audits
of the consolidated financial statements, we also have audited the financial
statement schedules as listed in the accompanying index. These consolidated
financial statements and the financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements 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 aforementioned post-acquisition consolidated financial
statements and financial statement schedules present fairly, in all material
respects, the financial position of Kemper Investors Life Insurance Company and
subsidiaries as of December 31, 1996 and as of January 4, 1996, and the results
of their operations and their cash flows for the post-acquisition period, in
conformity with generally accepted accounting principles. Further, in our
opinion, the aforementioned pre-acquisition consolidated financial statements
present fairly, in all material respects, the financial position of Kemper
Investors Life Insurance Company and subsidiaries and the results of their
operations and their cash flows for the pre-acquisition periods, in conformity
with generally accepted accounting principles.

As discussed in Note 1 to the consolidated financial statements, effective
January 4, 1996, an investor group as described in Note 1, acquired all of the
outstanding stock of Kemper Investors Life Insurance Company in a business
combination accounted for as a purchase. As a result of the acquisition, the
consolidated financial information for the periods after the acquisition is
presented on a different cost basis than that for the periods before the
acquisition and, therefore, is not comparable.

KPMG PEAT MARWICK LLP

Chicago, Illinois

March 21, 1997

69
<PAGE> 74

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

<TABLE>
<CAPTION>
DECEMBER 31 JANUARY 4
1996 1996
----------- ----------
<S> <C> <C>
ASSETS
Fixed maturities, available for sale, at fair value (cost:
December 31, 1996, $3,929,650; January 4, 1996,
$3,749,323)............................................... $3,866,431 $3,749,323
Short-term investments...................................... 71,696 372,515
Joint venture mortgage loans................................ 110,971 110,194
Third-party mortgage loans.................................. 106,585 144,450
Other real estate-related investments....................... 50,157 34,296
Policy loans................................................ 288,302 289,390
Other invested assets....................................... 23,507 19,215
---------- ----------
Total investments................................. 4,517,649 4,719,383
Cash........................................................ 2,776 25,811
Accrued investment income................................... 115,199 104,402
Goodwill.................................................... 244,688 254,883
Value of business acquired.................................. 189,639 190,222
Deferred insurance acquisition costs........................ 26,811 --
Federal income tax receivable............................... 3,840 112,646
Reinsurance recoverable..................................... 427,165 502,836
Receivable on sales of securities........................... 32,569 902
Other assets and receivables................................ 30,277 10,540
Assets held in separate accounts............................ 2,127,247 1,761,110
---------- ----------
Total assets...................................... $7,717,860 $7,682,735
========== ==========
LIABILITIES
Future policy benefits...................................... $4,256,521 $4,585,148
Ceded future policy benefits................................ 427,165 502,836
Benefits and claims payable to policyholders................ 36,142 4,535
Other accounts payable and liabilities...................... 59,462 30,030
Deferred income taxes....................................... 60,362 53,472
Liabilities related to separate accounts.................... 2,127,247 1,761,110
---------- ----------
Total liabilities................................. 6,966,899 6,937,131
---------- ----------
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.................................. 761,538 743,104
Unrealized loss on investments.............................. (47,498) --
Retained earnings........................................... 34,421 --
---------- ----------
Total stockholder's equity........................ 750,961 745,604
---------- ----------
Total liabilities and stockholder's equity........ $7,717,860 $7,682,735
========== ==========
</TABLE>

See accompanying notes to consolidated financial statements.

70
<PAGE> 75

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------
PREACQUISITION
----------------------
1996 1995 1994
-------- --------- --------
<S> <C> <C> <C>
REVENUE
Net investment income.................................. $299,688 $ 348,448 $353,084
Realized investment gains (losses)..................... 13,602 (318,700) (54,557)
Premium income......................................... 7,822 236 --
Fees and other income.................................. 35,095 38,101 31,950
-------- --------- --------
Total revenue................................ 356,207 68,085 330,477
-------- --------- --------
BENEFITS AND EXPENSES
Benefits and interest credited to policyholders........ 237,349 245,615 248,494
Commissions, taxes, licenses and fees.................. 28,135 31,793 26,910
Operating expenses..................................... 24,678 20,837 25,324
Deferral of insurance acquisition costs................ (27,820) (36,870) (31,852)
Amortization of insurance acquisition costs............ 2,316 14,423 20,809
Amortization of value of business acquired............. 21,530 -- --
Amortization of goodwill............................... 10,195 -- --
-------- --------- --------
Total benefits and expenses.................. 296,383 275,798 289,685
-------- --------- --------
Income (loss) before income tax expense (benefit)...... 59,824 (207,713) 40,792
Income tax expense (benefit)........................... 25,403 (74,664) 14,431
-------- --------- --------
Net income (loss)............................ $ 34,421 $(133,049) $ 26,361
======== ========= ========
</TABLE>

See accompanying notes to consolidated financial statements.

71
<PAGE> 76

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY

(in thousands)

<TABLE>
<CAPTION>
PREACQUISITION
-------------------------
DECEMBER 31 JANUARY 4 DECEMBER 31 DECEMBER 31
1996 1996 1995 1994
----------- --------- ----------- -----------
<S> <C> <C> <C> <C>
CAPITAL STOCK, beginning and end of
period................................... $ 2,500 $ 2,500 $ 2,500 $ 2,500
-------- -------- --------- ---------

ADDITIONAL PAID-IN CAPITAL, beginning of
period................................... 743,104 491,994 491,994 409,423
Capital contributions from parent.......... 18,434 -- -- 82,500
Adjustment to reflect purchase accounting
method................................... -- 251,110 -- --
Transfer of limited partnership interest to
parent................................... -- -- -- 71
-------- -------- --------- ---------
End of period.................... 761,538 743,104 491,994 491,994
-------- -------- --------- ---------

UNREALIZED GAIN (LOSS) ON INVESTMENTS,
beginning of period...................... -- 68,502 (236,443) 93,096
Unrealized gain (loss) on revaluation of
investments, net......................... (47,498) -- 304,945 (329,539)
Adjustment to reflect purchase accounting
method................................... -- (68,502) -- --
-------- -------- --------- ---------
End of period.................... (47,498) -- 68,502 (236,443)
-------- -------- --------- ---------

RETAINED EARNINGS, beginning of period..... -- 42,880 175,929 149,568
Net income (loss).......................... 34,421 -- (133,049) 26,361
Adjustment to reflect purchase accounting
method................................... -- (42,880) -- --
-------- -------- --------- ---------
End of period.................... 34,421 -- 42,880 175,929
-------- -------- --------- ---------

Total stockholder's equity....... $750,961 $745,604 $ 605,876 $ 433,980
======== ======== ========= =========
</TABLE>

See accompanying notes to consolidated financial statements.

72
<PAGE> 77

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------
PREACQUISITION
-------------------------
1996 1995 1994
----------- --------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss).............................. $ 34,421 $(133,049) $ 26,361
Reconcilement of net income (loss) to net cash
provided:
Realized investment losses (gains).......... (13,602) 318,700 54,557
Interest credited and other charges......... 230,298 237,984 242,591
Deferred insurance acquisition costs........ (25,504) (22,447) (11,043)
Amortization of value of business
acquired.................................. 21,530 -- --
Amortization of goodwill.................... 10,195 -- --
Amortization of discount and premium on
investments............................... 25,743 4,586 (1,383)
Deferred income taxes....................... (897) 38,423 20,809
Net change in Federal income tax
receivable................................ 108,806 (86,990) 809
Other, net.................................. (22,283) (29,905) (14,161)
----------- --------- -----------
Net cash provided from operating
activities........................... 368,707 327,302 318,540
----------- --------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash from investments sold or matured:
Fixed maturities held to maturity........... 264,383 320,143 144,717
Fixed maturities sold prior to maturity..... 891,995 297,637 910,913
Mortgage loans, policy loans and other
invested assets........................... 168,727 450,573 536,668
Cost of investments purchased or loans
originated:
Fixed maturities............................ (1,369,091) (549,867) (1,447,393)
Mortgage loans, policy loans and other
invested assets........................... (119,044) (131,966) (281,059)
Short-term investments, net.................... 300,819 (168,351) 198,299
Net change in receivable and payable for
securities transactions..................... (31,667) (1,397) (16,553)
Net reductions in other assets................. 105 1,996 2,678
----------- --------- -----------
Net cash provided by investing
activities........................... 106,237 218,768 48,270
----------- --------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Policyholder account balances:
Deposits.................................... 141,159 247,778 215,034
Withdrawals................................. (700,084) (755,917) (652,513)
Capital contributions from parent.............. 18,434 -- 82,500
Other.......................................... 42,512 (35,309) 3,871
----------- --------- -----------
Net cash used in financing
activities........................... (497,979) (543,448) (351,108)
----------- --------- -----------
Net increase (decrease) in cash... (23,035) 2,622 15,702
CASH, beginning of period........................ 25,811 23,189 7,487
----------- --------- -----------
CASH, end of period.............................. $ 2,776 $ 25,811 $ 23,189
=========== ========= ===========
</TABLE>

See accompanying notes to consolidated financial statements.

73
<PAGE> 78

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

Kemper Investors Life Insurance Company and subsidiaries (the "Company") issues
fixed and variable annuity products, variable life, term life and
interest-sensitive life insurance products marketed primarily through a network
of financial institutions, securities brokerage firms, insurance agents and
financial planners. The Company is licensed in the District of Columbia and all
states except New York. The Company is a wholly-owned subsidiary of Kemper
Corporation ("Kemper"). On January 4, 1996, an investor group comprised of
Zurich Insurance Company ("Zurich"), Insurance Partners, L.P. ("IP") and
Insurance Partners Offshore (Bermuda), L.P. (together with IP, "Insurance
Partners") acquired all of the issued and outstanding common stock of Kemper. As
a result of the change in control, Zurich and Insurance Partners own 80 percent
and 20 percent, respectively, of Kemper and therefore the Company.

The financial statements include the accounts of the Company on a consolidated
basis. All significant intercompany balances and transactions have been
eliminated.

PURCHASE ACCOUNTING METHOD

The acquisition of the Company on January 4, 1996, was accounted for using the
purchase method of accounting. The consolidated financial statements of the
Company prior to January 4, 1996, were prepared on a historical cost basis in
accordance with generally accepted accounting principles. The accompanying
financial statements and notes thereto prepared prior to January 4, 1996 have
been labeled "preacquisition". The accompanying consolidated financial
statements of the Company as of January 4, 1996 (the acquisition date) and as of
and for the year ended December 31, 1996, have been prepared in conformity with
the purchase method of accounting. The Company has presented January 4, 1996
(the acquisition date), as the opening purchase accounting balance sheet for
comparative purposes throughout the accompanying financial statements and notes
thereto.

Under purchase accounting, the Company's assets and liabilities have been marked
to their relative fair market values as of the acquisition date. The difference
between the cost of acquiring the Company and the net fair market values of the
Company's assets and liabilities as of the acquisition date has been recorded as
goodwill. The Company is amortizing goodwill on a straight-line basis over
twenty-five years. The allocated cost of acquiring the Company was $745.6
million and the acquisition resulted in goodwill of $254.9 million as of January
4, 1996.

The Company reviews goodwill to determine if events or changes in circumstances
may have affected the recoverability of the outstanding goodwill as of each
reporting period. In the event that the Company determines that goodwill is not
recoverable, it would amortize such amounts as additional goodwill expense in
the accompanying financial statements. As of December 31, 1996, the Company
believes that no such adjustment is necessary.

74
<PAGE> 79

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Deferred insurance acquisition costs, and the related amortization thereof, for
policies sold prior to January 4, 1996, have been replaced by the value of
business acquired.

The value of business acquired reflects the estimated fair value of the
Company's life insurance business in force and represents the portion of the
cost to acquire the Company that is allocated to the value of the right to
receive future cash flows from insurance contracts existing at the date of
acquisition. Such value is the present value of the actuarially determined
projected cash flows for the acquired policies.

A 15 percent discount rate was used to determine such value and represents the
rate of return required by Zurich and Insurance Partners to invest in the
business being acquired. In selecting the rate of return used to value the
policies purchased, the Company considered the magnitude of the risks associated
with each of the actuarial assumptions used in determining expected future cash
flows, the cost of capital available to fund the acquisition, the perceived
likelihood of changes in insurance regulations and tax laws, the complexity of
the Company's business, and the prices paid (i.e., discount rates used in
determining other life insurance company valuations) on similar blocks of
business sold in recent periods.

The value of the business acquired is amortized over the estimated contract life
of the business acquired in relation to the present value of estimated gross
profits using current assumptions based on an interest rate equal to the
liability or contract rate on the value of business acquired. The estimated
amortization and accretion of interest for the value of business acquired for
each of the years through December 31, 2001 are as follows:

<TABLE>
<CAPTION>
PROJECTED
(IN THOUSANDS) BEGINNING ACCRETION OF ENDING
YEAR ENDED DECEMBER 31 BALANCE AMORTIZATION INTEREST BALANCE
- ----------------------------------------------- --------- ------------ ------------ ---------
<S> <C> <C> <C> <C>
1996........................................... $190,222 $(31,427) $ 9,897 $168,692
1997........................................... 168,692 (26,330) 10,152 152,514
1998........................................... 152,514 (26,769) 9,085 134,830
1999........................................... 134,830 (26,045) 8,000 116,785
2000........................................... 116,785 (24,288) 6,834 99,331
2001........................................... 99,331 (21,538) 5,867 83,660
</TABLE>

The projected ending balance of the value of business acquired will be further
adjusted to reflect the impact of unrealized gains or losses on fixed maturities
held as available for sale in the investment portfolio. Such adjustments are not
recorded in the Company's net income but rather are recorded as a credit or
charge to stockholder's equity, net of income tax. As of December 31, 1996, this
adjustment increased the value of business acquired and stockholder's equity by
approximately $20.9 million and $13.6 million, respectively.

ESTIMATES

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
could affect the reported amounts of assets and liabilities as well as the
disclosure of contingent assets or liabilities at the date of the financial
statements. As a result, actual results reported as revenue and expenses could
differ from the estimates reported in the

75
<PAGE> 80

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

accompanying financial statements. As further discussed in the accompanying
notes to the consolidated financial statements, significant estimates and
assumptions affect deferred insurance acquisition costs, the value of business
acquired, provisions for real estate-related losses and reserves,
other-than-temporary declines in values for fixed maturities, the valuation
allowance for deferred income taxes and the calculation of fair value
disclosures for certain financial instruments.

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 note captioned "Reinsurance".)

Premiums for term life policies are reported as earned when due. Profits for
such policies are recognized over the duration of the insurance policies by
matching benefits and expenses to premium income.

DEFERRED INSURANCE ACQUISITION COSTS

The costs of acquiring new business after January 4, 1996, principally
commission expense and certain policy issuance and underwriting expenses, have
been deferred to the extent they are recoverable from estimated future gross
profits on the related contracts and policies. The deferred insurance
acquisition costs for annuities, separate account business and
interest-sensitive life insurance products are being amortized over the
estimated contract life in relation to the present value of estimated gross
profits. Deferred insurance acquisition costs related to such interest-sensitive
products also reflect the estimated impact of unrealized gains or losses on
fixed maturities held as available for sale in the investment portfolio, through
a credit or charge to stockholder's equity, net of income tax. The deferred
insurance acquisition costs for term-life insurance products are being amortized
over the premium paying period of the policies.

FUTURE POLICY BENEFITS

Liabilities for future policy benefits related to annuities and
interest-sensitive life contracts reflect net premiums received plus interest
credited during the contract accumulation period and the present value of future
payments for contracts that have annuitized. Current interest rates credited
during the contract accumulation period range from 4.0 percent to 7.5 percent.
Future minimum guaranteed interest rates vary from 3.0 percent to 4.5 percent.
For contracts that have annuitized, interest rates used in determining the
present value of future payments range principally from 3.0 percent to 12.0
percent.

Liabilities for future term life policy benefits have been computed principally
by a net level premium method. Anticipated rates of mortality are based on the
1975-1980 Select and Ultimate Table modified by Company experience, including
withdrawals. Estimated future investment yields are a level 7 percent for
reinsurance assumed and for direct business, 8 percent for three years; 7
percent for year four; and 6 percent thereafter.

76
<PAGE> 81

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

INVESTED ASSETS AND RELATED INCOME

Investments in fixed maturities are carried at fair value. Short-term
investments are carried at cost, which approximates fair value. (See note
captioned "Fair Value of Financial Instruments".)

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

Mortgage loans are carried at their unpaid balance, net of unamortized discount
and any applicable reserves or write-downs. Other real estate-related
investments net of any applicable reserve and write-downs include notes
receivable from real estate ventures; investments in real estate ventures,
adjusted for the equity in the operating income or loss of such ventures; common
stock carried at fair value and real estate owned carried 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. At year-end
1995, reflecting the Company's change in strategy with respect to its real
estate portfolio, and the disposition thereof, and on January 4, 1996,
reflecting the acquisition of the Company, real estate-related investments were
valued using an estimate of the investments observable market price, net of
estimated costs to sell. 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.

Under purchase accounting, the market value of the Company's policy loans and
other invested assets consisting primarily of venture capital investments and a
leveraged lease, became the Company's new cost basis in such investments.
Investments in policy loans and other invested assets after January 4, 1996 are
carried at cost. Other invested assets also include equity securities, not
related to real estate-related investments, which are carried at fair value.

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

77
<PAGE> 82

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

in real estate-related reserves and write-downs are included in revenue. Net
unrealized gains or losses on revaluation of investments are credited or charged
to stockholder's equity. Such unrealized gains are recorded net of deferred
income tax expense, while unrealized losses are not tax benefitted.

SEPARATE ACCOUNT BUSINESS

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

INCOME TAX

The operations of the Company prior to January 4, 1996 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 consolidated Federal tax return. Subsequent to January 4,
1996, the Company and its subsidiaries will file separate Federal income tax
returns.

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 refunded by Kemper under the tax allocation arrangement for the
period from January 1, 1996 to January 4, 1996 and for the years ended December
31, 1995 and 1994 amounted to $108.8 million, $25.2 million and $10.7 million,
respectively. The Company paid $28.1 million of Federal income taxes directly to
the United States Treasury Department during 1996.

Not reflected in the statement of cash flows are rollovers of mortgage loans,
other loans and investments totaling approximately $57.0 million in 1994.

78
<PAGE> 83

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(3) INVESTED ASSETS AND RELATED INCOME

The Company is carrying its fixed maturity investment portfolio at estimated
fair value as fixed maturities are considered available for sale. The carrying
value (estimated fair value) of fixed maturities compared with amortized cost,
adjusted for other-than-temporary declines in value, were as follows:

<TABLE>
<CAPTION>
Estimated Unrealized
Carrying Amortized ---------------------
Value Cost Gains Losses
(in thousands) -------- --------- ----- ------
<S> <C> <C> <C> <C>
DECEMBER 31, 1996
U.S. treasury securities and obligations of U.S.
government agencies and authorities............. $ 92,238 $ 93,202 $ -- $ (964)
Obligations of states and political subdivisions,
special revenue and nonguaranteed............... 30,853 31,519 -- (666)
Debt securities issued by foreign governments..... 105,394 108,456 504 (3,566)
Corporate securities.............................. 1,896,615 1,935,511 5,918 (44,814)
Mortgage and asset-backed securities.............. 1,741,331 1,760,962 1,990 (21,621)
---------- ---------- ------ --------
Total fixed maturities..................... $3,866,431 $3,929,650 $8,412 $(71,631)
========== ========== ====== ========

JANUARY 4, 1996
U.S. treasury securities and obligations of U.S.
government agencies and authorities............. $ 215,637 $ 215,637 $ -- $ --
Obligations of states and political subdivisions,
special revenue and nonguaranteed............... 24,241 24,241 -- --
Debt securities issued by foreign governments..... 139,361 139,361 -- --
Corporate securities.............................. 1,695,268 1,695,268 -- --
Mortgage and asset-backed securities.............. 1,674,816 1,674,816 -- --
---------- ---------- ------ --------
Total fixed maturities..................... $3,749,323 $3,749,323 $ -- $ --
========== ========== ====== ========
</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

79
<PAGE> 84

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(3) INVESTED ASSETS AND RELATED INCOME (CONTINUED)

issuer restructuring plan; and the timing, type and amount of any restructured
securities that the Company anticipates it will receive.

The Company's $267.7 million real estate portfolio at December 31, 1996 consists
of joint venture and third-party mortgage loans and other real estate-related
investments.

At December 31, 1996 and January 4, 1996, total impaired loans were as follows:

<TABLE>
<CAPTION>
December 31 January 4
1996 1996
(in millions) ----------- ---------
<S> <C> <C>
Impaired loans without reserves--gross...................... $39.8 $ --
Impaired loans with reserves--gross......................... 7.6 21.9
----- -----
Total gross impaired loans........................... 47.4 21.9
Reserves related to impaired loans.......................... (4.4) (6.5)
----- -----
Net impaired loans................................... $43.0 $15.4
===== =====
</TABLE>

Impaired loans without reserves include loans in which the deficit in equity
investments in real estate-related investments is considered in determining
reserves and write-downs. At December 31, 1996, the Company's deficit in equity
investments considered in determining reserves and write-downs amounted to $5.9
million. The Company had an average balance of $30.8 million and $124.2 million
in impaired loans for 1996 and 1995, respectively. Cash payments received on
impaired loans are generally applied to reduce the outstanding loan balance.

At December 31, 1996 and January 4, 1996, loans on nonaccrual status amounted to
$43.5 million and $3.5 million, respectively. The Company's nonaccrual loans are
generally included in impaired loans.

At December 31, 1996, securities carried at approximately $6.1 million were on
deposit with governmental agencies as required by law.

At December 31, 1996, the Company had six separate asset-backed securities
included in fixed maturity investments from trusts formed to securitize assets
underwritten by Green Tree Financial Corporation, which in aggregate amounted to
$90.7 million. No other investments exceeded ten percent of the Company's
stockholder's equity at December 31, 1996.

Proceeds from sales of investments in fixed maturities prior to maturity were
$892.0 million, $297.6 million and $910.9 million during 1996, 1995 and 1994,
respectively. Gross gains of $9.9 million, $21.2 million and $6.0 million and
gross losses of $16.2 million, $11.9 million and $55.9 million were realized on
sales of fixed maturities in 1996, 1995 and 1994, respectively.

80
<PAGE> 85

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(3) INVESTED ASSETS AND RELATED INCOME (CONTINUED)

The following table sets forth the maturity aging schedule of fixed maturity
investments at December 31, 1996:

<TABLE>
<CAPTION>
Carrying Amortized
Value Cost Value
(in thousands) -------- ----------
<S> <C> <C>
One year or less............................................ $ 36,814 $ 36,862
Over one year through five.................................. 643,741 648,811
Over five years through ten................................. 1,170,034 1,200,620
Over ten years.............................................. 274,511 282,395
Securities not due at a single maturity date(1)............. 1,741,331 1,760,962
---------- ----------
Total fixed maturities............................... $3,866,431 $3,929,650
========== ==========
</TABLE>

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

(1) Weighted average maturity of 4.6 years.

The sources of net investment income were as follows:

<TABLE>
<CAPTION>
Preacquisition
-----------------------
1996 1995 1994
(in thousands) -------- -------- --------
<S> <C> <C> <C>
Interest and dividends on fixed maturities.............. $250,683 $269,934 $274,231
Dividends on equity securities.......................... 646 681 1,751
Income from short-term investments...................... 9,130 13,159 10,668
Income from mortgage loans.............................. 20,257 40,494 41,713
Income from policy loans................................ 20,700 19,658 18,517
Income from other real estate-related investments....... 4,917 15,565 21,239
Income from other loans and investments................. 2,480 1,555 3,533
-------- -------- --------
Total investment income.......................... 308,813 361,046 371,652
Investment expense...................................... (9,125) (12,598) (18,568)
-------- -------- --------
Net investment income............................ $299,688 $348,448 $353,084
======== ======== ========
</TABLE>

81
<PAGE> 86

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(3) INVESTED ASSETS AND RELATED INCOME (CONTINUED)

Realized gains (losses) for the years ended December 31, 1996, 1995 and 1994,
were as follows:

<TABLE>
<CAPTION>
Realized Gains (Losses)
------------------------------------------
Preacquisition
--------------------------
1996 1995 1994
(in thousands) ------- --------- --------
<S> <C> <C> <C>
Real estate-related.................................... $17,462 $(325,611) $(41,720)
Fixed maturities....................................... (6,344) 9,336 (49,857)
Equity securities...................................... -- (346) 28,243
Other.................................................. 2,484 (2,079) 8,777
------- --------- --------
Realized investment gains (losses) before income tax
expense (benefit)................................. 13,602 (318,700) (54,557)
Income tax expense (benefit)........................... 4,761 (111,545) (19,095)
------- --------- --------
Net realized investment gains (losses)............... $ 8,841 $(207,155) $(35,462)
======= ========= ========
</TABLE>

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, 1996,
1995 and 1994 were as follows:

<TABLE>
<CAPTION>
Change in Unrealized Gains (Losses)
------------------------------------------------
Preacquisition
--------------------
December 31
December 31 January 4 --------------------
1996 1996 1995 1994
(in thousands) ------------ ---------- -------- ---------
<S> <C> <C> <C> <C>
Fixed maturities................................... $(63,219) $-- $351,964 $(351,646)
Equity securities.................................. 1,256 -- 180 (32,710)
Adjustment to deferred insurance acquisition
costs............................................ 1,307 -- (14,277) 11,325
Adjustment to value of business acquired........... 20,947 -- -- --
-------- --- -------- ---------
Unrealized gain (loss) before income tax expense
(benefit)..................................... (39,709) -- 337,867 (373,031)
Income tax expense (benefit)....................... 7,789 -- 32,922 (43,492)
-------- --- -------- ---------
Net unrealized gain (loss) on investments... $(47,498) $-- $304,945 $(329,539)
======== === ======== =========
</TABLE>

(4) UNCONSOLIDATED INVESTEES

At December 31, 1996, the Company, along with other Kemper subsidiaries,
directly held partnership interests in a number of real estate joint ventures.
The Company's direct and indirect real estate joint venture investments are
accounted for utilizing the equity method, with the Company recording its share
of the operating results of the respective partnerships. The Company, as an
equity owner, has the ability to fund, and historically has elected to fund,
operating requirements of certain of the joint ventures. Consolidation

82
<PAGE> 87

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(4) UNCONSOLIDATED INVESTEES (CONTINUED)

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, 1996 and January 4, 1996, the Company's net equity investment
in unconsolidated investees amounted to $11.7 million and $11.4 million,
respectively. The Company's share of net income related to such unconsolidated
investees amounted to $223 thousand for the year ended December 31, 1996,
compared with net losses of $453 thousand, and $6.3 million for the years ended
December 31, 1995 and 1994, respectively.

Also at January 4, 1996, 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"), had equity
interests. These joint venture-related loans were sold during 1996.

(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 (see "INVESTMENTS" beginning on page 10) and real
estate.

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

GEOGRAPHIC DISTRIBUTION AS OF DECEMBER 31, 1996

<TABLE>
<S> <C>
California..................... 35.2%
Illinois....................... 13.5
Hawaii......................... 11.0
Colorado....................... 7.9
Oregon......................... 7.6
Washington..................... 7.4
Florida........................ 5.4
Texas.......................... 4.2
Ohio........................... 2.7
Other states................... 5.1
-----
Total................ 100.0%
=====
</TABLE>

DISTRIBUTION BY PROPERTY TYPE AS OF DECEMBER 31, 1996

<TABLE>
<S> <C>
Hotel.......................... 38.8%
Land........................... 24.4
Office......................... 14.1
Residential.................... 9.1
Retail......................... 2.6
Industrial..................... 1.0
Other.......................... 10.0
-----
Total................ 100.0%
=====
</TABLE>

Real estate markets have been depressed in recent periods in areas where most of
the Company's real estate portfolio is located. Portions of California's and
Hawaii's 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 continue to show some stabilization and improvement.

83
<PAGE> 88

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Undeveloped land represented approximately 24.4 percent of the Company's real
estate portfolio at December 31, 1996. 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 construction
and zoning 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.

Approximately half 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 note captioned
"Unconsolidated Investees".)

At December 31, 1996, loans to and investments in joint ventures in which
Patrick M. Nesbitt or his affiliates ("Nesbitt"), have interests constituted
approximately $101.3 million, or 37.8 percent, of the Company's real estate
portfolio. The Nesbitt ventures primarily consist of eleven hotel properties. At
December 31, 1996, the Company did not have any Nesbitt-related
off-balance-sheet legal funding commitments outstanding.

At December 31, 1996, loans to and investments in a master limited partnership
(the "MLP") between subsidiaries of Kemper and subsidiaries of Lumbermens,
constituted approximately $53.0 million, or 19.8 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,
1996. At December 31, 1996, MLP-related commitments accounted for approximately
$9.4 million of the Company's off-balance-sheet legal commitments, which the
Company expects to fund.

At December 31, 1996, the Company's loans to and investments in projects with
the Prime Group, Inc. or its affiliates totaled approximately $(5.3) million.
Negative amounts represent the Company's share of project related operating
losses in excess of the Company's investment. Prime Group-related commitments,
however, accounted for $145.2 million of the off-balance-sheet legal commitments
at December 31, 1996, of which the Company expects to fund $15.9 million.

84
<PAGE> 89

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(6) INCOME TAXES

Income tax expense (benefit) was as follows for the years ended December 31,
1996, 1995 and 1994:

<TABLE>
<CAPTION>
Preacquisition
----------------------
1996 1995 1994
(in thousands) ------- --------- -------
<S> <C> <C> <C>
Current............................................... $26,300 $(113,087) $(6,898)
Deferred.............................................. (897) 38,423 21,329
------- --------- -------
Total....................................... $25,403 $ (74,664) $14,431
======= ========= =======
</TABLE>

Included in the 1995 current tax benefit is the recognition of a net operating
loss carryover at December 31, 1995 which was 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 and its
subsidiaries will each file a stand alone Federal income tax return. Previously,
the Company had filed a consolidated Federal income tax return with Kemper. In
1996, the Company and Kemper settled all outstanding balances under the tax
allocation agreement.

The actual income tax expense (benefit) for 1996, 1995 and 1994 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 1996, 1995, and 1994 to income (loss) before
income tax expense (benefit).

<TABLE>
<CAPTION>
Preacquisition
---------------------
1996 1995 1994
(in thousands) ------- -------- -------
<S> <C> <C> <C>
Computed expected tax expense (benefit)................ $20,938 $(72,700) $14,277
Difference between "expected" and actual tax expense
(benefit):
State taxes.......................................... 913 (1,370) 645
Amortization of goodwill............................. 3,568 -- --
Foreign tax credit................................... -- (183) (155)
Other, net........................................... (16) (411) (336)
------- -------- -------
Total actual tax expense (benefit)........... $25,403 $(74,664) $14,431
======= ======== =======
</TABLE>

Deferred tax assets and liabilities are generally determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. The Company only records deferred tax
assets if future realization of the tax benefit is more likely than not, with a
valuation allowance recorded for the portion that is not likely to be realized.

The Company has established a valuation allowance to reduce the deferred Federal
tax asset related to real estate and other investments to the amount that, based
upon available evidence, is, in management's judgment, more likely than not to
be realized. Any reversals of the valuation allowance are contingent upon the
recognition of future capital gains in the Company's Federal income tax return
or a change in

85
<PAGE> 90

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(6) INCOME TAXES (CONTINUED)

circumstances which causes the recognition of the benefits to become more likely
than not. The change in the valuation allowance is related solely to the change
in the net deferred Federal tax asset or liability from unrealized gains or
losses on investments.

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>
Preacquisition
---------------------
December 31
December 31 January 4 ---------------------
1996 1996 1995 1994
(in thousands) ----------- --------- --------- --------
<S> <C> <C> <C> <C>
Deferred Federal tax assets:
Unrealized losses on investments........... $ 16,624 $ -- $ -- $ 85,331
Life policy reserves....................... 46,452 46,654 42,512 51,519
Real estate-related........................ 20,642 27,736 21,920 39,360
Other investment-related................... 5,409 1,773 1,725 7,435
Other...................................... 8,159 9,750 6,864 6,415
-------- -------- --------- --------
Total deferred Federal tax assets....... 97,286 85,913 73,021 190,060
Valuation allowance........................ (31,825) (15,201) (15,201) (100,532)
-------- -------- --------- --------
Total deferred Federal tax assets after
valuation allowance................... 65,461 70,712 57,820 89,528
-------- -------- --------- --------
Deferred Federal tax liabilities:
Deferred insurance acquisition costs....... 9,384 -- 111,523 108,663
Value of business acquired................. 66,373 66,578 -- --
Other investment-related................... 28,855 37,919 -- --
Unrealized gains on investments............ -- -- 37,919 --
Depreciation and amortization.............. 15,473 15,490 18,767 18,878
Other...................................... 5,738 4,197 2,320 3,351
-------- -------- --------- --------
Total deferred Federal tax
liabilities........................... 125,823 124,184 170,529 130,892
-------- -------- --------- --------
Net deferred Federal tax liabilities......... $(60,362) $(53,472) $(112,709) $(41,364)
======== ======== ========= ========
</TABLE>

The valuation allowance is subject to future adjustments based on, among other
items, the Company'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 1993 are currently under
examination by the IRS.

(7) RELATED-PARTY TRANSACTIONS

The Company received cash capital contributions of $18.4 million and $82.5
million during 1996 and 1994, respectively.

86
<PAGE> 91

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(7) RELATED-PARTY TRANSACTIONS (CONTINUED)

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, 1996 and January 4, 1996, joint venture
mortgage loans totaled $111.0 million and $110.2 million, respectively, and
during 1996, 1995 and 1994, the Company earned interest income on these joint
venture loans of $9.5 million, $19.6 million and $22.0 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 1996,
1995 and 1994, expenses allocated to the Company from ZKI and KSvC amounted to
$1.7 million, $4.4 million and $6.5 million, respectively. The Company also paid
to ZKI investment management fees of $3.6 million, $3.4 million and $6.0 million
during 1996, 1995 and 1994, respectively. In addition, expenses allocated to the
Company from FKLA during 1996, 1995 and 1994 amounted to $10.5 million, $14.3
million and $11.1 million, respectively.

During 1995 and 1994, the Company sold certain mortgages and real estate-related
investments, net of reserves, amounting to approximately $3.5 million and $154.0
million, respectively, to an affiliated non-life realty company, in exchange for
cash. No gain or loss was recognized on these sales. During 1996, the Company
purchased approximately $24.5 million of real estate-related investments from
such affiliated non-life realty subsidiaries for cash. The Company also paid to
Kemper real estate subsidiaries $1.8 million in both 1996 and 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 and to individual death claims. 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 and common board members with the Company, FKLA and
Kemper. As of December 31, 1996 and January 4, 1996, the reinsurance recoverable
related to the fixed-rate annuity liabilities ceded to FLA amounted to $427.0
million and $502.8 million, respectively. During 1995, the Company recorded
income of $4.4 million related to a ceding commission experience adjustment from
the 1992 reinsurance agreement.

In December 1996, the Company assumed on a yearly renewable term basis
approximately $14.4 billion (face amount) of term life insurance from FKLA. As a
result of this transaction, the Company recorded

87
<PAGE> 92

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(8) REINSURANCE (CONTINUED)

premiums and reserves of approximately $7.3 million. The difference between the
cash transferred, which represents the statutory reserves of the business
assumed, and the reserves recorded under generally accepted accounting
principles, of approximately $18.4 million, was deemed to be a capital
contribution from Kemper and was recorded as additional paid-in-capital during
1996.

The Company's retention limit on term life insurance is $300 thousand (face
amount) on the life of any one individual with the excess amounts ceded to
outside reinsurers. The term life insurance business assumed from FKLA during
1996 did not have any individual contracts greater than $300 thousand in face
amount. Reserves ceded to outside reinsurers on the Company's direct business
amounted to approximately $94 thousand as of December 31, 1996.

(9) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS

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

The allocated accumulated postretirement benefit obligation accrued by the
Company amounted to $1.7 million and $687 thousand at December 31, 1996 and
January 4, 1996, respectively.

The discount rate used in determining the allocated postretirement benefit
obligation was 7.75 percent and 7.25 percent for 1996 and 1995, respectively.
The assumed health care trend rate used was based on projected experience for
1996 and 1997, 10 percent in 1998, gradually declining to 5.0 percent by the
year 2001 and remaining at that level thereafter.

A one percentage point increase in the assumed health care cost trend rate for
each year would increase the accumulated postretirement benefit obligation as of
December 31, 1996 and January 4, 1996 by $56 thousand and $146 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

88
<PAGE> 93

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(10) COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)

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.

The Company is liable for guaranty fund assessments related to certain
unaffiliated insurance companies that have become insolvent during the years
1996 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. 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, 1996.

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

At December 31, 1996, the Company had future legal loan commitments and stand-by
financing agreements totaling $197.4 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 $39.6 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 was 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

89
<PAGE> 94

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(12) DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)

securities held by the Company. The Company sold its interest in such securities
during 1996. The following table summarizes various information regarding these
derivative financial instruments as of January 4, 1996:

<TABLE>
<CAPTION>
WEIGHTED
(IN THOUSANDS) WEIGHTED AVERAGE
AVERAGE REPRICING
NOTIONAL CARRYING ESTIMATED YEARS TO FREQUENCY
JANUARY 4, 1996 AMOUNT VALUE FAIR VALUE EXPIRATION (DAYS)
--------------- -------- -------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Non-trading foreign exchange forward options............. $43,754 $112 $112 .32 30
</TABLE>

The Company's hedges relating to foreign currency exposure were 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 1996,
1995 and 1994 totaled $227 thousand, $(1.0) million and $6.4 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 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 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.

90
<PAGE> 95

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(13) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)

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

Mortgage loans and other real estate-related investments: Fair values for
mortgage loans and other real estate-related investments were estimated 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 1996 to be 4.75 percent, while the assumed average
market crediting rate was 5.8 percent in 1996.

The carrying values and estimated fair values of the Company's financial
instruments at December 31, 1996 and January 4, 1996 were as follows:

<TABLE>
<CAPTION>
December 31, 1996 January 4, 1996
------------------------ ------------------------
Carrying Fair Carrying Fair
Value Value Value Value
(in thousands) ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Financial instruments recorded as assets:
Fixed maturities(1)...................... $3,866,431 $3,866,431 $3,749,323 $3,749,323
Cash and short-term investments.......... 74,472 74,472 398,326 398,326
Mortgage loans and other real
estate-related assets................. 267,713 267,713 288,940 288,940
Policy loans............................. 288,302 288,302 289,390 289,390
Other invested assets.................... 23,507 23,507 19,215 19,215
Financial instruments recorded as
liabilities:
Life policy benefits..................... 4,249,264 4,101,588 4,585,148 4,585,148
</TABLE>

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

(1) Includes $112 thousand carrying value and fair value for January 4, 1996, 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. (See "Restrictions on dividends" on page
6.) The maximum amount of dividends which can be paid by the Company without
prior approval in 1997 is $40.9 million. The Company paid no cash dividends in
1996, 1995 or 1994.

91
<PAGE> 96

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

<TABLE>
<CAPTION>
1996 1995 1994
(in thousands) -------- -------- --------
<S> <C> <C> <C>
Net income (loss).......................................... $ 37,287 $(64,707) $ 44,491
======== ======== ========
Statutory surplus.......................................... $411,837 $383,374 $416,243
======== ======== ========
</TABLE>

92
<PAGE> 97

APPENDIX A

ILLUSTRATION OF A MARKET VALUE ADJUSTMENT

Purchase Payment: $40,000
Guarantee Period: 5 Years
Guaranteed Interest Rate: 5% Annual Effective Rate

The following examples illustrate how the Market Value Adjustment and the
Withdrawal Charge may affect the values of a Certificate upon a withdrawal. The
5% assumed Guaranteed Interest Rate is the rate required to be used in the
"Summary of Expenses." In these examples, the withdrawal occurs one year after
the Date of Issue. The Market Value Adjustment operates in a similar manner for
transfers. No Withdrawal Charge applies to transfers.

The Guarantee Period Value for this $40,000 Purchase Payment is $51,051.26 at
the end of the five-year Guarantee Period. After one year, when the withdrawals
occur in these examples, the Guarantee Period Value is $42,000.00. It is also
assumed, for the purposes of these examples, that no prior partial withdrawals
or transfers have occurred.

The Market Value Adjustment will be based on the rate KILICO is then crediting
(at the time of the withdrawal) on new Certificates with the same Guarantee
Period as the time remaining in your Guarantee Period rounded to the next higher
number of complete years. One year after the Purchase Payment there would have
been four years remaining in your Guarantee Period. These examples also show the
Withdrawal Charge (if any) which would be calculated separately after the Market
Value Adjustment.

EXAMPLE OF A DOWNWARD MARKET VALUE ADJUSTMENT

A downward Market Value Adjustment results from a full or partial withdrawal
that occurs when interest rates have increased. Assume interest rates have
increased one year after the Purchase Payment and KILICO is then crediting 6.5%
for a four-year Guarantee Period. Upon a full withdrawal, the market value
adjustment factor would be:

(1 + .05) 4
-.0726961* = [----------------- ] -1
(1 + .065 + .005)

The Market Value Adjustment is a reduction of $3,053.24 from the Guarantee
Period Value:

-3,053.24 = -.0726961 X 42,000.00

The Market Adjusted Value would be:

$38,946.76 = $42,000.00 - $3,053.24

A Withdrawal Charge of 6% would be assessed against the Market Adjusted Value in
excess of the amount available as a free withdrawal. In this case, there are no
prior withdrawals, so 15% of the Market Adjusted Value is not subject to a
Withdrawal Charge. The Withdrawal Charge is thus:

$1,986.29 = $38,946.76 X .85 X .06

Thus, the amount payable on a full withdrawal would be:

$36,960.48 = $38,946.76 - $1,986.29
- ---------------
* Actual calculation utilizes 10 decimal places.

93
<PAGE> 98

If instead of a full withdrawal, 50% of the Guarantee Period Value was withdrawn
(partial withdrawal of 50%), the Market Value Adjustment would be 50% of that of
the full withdrawal:

-$1,526.62 = -.0726961 X $21,000.00

The Market Adjusted Value would be:

$19,473.38 = $21,000.00 - $1,526.62

The Withdrawal Charge of 6% would apply to the Market Adjusted Value being
withdrawn, less 15% of the full Market Adjusted Value as there are no prior
withdrawals:

$819.68 = ($19,473.38 - .15 X $38,946.76) X .06

Thus, the amount payable on this partial withdrawal would be:

$18,653.70 = $19,473.38 - $819.68

EXAMPLE OF AN UPWARD MARKET VALUE ADJUSTMENT

An upward Market Value Adjustment results from a withdrawal that occurs when
interest rates have decreased. Assume interest rates have decreased one year
later and KILICO is then crediting 4% for a four-year Guarantee Period. Upon a
full withdrawal, the market value adjustment factor would be:

(1 + .05) 4
+.0192766 = [----------------] -1
(1 + .04 + .005)

The Market Value Adjustment is an increase of $809.62 to the Guarantee Period
Value:

$809.62 = $42,000.00 X .0192766

The Market Adjusted Value would be:

$42,809.62 = $42,000.00 + $809.62

A Withdrawal Charge of 6% would apply to the Market Adjusted Value being
withdrawn, less 15% of the full Market Adjusted Value, as there were no prior
withdrawals:

$2,183.29 = $42,809.62 X .85 X .06

Thus, the amount payable on withdrawal would be:

$40,626.33 = $42,809.62 - $2,183.29

If instead of a full withdrawal, 50% of the Guarantee Period Value was withdrawn
(partial withdrawal of 50%), the Market Value Adjustment would be:

$404.81 = $21,000.00 X .0192766

The Market Adjusted Value of $21,000.00 would be:

$21,404.81 = $21,000.00 + $404.81

The Withdrawal Charge of 6% would apply to the Market Adjusted Value being
withdrawn, less 15% of the full Market Adjusted Value as there are no prior
withdrawals:

$899.00 = ($21,404.81 - .1 X $42,809.62) X .06

94
<PAGE> 99

Thus, the amount payable on this partial withdrawal would be:

$20,505.81 = $21,404.81 - $899.00

Actual Market Value Adjustment may have a greater or lesser impact than that
shown in the Examples, depending on the actual change in interest crediting
rates and the timing of the withdrawal or transfer in relation to the time
remaining in the Guarantee Period.

95
<PAGE> 100

APPENDIX B

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

This Disclosure Statement describes the statutory and regulatory provisions
applicable to the operation of Individual Retirement Annuities (IRAs) and Simple
Individual Retirement Annuities (SIMPLE IRAs). Internal Revenue Service
regulations require that this be given to each person desiring to establish an
IRA or a SIMPLE IRA. Further information can be obtained from Kemper Investors
Life Insurance Company and from any district office of the Internal Revenue
Service.

A. REVOCATION

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

B. STATUTORY REQUIREMENTS

This Certificate is intended to meet the requirements of Section 408(b) of the
Internal Revenue Code (Code), or of Section 408(p) of the Code for use as a
SIMPLE IRA, whichever is applicable. The Certificate has not been approved as to
form for use as an IRA or a SIMPLE IRA by the Internal Revenue Service. Such
approval by the Internal Revenue Service is a determination only as to form of
the Certificate, and does not represent a determination on the merits of the
Certificate.

1. The amount in your IRA must be fully vested at all times and the entire
interest of the owner must be nonforfeitable.

2. The Certificate must be nontransferable by the owner.

3. The Certificate must have flexible premiums.

4. You must start receiving distributions on or before April 1 of the year
following the year in which you reach age 70 1/2 (the required beginning
date)(see "Required Distributions").

5. Except in the case of a rollover contribution or a direct transfer (see
"Rollovers and Direct Transfers"), or a contribution made in accordance with the
terms of a Simplified Employee Pension (SEP), (1) all contributions to an IRA
must be cash contributions which do not exceed $2,000 for any taxable year, and
(2) all contributions to a SIMPLE IRA must be cash contributions, including
matching or nonelective employer contributions (see "SIMPLE IRAs"), which do not
exceed $6,000 for any year (as adjusted for inflation).

6. The Contract must be for the exclusive benefit of you and your beneficiaries.

C. ROLLOVERS AND DIRECT TRANSFERS

1. A rollover is a tax-free transfer from one retirement program to another that
you cannot deduct on your tax return. There are two kinds of tax-free rollover
payments under an IRA. In one, you transfer amounts from one IRA to another.
With the other, you transfer amounts from a qualified employee benefit plan or
tax-sheltered annuity to an IRA. Tax-free rollovers can be made from a SIMPLE
IRA to another SIMPLE IRA or to a SIMPLE Individual Retirement Account under
section 408(p) of the Code. An individual can

96
<PAGE> 101

make a tax-free rollover to an IRA from a SIMPLE IRA after a two-year period has
expired since the individual first participated in a SIMPLE plan.

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

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

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

5. All or a part of the premium for this Certificate used as an IRA may be paid
from a rollover from an IRA, qualified pension or profit-sharing plan or
tax-sheltered annuity, or from a direct transfer from another IRA. All or part
of the premium for this Certificate used as a SIMPLE IRA may be paid from a
rollover from a SIMPLE IRA or SIMPLE Individual Retirement Account or, to the
extent permitted by law, from a direct transfer from a SIMPLE IRA or SIMPLE
Individual Retirement Account.

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

D. ALLOWANCE OF DEDUCTION

1. In general, the amount you can contribute each year to an IRA is the lesser
of $2,000 or your taxable compensation for the year. If you have more than one
IRA, the limit applies to the total contributions made to your own IRAs for the
year. Generally, if you work the amount that you earn is compensation. Wages,
salaries, tips, professional fees, bonuses and other amounts you receive for
providing personal services are compensation. If you own and operate your own
business as a sole proprietor, your net earnings reduced by your deductible
contributions on your behalf to self-employed retirement plans is compensation.
If you are an active partner in a partnership and provide services to the
partnership, your share of partnership income reduced by deductible
contributions made on your behalf to qualified retirement plans is compensation.
All taxable alimony and separate maintenance payments received under a decree of
divorce or separate maintenance is compensation.

2. If neither you nor your spouse are covered for any part of the year by a
qualified retirement plan, the amount you can deduct each year is also the
lesser of $2,000 or your taxable compensation. If either you or your spouse are
covered by a qualified retirement plan, the $2,000 deduction 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.

97
<PAGE> 102

5. IRA contributions of up to $2,000 can be made for you and for your spouse if
the combined compensation of you and your spouse is at least equal to the amount
contributed. Both of you cannot participate in the same IRA account or contract.

E. SEP-IRA'S

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

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

F. SIMPLE IRAS

1. A SIMPLE IRA must be established with your employer using a qualified salary
reduction agreement.

2. You may elect to have your employer contribute to your SIMPLE IRA, under a
qualified salary reduction agreement, an amount (expressed as a percentage of
your compensation) not to exceed $6,000 (as adjusted for inflation) for the
year. In addition to these employee elective contributions, your employer is
required to make each year either (1) a matching contribution equal to up to 3
percent, and not less than 1 percent, of your SIMPLE IRA contribution for the
year, or (2) a nonelective contribution equal to 2 percent of your compensation
for the year (up to $150,000 of compensation, as adjusted for inflation). No
other contributions may be made to a SIMPLE IRA.

3. Employee elective contributions and employer contributions (I.E., matching
contributions and nonelective contributions) to your SIMPLE IRA are excluded
from your gross income.

4. To the extent an individual with a SIMPLE IRA is no longer participating in a
SIMPLE plan (E.G., the individual has terminated employment), and two years has
passed since the individual first participated in the plan, the individual may
treat the SIMPLE IRA as an IRA.

G. TAX STATUS OF THE CONTRACT AND DISTRIBUTIONS

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

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

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

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

H. REQUIRED DISTRIBUTIONS

You must start receiving minimum distributions required under the Certificate
and Section 401(a)(9) of the Code from your IRA and SIMPLE IRA starting with the
year you reach age 70 1/2 (your 70 1/2 year). Ordinarily, the required minimum
distribution for a particular year must be received by December 31 of that year.
However, you may delay the required minimum distribution for the year you reach
age 70 1/2 until April 1 of the following year (I.E., the required beginning
date).

98
<PAGE> 103

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

The applicable life expectancy is your remaining life expectancy or the
remaining joint life and last survivor expectancy of you and your designated
beneficiary. Life expectancies are determined using the expected return multiple
tables shown in IRS Publication 590 "Individual Retirement Arrangements." To
obtain a free copy of IRS Publication 590 and other IRS forms, phone the IRS
toll free at 1-800-729-3676 or write the IRS Forms Distribution Center for your
area as shown in your income tax return instructions.

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

If the actual distribution from your Certificate is less than the minimum amount
that should be distributed in accordance with the minimum distribution
requirements mentioned above, the difference generally is an excess
accumulation. There is a 50% excise tax on any excess accumulations. If the
excess accumulation is due to reasonable error, and you have taken (or are
taking) steps to remedy the insufficient distribution, you can request that this
50% excise tax be excused by filing with your tax return an IRS Form 5329,
together with a letter of explanation and the excise tax payment.

I. TAX ON EXCESS CONTRIBUTIONS

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

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

3. If an excess contribution 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 contribution. You will have to amend your
tax return for the year in which the excess occurred to correct the reporting of
the rollover amounts in that year. Do not include, in the year you withdraw it,
the excess contribution that was the result of the incorrect information.

J. TAX ON PREMATURE DISTRIBUTIONS

There is an additional tax on premature distributions from your IRA equal to 10%
of the amount of the premature distribution that you must include in your gross
income. For premature distributions from a SIMPLE IRA made within the first 2
years you participate in a SIMPLE plan, the additional tax is equal to 25% of
the amount of the premature distribution that must be included in gross income.
Premature

99
<PAGE> 104

distributions are generally amounts you withdraw before you are age 59 1/2.
However, the tax on premature distributions does not apply:

1. To amounts that are rolled over tax free.

2. To a series of substantially equal periodic payments made (not less
frequently than annually) 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.

4. To distributions made on or after your death.

K. PROHIBITED TRANSACTIONS

If you or your beneficiary engage in a prohibited transaction described in
section 4975(c) of the Code with respect to the Certificate, the Certificate
will lose its classification as an IRA or SIMPLE IRA, whichever is applicable,
and you must include in your gross income, for the taxable year during which you
or your beneficiary engage in the prohibited transaction, the fair market value
of the Certificate.

L. IRA EXCISE TAX REPORTING

Use Form 5329, Additional Taxes Attributable to Qualified Retirement Plans
(Including IRAs), Annuities, and Modified Endowment Contracts, to report the
excise taxes on excess contributions, premature distributions, and excess
accumulations. If you do not owe any IRA excise taxes, you do not need Form
5329. Further information can be obtained from any district office of the
Internal Revenue Service.

M. BORROWING

If you borrow money against your Certificate or use it as security for a loan,
the Certificate will lose its classification as an IRA or SIMPLE IRA , whichever
is applicable, and you must include in gross income the fair market value of the
IRA contract as of the first day of your tax year. In addition, the portion
borrowed or used as security for a loan will be treated as a distribution
subject to the tax on premature distributions described above. (Note: This
Certificate does not allow borrowings against it, nor may it be assigned or
pledged as collateral for a loan.)

N. FINANCIAL DISCLOSURE FOR THE SEPARATE ACCOUNT (VARIABLE ACCOUNT)
AND MVA OPTION.

1. If on the enrollment application you indicated an allocation to a Subaccount,
this Certificate will be assessed a daily charge of an amount which will equal
an aggregate of 1.25% per annum.

2. An annual records maintenance charge of $30.00 will be assessed against the
Separate Account Value each Certificate Year. If no values are in the
Subaccounts, the charge will be assessed against Guarantee Period Value.

3. Withdrawal and early annuitization charges will be assessed based on the
Certificate Years elapsed since the Certificate was issued as described in the
prospectus under the heading "Withdrawal Charge."

100
<PAGE> 105

Withdrawals, transfers and early annuitizations of Guarantee Period Value may be
subject to a Market Value Adjustment as described in the prospectus under the
heading "Market Value Adjustment."

4. The method used to compute and allocate the annual earnings is contained in
the prospectus under the heading "Accumulation Unit Value" for Separate Account
Value and under the headings "Guarantee Periods of the MVA Option" and
"Establishment of Guaranteed Interest Rates" for Guarantee Period Value.

5. The growth in value of your Certificate is neither guaranteed nor projected
but is based on the investment experience of the Subaccounts or rates of
interest as declared by Kemper Investors Life Insurance Company.

101
<PAGE> 106

STATEMENT OF ADDITIONAL INFORMATION

MAY 1, 1997

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

INDIVIDUAL AND GROUP VARIABLE AND MARKET VALUE ADJUSTED

DEFERRED ANNUITY CONTRACTS

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

KEMPER PASSPORT

ISSUED BY

KEMPER INVESTORS LIFE INSURANCE COMPANY

HOME OFFICE: 1 KEMPER DRIVE, LONG GROVE, ILLINOIS 60049 (847) 550-5500

This Statement of Additional Information is not a prospectus. This Statement of
Additional Information should be read in conjunction with the Prospectus of the
Separate Account dated May 1, 1997. 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-5
Experts..................................................... B-5
Financial Statements........................................ B-5
Independent Auditors' Report................................ B-7
Financial Statements of the Separate Account................ B-8
</TABLE>

<PAGE> 107

SERVICES TO THE SEPARATE ACCOUNT

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

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

The Certificates are sold by licensed insurance agents, where the Certificates
may be lawfully sold, who are registered representatives of broker-dealers which
are registered under the Securities Exchange Act of 1934 and are members of the
National Association of Securities Dealers, Inc. The Certificates are
distributed through the principal underwriter for the Separate Account,
Investors Brokerage Services, Inc., a subsidiary of KILICO, which enters into
selling group agreements with the affiliated and unaffiliated broker-dealers.
Subject to the provisions of the Contracts, units of the Subaccounts under the
Contract are offered on a continuous basis.

KILICO pays commissions to the seller which may vary but are not anticipated to
exceed in the aggregate an amount equal to six percent (6%) of Purchase
Payments. During 1996, 1995 and 1994, KILICO incurred gross commissions payable
of approximately $8.1, $2.8 and $5.5 million, 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, except "average annual total
return" is not shown for Money Market Subaccount #1 and Money Market Subaccount
#2 (collectively, the "Money Market Subaccounts"); "yield" information may be
provided in the case of the High Yield, Investment Grade Bond, Government
Securities and Global Income Subaccounts; and "yield" and "effective yield"
information may be provided in the case of the Money Market Subaccounts. 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 and Record Maintenance Charge that may be imposed
at the end of the period as well as all other recurring charges and fees
applicable under the Certificates to all Owners' 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 Appendix A.

B-1
<PAGE> 108

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 $40,000) 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 $40,000 was chosen because that approximates the expected 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 Appendix A.

The yield for the High Yield Subaccount, the Government Securities Subaccount,
the Investment Grade Bond Subaccount and the Global Income Subaccount is
computed in accordance with a standard method prescribed by rules of the
Securities and Exchange Commission. The yields for the High Yield Subaccount,
Government Securities Subaccount and Investment Grade Bond Subaccount, based
upon the one month period ended March 31, 1997, were 7.58%, 5.32% and 4.87%,
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> <C>
a - b 6
YIELD = 2[( ------- +1) - 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 Money Market Subaccounts yields are computed in accordance with a standard
method prescribed by rules of the Securities and Exchange Commission. Under that
method, the current yield quotation is based on a seven-day period and computed
as follows: the net change in the Accumulation Unit Value during the period is
divided by the Accumulation Unit Value at the beginning of the period ("base
period return") and the result is divided by 7 and multiplied by 365 and the
current yield figure carried to the nearest one-hundredth of one percent.
Realized capital gains or losses and unrealized appreciation or depreciation of
the Account's portfolio are not included in the calculation. The yield for the
seven-day period ended March 31, 1997 was 3.71% for Money Market Subaccount #1
and 4.96% for Money Market Subaccount #2. The average portfolio maturity was 21
days.

The Money Market Subaccount's effective yield is determined by taking the base
period return (computed as described above) and calculating the effect of
assumed compounding. The formula for the effective yield is: (base period return
+1) (365) L 7 - 1. The effective yield for the seven-day period ended March 31,
1997 was 3.78% for Money Market Subaccount #1 and 5.08% for Money Market
Subaccount #2.

B-2
<PAGE> 109

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 semiannual 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 9% of aggregate
Purchase Payments under the Certificate. 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 applicable period.

The figures in Appendix A show performance information for periods from March 5,
1982 (inception) for the Money Market Subaccounts, Total Return Subaccount and
High Yield Subaccount and for periods from December 9, 1983 (inception) for the
Growth Subaccount to December 31, 1996. For the Government Securities
Subaccount, performance figures will reflect investment experience as if the
Government Securities Subaccount had been available under the Certificates since
September 3, 1987, the inception date of the Government Securities Portfolio.
Performance of the Subaccounts will vary from time to time, and these results
are not necessarily representative of future results. Performance information is
also shown for the year ended December 31, 1996. The total return performance of
each Subaccount is calculated for a specified period of time by assuming an
initial Purchase Payment of $40,000 fully allocated to each Subaccount and the
deduction of all expenses and fees, including a prorated portion of the $30
annual Records Maintenance Charge. No withdrawals are assumed. The percentage
increases are determined by subtracting the initial Purchase Payment from the
ending value and dividing the remainder by the beginning value.

Comparative information may be shown 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, the Merrill Lynch Government/Corporate Master Index, the CDA Mutual
Fund--International Index and the Morgan Stanley Capital International Europe
Australia Far East Index. The Total Return, Growth, International, Value,
Value+Growth, Small Cap Value, Horizon 20+, Horizon 10+, Horizon 5 and Blue Chip
Subaccounts 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. The Consumer Price Index is generally
considered to be a measure of inflation and thus the performance of the Money
Market, Total Return, High Yield, Growth, Government Securities, International,
Investment Grade Bond, Horizon 20+, Horizon 10+, Horizon 5, Value, Value+Growth,
Small Cap Value, Blue Chip and Global Income Subaccounts may be compared to that
index. The High Yield, Government Securities, Investment Grade Bond and Global
Income Subaccounts may be compared to the Lehman Brothers Government and
Corporate Bond Index, the Salomon Brothers High Grade Corporate Bond Index and
the Merrill Lynch Government/Corporate Master Index because such indices are
generally considered to represent the performance of intermediate and long term
bonds during various market cycles. The Money Market Subaccounts may also be
compared to the CDA Certificate of Deposit Index because

B-3
<PAGE> 110

certificates of deposit represent an alternative current income producing
product. The International Subaccount may be compared to the CDA Mutual
Fund--International Index because the index is a weighted performance average of
other mutual funds that invest primarily in securities of foreign issuers. The
International Subaccount may also be compared to the Morgan Stanley Capital
International Europe, Australia, Far East Index because the index is an
unmanaged index that is considered to be generally representative of major
non-United States stock markets. Please note the differences and similarities
between the investments which a Subaccount may purchase and the investments
measured by the indexes which are described below. In particular, it should be
noted that certificates of deposit may offer fixed or variable yields and
principal is guaranteed and may be insured. The units of the Subaccounts are not
insured. Also, the value of the Subaccounts will fluctuate.

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

The performance of the Subaccounts may be compared 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, a 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
may not include the deduction of mortality and expense risk charges and other
asset based charges. Deductions of these charges may cause the rankings to be
different. Future performance cannot be guaranteed. Lipper publishes performance
analyses on a regular basis from which the rankings are derived. The Money
Market Subaccounts, Total Return Subaccount, High Yield Subaccount, Growth
Subaccount, Government Securities Subaccount, International Subaccount,
Investment Grade Bond Subaccount, Value Subaccount, Small Cap Value Subaccount,
Value+Growth Subaccount, Horizon 20+ Subaccount, Horizon 10+ Subaccount, and
Horizon 5 Subaccount are ranked by Lipper in the Money Market, Flexible
Portfolio, High Current Yield, Capital Appreciation, U.S. Government and
International Funds 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
Subaccounts may also be compared to other variable annuity funds ranked by the
VARDS Report and Morningstar, Inc.

B-4
<PAGE> 111

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 consolidated balance sheets of KILICO as of December 31, 1996 and January 4,
1996 and the related consolidated statements of operations, stockholder's
equity, and cash flows for the periods from January 4, 1996 to December 31, 1996
and for each of the years in the two year period ended December 31, 1995 and the
statements of assets and liabilities and contract owners' equity of the Separate
Account as of December 31, 1996 and the related statements of operations for the
year then ended, and the statements of changes in contract owners' equity for
the years ended December 31, 1996 and 1995 have been included herein and in the
registration statement in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing. The report of
KPMG Peat Marwick LLP covering KILICO's financial statements contains an
explanatory paragraph that states as a result of the acquisition of its parent,
Kemper Corporation, the consolidated financial information for the periods after
the acquisition is presented on a different cost basis than that for the periods
before the acquisition and, therefore, is not comparable.

FINANCIAL STATEMENTS

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

B-5
<PAGE> 112

[This page intentionally left blank]

B-6
<PAGE> 113

INDEPENDENT AUDITORS' REPORT

THE BOARD OF DIRECTORS

KEMPER INVESTORS LIFE INSURANCE COMPANY:

We have audited the accompanying statements of assets and liabilities and
contract owners' equity of the Money Market Subaccount, Money Market Subaccount
#2, Total Return Account, High Yield Subaccount, Growth Subaccount, Government
Securities Subaccount, International Subaccount, Small Cap Growth Subaccount,
Investment Grade Bond Subaccount, Value Subaccount, Small Cap Value Subaccount,
Value+Growth Subaccount, Horizon 20+ Subaccount, Horizon 10+ Subaccount, and
Horizon 5 Subaccount of KILICO Variable Annuity Separate Account (the Account)
as of December 31, 1996 and the related statements of operations for the year
then ended, and the statements of changes in contract owners' equity for each of
the years in the two-year period then ended. These financial statements are the
responsibility of the Account'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. Our procedures included
confirmation of investments owned at December 31, 1996 by correspondence with
the transfer agent. 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 financial statements referred to above present fairly, in
all material respects, the financial position of the Money Market Subaccount,
Money Market Subaccount #2, Total Return Account, High Yield Subaccount, Growth
Subaccount, Government Securities Subaccount, International Subaccount, Small
Cap Growth Subaccount, Investment Grade Bond Subaccount, Value Subaccount, Small
Cap Value Subaccount, Value+Growth Subaccount, Horizon 20+ Subaccount, Horizon
10+ Subaccount, and Horizon 5 Subaccount at December 31, 1996 and the results of
their operations, and changes in their contract owners' equity for the periods
stated in the first paragraph above, in conformity with generally accepted
accounting principles.

KPMG PEAT MARWICK LLP

Chicago, Illinois

March 26, 1997

B-7
<PAGE> 114

KILICO VARIABLE ANNUITY SEPARATE ACCOUNT

STATEMENTS OF ASSETS AND LIABILITIES AND CONTRACT OWNERS' EQUITY

DECEMBER 31, 1996

(IN THOUSANDS)

<TABLE>
<CAPTION>
MONEY MONEY TOTAL HIGH GOVERNMENT
MARKET MARKET RETURN YIELD GROWTH SECURITIES
SUBACCOUNT SUBACCOUNT #2 SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Investments in underlying portfolio
funds, at current values.............. $59,117 8,476 693,657 286,846 484,754 79,836
Dividends and other receivables......... 296 19 19 2 2 --
------- ----- ------- ------- ------- ------
Total assets..................... 59,413 8,495 693,676 286,848 484,756 79,836
------- ----- ------- ------- ------- ------
LIABILITIES AND CONTRACT OWNERS' EQUITY
Liabilities:
Mortality and expense risk and
administrative charges.............. 65 -- 2,187 304 520 87
Other................................. -- -- 78 47 42 62
------- ----- ------- ------- ------- ------
Total liabilities................ 65 -- 2,265 351 562 149
------- ----- ------- ------- ------- ------
Contract owners' equity................. $59,348 8,495 691,411 286,497 484,194 79,687
======= ===== ======= ======= ======= ======
ANALYSIS OF CONTRACT OWNERS' EQUITY
Excess (deficiency) of proceeds from
units sold over payments for units
redeemed.............................. (7,586) 7,692 273,270 105,550 234,859 51,794
Accumulated net investment income
(loss)................................ 66,934 803 203,402 161,848 97,528 25,750
Accumulated net realized gain (loss) on
sales of investments.................. -- -- 66,834 891 47,242 1,157
Unrealized appreciation of
investments........................... -- -- 147,905 18,208 104,565 986
------- ----- ------- ------- ------- ------
Contract owners' equity................. $59,348 8,495 691,411 286,497 484,194 79,687
======= ===== ======= ======= ======= ======
</TABLE>

See accompanying notes to financial statements.

B-8
<PAGE> 115

<TABLE>
<CAPTION>
SMALL CAP INVESTMENT SMALL CAP VALUE + HORIZON HORIZON
INTERNATIONAL GROWTH GRADE BOND VALUE VALUE GROWTH 20+ 10+ HORIZON 5
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
163,108 68,928 1,975 20,977 12,986 10,003 3,532 5,688 2,482
2 -- -- 4 -- 2 1 1 --
------- ------ ----- ------ ------ ------ ----- ----- -----
163,110 68,928 1,975 20,981 12,986 10,005 3,533 5,689 2,482
------- ------ ----- ------ ------ ------ ----- ----- -----
178 72 2 20 13 10 3 5 2
24 6 100 102 102 100 100 100 100
------- ------ ----- ------ ------ ------ ----- ----- -----
202 78 102 122 115 110 103 105 102
------- ------ ----- ------ ------ ------ ----- ----- -----
162,908 68,850 1,873 20,859 12,871 9,895 3,430 5,584 2,380
======= ====== ===== ====== ====== ====== ===== ===== =====
123,259 52,058 1,852 19,213 12,229 9,229 3,184 5,238 2,268
1,147 27 (11) (77) (44) (63) (28) (30) (14)
8,369 2,894 2 12 (51) (1) 16 9 1
30,133 13,871 30 1,711 737 730 258 367 125
------- ------ ----- ------ ------ ------ ----- ----- -----
162,908 68,850 1,873 20,859 12,871 9,895 3,430 5,584 2,380
======= ====== ===== ====== ====== ====== ===== ===== =====
</TABLE>

B-9
<PAGE> 116

KILICO VARIABLE ANNUITY SEPARATE ACCOUNT

STATEMENTS OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 1996

(IN THOUSANDS)

<TABLE>
<CAPTION>
MONEY MONEY TOTAL GOVERNMENT
MARKET MARKET RETURN HIGH YIELD GROWTH SECURITIES
SUBACCOUNT SUBACCOUNT #2 SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Dividends and capital gains
distributions........................... $3,384 243 43,040 24,635 63,740 6,220
Expenses:
Mortality and expense risk and
administrative charges................ 891 -- 9,244 3,534 6,193 1,238
------ --- ------ ------ ------ ------
Net investment income (loss).............. 2,493 243 33,796 21,101 57,547 4,982
------ --- ------ ------ ------ ------
Net realized and unrealized gain (loss) on
investments:
Net realized gain (loss) on sales of
investments........................... -- -- 17,341 4,321 11,516 117
Change in unrealized appreciation
(depreciation) of investments......... -- -- 42,597 5,924 10,026 (4,343)
------ --- ------ ------ ------ ------
Net realized and unrealized gain (loss) on
investments............................. -- -- 59,938 10,245 21,542 (4,226)
------ --- ------ ------ ------ ------
Net increase in contract owners' equity
resulting from operations............... $2,493 243 93,734 31,346 79,089 756
====== === ====== ====== ====== ======

<CAPTION>
SMALL CAP
INTERNATIONAL GROWTH
SUBACCOUNT SUBACCOUNT
------------- --------------
<S> <C> <C>
Dividends and capital gains
distributions........................... 3,133 1,209
Expenses:
Mortality and expense risk and
administrative charges................ 2,191 731
------ ------
Net investment income (loss).............. 942 478
------ ------
Net realized and unrealized gain (loss) on
investments:
Net realized gain (loss) on sales of
investments........................... 5,409 2,710
Change in unrealized appreciation
(depreciation) of investments......... 14,729 8,276
------ ------
Net realized and unrealized gain (loss) on
investments............................. 20,138 10,986
------ ------
Net increase in contract owners' equity
resulting from operations............... 21,080 11,464
====== ======
</TABLE>

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

(a) For the period from May 1, 1996 (commencement of operations) to December 31,
1996.

See accompanying notes to financial statements.

B-10
<PAGE> 117

<TABLE>
<CAPTION>
INVESTMENT SMALL CAP
GRADE BOND VALUE VALUE VALUE+GROWTH HORIZON 20+ HORIZON 10+ HORIZON 5
SUBACCOUNT(a) SUBACCOUNT(a) SUBACCOUNT(a) SUBACCOUNT(a) SUBACCOUNT(a) SUBACCOUNT(a) SUBACCOUNT(a)
- ------------- ------------- ------------- ------------- ------------- ------------- -------------
<C> <C> <C> <C> <C> <C> <C>
-- -- -- -- -- -- --
11 77 44 63 28 30 14
--- ----- --- --- --- --- ---
(11) (77) (44) (63) (28) (30) (14)
--- ----- --- --- --- --- ---
2 12 (51) (1) 16 9 1
30 1,711 737 730 258 367 125
--- ----- --- --- --- --- ---
32 1,723 686 729 274 376 126
--- ----- --- --- --- --- ---
21 1,646 642 666 246 346 112
=== ===== === === === === ===
</TABLE>

B-11
<PAGE> 118

KILICO VARIABLE ANNUITY SEPARATE ACCOUNT

STATEMENTS OF CHANGES IN CONTRACT OWNERS' EQUITY

FOR THE YEAR ENDED DECEMBER 31, 1996

(IN THOUSANDS)

<TABLE>
<CAPTION>
MONEY MONEY TOTAL HIGH GOVERNMENT
MARKET MARKET RETURN YIELD GROWTH SECURITIES
SUBACCOUNT SUBACCOUNT #2 SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Operations:
Net investment income (loss)....... $ 2,493 243 33,796 21,101 57,547 4,982
Net realized gain (loss) on sales
of investments................... -- -- 17,341 4,321 11,516 117
Change in unrealized appreciation
(depreciation) of investments.... -- -- 42,597 5,924 10,026 (4,343)
-------- ------ ------- ------- ------- -------
Net increase in contract owners'
equity resulting from
operations..................... 2,493 243 93,734 31,346 79,089 756
-------- ------ ------- ------- ------- -------
Account unit transactions:
Proceeds from units sold........... 22,801 12,928 47,161 36,482 43,192 7,926
Net transfers (to) from affiliate
and subaccounts.................. (7,498) (6,807) (27,829) (7,862) (9,293) (9,264)
Payments for units redeemed........ (16,282) (184) (78,322) (28,503) (41,011) (10,724)
-------- ------ ------- ------- ------- -------
Net increase (decrease) in
contract owners' equity from
account unit transactions...... (979) 5,937 (58,990) 117 (7,112) (12,062)
-------- ------ ------- ------- ------- -------
Total increase (decrease) in contract
owners' equity..................... 1,514 6,180 34,744 31,463 71,977 (11,306)
Beginning of period.................. 57,834 2,315 656,667 255,034 412,217 90,993
-------- ------ ------- ------- ------- -------
End of period........................ $ 59,348 8,495 691,411 286,497 484,194 79,687
======== ====== ======= ======= ======= =======
</TABLE>

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

(a) For the period from May 1, 1996 (commencement of operations) to December 31,
1996.

See accompanying notes to financial statements.

B-12
<PAGE> 119

<TABLE>
<CAPTION>
SMALL CAP INVESTMENT SMALL CAP VALUE +
INTERNATIONAL GROWTH GRADE BOND VALUE VALUE GROWTH HORIZON 20+ HORIZON 10+
SUBACCOUNT SUBACCOUNT SUBACCOUNT(a) SUBACCOUNT(a) SUBACCOUNT(a) SUBACCOUNT(a) SUBACCOUNT(a) SUBACCOUNT(a)
------------- ---------- ------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
942 478 (11) (77) (44) (63) (28) (30)
5,409 2,710 2 12 (51) (1) 16 9
14,729 8,276 30 1,711 737 730 258 367
------- ------ ----- ------ ------ ----- ----- -----
21,080 11,464 21 1,646 642 666 246 346
------- ------ ----- ------ ------ ----- ----- -----
20,272 13,879 1,262 9,908 6,111 6,223 2,580 4,108
819 11,423 632 9,522 6,244 3,214 620 1,206
(13,606) (3,253) (42) (217) (126) (208) (16) (76)
------- ------ ----- ------ ------ ----- ----- -----
7,485 22,049 1,852 19,213 12,229 9,229 3,184 5,238
------- ------ ----- ------ ------ ----- ----- -----
28,565 33,513 1,873 20,859 12,871 9,895 3,430 5,584
134,343 35,337 -- -- -- -- -- --
------- ------ ----- ------ ------ ----- ----- -----
162,908 68,850 1,873 20,859 12,871 9,895 3,430 5,584
======= ====== ===== ====== ====== ===== ===== =====

HORIZON 5
SUBACCOUNT(a)
-------------
<S><C>
(14)
1
125
-----
112
-----
1,453
887
(72)
-----
2,268
-----
2,380
--
-----
2,380
=====
</TABLE>

B-13
<PAGE> 120

KILICO VARIABLE ANNUITY SEPARATE ACCOUNT

STATEMENTS OF CHANGES IN CONTRACT OWNERS' EQUITY (CONTINUED)

FOR THE YEAR ENDED DECEMBER 31, 1995

(IN THOUSANDS)

<TABLE>
<CAPTION>
MONEY MONEY TOTAL HIGH GOVERNMENT
MARKET MARKET RETURN YIELD GROWTH SECURITIES
SUBACCOUNT SUBACCOUNT #2 SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Operations:
Net investment income (loss)....... $ 2,985 140 9,834 18,691 20,654 4,658
Net realized gain (loss) on sales
of investments................... -- -- 5,320 1,290 5,966 (1)
Change in unrealized appreciation
of investments................... -- -- 119,468 15,252 67,323 10,500
------- ------ ------- ------- ------- -------
Net increase in contract owners'
equity resulting from
operations..................... 2,985 140 134,622 35,233 93,943 15,157
------- ------ ------- ------- ------- -------
Account unit transactions:
Proceeds from units sold........... 7,440 1,994 47,745 21,167 35,473 5,546
Net transfers (to) from affiliate
and subaccounts.................. (14,703) (3,412) (21,697) 13,859 1,693 (6,225)
Payments for units redeemed........ (16,838) (92) (87,868) (32,713) (39,162) (14,994)
------- ------ ------- ------- ------- -------
Net increase (decrease) in
contract owners' equity from
account unit transactions...... (24,101) (1,510) (61,820) 2,313 (1,996) (15,673)
------- ------ ------- ------- ------- -------
Total increase (decrease) in contract
owners' equity..................... (21,116) (1,370) 72,802 37,546 91,947 (516)
Beginning of period.................. 78,950 3,685 583,865 217,488 320,270 91,509
------- ------ ------- ------- ------- -------
End of period........................ $57,834 2,315 656,667 255,034 412,217 90,993
======= ====== ======= ======= ======= =======
</TABLE>

See accompanying notes to financial statements.

B-14
<PAGE> 121

<TABLE>
<CAPTION>
INVESTMENT
SMALL CAP GRADE SMALL CAP
INTERNATIONAL GROWTH BOND VALUE VALUE VALUE+GROWTH HORIZON 20+ HORIZON 10+ HORIZON 5
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
------------- ---------- ---------- ---------- ---------- ------------ ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1,112 (290) -- -- -- -- -- -- --
605 261 -- -- -- -- -- -- --
11,955 5,307 -- -- -- -- -- -- --
------- ------ -- -- -- -- -- -- --
13,672 5,278 -- -- -- -- -- -- --
17,837 6,412 -- -- -- -- -- -- --
(6,157) 12,876 -- -- -- -- -- -- --
(13,593) (2,032) -- -- -- -- -- -- --
------- ------ -- -- -- -- -- -- --
(1,913) 17,256 -- -- -- -- -- -- --
------- ------ -- -- -- -- -- -- --
11,759 22,534 -- -- -- -- -- -- --
122,584 12,803 -- -- -- -- -- -- --
------- ------ -- -- -- -- -- -- --
134,343 35,337 -- -- -- -- -- -- --
======= ====== == == == == == == ==
</TABLE>

B-15
<PAGE> 122

KILICO VARIABLE ANNUITY SEPARATE ACCOUNT

NOTES TO 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 a wholly-owned subsidiary of 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
27 Subaccounts. Various Subaccount options are available to Contract Owners
depending upon their respective Contracts. Fourteen Subaccounts are available to
Contract Owners and each Subaccount invests exclusively in a corresponding
Portfolio of the Investors Fund Series (the "Fund"), an open-end diversified
management investment company.

ESTIMATES

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
could affect the reported amounts of assets and liabilities as well as the
disclosure of contingent amounts at the date of the financial statements. As a
result, actual results reported as income and expenses could differ from the
estimates reported in the accompanying financial statements.

SECURITY VALUATION

The investments are stated at current value which is based on the closing bid
price, net asset value, at December 31, 1996.

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

B-16
<PAGE> 123

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(1) GENERAL INFORMATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Account increase liabilities under the contract and are, therefore, not taxed.
Thus the Separate Account may realize net investment income and capital gains
and losses without Federal income tax consequences.

(2) SUMMARY OF INVESTMENTS

Investments, at cost, at December 31, 1996, 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).............................................. 67,593 $ 67,593
Total Return Portfolio...................................... 246,380 545,752
High Yield Portfolio........................................ 223,976 268,638
Growth Portfolio............................................ 143,796 380,189
Government Securities Portfolio............................. 66,125 78,850
International Portfolio..................................... 104,269 132,975
Small Cap Growth Portfolio.................................. 41,110 55,057
Investment Grade Bond Portfolio............................. 1,907 1,945
Value Portfolio............................................. 17,874 19,266
Small Cap Value Portfolio................................... 12,750 12,249
Value+Growth Portfolio...................................... 8,729 9,273
Horizon 20+ Portfolio....................................... 3,063 3,274
Horizon 10+ Portfolio....................................... 5,107 5,321
Horizon 5 Portfolio......................................... 2,265 2,357
----------
TOTAL INVESTMENTS................................... $1,582,739
==========
</TABLE>

The underlying investments of the Fund's portfolios are summarized below.

MONEY MARKET PORTFOLIO: This Portfolio invests primarily in short-term
obligations of major banks and corporations. The Money Market Subaccount
represents the ADVANTAGE III Money Market Subaccount and the PASSPORT Money
Market Subaccount #1. Money Market Subaccount #2 represents funds allocated by
the owner of a contract to the dollar cost averaging program. Under the dollar
cost averaging program, an owner may predesignate a portion of the Subaccount
value to be automatically transferred on a monthly basis to one or more of the
other Subaccounts. This option is only available to PASSPORT individual and
group variable and market value adjusted deferred annuity contracts.

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).

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.

B-17
<PAGE> 124

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(2) SUMMARY OF INVESTMENTS (CONTINUED)

GROWTH PORTFOLIO: This Portfolio's investments normally will consist of common
stocks and securities convertible into or exchangeable for common stocks,
however, it may also make private placement investments (which are normally
restricted securities).

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.

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.

SMALL CAP GROWTH PORTFOLIO: This Portfolio's investments will consist primarily
of common stocks and securities convertible into or exchangeable for common
stocks and to a limited degree in preferred stocks and debt securities. At least
65% of the Portfolio's total assets will be invested in equity securities of
companies having a market capitalization of $1 billion or less at the time of
initial investment.

INVESTMENT GRADE BOND PORTFOLIO: This Portfolio seeks high current income by
investing primarily in a diversified portfolio of investment grade debt
securities.

VALUE PORTFOLIO: This Portfolio seeks to achieve a high rate of total return.

SMALL CAP VALUE PORTFOLIO: This Portfolio seeks long-term capital appreciation.

VALUE+GROWTH PORTFOLIO: This Portfolio seeks growth of capital through
professional management of a portfolio of growth and value stocks.

HORIZON 20+ PORTFOLIO: This Portfolio is designed for investors with
approximately a 20+ year investment horizon, and seeks growth of capital, with
income as a secondary objective.

HORIZON 10+ PORTFOLIO: This Portfolio is designed for investors with
approximately a 10+year investment horizon, and seeks a balance between growth
of capital and income, consistent with moderate risk.

HORIZON 5 PORTFOLIO: This Portfolio is designed for investors with approximately
a 5 year investment horizon, and seeks income consistent with a preservation of
capital, with growth of capital as a secondary objective.

(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

B-18
<PAGE> 125

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(3) TRANSACTIONS WITH AFFILIATES (CONTINUED)

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 Growth
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 December 31, 1996, 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, 1996, KILICO received contingent deferred sales charges of
$1,726,400.

Zurich Kemper Investments, Inc. ("ZKI") (formerly named Kemper Financial
Services, Inc.), an affiliated company, is the investment manager of the
Investors Fund Series which serves as the underlying investments of the PASSPORT
contracts. In connection with the acquisition of Kemper Corporation on January
4, 1996, Zurich also acquired 100% of ZKI.

(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-19
<PAGE> 126

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

Contract owners' equity at December 31, 1996, 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
MONEY MARKET
Flexible Payment, Qualified............................... 770 $ 2.297 $ 1,768
Flexible Payment, Nonqualified............................ 4,762 2.297 10,939
Periodic Payment, Qualified............................... 10,827 2.199 23,808
Periodic Payment, Nonqualified............................ 3,948 2.199 8,680
----------
45,195
----------
TOTAL RETURN
Flexible Payment, Qualified............................... 990 5.473 5,420
Flexible Payment, Nonqualified............................ 4,838 5.068 24,518
Periodic Payment, Qualified............................... 89,982 5.239 471,457
Periodic Payment, Nonqualified............................ 17,433 4.882 85,105
----------
586,500
----------
HIGH YIELD
Flexible Payment, Qualified............................... 422 5.738 2,422
Flexible Payment, Nonqualified............................ 2,440 5.494 13,405
Periodic Payment, Qualified............................... 24,077 5.493 132,251
Periodic Payment, Nonqualified............................ 10,028 5.351 53,659
----------
201,737
----------
GROWTH
Flexible Payment, Qualified............................... 260 5.303 1,380
Flexible Payment, Nonqualified............................ 1,396 5.285 7,379
Periodic Payment, Qualified............................... 58,672 5.102 299,371
Periodic Payment, Nonqualified............................ 14,340 5.095 73,063
----------
381,193
----------
GOVERNMENT SECURITIES
Flexible Payment, Qualified............................... 165 1.599 264
Flexible Payment, Nonqualified............................ 1,187 1.599 1,898
Periodic Payment, Qualified............................... 18,485 1.566 28,943
Periodic Payment, Nonqualified............................ 13,804 1.566 21,613
----------
52,718
----------
INTERNATIONAL
Flexible Payment, Qualified............................... 429 1.590 683
Flexible Payment, Nonqualified............................ 1,190 1.590 1,892
Periodic Payment, Qualified............................... 62,425 1.567 97,809
Periodic Payment, Nonqualified............................ 12,177 1.567 19,079
----------
119,463
----------
SMALL CAP GROWTH
Flexible Payment, Qualified............................... 132 1.686 222
Flexible Payment, Nonqualified............................ 711 1.686 1,198
Periodic Payment, Qualified............................... 25,931 1.673 43,372
Periodic Payment, Nonqualified............................ 4,091 1.673 6,842
----------
51,634
----------
</TABLE>

B-20
<PAGE> 127

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

<TABLE>
<CAPTION>
CONTRACT
NUMBER UNIT OWNERS'
OF UNITS VALUE EQUITY
-------- ------- ----------
<S> <C> <C> <C>
INVESTMENT GRADE BOND
Flexible Payment, Qualified............................... -- $ -- $ --
Flexible Payment, Nonqualified............................ 68 1.029 70
Periodic Payment, Qualified............................... 326 1.027 335
Periodic Payment, Nonqualified............................ 50 1.027 51
----------
456
----------
VALUE
Flexible Payment, Qualified............................... 8 1.166 11
Flexible Payment, Nonqualified............................ 238 1.166 271
Periodic Payment, Qualified............................... 4,864 1.164 5,659
Periodic Payment, Nonqualified............................ 1,625 1.164 1,890
----------
7,831
----------
SMALL CAP VALUE
Flexible Payment, Qualified............................... -- -- --
Flexible Payment, Nonqualified............................ 7 1.012 10
Periodic Payment, Qualified............................... 3,784 1.010 3,820
Periodic Payment, Nonqualified............................ 840 1.010 848
----------
4,678
----------
VALUE+GROWTH
Flexible Payment, Qualified............................... 12 1.138 14
Flexible Payment, Nonqualified............................ 33 1.138 38
Periodic Payment, Qualified............................... 986 1.136 1,121
Periodic Payment, Nonqualified............................ 454 1.136 516
----------
1,689
----------
HORIZON 20+
Flexible Payment, Qualified............................... -- -- --
Flexible Payment, Nonqualified............................ -- -- --
Periodic Payment, Qualified............................... 406 1.144 464
Periodic Payment, Nonqualified............................ 7 1.144 8
----------
472
----------
HORIZON 10+
Flexible Payment, Qualified............................... 10 1.106 12
Flexible Payment, Nonqualified............................ 20 1.106 23
Periodic Payment, Qualified............................... 634 1.104 700
Periodic Payment, Nonqualified............................ 229 1.104 253
----------
988
----------
HORIZON 5
Flexible Payment, Qualified............................... -- -- --
Flexible Payment, Nonqualified............................ 45 1.089 49
Periodic Payment, Qualified............................... 243 1.086 264
Periodic Payment, Nonqualified............................ 84 1.086 91
----------
404
----------
TOTAL ADVANTAGE III CONTRACT OWNERS' EQUITY............................................. $1,454,958
==========
</TABLE>

B-21
<PAGE> 128

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

<TABLE>
<CAPTION>
CONTRACT
NUMBER UNIT OWNERS'
OF UNITS VALUE EQUITY
-------- ------- ----------
<S> <C> <C> <C>
PASSPORT SUBACCOUNT
MONEY MARKET #1
Qualified............................................. 4,139 $ 1.153 $ 4,774
Nonqualified.......................................... 8,132 1.153 9,379
----------
Total............................................... 14,153
----------
MONEY MARKET #2
Qualified............................................. 2,263 1.227 2,777
Nonqualified.......................................... 4,660 1.227 5,718
----------
Total............................................... 8,495
----------
TOTAL RETURN
Qualified............................................. 18,236 1.423 25,942
Nonqualified.......................................... 55,511 1.423 78,969
----------
Total............................................... 104,911
----------
HIGH YIELD
Qualified............................................. 11,427 1.708 19,517
Nonqualified.......................................... 38,199 1.708 65,243
----------
Total............................................... 84,760
----------
GROWTH
Qualified............................................. 17,120 1.724 29,519
Nonqualified.......................................... 42,617 1.724 73,482
----------
Total............................................... 103,001
----------
GOVERNMENT SECURITIES
Qualified............................................. 4,714 1.263 5,953
Nonqualified.......................................... 16,641 1.263 21,016
----------
Total............................................... 26,969
----------
INTERNATIONAL
Qualified............................................. 7,403 1.571 11,628
Nonqualified.......................................... 20,257 1.571 31,817
----------
Total............................................... 43,445
----------
SMALL CAP GROWTH
Qualified............................................. 2,967 1.675 4,969
Nonqualified.......................................... 7,313 1.675 12,247
----------
Total............................................... 17,216
----------
</TABLE>

B-22
<PAGE> 129

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

<TABLE>
<CAPTION>
CONTRACT
NUMBER UNIT OWNERS'
OF UNITS VALUE EQUITY
-------- ------- ----------
<S> <C> <C> <C>
INVESTMENT GRADE BOND
Qualified............................................. 474 $ 1.027 $ 486
Nonqualified.......................................... 907 1.027 931
----------
Total............................................... 1,417
----------
VALUE
Qualified............................................. 2,964 1.164 3,450
Nonqualified.......................................... 8,229 1.164 9,578
----------
Total............................................... 13,028
----------
SMALL CAP VALUE
Qualified............................................. 1,862 1.010 1,879
Nonqualified.......................................... 6,251 1.010 6,314
----------
Total............................................... 8,193
----------
VALUE+GROWTH
Qualified............................................. 1,392 1.137 1,582
Nonqualified.......................................... 5,828 1.137 6,624
----------
Total............................................... 8,206
----------
HORIZON 20+
Qualified............................................. 825 1.144 943
Nonqualified.......................................... 1,761 1.144 2,015
----------
Total............................................... 2,958
----------
HORIZON 10+
Qualified............................................. 868 1.105 958
Nonqualified.......................................... 3,294 1.105 3,638
----------
Total............................................... 4,596
----------
HORIZON 5
Qualified............................................. 227 1.087 247
Nonqualified.......................................... 1,591 1.087 1,729
----------
Total............................................... 1,976
----------
TOTAL PASSPORT CONTRACT OWNERS' EQUITY.................. $ 443,324
==========
</TABLE>

B-23
<PAGE> 130

APPENDIX A

TABLE OF HISTORICAL HYPOTHETICAL* ACCUMULATION UNIT VALUES
AND PERFORMANCE INFORMATION

The historical accumulation unit values are for the life of the Separate Account
in its present organization as a unit investment trust and in its prior
organization as several managed separate accounts based on current deductions
and charges applicable to the Certificates. The Certificates were first offered
January 6, 1992. Values may have varied had assets actually been allocated to
the Separate Account under the Certificates.

HISTORICAL HYPOTHETICAL ACCUMULATION UNIT VALUES

<TABLE>
<CAPTION>
MONEY MARKET
SUBACCOUNT #1
- ---------------------------------------
UNIT
DATE VALUES
- -------- --------
<S> <C> <C>
04/06/82 ................... .521904
12/31/82 ................... .561706
12/31/83 ................... .605415
12/31/84 ................... .661060
12/31/85 ................... .705934
12/31/86 ................... .743260
12/31/87 ................... .782353
12/31/88 ................... .830274
12/31/89 ................... .894703
12/31/90 ................... .955536
12/31/91 ................... .999459
12/31/92 ................... 1.021027
12/31/93 ................... 1.037409
12/31/94 ................... 1.065127
12/31/95 ................... 1.111573
12/31/96 ................... 1.153353
</TABLE>

<TABLE>
<CAPTION>
MONEY MARKET
SUBACCOUNT #2
- ---------------------------------------
UNIT
DATE VALUES
- -------- --------
<S> <C> <C>
04/06/82 ................... .488861
12/31/82 ................... .526477
12/31/83 ................... .569164
12/31/84 ................... .623384
12/31/85 ................... .669150
12/31/86 ................... .709261
12/31/87 ................... .752167
12/31/88 ................... .804725
12/31/89 ................... .874829
12/31/90 ................... .944037
12/31/91 ................... .999255
12/31/92 ................... 1.033619
12/31/93 ................... 1.063332
12/31/94 ................... 1.105349
12/31/95 ................... 1.167919
12/31/96 ................... 1.227089
</TABLE>

TOTAL RETURN
SUBACCOUNT
- ---------------------------------------
UNIT
DATE VALUES
- -------- --------
<S> <C> <C>
04/14/82 ................... .271127
12/31/82 ................... .334579
12/31/83 ................... .388564
12/31/84 ................... .364932
12/31/85 ................... .462836
12/31/86 ................... .526008
12/31/87 ................... .522732
12/31/88 ................... .578123
12/31/89 ................... .707717
12/31/90 ................... .734077
12/31/91 ................... .997337
12/31/92 ................... 1.001657
12/31/93 ................... 1.109293
12/31/94 ................... .991561
12/31/95 ................... 1.233678
12/31/96 ................... 1.422563
</TABLE>

<TABLE>
<CAPTION>
HIGH YIELD
SUBACCOUNT
- ---------------------------------------
UNIT
DATE VALUES
- -------- --------
<S> <C> <C>
04/14/82 ................... .309713
12/31/82 ................... .382894
12/31/83 ................... .433711
12/31/84 ................... .482077
12/31/85 ................... .579127
12/31/86 ................... .673071
12/31/87 ................... .703823
12/31/88 ................... .805071
12/31/89 ................... .784945
12/31/90 ................... .655406
12/31/91 ................... .982658
12/31/92 ................... 1.142847
12/31/93 ................... 1.354484
12/31/94 ................... 1.307729
12/31/95 ................... 1.516342
12/31/96 ................... 1.707976
</TABLE>

<TABLE>
<CAPTION>
GROWTH
SUBACCOUNT
- ---------------------------------------
UNIT
DATE VALUES
- -------- --------
<S> <C> <C>
12/13/83 ................... .336632
12/31/83 ................... .346384
12/31/84 ................... .378954
12/31/85 ................... .468051
12/31/86 ................... .504874
12/31/87 ................... .507011
12/31/88 ................... .502672
12/31/89 ................... .636443
12/31/90 ................... .632214
12/31/91 ................... .995577
12/31/92 ................... 1.018405
12/31/93 ................... 1.152836
12/31/94 ................... 1.092975
12/31/95 ................... 1.435510
12/31/96 ................... 1.724222
</TABLE>

GOVERNMENT SECURITIES
SUBACCOUNT
- ---------------------------------------
UNIT
DATE VALUES
- -------- --------
<S> <C> <C>
07/13/87 ................... .700085
12/31/87 ................... .710087
12/31/88 ................... .723278
12/31/89 ................... .811610
12/31/90 ................... .881949
12/31/91 ................... 1.004106
12/31/92 ................... 1.050227
12/31/93 ................... 1.104499
12/31/94 ................... 1.060977
12/31/95 ................... 1.246817
12/31/96 ................... 1.262885
</TABLE>

INTERNATIONAL SUBACCOUNT
- ---------------------------------------
UNIT
DATE VALUES
- -------- --------
<S> <C> <C>
12/31/92 ................... .980721
12/31/93 ................... 1.286576
12/31/94 ................... 1.225134
12/31/95 ................... 1.365361
12/31/96 ................... 1.570689
</TABLE>

SMALL CAP GROWTH SUBACCOUNT
- ---------------------------------------
UNIT
DATE VALUES
- -------- --------
<S> <C> <C>
12/31/94 ................... 1.030937
12/31/95 ................... 1.324483
12/31/96 ................... 1.674797
</TABLE>

B-24
<PAGE> 131

<TABLE>
<CAPTION>
INVESTMENT GRADE
BOND SUBACCOUNT
- ---------------------------------------
UNIT
DATE VALUES
- -------- --------
<S> <C> <C>
12/31/96 ................... 1.027174
</TABLE>

<TABLE>
<CAPTION>
INVESTMENT GRADE
BOND SUBACCOUNT
- ---------------------------------------
UNIT
DATE VALUES
- -------- --------
<S> <C> <C>
12/31/96 ................... 1.163902
</TABLE>

<TABLE>
<CAPTION>
VALUE
SUBACCOUNT
- ---------------------------------------
UNIT
DATE VALUES
- -------- --------
<S> <C> <C>
12/31/96 ................... 1.010142
</TABLE>

<TABLE>
<CAPTION>
VALUE & GROWTH
SUBACCOUNT
- ---------------------------------------
UNIT
DATE VALUES
- -------- --------
<S> <C> <C>
12/31/96 ................... 1.136559
</TABLE>

<TABLE>
<CAPTION>
VALUE & GROWTH
SUBACCOUNT
- ---------------------------------------
UNIT
DATE VALUES
- -------- --------
<S> <C> <C>
12/31/96 ................... 1.144182
</TABLE>

<TABLE>
<CAPTION>
HORIZON 20+
SUBACCOUNT
- ---------------------------------------
UNIT
DATE VALUES
- -------- --------
<S> <C> <C>
12/31/96 ................... 1.104505
</TABLE>

<TABLE>
<CAPTION>
HORIZON 5 SUBACCOUNT
- ---------------------------------------
UNIT
DATE VALUES
- -------- --------
<S> <C> <C>
12/31/96 ................... 1.086828
</TABLE>

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

* As of January 6, 1992 the accumulation unit values are based on actual
performance.

B-25
<PAGE> 132

PERFORMANCE INFORMATION

<TABLE>
<CAPTION>
VALUES OF INITIAL
$40,000
INVESTMENT IN COMPARED TO
SUBACCOUNTS-- ----------------------------------
DECEMBER 31, 1996 STANDARD
---------------------- DOW JONES & CONSUMER
ENDING PERCENTAGE INDUSTRIAL POOR'S PRICE EAFE
TOTAL RETURN TABLE VALUE INCREASE AVERAGE(1) 500(2) INDEX(3) (13)
------------------ ------ ---------- ---------- -------- -------- ----
<S> <C> <C> <C> <C> <C> <C>
GROWTH SUBACCOUNT
Life of Subaccount(4)................... 204,205 410.51 411.74 348.69 57.47 591.59
Ten years............................... 136,251 240.63 240.11 205.88 43.68 131.08
Five years.............................. 69,156 72.89 103.49 77.60 15.11 50.25
One year................................ 48,015 20.04 26.01 20.26 3.31 6.36

TOTAL RETURN SUBACCOUNT
Life of Subaccount(5)................... 195,424 388.56 698.69 577.46 68.11 781.60
Ten years............................... 108,029 170.07 240.11 205.88 43.68 131.08
Five years.............................. 57,779 44.45 103.49 77.60 15.11 50.25
One year................................ 46,092 15.23 26.01 20.26 3.31 6.36

INTERNATIONAL SUBACCOUNT(14)
Life of Subaccount...................... 62,735 56.84 101.50 77.52 15.11 50.25
One year................................ 45,990 14.98 26.01 20.26 3.31 6.36

SMALL CAP GROWTH SUBACCOUNT
Life of Subaccount(15).................. 66,956 67.39 74.23 63.51 8.08 18.74
One year................................ 50,559 26.40 26.01 20.26 3.31 6.36

VALUE SUBACCOUNT
Life of Subaccount(16).................. 46,541 16.35 15.79 13.23 1.99 0.36

SMALL CAP VALUE SUBACCOUNT
Life of Subaccount(16).................. 40,397 0.99 15.79 13.23 1.99 0.36

VALUE + GROWTH SUBACCOUNT
Life of Subaccount(16).................. 45,453 13.63 15.79 13.23 1.99 0.36

HORIZON 20+ SUBACCOUNT
Life of Subaccount(16).................. 45,753 14.38 15.79 13.23 1.99 0.36

HORIZON 10+ SUBACCOUNT
Life of Subaccount(16).................. 44,166 10.42 15.79 13.23 1.99 0.36

HORIZON 5 SUBACCOUNT
Life of Subaccount(16).................. 43,460 8.65 15.79 13.23 1.99 0.36
</TABLE>

B-26
<PAGE> 133

<TABLE>
<CAPTION>
VALUES OF
INITIAL COMPARED TO
$40,000 --------------------------------------------------------------
INVESTMENT IN SALOMON
SUBACCOUNTS-- BROS. LEHMAN MERRILL
DECEMBER 31, 1996 CDA HIGH GRADE BROS. LYNCH
--------------------- CONSUMER CERT. CORP. GOVT./CORP. GOVT./CORP.
ENDING PERCENTAGE PRICE OF DEPOSIT BOND BOND MASTER
TOTAL RETURN TABLE VALUE INCREASE INDEX(3) INDEX(6) INDEX(7) INDEX(8) INDEX(9)
------------------ ------ ---------- -------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
MONEY MARKET SUBACCOUNT #1
Life of Subaccount(10)................. 88,074 120.19% 68.11 N/A 570.60 399.28 398.53
Ten years.............................. 61,828 54.57 43.68 N/A 147.34 123.56 123.68
Five years............................. 46,045 15.11 15.11 22.57 50.52 41.43 41.74
One year............................... 41,470 3.68 3.31 4.98 1.39 2.90 2.91

MONEY MARKET SUBACCOUNT #2
Life of Subaccount(10)................. 100,092 150.23 68.11 N/A 570.60 399.28 398.53
Ten years.............................. 68,983 72.46 43.68 N/A 147.34 123.56 123.68
Five years............................. 49,031 22.58 15.11 22.57 50.52 41.43 41.74
One year............................... 42,005 5.01 3.31 4.98 1.39 2.90 2.91

HIGH YIELD SUBACCOUNT
Life of Subaccount(11)................. 214,519 436.30 68.11 N/A 570.60 399.28 398.53
Ten years.............................. 101,186 152.97 43.68 N/A 147.34 123.56 123.68
Five years............................. 69,414 73.54 15.11 22.57 50.52 41.43 41.74
One year............................... 45,026 12.57 3.31 4.98 1.39 2.90 2.91

GOVERNMENT SECURITIES SUBACCOUNT
Life of Subaccount(12)................. 71,197 77.99 39.16 70.67 158.01 126.33 127.03
Five years............................. 50,217 25.54 15.11 22.57 50.52 41.43 41.74
One year............................... 40,489 1.22 3.31 4.98 1.39 2.90 2.91

INVESTMENT GRADE BOND SUBACCOUNT
Life of Subaccount(16)................. 41,080 2.70 1.99 N/A 8.30 6.10 6.04
</TABLE>

B-27
<PAGE> 134

<TABLE>
<CAPTION>
COMPARED TO
----------------------------------------
AVERAGE DOW STANDARD
ANNUAL JONES & POOR'S CONSUMER
AVERAGE ANNUAL TOTAL TOTAL INDUSTRIAL 500 STOCK PRICE EAFE
RETURN TABLE RETURN AVERAGE(1) INDEX(2) INDEX(3) (13)
-------------------- ------- ---------- --------- -------- ----
<S> <C> <C> <C> <C> <C>
GROWTH SUBACCOUNT
Life of Subaccount(4)................................. 12.64 13.31 12.18 3.54 15.96
Ten years............................................. 11.84 13.02 11.83 3.69 8.74
Five years............................................ 8.93 15.26 12.17 2.85 8.48
One year.............................................. 10.87 26.01 20.26 3.31 6.36

TOTAL RETURN SUBACCOUNT
Life of Subaccount(5)................................. 10.42 15.04 13.77 3.57 15.81
Ten years............................................. 8.73 13.02 11.83 3.69 8.74
Five years............................................ 4.63 15.26 12.17 2.85 8.48
One year.............................................. 6.08 26.01 20.26 3.31 6.36

INTERNATIONAL SUBACCOUNT
Life of Subaccount(14)................................ 7.36 15.09 12.20 2.86 8.51
One year.............................................. 6.44 26.01 20.26 3.31 6.36

SMALL CAP GROWTH SUBACCOUNT
Life of Subaccount(15)................................ 18.33 23.15 20.25 2.96 6.65
One year.............................................. 17.70 26.01 20.26 3.31 6.36

VALUE SUBACCOUNT
Life of Subaccount(16)................................ 13.30 15.79 13.23 1.99 0.36

SMALL CAP VALUE SUBACCOUNT
Life of Subaccount(16)................................ (7.75) 15.79 13.23 1.99 0.36

VALUE + GROWTH SUBACCOUNT
Life of Subaccount(16)................................ 10.11 15.79 13.23 1.99 0.36

HORIZON 20+ SUBACCOUNT
Life of Subaccount(16)................................ 10.46 15.79 13.23 1.99 0.36

HORIZON 10+ SUBACCOUNT
Life of Subaccount(16)................................ 4.77 15.79 13.23 1.99 0.36

HORIZON 5 SUBACCOUNT
Life of Subaccount(16)................................ 2.35 15.79 13.23 1.99 0.36
</TABLE>

<TABLE>
<CAPTION>
COMPARED TO
-----------------------------------------------------
SALOMON LEHMAN MERRILL
AVERAGE BROS. BROS. LYNCH
ANNUAL CONSUMER HIGH GRADE GOVT./CORP. GOVT./CORP.
AVERAGE ANNUAL TOTAL TOTAL PRICE CORP. BOND BOND MASTER
RETURN TABLE RETURN INDEX(3) INDEX(7) INDEX(8) INDEX(9)
-------------------- ------- -------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
HIGH YIELD SUBACCOUNT
Life of Subaccount(11)................................ 11.54 3.57 13.70 11.46 11.44
Ten years............................................. 8.31 3.69 9.48 8.38 8.38
Five years............................................ 9.15 2.85 8.52 7.18 7.22
One year.............................................. 3.81 3.31 1.39 2.90 2.91

GOVERNMENT SECURITIES SUBACCOUNT
Life of Subaccount(12)................................ 5.24 3.61 10.70 9.15 9.19
Five years............................................ 2.10 2.85 8.52 7.18 7.22
One year.............................................. (6.67) 3.31 1.39 2.90 2.91

INVESTMENT GRADE BOND SUBACCOUNT
Life of Subaccount(16)................................ (5.18) 1.99 8.30 6.10 6.04
</TABLE>

B-28
<PAGE> 135

<TABLE>
<CAPTION>
YIELD INFORMATION QUALIFIED AND NON-QUALIFIED
----------------- ---------------------------
<S> <C>
HIGH YIELD SUBACCOUNT
30 day period ended 3/31/97............................... 7.58%
GOVERNMENT SECURITIES SUBACCOUNT
30 day period ended 3/31/97............................... 5.32%
INVESTMENT GRADE BOND SUBACCOUNT
30 day period ended 3/31/97............................... 4.87%
MONEY MARKET SUBACCOUNT
7 day period ended 3/31/97................................ 3.71%
</TABLE>

- ---------------
* N/A: Not Available.

(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, 1996.

(5) From March 5, 1982 to December 31, 1996.

(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, 1996.

(11) From March 5, 1982 to December 31, 1996.

(12) From September 3, 1987 to December 31, 1996.

(13) The EAFE is the Morgan Stanley Capital International's 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, 1996.

(15) From May 2, 1994 to December 31, 1996.

(16) From May 1, 1996 to December 31, 1996.

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
reinvested such calculations do not include the effect of any sales charges and
include the deduction of mortality and expense risk charges and

B-29
<PAGE> 136

other asset based charges. Future performance cannot be guaranteed. Lipper
published performance analyses on a regular basis from which the following
rankings were derived.

The Total Return Subaccount, High Yield Subaccount, Growth Subaccount, Money
Market Subaccount, International Subaccount and Government Securities Subaccount
are ranked by Lipper in the Flexible Portfolio, High Current Yield, Capital
Appreciation, Money Market, International, and Government Securities--U.S.
Mortgage and GNMA categories, respectively. Variable annuity subaccounts 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 subaccounts ranked
by Morningstar, Inc. or VARDS Inc.

<TABLE>
<CAPTION>
LIPPER VARIABLE ANNUITY
SUBACCOUNT PERFORMANCE ANALYSES
---------- -----------------------
2/29/96 TO 2/28/97
------------------
<S> <C>
Total Return.................................. 16.09
High Yield.................................... 11.70
Growth........................................ 18.32
Money Market #1............................... 3.69
Money Market #2............................... 4.98
Government Securities......................... 3.72
International................................. 12.61
</TABLE>

TAX-DEFERRED ACCUMULATION

<TABLE>
<CAPTION>
NON-QUALIFIED CONVENTIONAL
ANNUITY SAVINGS PLAN
AFTER-TAX CONTRIBUTIONS
AND TAX-DEFERRED EARNINGS
--------------------------------
TAXABLE LUMP AFTER-TAX CONTRIBUTIONS
NO WITHDRAWALS SUM WITHDRAWAL AND TAXABLE EARNINGS
-------------- -------------- -----------------------
<S> <C> <C> <C>
10 Years............. $107,946 $ 86,448 $ 81,693
20 Years............. 233,048 165,137 133,476
30 Years............. 503,133 335,021 218,082
</TABLE>

This chart compares the accumulation of a $50,000 initial investment into a
Non-Qualified Annuity and a Conventional Savings Plan. Contributions to the
Non-qualified Annuity and the Conventional Savings Plan are made after-tax. Only
the gain in the Non-Qualified Annuity will be subject to income tax in a taxable
lump sum withdrawal. The chart assumes a 37.1% federal marginal tax rate and an
8% annual return. The 37.1% federal marginal tax is based on a marginal tax rate
of 36%, representative of the target market, adjusted to reflect a decrease of
$3 of itemized deductions for each $100 of income over $117,950. Tax rates are
subject to change as is the tax-deferred treatment of the Certificates. Income
on Non-Qualified Annuities is taxed as ordinary income upon withdrawal. A 10%
tax penalty may apply to early withdrawals. See "Federal Income Taxes" in the
prospectus. The chart does not reflect the following charges and expenses under
Kemper Passport: 1.10% mortality and expense risk; .15% administration charges;
6% maximum deferred withdrawal charge; and $30 annual records maintenance
charge. The tax-deferred accumulation would be reduced if these charges were
reflected. No implication is intended by the use of these assumptions that the
return shown is guaranteed in any way or that the return shown represents an

B-30

<PAGE> 137

average or expected rate of return over the period of the Contracts.
[IMPORTANT--THIS IS NOT AN ILLUSTRATION OF YIELD OR RETURN]

Unlike savings plans, contributions to Non-Qualified Annuities provide
tax-deferred treatment on earnings. In addition, contributions to tax-deferred
retirement annuities are not subject to current tax in the year of contribution.
When monies are received from a Non-Qualified Annuity (and you have many
different options on how you receive your funds), they are subject to income
tax. At the time of receipt, if the person receiving the monies is retired, not
working or has additional tax exemptions, these monies may be taxed at a lesser
rate.

B-31
<PAGE> 138

APPENDIX B

STATE PREMIUM TAX CHART

<TABLE>
<CAPTION>
RATE OF TAX
-------------------------------
QUALIFIED NON-QUALIFIED
STATE PLANS PLANS
----- --------- -------------
<S> <C> <C>
California.................................................. .50% 2.35%*
District of Columbia........................................ 2.25% 2.25%*
Kansas...................................................... -- 2.00%*
Kentucky.................................................... 2.00%* 2.00%*
Maine....................................................... -- 2.00%
Nevada...................................................... -- 3.50%*
South Dakota................................................ -- 1.25%
West Virginia............................................... 1.00% 1.00%
Wyoming..................................................... -- 1.00%
</TABLE>

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

B-32
<PAGE> 139

PART C

OTHER INFORMATION

ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS

(A) FINANCIAL STATEMENTS TO BE INCLUDED IN PART A:

Kemper Investors Life Insurance Company and Subsidiaries

Independent Auditors' Report

Kemper Investors Life Insurance Company and Subsidiaries Consolidated
Balance Sheet as of December 31, 1996 and January 4, 1996

Kemper Investors Life Insurance Company and Subsidiaries Consolidated
Statement of Operations for the Years Ended December 31, 1996, 1995 and
1994

Kemper Investors Life Insurance Company and Subsidiaries Consolidated
Statement of Stockholder's Equity for the Year Ended December 31, 1996,
and for the period from January 1, 1996 to January 4, 1996, and for the
Years Ended December 31, 1995 and 1994

Kemper Investors Life Insurance Company and Subsidiaries Consolidated
Statement of Cash Flows for the Years Ended December 31, 1996, 1995 and
1994

Notes to Consolidated Financial Statements

(B) FINANCIAL STATEMENTS TO BE INCLUDED IN PART B:

KILICO Variable Annuity Separate Account

Independent Auditors' Report

Statements of Assets and Liabilities and Contract Owners' Equity as of
December 31, 1996

Statements of Operations for the Year Ended December 31, 1996

Statements of Changes in Contract Owners' Equity for the Years Ended
December 31, 1996 and 1995

Notes to Financial Statements

<TABLE>
<CAPTION>
<C> <S>
41.1 A copy of resolution of the Board of Directors of Kemper
Investors Life Insurance Company dated September 13, 1977.
41.2 A copy of Record of Action of Kemper Investors Life
Insurance Company dated April 15, 1983.
1.3 Plan of Reorganization.
2. Not Applicable.
23.1 Distribution Agreement between Investors Brokerage Services,
Inc. and KILICO.
13.2 Addendum to Kemper Financial Services, Inc. Selling Group
Agreement.
54.1 Form of Group Variable and Market Value Adjusted Annuity
Contract.
54.2 Form of Certificate to Variable and Market Value Adjusted
Annuity Contract and Enrollment Application.
54.3 Form of Individual Variable and Market Value Adjusted
Annuity Contract and Enrollment Application.
54.4 Form of Endorsement to Variable and Market Value Adjusted
Deferred Annuity Contract.
</TABLE>

C-1
<PAGE> 140

<C> <S>
(5)4.5 Form of Endorsement to Certificate to Variable and Market
Value Adjusted Deferred Annuity Contract.
(5)5. Form of Application.
(2)6.1 Kemper Investors Life Insurance Company articles of
incorporation.
(5)6.2 Kemper Investors Life Insurance Company by-laws.
7. Inapplicable.
8. Inapplicable.
9. Opinion and Consent of Counsel.
10. Consent of KPMG Peat Marwick LLP.
11. Inapplicable.
12. Inapplicable.
13.1 Schedules for Computation of Performance Information.
(3)13.2 Schedule for Computation of Performance Information for
Small Cap Growth Subaccount.
(3)13.3 Schedules for Computation of Performance Information for
Investment Grade Bond, Value, Small Cap Value, Value+Growth,
Horizon 20+, Horizon 10+ and Horizon 5 Subaccounts.
(6)14. Organizational Chart.
(5)16.1 Schedule V: Valuation and qualifying accounts.
(2)16.2 Independent Auditors' Report.
(2)17. Notice Concerning Regulatory Relief.
</TABLE>

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

(1) Incorporated herein by reference to Exhibits filed with Amendment No. 32 to
the Registration Statement on Form N-4 for KILICO Variable Annuity Separate
Account (File No. 811-3199) filed on or about April 27, 1995.

(2) Incorporated herein by reference to Exhibits filed with the Amendment No.
1 to Registration Statement on Form S-1 for KILICO (File No. 333-02491)
filed on or about April 25, 1996.

(3) Incorporated by reference to Exhibits filed with Amendment No. 9 to the
Statement on Form N-4 for KILICO (File No. 33-43501) filed on or about April
26, 1996.

(4) Incorporated herein by reference to Exhibits filed with the Registration
Statement on Form N-4 for KILICO (File No. 333-22375) filed on or about
February 26, 1997.

(5) Incorporated herein by reference to Amendment No. 2 to the Registration
Statement on Form S-1 for KILICO (File No. 333-02491) filed on or about
April 23, 1997.

(6) Incorporated herein by reference to Amendment No. 25 to the Registration
Statement on Form N-4 (File No. 2-72671) filed on or about April 25, 1997.

C-2
<PAGE> 141

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

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

<TABLE>
<CAPTION>
NAME OFFICE WITH KILICO
---- ------------------
<S> <C>
John B. Scott........................ President, Chief Executive Officer and Director
Frederick L. Blackmon................ Senior Vice President and Chief Financial Officer
James E. Hohmann..................... Senior Vice President and Chief Actuary
William H. Bolinder.................. Chairman of the Board and Director
Daniel L. Doctoroff.................. Director
Steven M. Gluckstern................. Vice Chairman and Director
Paul H. Warren....................... Director
Loren J. Alter....................... Director
Michael P. Stramaglia................ Director
Eliane C. Frye....................... Executive Vice President
Debra P. Rezabek..................... Senior Vice President, General Counsel, and Corporate
Secretary
James C. Harkensee................... Senior Vice President
Edward K. Loughridge................. Senior Vice President and Corporate Development Officer
George Vlaisavljevich................ Senior Vice President
Robert A. Daniel..................... Controller and Treasurer
Gary W. Fridley...................... Chief Investment Officer
Stuart K. Holcomb.................... Chief Marketing Officer
David B. Little...................... Chief Information Technology Officer
Lynn E. Patterson.................... Chief Underwriter and Service Officer
Barbara S. Sacks..................... Chief Service Officer
</TABLE>

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

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

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

ITEM 27. NUMBER OF CONTRACT OWNERS

At March 31, 1997, the Registrant had approximately 8,975 qualified
and non-qualified Kemper Passport Contract Owners.

ITEM 28. INDEMNIFICATION

To the extent permitted by law of the State of Illinois and subject to
all applicable requirements thereof, Article VI of the By-Laws of Kemper
Investors Life Insurance Company ("KILICO") provides for the
indemnification of any person against all expenses (including attorneys
fees), judgments, fines, amounts paid in settlement and other costs
actually and reasonably incurred by him in connection with any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative in which he is a party or is threatened to
be made a party by reason of his being or having been a director, officer,
employee or agent of KILICO, or serving or having served, at the request of
KILICO, as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, or by reason of his
holding a fiduciary position in connection with the management or
administration of retirement, pension, profit sharing or other benefit
plans including, but not limited to, any fiduciary liability under the
Employee Retirement Income Security Act of 1974 and any amendment thereof,
if he acted in good faith and in a manner he reasonably believed to be in
and not opposed to the best interests of KILICO, and with respect to any
criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction, or upon a plea of NOLO CONTENDERE
or its equivalent, shall not, of itself, create a presumption that he did
not act in good faith and in a manner

C-3
<PAGE> 142

which he reasonably believed to be in or not opposed to the best interests
of KILICO, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful. No
indemnification shall be made in respect of any claim, issue or matter as
to which a director or officer shall have been adjudged to be liable for
negligence or misconduct in the performance of his duty to the company,
unless and only to the extent that the court in which such action or suit
was brought or other court of competent jurisdiction shall determine upon
application that, despite the adjudication of liability but in view of all
the circumstances of the case, he is fairly and reasonably entitled to
indemnity for such expenses as the court shall deem proper.

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

ITEM 29.(A) PRINCIPAL UNDERWRITER

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

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

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

<TABLE>
<CAPTION>
NAME AND PRINCIPAL POSITION AND OFFICES
BUSINESS ADDRESS WITH UNDERWRITER
------------------ --------------------
<S> <C>
John B. Scott.............................................. Chairman and Director
Otis R. Heldman, Jr. ...................................... President and Director
Robert A. Daniel........................................... Vice President and Treasurer
Michael A. Kelly........................................... Vice President
Debra P. Rezabek........................................... Secretary
Frank J. Julian............................................ Assistant Secretary
Jerome J. Cwiok............................................ Director
Eliane C. Frye............................................. Director
George Vlaisavljevich...................................... Director
</TABLE>

ITEM 29.(C)

Inapplicable.

ITEM 30. LOCATION OF ACCOUNTS AND RECORDS

Accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the Rules
promulgated thereunder are maintained by Kemper Investors Life Insurance
Company at its home office at 1 Kemper Drive, Long Grove, Illinois 60049 or
at Zurich Kemper Investments, Inc., 222 South Riverside Plaza, Chicago,
Illinois 60606-5808.

ITEM 31. MANAGEMENT SERVICES

Inapplicable.

C-4
<PAGE> 143

ITEM 32. UNDERTAKINGS AND REPRESENTATIONS

Representation Regarding Fees and Charges Pursuant to Section 26 of
the Investment Company Act of 1940.

Kemper Investors Life Insurance Company ("KILICO") represents that the
fees and charges deducted under the Contract, in the aggregate, are
reasonable in relation to the services rendered, the expenses expected to
be incurred, and the risks assumed by KILICO.

C-5
<PAGE> 144

SIGNATURES

As required by the Securities Act of 1933 and the Investment Company Act of
1940, the Registrant, KILICO Variable Annuity Separate Account, certifies that
it meets the requirements of Securities Act Rule 485(b) for effectiveness of
this Amendment to the Registration Statement and has duly caused this Amendment
to the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Long Grove and State of Illinois on
the 24th day of April, 1997.

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

By: /s/ JOHN B. SCOTT*

-------------------------------------
John B. Scott, Chief Executive
Officer and President

KEMPER INVESTORS LIFE INSURANCE
COMPANY
(Depositor)

BY: /s/ JOHN B. SCOTT*

-------------------------------------
John B. Scott, Chief Executive
Officer and President

As required by the Securities Act of 1933, this Amendment to the
Registration Statement has been signed below by the following directors and
principal officers of Kemper Investors Life Insurance Company in the capacities
indicated on the 24th day of April, 1997.

<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ JOHN B. SCOTT* Chief Executive Officer, President and Director (Principal
- ------------------------------------ Executive Officer)
John B. Scott
/s/ W.H. BOLINDER* Chairman of the Board and Director
- ------------------------------------
William H. Bolinder
/s/ FREDERICK L. BLACKMON* Senior Vice President Chief Financial Officer (Principal
- ------------------------------------ Financial Officer and Principal Accounting Officer)
Frederick L. Blackmon
/s/ LOREN J. ALTER* Director
- ------------------------------------
Loren J. Alter
/s/ DANIEL L. DOCTOROFF* Director
- ------------------------------------
Daniel L. Doctoroff
/s/ STEVEN M. GLUCKSTERN* Director
- ------------------------------------
Steven M. Gluckstern
/s/ MICHAEL P. STRAMAGLIA* Director
- ------------------------------------
Michael P. Stramaglia
/s/ PAUL H. WARREN* Director
- ------------------------------------
Paul H. Warren

*By: /s/ FRANK J. JULIAN
- ------------------------------------
Frank J. Julian
Attorney-in-Fact**
April 24, 1997
</TABLE>

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

**Pursuant to Power of Attorney forms filed as Exhibit 24 to Amendment No. 2 to
the Registration Statement of Kemper Investors Life Insurance Company on Form
S-1 filed on April 23, 1997 (File No. 333-02491) which are hereby incorporated
herein by reference.

<PAGE> 145

EXHIBIT INDEX

<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER TITLE PAGES
------- ----- ------------
<C> <S> <C>
1.3 Plan of Reorganization......................................
9 Opinion and Consent of Counsel..............................
10 Consent of KPMG Peat Marwick LLP............................
13.1 Schedules for Computation of Performance Information........
</TABLE>

<PAGE> 1

Exhibit 1.3

AGREEMENT AND PLAN OF
REORGANIZATION

This Agreement and Plan of Reorganization (the "Agreement"), dated this __
day of _________, 1989, is entered into by and among Kemper Investors Life
Insurance Company ("KILICO"), a stock life insurance company organized under the
laws of the State of Illinois, KILICO on behalf of KILICO Variable Separate
Account, organized under the insurance laws of the State of Illinois, KILICO
Money Market Separate Account ("Money Market Account") KILICO Total Return
Separate Account" ("Total Return Account"), KILICO Income Separate Account
("Income Accounts"), KILICO Equity Separate Account ("Equity Account")
(collectively, the "Accounts"), all organized under the insurance laws of the
State of Illinois, Kemper Investors Fund ("KINF"), a business trust organized
under the laws of the Commonwealth of Massachusetts, and Kemper Financial
Services, Inc. ("KFS"), a corporation organized under the laws of the State of
Delaware.

WHEREAS, KINF is a series-type mutual fund consisting of the following
portfolios: money market, total return, high yield, equity, and government
securities (individually and collectively referred to as the "Existing
Portfolio(s)"), and is registered with the Securities and Exchange Commission
("SEC") as an open-end, diversified management investment company under the
Investment Company Act of 1940 (the "1940 Act");

<PAGE> 2

WHEREAS, KFS is the investment adviser and principal underwriter of KINF,
and the principal underwriter of KILICO Variable Separate Account and the
Accounts;

WHEREAS, KILICO is the investment adviser of the Accounts;

WHEREAS, the Money Market Account is registered with the SEC as an
open-end, diversified management investment company and invests primarily in
high quality short-term money market instruments in seeking to provide maximum
current income to the extent consistent with stability of principal;

WHEREAS, the Total Return Account is registered with the SEC as an
open-end, diversified management investment company and invests in a
combination of debt securities and common stock in seeking to provide a high
total return, through a combination of income and capital appreciation;

WHEREAS, the Income Account is registered with the SEC as an open-end,
diversified management investment company and invests in fixed-income
securities in seeking to provide a high level of current income;

WHEREAS, the Equity Account is registered with the SEC as an open-end,
diversified management investment company and normally invests in common stocks
and securities convertible into common stocks in seeking to provide maximum
appreciation of capital;

<PAGE> 3

WHEREAS, KILICO Variable Separate Account is registered with the SEC as an
unit investment trust investment company under the 1940 Act and has the
following sub-accounts: money market, total return, high yield, equity and
government securities;

WHEREAS, KILICO is the depositor of and currently provides
administrative and contract owner recordkeeping services for the Accounts and
KILICO Variable Separate Account;

WHEREAS, the respective Board of Managers (the "Board" or "Boards") of
each Account has approved the reorganization of the Accounts into a single unit
investment trust with sub-accounts investing in shares of a corresponding
portfolio of KINF;

WHEREAS, the respective Boards have determined that the Money Market
Account shall be the continuing unit investment trust separate account (the
"KILICO Variable Annuity Separate Account"), that the Total Return, Income and
Equity Accounts shall be combined with the Money Market Account and shall
continue as sub-accounts of the KILICO Variable Annuity Separate Account
("Sub-Accounts"), and that the separate registrations of the Total Return,
Income and Equity Accounts with the SEC shall be withdrawn;

WHEREAS, the Existing Portfolios currently serve as investment vehicles
for KILICO Variable Separate Account funding variable life insurance policies;

<PAGE> 4

WHEREAS, the Existing Portfolios of KINF will serve as investment vehicles
for the KILICO Variable Annuity Separate Account funding variable annuity
contracts;

WHEREAS, KINF will act as an investment vehicle for KILICO Variable
Separate Account and KILICO Variable Annuity Separate Account and may in the
future act as an investment vehicle for other separate accounts funding variable
annuities, variable life insurance or other insurance products offered by KILICO
or other insurance companies;

WHEREAS, the Board of Directors of KILICO, the Boards of Managers of the
Accounts, and the Board of Trustees of KINF have each considered and approved
the actions contemplated by this Agreement; and

WHEREAS, this Agreement is conditioned upon approval of the reorganization
contemplated by this Agreement, by majority vote, as defined in the 1940 Act and
rules thereunder, of the contract owners in each of the Accounts ("Contract
Owner") at meetings called for that purpose, or any adjournments thereof.

NOW, THEREFORE, in consideration of the mutual promises made herein, the
parties hereto agree as follows:

<PAGE> 5

ARTICLE I
CLOSING DATE

SECTION 1.01. The reorganization contemplated by this Agreement shall be
effective on September 1, 1989 or on such other date as may be mutually agreed
upon by all parties to this Agreement (the "Closing Date"). The time of the
Closing Date as of which the reorganization is consummated is referred to
hereinafter as the "Effective Time."

SECTION 1.02. The parties agree to use their best efforts to obtain all
regulatory and Contract Owner approvals and perform all other acts necessary or
desirable to complete the reorganization as of the Closing Date.

ARTICLE II

REORGANIZATION TRANSACTIONS

SECTION 2.01. As of the Effective Time, KILICO, on behalf of the Accounts,
will sell, assign and transfer to KINF all of each Account's cash, securities
and other investments held or in transit, receivables for investments sold,
dividends, interest receivables and any other assets of each Account
("portfolio assets"). The portfolio assets of the Money Market Account will be
held as the property of the Money Market portfolio, the portfolio assets of the
Total Return Account as the property of the Total Return portfolio, the
portfolio assets of the Income Account as the property of the High Yield
portfolio, and the portfolio assets of the Equity Account as the property of
the Equity portfolio.

<PAGE> 6

SECTION 2.02. In exchange for the portfolio assets of each Account, KINF
will issue full and fractional shares of its corresponding Existing Portfolio
to KILICO, as depositor for the KILICO Variable Annuity Separate Account, and
will assume any unsatisfied liabilities incurred by each Account before the
Effective Time. The number of shares of the corresponding Existing Portfolio to
be issued in the exchange shall be that number which, based upon the relative
net asset values per share of each Existing Portfolio, has an aggregate net
asset value equal to the portfolio assets minus the liabilities of the
respective Account. The value of the portfolio assets less the liabilities of
each Account shall be determined as of the close of business on the business
day preceding the Closing Date, as determined by the method or methods set
forth in the prospectuses and statements of additional information of the
Accounts, dated May 1, 1989.

SECTION 2.03. As of the Effective Time, KILICO shall cause the shares it
receives from KINF pursuant to Section 2.02 above to be duly and validly
recorded and held on its records as assets of newly-created Sub-Accounts of the
KILICO Variable Annuity Separate Account, such that the Contract Owners'
interests in the Money Market Sub-Account will then be equivalent to their
former interests in the Money Market Account, the Contract Owners' interests in
the Total Return Sub-Account will then be equivalent to their former interests
in the Total Return Account, the Contract Owners' interests in the High Yield
Sub-Account will then be equivalent to their former interests in the Income
Account and the Contract Owners' interests in the Equity Sub-Account will then
be equivalent to their former interests in the Equity Account. KILICO shall
take all action necessary to ensure that such

<PAGE> 7

interests in the Sub-Accounts, immediately following the Effective Time, are
duly and validly recorded on the Contract Owners' account records. The Accounts
other than the KILICO Variable Annuity Separate Account shall thereafter file
with the SEC applications to deregister under Section 8(f) of the
1940 Act.

SECTION 2.04. The net asset value per share of the shares of each of the
Existing Portfolios shall be determined as of the close of business on the
business day preceding the Closing Date, by the method or methods set forth in
the prospectus and statement of information of KINF, dated May 1, 1989.

SECTION 2.05. KINF shares to be issued hereunder shall be issued in open
account form by book entry without the issuance of certificates.

SECTION 2.06. If, at any time after the Closing Date, the Accounts, KINF,
KFS or KILICO shall determine that any further conveyance, assignment,
documentation or action is necessary or desirable to complete the
reorganization contemplated by this Agreement or confirm full title to the
assets transferred, the appropriate party or parties shall execute and deliver
all such instruments and take all such actions.

SECTION 2.7. Following the Closing Date, KILICO shall provide
administrative and contract owner recordkeeping services to the KILICO Variable
Annuity Separate Account, either directly or through other

<PAGE> 8

entitles, substantially identical to the administrative and contract owner
recordkeeping services currently provided by KILICO to the Accounts.

SECTION 2.8. Following the Closing Date, KILICO shall cease to charge the
Accounts for investment advisory services and, with respect to contracts issued
prior to the Effective Time, no investment advisory or other expenses shall be
charged against the Existing Portfolios of a type or in an amount that could
not have been charged against the Accounts had the reorganization not occurred
unless such expenses are reimbursed, with respect to such contracts or
certificates, by KILICO. The requirement to make such reimbursement shall not
apply, however, to any federal income tax payable if KINF fails to qualify as a
"regulated investment company" under the applicable provisions of the Internal
Revenue Code.

ARTICLE III

REPRESENTATIONS, WARRANTIES AND CONDITIONS

SECTION 3.01. Each Account, KFS, KILICO and KINF, as appropriate, make the
following representations and warranties, which shall survive the closing of
the reorganization:

(a) There are no suits, actions or proceedings pending or threatened
against any party to this Agreement which, to its knowledge, if
adversely determined, would materially and adversely affect its
financial condition, the conduct of its business or its ability to
carry out its obligations hereunder;

<PAGE> 9

(b) There are no investigations or administrative proceedings by the SEC
or by any insurance or securities regulatory body of any state
territory or the District of Columbia pending against any party to
this Agreement which, to its knowledge, would lead to any suit, action
or proceeding that would materially and adversely affect its financial
condition, the conduct of its business or its ability to carry
out its obligations hereunder;

(c) Should any party to this Agreement become aware, prior to the
Effective Time, of any suit, action or proceeding of the types
described in paragraphs (a) or (b) above, instituted or commenced
against it, such party shall immediately notify and advise all other
parties to this Agreement;

(d) Immediately prior to the Effective Time, KILICO shall have valid and
unencumbered title to the portfolio assets of the Accounts, except
with respect to those assets for which payment has not yet been made;
and

(e) All information provided by each party concerning itself required in
any application, registration statement or other filing with a
governmental body to be made by KINF, by KILICO, by KILICO Variable
Separate Account, by KFS, by the Accounts or by the KILICO Variable
Annuity Separate Account, or any or all of them, in connection with
any of the transactions contemplated by this Agreement shall be
correct in all material respects and shall not

<PAGE> 10

omit any material fact required to be stated therein or necessary in
order to make the statements therein not misleading.

SECTION 3.02. The obligations of the parties hereunder shall be Subject to
satisfaction of each of the following conditions:

(a) The representations and warranties contained herein shall be true as
of and at the Effective Time with the same effect as though made at
such time, and such parties shall have performed all obligations
required by this Agreement to be performed by each of them prior to
such time;

(b) The SEC shall not have issued an unfavorable advisory report under
Section 25(b) of the 1940 Act nor instituted any proceeding seeking to
enjoin consummation of the reorganization contemplated hereby;

(c) Each party shall have made available all information concerning itself
which may be required in any application, registration statement or
other filing with a governmental body to be made by KINF, by KILICO,
by KILICO Variable Separate Account, by KFS, by the Accounts or by the
KILICO Variable Annuity Separate Account, or any or all of them, in
connection with any of the transactions contemplated by this Agreement
and has joined in such applications or filings, subject to reasonable
approval of its counsel;

<PAGE> 11

(d) The appropriate parties shall have received orders from the SEC
providing such exemptions and approvals as they and their counsel
reasonably deem necessary, including exemptions from or approvals
under Sections 17(a) and 17(d) of the 1940 Act and Rule 17d-1
thereunder, and made all necessary filings with and received all
necessary approvals from state securities or insurance authorities;

(e) KILICO Variable Annuity Separate Account shall have filed with the
Commission one or more post-effective amendments to their registration
statements under the Securities Act of 1933 (the "1933 Act") as are
necessary or desirable in connection with the reorganization
contemplated by this Agreement; KINF shall have filed one or more
post-effective amendments to its registration statement under the 1933
Act as may be necessary or desirable to effect the purposes of the
reorganization; and the appropriate parties shall take all action
necessary for such filings to become effective as soon as possible
following the Closing Date, and no known reason shall exist for such
filings not to become effective within a reasonable period;

(f) At Contract Owners meetings called for such purposes (or any
adjournments thereof), a majority in interest, as defined in the 1940
Act and the rules thereunder, of the Contract Owners in each Account
shall have voted in favor of approving this Agreement and the
reorganization contemplated hereby, and the Contract Owners

<PAGE> 12

in the Accounts and the policy owners of the KILICO Variable Separate
Account shall have voted (by an affirmative vote of more than 50% of
the total eligible votes) to direct KILICO to vote, at a shareholders
meeting following the Contract Owners' meeting, the KINF shares held
by it to:

(1) ratify the election of the Board of Trustees of KINF;

(2) ratify the selection of Peat Marwick Main & Co. as KINF's
independent accountants for the fiscal year ending December 31,
1989.

(g) The Board of Trustees of KINF shall have taken the necessary action
at a meeting duly called for such purposes to approve this Agreement
and adopt it as a valid obligation of KINF and legally binding upon
it;

(h) KILICO and the Accounts shall have received an opinion of counsel to
KINF in form and substance reasonably satisfactory to them to the
effect that, as of Closing Date:

(1) KINF has been duly organized, is existing in good standing and is
authorized to issue shares of its Existing Portfolios for the
purposes contemplated by this Agreement and is duly registered and
in good standing as an open-end, management investment company
under the 1940 Act;

<PAGE> 13

(2) the shares of the Existing Portfolios to be issued pursuant
to the terms of this Agreement have been duly authorized and, when
issued and delivered as provided herein, will be validly issued,
fully paid and non-assessable;

(3) all actions required to be taken by or on the part of KINF to
authorize and carry out this Agreement and effect the
reorganization have been duly and properly taken; and

(4) this Agreement is a valid obligation of KINF and legally binding
upon it in accordance with its terms.

(1) KINF and the Accounts shall have received an opinion from counsel to
KILICO (who may be the same as counsel to KINF) in form and substance
reasonably satisfactory to them to the effect that, as of the Closing
Date:

(1) KILICO, KILICO Variable Separate Account, and the Accounts are
validly organized, KILICO is in good standing under the laws of
the State of Illinois and all such entities are fully empowered
and qualified to carry out their businesses in all jurisdictions
where they do so, including to enter into this Agreement and
effect the transactions contemplated hereby;

<PAGE> 14

(2) all corporate and other proceedings necessary and required to be
taken by or on the part of KILICO, KILICO Variable Separate
Account, and the Accounts to authorize and carry out this
Agreement and to effect the reorganization have been duly and
properly taken; and

(3) this Agreement is a valid obligation of KILICO, KILICO Variable
Separate Account and the Accounts and legally binding upon them in
accordance with its terms.

(j) Each party shall have furnished, as reasonably requested by any other
party, such other legal opinions, officers' certificates, incumbency
certificates, certified copies of board and committee resolutions,
good standing certificates, and other closing documentation as may be
appropriate for a transaction of this type.

ARTICLE IV

COSTS

SECTION 4.01. KILICO shall bear all expenses incurred in connection with
effecting the reorganization contemplated by this Agreement including, without
limitation, any expenses in connection with actions taken pursuant to Section
2.06 herein, preparation and filing of necessary registration statements, proxy
statements and applications and amendments on behalf of any and all parties
hereto, expenses of KINF and all legal, accounting and data processing
services.

<PAGE> 15

ARTICLE V

TERMINATION

SECTION 5.01. This Agreement may be terminated and the reorganization
abandoned as follows at any time prior to the Effective Time, notwithstanding
approvals by Contract Owners .

(1) by mutual consent of the parties hereto;

(2) by any of the parties if any condition set forth in Section 3.02 has
not been fulfilled by the other parties; or

(3) by any of the parties if the reorganization does not occur by December
31, 1989 and no subsequent date can be mutually agreed upon.

SECTION 5.02. At any time prior to the Effective Time, any of the terms or
conditions of this Agreement may be waived by the party or parties entitled to
the benefit thereof if such waiver will not have a material adverse effect on
the interests of Contract Owners.

ARTICLE VI

GENERAL

SECTION 6.01. This Agreement may be executed in two or more counterparts,
each of which shall be deemed an original but all of which shall constitute one
and the same instrument.

<PAGE> 16

SECTION 6.02. A copy of the Declaration of Trust of KINF, as amended, is
on file with the Secretary of the Commonwealth of Massachusetts; and notice is
hereby given that this Agreement is executed on behalf of the Trustees of KINF
as Trustees and not individually and that the obligations of this instrument
are not personally binding upon any shareholder of KINF or on any of the
Trustees, officers, employees or agents of KINF, but are binding only upon the
assets and property of KINF.

IN WITNESS WHEREOF, as of the day and year first above written, each of
the parties has caused this Agreement to be executed on its behalf by its
President or a Vice President or Chairman and attested by its Secretary or
Assistant Secretary, all thereunto duly authorized.

ATTEST: KEMPER INVESTORS LIFE
INSURANCE COMPANY

___________________________ By:____________________________
Title Title

ATTEST: KILICO VARIABLE SEPARATE ACCOUNT
By: KEMPER INVESTORS LIFE
INSURANCE COMPANY

___________________________ By:____________________________
Title Title

ATTEST: KILICO MONEY MARKET SEPARATE ACCOUNT

___________________________ By:____________________________
Title Title

ATTEST: KILICO TOTAL RETURN SEPARATE ACCOUNT

___________________________ By:____________________________
Title Title

16
<PAGE> 17

ATTEST: KILICO INCOME SEPARATE ACCOUNT

___________________________ By:____________________________
Title Title

ATTEST: KILICO EQUITY SEPARATE ACCOUNT

___________________________ By:____________________________
Title Title

ATTEST: KEMPER FINANCIAL SERVICES, INC.

___________________________ By:____________________________
Title Title

ATTEST: KEMPER INVESTORS FUND

___________________________ By:____________________________
Title Title

<PAGE> 1

EXHIBIT 9

[KEMPER INVESTORS LIFE INSURANCE COMPANY LETTERHEAD]

December 10, 1991

Kemper Investors Life Insurance Company
120 South LaSalle Street
Chicago, Illinois 60603

Dear Sirs:

This opinion is furnished in connection with the filing of a Registration
Statement on Form N-4, File No. 811-3199 ("Registration Statement") by Kemper
Investors Life Insurance Company ("KILICO") for the KILICO Variable Annuity
Separate Account ("Account"). The Registration Statement covers an indefinite
number of units of interest in the Subaccounts. Purchase payments to be
received under Group Variable and Market Value Adjusted Deferred Annuity
Contracts ("Contracts") offered by KILICO may be allocated by KILICO to the
Subaccount in accordance with the owner's direction with reserves established
by KILICO to support such Contracts.

The Contracts are designed to provide annuity benefits and are to be
offered in the manner described in the Prospectus which is included in the
Registration Statement.

The Contracts will be sold only in jurisdictions authorizing such sales.

I have examined all such corporate records of KILICO and such other
documents and laws as I consider appropriate as a basis for this opinion. On
the basis of such examination, it is my opinion that:

1. KILICO is a corporation duly organized and validly existing under the
laws of the State of Illinois.

2. The Account is an account established and maintained by KILICO pursuant
to the laws of the State of Illinois, under which income, gains and
losses, whether or not realized, from assets allocated to the Account,
are, in accordance with the Contracts, credited to or charged against
the Account without regard to other income, gains or losses of KILICO.

3. Assets allocated to the Subaccounts will be owned by

<PAGE> 2
Kemper Investors Life Insurance Company
December 5, 1991
Page 2

KILICO. The Contracts provide that the portion of the assets of the
Account equal to the reserves and other Contract liabilities with
respect to the Account will not be chargeable with liabilities arising
out of any other business KILICO may conduct.

4. When issued and sold as described above, the Contracts will be duly
authorized and will constitute validly issued and binding obligations
of KILICO in accordance with their terms.

I hereby consent to the use of this opinion as an exhibit to the
Registration Statement.

Sincerely

/s/ David F. Dierenfeldt
David F. Dierenfeldt
Counsel

DFD/jwu

<PAGE> 1
CONSENT OF INDEPENDENT AUDITORS

The Board of Directors
Kemper Investors Life Insurance Company

We consent to the use of our reports included herein on Kemper Investors Life
Insurance Company (KILICO) and on the financial statements of the subaccounts of
KILICO Variable Annuity Separate Account and to the reference to our firm under
the heading "Experts" in the prospectus. Our report on KILICO's financial
statements dated March 21, 1997, contains an explanatory paragraph that states
as a result of the acquisition of its parent, Kemper Corporation, the
consolidated financial information for the periods after the acquisition is
presented on a different cost basis than that for the periods before the
acquisition and, therefore, is not comparable.

KPMG PEAT MARWICK LLP

Chicago, Illinois
April 25, 1997

<PAGE> 1

EXHIBIT 13.1

EXHIBIT OF PERFORMANCE CALCULATIONS
THIS EXHIBIT REFLECTS THE CALCULATION OF CERTAIN PERFORMANCE FIGURES
THAT APPEAR UNDER "PERFORMANCE" IN APPENDIX A OF THE PART B.

A. TOTAL RETURN

1. Formula. The total return performance of the Money Market, Total
Return, High Yield, Equity and Government Securities Subaccounts for a
specified period equals the change in the value of a hypothetical initial
purchase payment of $40,000 ("Purchase Payment") from the beginning of the
period to the end of the period. The total return performance is calculated
assuming the change in the value of the Purchase Payment fully allocated to
each subaccount and the deduction of all expenses and fees, including a
prorated portion of the $30 annual policy fee. This proration is based on the
total number of contract holders. No withdrawals are assumed. Total Return may
be expressed either as a dollar value or as a percentage change. The percentage
change in the value of the Purchase Payment for the period is calculated by
subtracting the initial Purchase Payment from the ending value and dividing the
remainder by the beginning value:

Percentage Change = EV - P
------
P
EV = Ending Value
P = Purchase Payment
The decimal return is converted to a percentage by multiplying by 100.

2. Performance Reflected. The representative total return calculation
reflected in this Section A is for a $40,000 Purchase Payment into the Total
Return Subaccount for the one-year period ended December 31, 1990.

3. Calculation. The Purchase Payment is divided by the beginning AUV to
calculate the beginning number of units.

1 1
P/V = U $40,000/$2.617601 = 15,281.17 units

The initial number of units are reduced at the end of the year by a prorated
portion of the annual policy maintenance fee.

1 2 2
U - (M/V ) = U 15,281.17 - ($25.44/$2.715497) = 15,271.80 units

The ending value is calculated by converting ending units to dollars.
2 2
U x V = EV 15,271.80 units x $2.715497 = $41,470.53

The percentage change return is calculated by subtracting the initial
Purchase Payment from the ending value and dividing the remainder by the
beginning value.

(EV - P)/P = R ($41,470.53 - $40,000)/$40,000 = 0.0368

The decimal return is converted to a percentage by multiplying by 100.

R x 100 = Total Return % 0.0368 X 100 = 3.68%

B. AVERAGE ANNUAL TOTAL RETURN

1. Formula. The average annual total return (AATR) performance of the Total
Return, High Yield, Equity and Government Securities Subaccounts for a
specified period equals the change in the value of a hypothetical initial
purchase payment of $1,000 ("Purchase Payment") from the beginning of the
period to the end of the period. The AATR performance is calculated assuming
the change in the value of the Purchase Payment fully allocated to each
subaccount and the deduction of all expenses and fees, including a prorated
portion of the $30 annual policy fee. This proration is based on the total
number of contract holders. At the end of the specified period, it is assumed
that a full

<PAGE> 2

surrender is taken. The AATR for a specific period is found by talking a
hypothetical $1,000 Purchase Payment and computing the redeemable value at the
end of the period after all fees and surrender charges. The Ending Redeemable
Value (ERV) is then divided by the Purchase Payment, and this quotient is taken
to the Nth root (N representing the number of years in the period) and 1 is
subtracted from the result, which is then expressed as a percentage. Thus the
following formula applies:
ERV 1/N
Average Annual Total Return = (---) - 1
P

ERV = Ending Redeemable Value
P = Purchase Payment
N = Number of years
The decimal return is converted to a percentage by multiplying by 100.

2. Performance Reflected. The representative AATR calculation reflected in
this Section B is for a $1,000 Purchase Payment into the Total Return
Subaccount for the one-year period ended December 31, 1990.

3. Calculation. The Purchase Payment is divided by the beginning AUV to
calculate the beginning number of units.

1 1
P/V = U $1,000/$2.617601 = 382.03 units

The initial number of units are reduced at the end of the year by a prorated
portion of the annual policy maintenance fee.

1 2 2
U - (M/V ) = U 382.03 - ($25.44/$2.715497) = 372.66 units

The ending value is calculated by converting ending units to dollars.
2 2
U x V = EV 372.66 units x $2.715497 = $1,011.96

The ending redeemable value is calculated by subtracting the surrender charge
from the ending value.

EV - (EV x SC) = ERV $1,011.96 - ($1,011.96 x 6%) = $951.24

The percentage change quotient is calculated by dividing the ending
redeemable value by the beginning value.

(ERV/P) = R $951.24 / $1,000 = .95124

The quotient is taken to the Nth root.

The Nth root of .95124 is = .95124

One is subtracted from the result.

.95104 - 1 =-0.04876

The decimal return is converted to a percentage by multiplying by 100.

-0.04876 x 100 = -4.88% = Average Annual Total Return

<PAGE> 3

YIELD CALCULATION
HIGH YIELD SUBACCOUNT
GOVERNMENT SECURITIES SUBACCOUNT

The yield for the High Yield Subaccount and the Government Securities
Subaccount is computed in accordance with a standard method prescribed by rules
of the Securities and Exchange Commission. Yield is a measure of the net
dividend and interest income earned over a specific one month or 30-day period.
The yield quotations are based on a 30-day (or one month) period ended on
December 31, 1990 and computed by dividing the net investment income per
accumulation unit earned during the period by the maximum offering price per
unit on the last day of the period, according to the following formula:

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

WHERE:

a = net investment income earned during the period by the portfolio
attributable to shares owned by the sub-account.

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

c = the average daily number of accumulation units outstanding during the
period.

d = the maximum offering price per accumulation unit on the last day of the
period.

High Yield Subaccount
30 day period ended 12/31/90

a = $1,593,155
b = $160,308
c = 42,336,012 units
d = $2.122192
Yield= 19.92%

Government Securities Subaccount
30 day period ended 12/31/90

a = $200,593
b = $42,169
c = 21,600,887 units
d = $1.254327
Yield = 7.12%

<PAGE> 4

MONEY MARKET SUBACCOUNTS
YIELD CALCULATION

1. Formula. Each Subaccount's current yield quotation is based on a seven-day
period and is calculated as follows. The first calculation is "base period
return before maintenance fee", which is the net change in the Accumulation
Unit Value ("AUV") during the period resulting from net investment income
divided by the AUV at the beginning of the period. Realized capital gains or
losses and unrealized appreciation or depreciation are not included in the
calculation. The next calculation is "base period maintenance fee", which is
the annual maintenance fee prorated for the seven-day period and divided by the
average contract size.

The "base period return" is then calculated by subtracting the base period
maintenance fee from the base period return before maintenance fee. The result
is then divided by 7 and multiplied by 365 and the resulting yield figure is
carried to the nearest one-hundredth of one percent.

Each Subaccount's effective yield is determined by taking the base period
return (calculated as described above) and calculating the effect of assumed
compounding. The formula for the effective yield is:

365/7
(base period return +1) - 1.

2. Performance Reflected. The representative yield calculations reflected
herein are for the seven-day period ended December 31,1990, for Money Market
Subaccount #1.

3. Yield. First base period return before maintenance fee is calculated. The
following figures are provided for this purpose:

a. AUV at 12/24/90, beginning of seven-day period equals $1.832394.

b. AUV at 12/31/90, end of seven-day period equals $1.834632.

c. Change in AUV during the seven-day period ended 12/31/90 due to realized
capital gains or losses and unrealized appreciation or depreciation of
investments equals zero.

Base period return before maintenance fee for the seven-day period ended
12/31/90 =

change in AUV due to capital
12/31/90 AUV-12/24/90 AUV-- gains or losses and unrealized
appreciation or depreciation
----------------------------------------------------------

12/24/90 AUV

1.834632 - 1.832394 - 0 0.002238
= ----------------------- = -------- = 0.001221
1.832394 1.832394

Next, base period maintenance fee is calculated. The following figures are
provided for this purpose

d. Annual maintenance fee = $30 per contract.

e. Average contract size = $40,000.

Base period maintenance fee = Annual maintenance fee x 7/365 days
-----------------------------------
Average contract size
30 x 7/365 0.575342
= ---------- = -------- = 0.000014
40,000 40,000

<PAGE> 5

MONEY MARKET SUBACCOUNTS
(Continued)

Then, base period return is calculated.

Base period return = Base period return before maintenance fee
- Base period maintenance fee

= 0.001221 - 0.000014 = 0.001207

Then, yield is calculated.

Yield = Base period return x 365/7

= 0.001207 x 365/7 = 0.0629

The decimal return is converted to a percentage by multiplying by 100.

0.0629 x 100 = 6.29%

For Money Market Subaccount #2, the yield is determined using the following
assumed AUV's:

12/24/90 = 2.027743
12/31/90 = 2.030704

All other variables are the same as Money Market Subaccount #1.

The yield for Money Market Subaccount #2 is 7.54%.

4. Effective Yield. The base period return for use in the formula for effective
yield set forth in Subsection 1 above is the same as calculated in Subsection 3
above.
365/7
Effective yield = (Base period return + 1) - 1

365/7
= (0.001207 + 1) - 1

365/7
= (1.001207) - 1

= 1.0649 - 1 = .0649

The decimal return is converted to a percentage by multiplying by 100.

.0649 X 100 = 6.49%

For Money Market Subaccount #2, the effective yield is 7.83%.