KILICO VARIABLE ANNUITY SEPARATE ACCOUNT, 497, 1997-05-06

KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
497, 1997-05-06

Previous: KILICO VARIABLE ANNUITY SEPARATE ACCOUNT, 497J, 1997-05-06

Next: PHARMACEUTICAL FORMULATIONS INC, 10-K/A, 1997-05-06

<PAGE> 1

PROSPECTUS--MAY 1, 1997
- --------------------------------------------------------------------------------

PERIODIC PAYMENT

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

KEMPER ADVANTAGE III

ISSUED BY
KEMPER INVESTORS LIFE INSURANCE COMPANY
IN CONNECTION WITH
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
HOME OFFICE: 1 KEMPER DRIVE, LONG GROVE, ILLINOIS 60049 (847) 550-5500

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

Purchase payments for the Contracts may be allocated to one or more of the
options under which Contract values accumulate on either a variable or fixed
basis. These options consist of nineteen Subaccounts of the Separate Account and
the Fixed Accumulation Option of the General Account. Each Subaccount invests in
one of the Portfolios of the following funds: the Investors Fund Series
(formerly Kemper Investors Fund) ("IFS"), the Janus Aspen Series ("Janus"), the
Lexington Natural Resources Trust and Lexington Emerging Markets Fund
("Lexington"), and Fidelity Variable Insurance Products Fund and Fidelity
Variable Insurance Products Fund II ("Fidelity").

The following Portfolios of the Investors Fund Series are available under the
Contracts described in this Prospectus: Money Market, Total Return, High Yield,
Growth (formerly "Equity"), Government Securities, International and Small Cap
Growth (formerly "Small Capitalization Equity"). Zurich Kemper Investments, Inc.
(formerly named Kemper Financial Services, Inc.) ("ZKI"), is the investment
manager of each of the above IFS Portfolios. 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 and Small Cap Growth
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 as may be allocated by ZKI
to ZIML from time to time for management of foreign securities. The following
Portfolios of the Janus Aspen Series are managed by Janus Capital Corporation
and are available under the Contracts: Growth, Aggressive Growth, Worldwide
Growth, Balanced and Short-Term Bond. Lexington Natural Resources Trust and
Lexington Emerging Markets Fund each currently consist of only one Portfolio and
are managed by Lexington Management Corporation. The following Portfolios of the
Fidelity Variable Insurance Products Fund are managed by Fidelity Management &
Research Company ("FMR") and are available under the Contracts: Equity-Income
and Growth. The following Portfolios of the Fidelity Variable Insurance Products
Fund II are managed by FMR and are available under the Contracts: Asset Manager,
Index 500 and Contrafund.

Subaccounts and Portfolios may be added in the future. Contract values allocated
to any of the Subaccounts will vary to reflect the investment objectives and the
attendant risks of the Funds. Contract values allocated to the Fixed
Accumulation Option will accumulate on a fixed basis.

This Prospectus is designed to provide you with certain essential information
that you should know before investing. A Statement of Additional Information
dated May 1, 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 KILICO by writing or calling the address or
telephone number listed above. A table of contents for the Statement of
Additional Information is on page 34 of this Prospectus.

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

THE CONTRACTS ARE NOT INSURED BY THE FDIC. THEY ARE OBLIGATIONS OF THE ISSUING
INSURANCE COMPANY AND ARE NOT A DEPOSIT OF, OR GUARANTEED BY, ANY BANK OR
SAVINGS INSTITUTION AND ARE SUBJECT TO RISKS, INCLUDING POSSIBLE LOSS OF
PRINCIPAL.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE> 2

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

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DEFINITIONS................................................. 1
SUMMARY..................................................... 2
SUMMARY OF EXPENSES......................................... 4
CONDENSED FINANCIAL INFORMATION............................. 6
KILICO, THE SEPARATE ACCOUNT AND THE FUND................... 10
FIXED ACCUMULATION OPTION................................... 15
THE CONTRACTS............................................... 15
CONTRACT CHARGES AND EXPENSES............................... 19
THE ANNUITY PERIOD.......................................... 22
FEDERAL TAX MATTERS......................................... 25
DISTRIBUTION OF CONTRACTS................................... 30
VOTING RIGHTS............................................... 31
REPORTS TO CONTRACT OWNERS AND INQUIRIES.................... 31
DOLLAR COST AVERAGING....................................... 31
SYSTEMATIC WITHDRAWAL PLAN.................................. 32
PROVISIONS OF PRIOR CONTRACTS............................... 32
LEGAL PROCEEDINGS........................................... 33
TABLE OF CONTENTS--STATEMENT OF ADDITIONAL INFORMATION...... 34
APPENDIX.................................................... 35
</TABLE>
<PAGE> 3

DEFINITIONS

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

FUND OR FUNDS--Investors Fund Series (formerly Kemper Investors Fund),
Janus Aspen Series, Lexington Natural Resources Trust, Lexington Emerging
Markets Fund, Fidelity Variable Insurance Products Fund and Fidelity
Variable Insurance Products Fund II including any Portfolios thereunder.

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

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

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

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

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

1
<PAGE> 4

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

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

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

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

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

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

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

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

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

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

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

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

SUMMARY

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

The minimum initial Purchase Payment for a Non-Qualified Plan Contract is $2,500
and the minimum subsequent payment is $500. The minimum Purchase Payment for a
Qualified Plan Contract is $50. However, so long as annualized contribution
amounts from a payroll or salary deduction plan are equal to or greater than
$600, a periodic payment for a Qualified Plan Contract under $50 will be
accepted. For a Non-Qualified Plan Contract a minimum of $500 in Contract Value
must be allocated to an investment option before another investment option can
be selected. For a Qualified Plan Contract, as long as contribution amounts to a
new investment option from a payroll or salary reduction plan are equal to or
greater than $50 per month, another such investment option may be selected. The
maximum Purchase Payment for a Qualified Plan Contract is the maximum permitted
under the plan pursuant to which the Contract is issued. (See "The Contracts,"
page 15.)

KILICO provides for variable accumulations and benefits under the Contracts by
crediting purchase payments to one or more Subaccounts of the Separate Account
as selected by the Contract Owner. Each Subaccount invests in one of the
following corresponding Portfolios: IFS Money Market, IFS Total Return, IFS High
Yield, IFS Growth, IFS Government Securities, IFS International and IFS Small
Cap Growth; Janus Growth, Janus Aggressive Growth, Janus Worldwide Growth, Janus
Balanced and Janus Short-Term Bond; Lexington Natural Resources Trust; Lexington
Emerging Markets Fund; Fidelity Equity-Income, Fidelity Growth; Fidelity Asset
Manager, Fidelity Index 500, and Fidelity Contrafund. (See "The Funds" page 10.)
The Contract Values allocated to the Separate Account will vary with the
investment performance of the Portfolios and Funds selected by the Contract
Owner.

KILICO also provides for fixed accumulations and benefits under the Contracts in
the Fixed Accumulation Option of the General Account. Any portion of the
purchase payment allocated to the Fixed Accumulation Option is credited with
interest daily at a rate periodically declared by KILICO in its sole discretion,
but not less than 3%. (See "Fixed Accumulation Option," page 15.)

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

2
<PAGE> 5

Transfers between Subaccounts are permitted before and after annuitization, if
allowed by the applicable retirement plan and subject to certain limitations.
Restrictions apply to transfers out of the Fixed Accumulation Option. (See
"Transfer During Accumulation Period" and "Transfer During Annuity Period,"
pages 17 and 23, respectively.)

No sales charge is deducted from any Purchase Payment. A Contract Owner may
withdraw up to 10% of the Contract Value less Debt in any Contract Year without
assessment of any charge. If the Contract Owner withdraws an amount in excess of
10% of the Contract Value less Debt in any Contract Year, the amount withdrawn
in excess of 10% is subject to a contingent deferred sales charge ("Withdrawal
Charge"). The Withdrawal Charge starts at 6% in the first Contribution Year and
reduces by 1% each Contribution Year so that there is no charge in the seventh
and later Contribution Years. (See "Withdrawal Charge," page 21.) The Withdrawal
Charge also applies at the annuitization of Accumulation Units in their sixth
Contribution Year or earlier, except as set forth under "Withdrawal Charge."
However, in no event shall the aggregate Withdrawal Charges assessed against a
Contract exceed 7.25% of the aggregate Purchase Payments made under the
Contract. Please note that adverse tax consequences may occur with respect to
certain withdrawals. Withdrawals are permitted from Contracts issued in
connection with Section 403(b) Qualified Plans only under limited circumstances.
(See "Federal Tax Matters", page 25.)

KILICO makes charges under the Contract for assuming the mortality and expense
risk and administrative expenses under the Contract, for records maintenance,
and for any applicable premium taxes. (See "Charges Against the Separate
Account," page 19.) In addition, ZKI, Janus, Lexington, or FMR deduct varying
charges against the assets of the Funds for which they provide investment
advisory services. (See the Funds' Prospectuses for such information.)

The Contracts may be purchased in connection with retirement plans which qualify
either under Section 401 or 403(b) of the Internal Revenue Code of 1986, as
amended (the "Code") or as individual retirement account plans established under
Section 408 of the Code. The Contracts are also available in connection with
state and municipal deferred compensation plans and other entities qualified
under Section 457 of the Code and under other deferred compensation
arrangements, and are also offered under other retirement plans which may not
qualify for similar tax advantages. (See "Taxation of Annuities in General,"
page 25 and "Qualified Plans," page 28.)

A Contract Owner has the right within the "free look" period (generally ten
days, subject to state variation) after receiving the Contract to cancel the
Contract by delivering or mailing it to KILICO. Upon receipt by KILICO, the
Contract will be cancelled and a refund will be made. The amount of the refund
will depend on the state in which the Contract is issued; however, it generally
will be an amount at least equal to the Contract Value. (See "The Contracts,"
page 15.)

3
<PAGE> 6

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

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

FUND ANNUAL EXPENSES
(as percentage of each Portfolio's average net assets,
in some cases after expense waiver or reimbursement, for
the
period ended December 31, 1996)

<TABLE>
<CAPTION>
IFS IFS IFS IFS
MONEY TOTAL IFS IFS GOVERNMENT IFS SMALL CAP
MARKET RETURN HIGH YIELD GROWTH SECURITIES INTERNATIONAL GROWTH
------ ------ ---------- ------ ---------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Management
Fees.......... .50% .55% .60% .60% .55% .75% .65%
Other
Expenses...... .10 .04 .05 .04 .11 .21 .10
--- --- --- --- --- --- ---
Total Portfolio
Annual
Expenses....... .60% .59% .65% .64% .66% .96% .75%
=== === === === === === ===
</TABLE>

<TABLE>
<CAPTION>
Separate Account Annual Expenses
(as a percentage of average daily account value)
<S> <C>
Mortality and Expense
Risk........................... 1.00%
Administration................... .30%
Account Fees and Expenses........ 0%
Total Separate Account
Annual Expenses................ 1.30%
</TABLE>

FUND ANNUAL EXPENSES
(as percentage of each Portfolio's average net assets,
in some cases after expense waiver or reimbursement, for
the period ended December 31, 1996)
<TABLE>
<CAPTION>
JANUS JANUS JANUS
JANUS AGGRESSIVE WORLDWIDE JANUS SHORT-TERM
GROWTH(3) GROWTH(3) GROWTH(3) BALANCED(3) BOND(3)
--------- ---------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Management Fees................... .65% .72% .66% .79% .47%
Other Expenses.................... .04 .04 .14 .15 .19
--- --- --- --- ---
Total Portfolio Annual Expenses... .69% .76% .80% .94% .66%
=== === === === ===

<CAPTION>
LEXINGTON LEXINGTON FIDELITY
NATURAL EMERGING FIDELITY FIDELITY ASSET
RESOURCES MARKETS(4) EQUITY(5) GROWTH(5) MANAGER(5)
--------- ---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Management Fees................... 1.00% .85% .51% .61% .64%
Other Expenses.................... .42 .79 .07 .08 .10
---- ---- ---- ---- ----
Total Portfolio Annual Expenses... 1.42% 1.64% .58% .69% .74%
==== ==== ==== ==== ====

<CAPTION>
FIDELITY FIDELITY
INDEX CONTRA
500(6) FUND(5)
-------- --------
<S> <C> <C>
Management Fees................... .13% .61%
Other Expenses.................... .15 .13
--- ---
Total Portfolio Annual Expenses... .28% .74%
=== ===
</TABLE>

- --------------------------------------------------------------------------------
(1) A Contract Owner may withdraw up to 10% of the Contract Value less Debt in
any Contract Year without assessment of any charge. Under certain circumstances
the contingent deferred sales charge may be reduced or waived, including when
certain annuity options are selected.
(2) The Records Maintenance Charge will be waived for Contracts issued on or
after March 1, 1997 as Individual Retirement Annuities, Simplified Employee
Pensions or Non-Qualified Plan Contracts with a Contract Value equaling or
exceeding $50,000 on the date of assessment.

(3) The expense figures shown are net of certain fee waivers or reductions from
Janus Capital Corporation. Without such waivers, the Management Fee, Other
Expenses and Total Portfolio Annual Expenses for the Portfolios for the fiscal
year ended December 31, 1996 would have been .79%, .04% and .83%, respectively,
for the Growth and Aggressive Growth Portfolios; .77%, .14% and .91%,
respectively, for the Worldwide Growth Portfolio; .92%, .15% and 1.07%,
respectively, for the Balanced Portfolio; and .65%, .19% and .84%, respectively,
for the Short-Term Bond Portfolio. See the prospectus and Statement of
Additional Information of Janus Aspen Series for a description of these waivers.

(4) For the period May 1, 1996 through April 30, 1997, the adviser voluntarily
limited management and operating expenses to a maximum of 1.75%. Beginning May
1, 1997, the adviser will no longer reimburse the Fund to the extent that
management and operating expenses exceed 1.75%.

(5) A portion of the brokerage commissions that certain funds pay was used to
reduce funds' expenses. In addition, certain funds have entered into
arrangements with their custodian and transfer agent whereby interest earned on
uninvested cash balances was used to reduce custodian and transfer agent
expenses. Including these reductions, the Total Portfolio Annual Expenses for
the Portfolios for the fiscal year ended December 31, 1996 would have been .56%
for the Equity-Income Portfolio, .67% for the Growth Portfolio, .73% for the
Asset Manager Portfolio and .71% for the Contrafund Portfolio.

(6) FMR agreed to reimburse a portion of the Index 500 Portfolio's expenses
during this period. Without this reimbursement, the Management Fee, Other
Expenses and Total Portfolio Annual Expenses for the Portfolio for the fiscal
year ended December 31, 1996 would have been .28%, .15% and .43%, respectively,
on an annualized basis.

4
<PAGE> 7
- --------------------------------------------------------------------------------
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:
IFS Money Market 83 109 136 242
IFS Total Return 83 109 135 241
IFS High Yield 83 111 138 247
IFS Growth 83 110 138 246
IFS Government Securities 84 111 139 248
IFS International 86 120 154 279
IFS Small Cap Growth 84 114 143 258
Janus Growth 84 112 140 252
Janus Aggressive Growth 85 114 144 259
Janus Worldwide Growth 85 115 146 263
Janus Balanced 86 119 153 277
Janus Short-Term Bond 84 111 139 248
Lexington Natural Resources 91 133 177 325
Lexington Emerging Markets 93 140 187 346
Fidelity Equity--Income 83 109 135 240
Fidelity Growth 84 112 140 252
Fidelity Asset Manager 84 113 143 257
Fidelity Index 500 80 100 119 208
Fidelity Contra 84 113 143 257
If you do not surrender your contract: You would pay the
following expenses on a $1,000 investment, assuming 5%
annual return on assets:
IFS Money Market 21 66 113 242
IFS Total Return 21 65 112 241
IFS High Yield 22 67 115 247
IFS Growth 22 67 115 246
IFS Government Securities 22 67 116 248
IFS International 25 77 131 279
IFS Small Cap Growth 23 70 120 258
Janus Growth 22 68 117 252
Janus Aggressive Growth 23 71 121 259
Janus Worldwide Growth 23 72 123 263
Janus Balanced 25 76 130 277
Janus Short-Term Bond 22 67 116 248
Lexington Natural Resources 30 91 154 325
Lexington Emerging Markets 32 97 165 346
Fidelity Equity--Income 21 65 111 240
Fidelity Growth 22 68 117 252
Fidelity Asset Manager 23 70 120 257
Fidelity Index 500 18 56 96 208
Fidelity Contra 23 70 120 257
</TABLE>

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

5
<PAGE> 8

CONDENSED FINANCIAL INFORMATION

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

Selected data for the last ten years for accumulation units outstanding as of
the year ended December 31st for each period:
<TABLE>
<CAPTION>
FLEXIBLE PAYMENT CONTRACTS
---------------------------------------------
1996+ 1995**** 1994*** 1993 1992**
----- -------- ------- ---- ------
<S> <C> <C> <C> <C> <C>
TAX QUALIFIED
Accumulation unit value at beginning of period
IFS Money Market Subaccount....................... $ 2.208 2.111 2.051 2.014 1.966
IFS Total Return Subaccount....................... 4.735 3.796 4.236 3.816 3.790
IFS High Yield Subaccount......................... 5.082 4.372 4.517 3.802 3.261
IFS Growth Subaccount............................. 4.404 3.345 3.520 3.102 3.025
IFS Government Securities Subaccount*............. 1.575 1.337 1.388 1.317 1.256
IFS International Subaccount**.................... 1.379 1.234 1.293 .983 1.000
IFS Small Cap Growth Subaccount***................ 1.330 1.033
Janus Growth****.................................. 13.662 --
Janus Aggressive Growth****....................... 17.132 --
Janus Worldwide Growth****........................ 15.315 --
Janus Balanced****................................ 13.092 --
Janus Short-Term Bond****......................... 10.201 --
Lexington Natural Resources****................... 11.315 --
Lexington Emerging Markets****.................... 9.445 --
Fidelity VIP Equity-- Income Subaccount+.......... --
Fidelity VIP Growth Subaccount+................... --
Fidelity VIP II Asset Manager Subaccount+......... --
Fidelity VIP II Index 500 Subaccount+............. --
Fidelity VIP II Contrafund Subaccount+............ --
Accumulation unit value at end of period
IFS Money Market Subaccount....................... $ 2.297 2.208 2.111 2.051 2.014
IFS Total Return Subaccount....................... 5.473 4.735 3.796 4.236 3.816
IFS High Yield Subaccount......................... 5.738 5.082 4.372 4.517 3.802
IFS Growth Subaccount............................. 5.303 4.404 3.345 3.520 3.102
IFS Government Securities Subaccount*............. 1.599 1.575 1.337 1.388 1.317
IFS International Subaccount**.................... 1.590 1.379 1.234 1.293 .983
IFS Small Cap Growth Subaccount***................ 1.686 1.330 1.033
Janus Growth****.................................. 16.021 13.662
Janus Aggressive Growth****....................... 18.309 17.132
Janus Worldwide Growth****........................ 19.565 15.315
Janus Balanced****................................ 15.059 13.092
Janus Short-Term Bond****......................... 10.501 10.201
Lexington Natural Resources****................... 14.211 11.315

<CAPTION>
FLEXIBLE PAYMENT CONTRACTS
------------------------------------------
1991 1990 1989* 1988 1987
---- ---- ----- ---- ----
<S> <C> <C> <C> <C> <C>
TAX QUALIFIED
Accumulation unit value at beginning of period
IFS Money Market Subaccount....................... 1.875 1.751 1.621 1.523 1.443
IFS Total Return Subaccount....................... 2.776 2.669 2.174 1.960 1.967
IFS High Yield Subaccount......................... 2.169 2.591 2.651 2.311 2.204
IFS Growth Subaccount............................. 1.916 1.923 1.515 1.524 1.513
IFS Government Securities Subaccount*............. 1.101 1.013
IFS International Subaccount**....................
IFS Small Cap Growth Subaccount***................
Janus Growth****..................................
Janus Aggressive Growth****.......................
Janus Worldwide Growth****........................
Janus Balanced****................................
Janus Short-Term Bond****.........................
Lexington Natural Resources****...................
Lexington Emerging Markets****....................
Fidelity VIP Equity-- Income Subaccount+..........
Fidelity VIP Growth Subaccount+...................
Fidelity VIP II Asset Manager Subaccount+.........
Fidelity VIP II Index 500 Subaccount+.............
Fidelity VIP II Contrafund Subaccount+............
Accumulation unit value at end of period
IFS Money Market Subaccount....................... 1.966 1.875 1.751 1.621 1.523
IFS Total Return Subaccount....................... 3.790 2.776 2.669 2.174 1.960
IFS High Yield Subaccount......................... 3.261 2.169 2.591 2.651 2.311
IFS Growth Subaccount............................. 3.025 1.916 1.923 1.515 1.524
IFS Government Securities Subaccount*............. 1.256 1.101 1.013
IFS International Subaccount**....................
IFS Small Cap Growth Subaccount***................
Janus Growth****..................................
Janus Aggressive Growth****.......................
Janus Worldwide Growth****........................
Janus Balanced****................................
Janus Short-Term Bond****.........................
Lexington Natural Resources****...................

<CAPTION>
PERIODIC PAYMENT CONTRACTS
----------------------------------------------
1996+ 1995**** 1994*** 1993 1992**
----- -------- ------- ---- ------
<S> <C> <C> <C> <C> <C>
TAX QUALIFIED
Accumulation unit value at beginning of period
IFS Money Market Subaccount....................... 2.120 2.033 1.981 1.950 1.910
IFS Total Return Subaccount....................... 4.546 3.656 4.092 3.696 3.682
IFS High Yield Subaccount......................... 4.879 4.210 4.363 3.683 3.168
IFS Growth Subaccount............................. 4.250 3.238 3.417 3.020 2.954
IFS Government Securities Subaccount*............. 1.547 1.317 1.371 1.305 1.248
IFS International Subaccount**.................... 1.363 1.223 1.285 .980 1.000
IFS Small Cap Growth Subaccount***................ 1.323 1.031
Janus Growth****.................................. 13.650 --
Janus Aggressive Growth****....................... 17.117 --
Janus Worldwide Growth****........................ 15.302 --
Janus Balanced****................................ 13.081 --
Janus Short-Term Bond****......................... 10.192 --
Lexington Natural Resources****................... 11.305 --
Lexington Emerging Markets****.................... 9.436 --
Fidelity VIP Equity-- Income Subaccount+.......... --
Fidelity VIP Growth Subaccount+................... --
Fidelity VIP II Asset Manager Subaccount+......... --
Fidelity VIP II Index 500 Subaccount+............. --
Fidelity VIP II Contrafund Subaccount+............ --
Accumulation unit value at end of period
IFS Money Market Subaccount....................... 2.199 2.120 2.033 1.981 1.950
IFS Total Return Subaccount....................... 5.239 4.546 3.656 4.092 3.696
IFS High Yield Subaccount......................... 5.493 4.879 4.210 4.363 3.683
IFS Growth Subaccount............................. 5.102 4.250 3.238 3.417 3.020
IFS Government Securities Subaccount*............. 1.566 1.547 1.317 1.371 1.305
IFS International Subaccount**.................... 1.567 1.363 1.223 1.285 .980
IFS Small Cap Growth Subaccount***................ 1.673 1.323 1.031
Janus Growth****.................................. 15.960 13.650
Janus Aggressive Growth****....................... 18.238 17.117
Janus Worldwide Growth****........................ 19.490 15.302
Janus Balanced****................................ 15.001 13.081
Janus Short-Term Bond****......................... 10.460 10.192
Lexington Natural Resources****................... 14.154 11.305

<CAPTION>
PERIODIC PAYMENT CONTRACTS
------------------------------------------
1991 1990 1989* 1988 1987
---- ---- ----- ---- ----
<S> <C> <C> <C> <C> <C>
TAX QUALIFIED
Accumulation unit value at beginning of period
IFS Money Market Subaccount....................... 1.827 1.712 1.589 1.498 1.423
IFS Total Return Subaccount....................... 2.705 2.609 2.131 1.927 1.940
IFS High Yield Subaccount......................... 2.114 2.533 2.599 2.272 2.174
IFS Growth Subaccount............................. 1.876 1.889 1.492 1.506 1.500
IFS Government Securities Subaccount*............. 1.097 1.012
IFS International Subaccount**....................
IFS Small Cap Growth Subaccount***................
Janus Growth****..................................
Janus Aggressive Growth****.......................
Janus Worldwide Growth****........................
Janus Balanced****................................
Janus Short-Term Bond****.........................
Lexington Natural Resources****...................
Lexington Emerging Markets****....................
Fidelity VIP Equity-- Income Subaccount+..........
Fidelity VIP Growth Subaccount+...................
Fidelity VIP II Asset Manager Subaccount+.........
Fidelity VIP II Index 500 Subaccount+.............
Fidelity VIP II Contrafund Subaccount+............
Accumulation unit value at end of period
IFS Money Market Subaccount....................... 1.910 1.827 1.712 1.589 1.498
IFS Total Return Subaccount....................... 3.682 2.705 2.609 2.131 1.927
IFS High Yield Subaccount......................... 3.168 2.114 2.533 2.599 2.272
IFS Growth Subaccount............................. 2.954 1.876 1.889 1.492 1.506
IFS Government Securities Subaccount*............. 1.248 1.097 1.012
IFS International Subaccount**....................
IFS Small Cap Growth Subaccount***................
Janus Growth****..................................
Janus Aggressive Growth****.......................
Janus Worldwide Growth****........................
Janus Balanced****................................
Janus Short-Term Bond****.........................
Lexington Natural Resources****...................
</TABLE>

(CONTINUED ON NEXT PAGE)

6
<PAGE> 9

NON-TAX QUALIFIED
Accumulation unit value at beginning of period
IFS Money Market Subaccount....................... $ 2.208 2.111 2.051 2.014 1.966
IFS Total Return Subaccount....................... 4.384 3.515 3.922 3.533 3.509
IFS High Yield Subaccount......................... 4.865 4.186 4.325 3.640 3.122
IFS Growth Subaccount............................. 4.389 3.334 3.508 3.091 3.014
IFS Government Securities Subaccount*............. 1.575 1.337 1.388 1.317 1.256
IFS International Subaccount**.................... 1.379 1.234 1.293 .983 1.000
IFS Small Cap Growth Subaccount***................ 1.330 1.033
Janus Growth****.................................. 13.662 --

<CAPTION>
FLEXIBLE PAYMENT CONTRACTS
------------------------------------------
1991 1990 1989* 1988 1987
---- ---- ----- ---- ----
<S> <C> <C> <C> <C> <C>
Lexington Emerging Markets****....................
Fidelity VIP Equity-- Income Subaccount+..........
Fidelity VIP Growth Subaccount+...................
Fidelity VIP II Asset Manager Subaccount+.........
Fidelity VIP II Index 500 Subaccount+.............
Fidelity VIP II Contrafund Subaccount+............
Number of accumulation units outstanding at end of
period (000's omitted)
IFS Money Market Subaccount....................... 1,720 2,388 2,417 3,127 4,394
IFS Total Return Subaccount....................... 1,924 2,355 2,888 3,652 5,546
IFS High Yield Subaccount......................... 723 885 1,587 2,104 1,854
IFS Growth Subaccount............................. 255 251 578 489 1,022
IFS Government Securities Subaccount*............. 288 170 168
IFS International Subaccount**....................
IFS Small Cap Growth Subaccount***................
Janus Growth****..................................
Janus Aggressive Growth****.......................
Janus Worldwide Growth****........................
Janus Balanced****................................
Janus Short-Term Bond****.........................
Lexington Natural Resources****...................
Lexington Emerging Markets****....................
Fidelity VIP Equity-- Income Subaccount+..........
Fidelity VIP Growth Subaccount+...................
Fidelity VIP II Asset Manager Subaccount+.........
Fidelity VIP II Index 500 Subaccount+.............
Fidelity VIP II Contrafund Subaccount+............
NON-TAX QUALIFIED
Accumulation unit value at beginning of period
IFS Money Market Subaccount....................... 1.875 1.751 1.621 1.523 1.443
IFS Total Return Subaccount....................... 2.570 2.471 2.013 1.815 1.822
IFS High Yield Subaccount......................... 2.077 2.481 2.538 2.213 2.110
IFS Growth Subaccount............................. 1.909 1.917 1.509 1.518 1.508
IFS Government Securities Subaccount*............. 1.101 1.013
IFS International Subaccount**....................
IFS Small Cap Growth Subaccount***................
Janus Growth****..................................

<CAPTION>
PERIODIC PAYMENT CONTRACTS
----------------------------------------------
1996+ 1995**** 1994*** 1993 1992**
----- -------- ------- ---- ------
<S> <C> <C> <C> <C> <C>
Lexington Emerging Markets****.................... 10.009 9.436
Fidelity VIP Equity-- Income Subaccount+.......... 20.849
Fidelity VIP Growth Subaccount+................... 30.872
Fidelity VIP II Asset Manager Subaccount+......... 16.784
Fidelity VIP II Index 500 Subaccount+............. 88.364
Fidelity VIP II Contrafund Subaccount+............ 16.418
Number of accumulation units outstanding at end of
period (000's omitted)
IFS Money Market Subaccount....................... 10,827 10,881 15,997 14,891 12,605
IFS Total Return Subaccount....................... 89,982 100,774 110,428 108,395 100,100
IFS High Yield Subaccount......................... 24,077 25,327 26,546 26,749 22,202
IFS Growth Subaccount............................. 58,672 60,187 58,845 50,289 42,078
IFS Government Securities Subaccount*............. 18,485 21,771 24,332 31,898 28,368
IFS International Subaccount**.................... 62,425 63,495 61,490 38,844 10,372
IFS Small Cap Growth Subaccount***................ 25,931 17,371 8,304
Janus Growth****.................................. 976 168
Janus Aggressive Growth****....................... 937 121
Janus Worldwide Growth****........................ 1,413 95
Janus Balanced****................................ 360 132
Janus Short-Term Bond****......................... 63 13
Lexington Natural Resources****................... 243 58
Lexington Emerging Markets****.................... 443 80
Fidelity VIP Equity-- Income Subaccount+.......... 263
Fidelity VIP Growth Subaccount+................... 116
Fidelity VIP II Asset Manager Subaccount+......... 55
Fidelity VIP II Index 500 Subaccount+............. 53
Fidelity VIP II Contrafund Subaccount+............ 488
NON-TAX QUALIFIED
Accumulation unit value at beginning of period
IFS Money Market Subaccount....................... 2.120 2.033 1.981 1.950 1.910
IFS Total Return Subaccount....................... 4.236 3.406 3.812 3.444 3.431
IFS High Yield Subaccount......................... 4.753 4.101 4.250 3.588 3.086
IFS Growth Subaccount............................. 4.244 3.233 3.412 3.015 2.949
IFS Government Securities Subaccount*............. 1.547 1.317 1.371 1.305 1.248
IFS International Subaccount**.................... 1.363 1.223 1.285 .980 1.000
IFS Small Cap Growth Subaccount***................ 1.323 1.031
Janus Growth****.................................. 13.650 --

<CAPTION>
PERIODIC PAYMENT CONTRACTS
------------------------------------------
1991 1990 1989* 1988 1987
---- ---- ----- ---- ----
<S> <C> <C> <C> <C> <C>
Lexington Emerging Markets****....................
Fidelity VIP Equity-- Income Subaccount+..........
Fidelity VIP Growth Subaccount+...................
Fidelity VIP II Asset Manager Subaccount+.........
Fidelity VIP II Index 500 Subaccount+.............
Fidelity VIP II Contrafund Subaccount+............
Number of accumulation units outstanding at end of
period (000's omitted)
IFS Money Market Subaccount....................... 14,973 21,581 14,185 16,953 20,296
IFS Total Return Subaccount....................... 81,776 70,620 68,024 63,669 68,367
IFS High Yield Subaccount......................... 19,861 22,623 28,032 22,281 14,320
IFS Growth Subaccount............................. 28,271 22,451 19,163 17,780 17,000
IFS Government Securities Subaccount*............. 23,035 12,918 7,794
IFS International Subaccount**....................
IFS Small Cap Growth Subaccount***................
Janus Growth****..................................
Janus Aggressive Growth****.......................
Janus Worldwide Growth****........................
Janus Balanced****................................
Janus Short-Term Bond****.........................
Lexington Natural Resources****...................
Lexington Emerging Markets****....................
Fidelity VIP Equity-- Income Subaccount+..........
Fidelity VIP Growth Subaccount+...................
Fidelity VIP II Asset Manager Subaccount+.........
Fidelity VIP II Index 500 Subaccount+.............
Fidelity VIP II Contrafund Subaccount+............
NON-TAX QUALIFIED
Accumulation unit value at beginning of period
IFS Money Market Subaccount....................... 1.827 1.712 1.589 1.498 1.423
IFS Total Return Subaccount....................... 2.520 2.431 1.986 1.796 1.808
IFS High Yield Subaccount......................... 2.059 2.467 2.532 2.214 2.117
IFS Growth Subaccount............................. 1.873 1.887 1.490 1.503 1.498
IFS Government Securities Subaccount*............. 1.097 1.012
IFS International Subaccount**....................
IFS Small Cap Growth Subaccount***................
Janus Growth****..................................
</TABLE>

(CONTINUED ON NEXT PAGE)

7
<PAGE> 10

CONDENSED FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
FLEXIBLE PAYMENT CONTRACTS
---------------------------------------------
1996+ 1995**** 1994*** 1993 1992**
----- -------- ------- ---- ------
<S> <C> <C> <C> <C> <C>
Janus Aggressive Growth****....................... $17.132 --
Janus Worldwide Growth****........................ 15.315 --
Janus Balanced****................................ 13.092 --
Janus Short-Term Bond****......................... 10.201 --
Lexington Natural Resources Trust****............. 11.315 --
Lexington Emerging Markets****.................... 9.445 --
Fidelity VIP Equity-- Income Subaccount+.......... --
Fidelity VIP Growth Subaccount+................... --
Fidelity VIP II Asset Manager Subaccount+......... --
Fidelity VIP II Index 500 Subaccount+............. --
Fidelity VIP II Contrafund Subaccount+............ --
Accumulation unit value at end of period
IFS Money Market Subaccount....................... $ 2.297 2.208 2.111 2.051 2.014
IFS Total Return Subaccount....................... 5.068 4.384 3.515 3.922 3.533
IFS High Yield Subaccount......................... 5.494 4.865 4.186 4.325 3.640
IFS Growth Subaccount............................. 5.285 4.389 3.334 3.508 3.091
IFS Government Securities Subaccount*............. 1.599 1.575 1.337 1.388 1.317
IFS International Subaccount**.................... 1.590 1.379 1.234 1.293 .983
IFS Small Cap Growth Subaccount***................ 1.686 1.330 1.033
Janus Growth****.................................. 16.021 13.662
Janus Aggressive Growth****....................... 18.309 17.132
Janus Worldwide Growth****........................ 19.565 15.315
Janus Balanced****................................ 15.059 13.092
Janus Short-Term Bond****......................... 10.239 10.201
Lexington Natural Resources Trust****............. 14.211 11.315
Lexington Emerging Markets****.................... 10.048 9.445
Fidelity VIP Equity-- Income Subaccount+.......... 20.891
Fidelity VIP Growth Subaccount+................... 30.933
Fidelity VIP II Asset Manager Subaccount+......... 16.818
Fidelity VIP II Index 500 Subaccount+............. 88.539
Fidelity VIP II Contrafund Subaccount+............ 16.450
Number of accumulation units outstanding at end of
period (000's omitted)
IFS Money Market Subaccount....................... $ 4,762 5,512 6,914 7,153 8,495
IFS Total Return Subaccount....................... 4,838 5,554 6,613 8,042 8,853
IFS High Yield Subaccount......................... 2,440 2,821 3,621 4,517 4,876
IFS Growth Subaccount............................. 1,396 1,276 1,370 1,671 2,032

<CAPTION>
FLEXIBLE PAYMENT CONTRACTS
------------------------------------------
1991 1990 1989* 1988 1987
---- ---- ----- ---- ----
<S> <C> <C> <C> <C> <C>
Janus Aggressive Growth****.......................
Janus Worldwide Growth****........................
Janus Balanced****................................
Janus Short-Term Bond****.........................
Lexington Natural Resources Trust****.............
Lexington Emerging Markets****....................
Fidelity VIP Equity-- Income Subaccount+..........
Fidelity VIP Growth Subaccount+...................
Fidelity VIP II Asset Manager Subaccount+.........
Fidelity VIP II Index 500 Subaccount+.............
Fidelity VIP II Contrafund Subaccount+............
Accumulation unit value at end of period
IFS Money Market Subaccount....................... 1.966 1.875 1.751 1.621 1.523
IFS Total Return Subaccount....................... 3.509 2.570 2.471 2.013 1.815
IFS High Yield Subaccount......................... 3.122 2.077 2.481 2.538 2.213
IFS Growth Subaccount............................. 3.014 1.909 1.917 1.509 1.518
IFS Government Securities Subaccount*............. 1.256 1.101 1.013
IFS International Subaccount**....................
IFS Small Cap Growth Subaccount***................
Janus Growth****..................................
Janus Aggressive Growth****.......................
Janus Worldwide Growth****........................
Janus Balanced****................................
Janus Short-Term Bond****.........................
Lexington Natural Resources Trust****.............
Lexington Emerging Markets****....................
Fidelity VIP Equity-- Income Subaccount+..........
Fidelity VIP Growth Subaccount+...................
Fidelity VIP II Asset Manager Subaccount+.........
Fidelity VIP II Index 500 Subaccount+.............
Fidelity VIP II Contrafund Subaccount+............
Number of accumulation units outstanding at end of
period (000's omitted)
IFS Money Market Subaccount....................... 11,926 15,563 19,006 22,047 28,702
IFS Total Return Subaccount....................... 9,586 10,291 12,244 15,032 20,329
IFS High Yield Subaccount......................... 5,240 6,652 11,895 14,871 16,264
IFS Growth Subaccount............................. 1,773 1,955 1,931 2,890 3,890

<CAPTION>
PERIODIC PAYMENT CONTRACTS
----------------------------------------------
1996+ 1995**** 1994*** 1993 1992**
----- -------- ------- ---- ------
<S> <C> <C> <C> <C> <C>
Janus Aggressive Growth****....................... 17.117 --
Janus Worldwide Growth****........................ 15.302 --
Janus Balanced****................................ 13.081 --
Janus Short-Term Bond****......................... 10.192 --
Lexington Natural Resources Trust****............. 11.305 --
Lexington Emerging Markets****.................... 9.436 --
Fidelity VIP Equity-- Income Subaccount+.......... --
Fidelity VIP Growth Subaccount+................... --
Fidelity VIP II Asset Manager Subaccount+......... --
Fidelity VIP II Index 500 Subaccount+............. --
Fidelity VIP II Contrafund Subaccount+............ --
Accumulation unit value at end of period
IFS Money Market Subaccount....................... 2.199 2.120 2.033 1.981 1.950
IFS Total Return Subaccount....................... 4.882 4.236 3.406 3.812 3.444
IFS High Yield Subaccount......................... 5.351 4.753 4.101 4.250 3.588
IFS Growth Subaccount............................. 5.095 4.244 3.233 3.412 3.015
IFS Government Securities Subaccount*............. 1.566 1.547 1.317 1.371 1.305
IFS International Subaccount**.................... 1.567 1.363 1.223 1.285 .980
IFS Small Cap Growth Subaccount***................ 1.673 1.323 1.031
Janus Growth****.................................. 15.960 13.650
Janus Aggressive Growth****....................... 18.238 17.117
Janus Worldwide Growth****........................ 19.490 15.302
Janus Balanced****................................ 15.001 13.081
Janus Short-Term Bond****......................... 10.460 10.192
Lexington Natural Resources Trust****............. 14.154 11.305
Lexington Emerging Markets****.................... 10.009 9.436
Fidelity VIP Equity-- Income Subaccount+.......... 20.849
Fidelity VIP Growth Subaccount+................... 30.872
Fidelity VIP II Asset Manager Subaccount+......... 16.784
Fidelity VIP II Index 500 Subaccount+............. 88.364
Fidelity VIP II Contrafund Subaccount+............ 16.418
Number of accumulation units outstanding at end of
period (000's omitted)
IFS Money Market Subaccount....................... 3,948 4,839 7,343 6,204 9,820
IFS Total Return Subaccount....................... 17,433 20,342 24,773 26,640 26,043
IFS High Yield Subaccount......................... 10,028 12,047 12,416 14,735 14,424
IFS Growth Subaccount............................. 14,340 16,369 19,776 17,851 15,849

<CAPTION>
PERIODIC PAYMENT CONTRACTS
------------------------------------------
1991 1990 1989* 1988 1987
---- ---- ----- ---- ----
<S> <C> <C> <C> <C> <C>
Janus Aggressive Growth****.......................
Janus Worldwide Growth****........................
Janus Balanced****................................
Janus Short-Term Bond****.........................
Lexington Natural Resources Trust****.............
Lexington Emerging Markets****....................
Fidelity VIP Equity-- Income Subaccount+..........
Fidelity VIP Growth Subaccount+...................
Fidelity VIP II Asset Manager Subaccount+.........
Fidelity VIP II Index 500 Subaccount+.............
Fidelity VIP II Contrafund Subaccount+............
Accumulation unit value at end of period
IFS Money Market Subaccount....................... 1.910 1.827 1.712 1.589 1.498
IFS Total Return Subaccount....................... 3.431 2.520 2.431 1.986 1.796
IFS High Yield Subaccount......................... 3.086 2.059 2.467 2.532 2.214
IFS Growth Subaccount............................. 2.949 1.873 1.887 1.490 1.503
IFS Government Securities Subaccount*............. 1.248 1.097 1.012
IFS International Subaccount**....................
IFS Small Cap Growth Subaccount***................
Janus Growth****..................................
Janus Aggressive Growth****.......................
Janus Worldwide Growth****........................
Janus Balanced****................................
Janus Short-Term Bond****.........................
Lexington Natural Resources Trust****.............
Lexington Emerging Markets****....................
Fidelity VIP Equity-- Income Subaccount+..........
Fidelity VIP Growth Subaccount+...................
Fidelity VIP II Asset Manager Subaccount+.........
Fidelity VIP II Index 500 Subaccount+.............
Fidelity VIP II Contrafund Subaccount+............
Number of accumulation units outstanding at end of
period (000's omitted)
IFS Money Market Subaccount....................... 10,507 11,618 9,243 7,783 7,202
IFS Total Return Subaccount....................... 19,953 18,485 18,671 15,835 18,807
IFS High Yield Subaccount......................... 12,799 11,858 18,281 14,589 10,186
IFS Growth Subaccount............................. 9,577 7,812 5,542 9,303 8,919
</TABLE>

(CONTINUED ON NEXT PAGE)

8
<PAGE> 11

CONDENSED FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
FLEXIBLE PAYMENT CONTRACTS
---------------------------------------------
1996+ 1995**** 1994*** 1993 1992**
----- -------- ------- ---- ------
<S> <C> <C> <C> <C> <C>
IFS Government Securities Subaccount*............. $ 1,187 1,330 1,465 2,101 2,317
IFS International Subaccount**.................... 1,190 1,257 2,450 1,712 1,041
IFS Small Cap Growth Subaccount***................ 711 874 227
Janus Growth****.................................. 22 2
Janus Aggressive Growth****....................... 2 --
Janus Worldwide Growth****........................ 33 --
Janus Balanced****................................ 10 4
Janus Short-Term Bond****......................... -- 2
Lexington Natural Resources Trust****............. -- --
Lexington Emerging Markets****.................... 2 2
Fidelity VIP Equity-- Income Subaccount+.......... 1
Fidelity VIP Growth Subaccount+................... --
Fidelity VIP II Asset Manager Subaccount+......... --
Fidelity VIP II Index 500 Subaccount+............. 1
Fidelity VIP II Contrafund Subaccount+............ 2

<CAPTION>
FLEXIBLE PAYMENT CONTRACTS
------------------------------------------
1991 1990 1989* 1988 1987
---- ---- ----- ---- ----
<S> <C> <C> <C> <C> <C>
IFS Government Securities Subaccount*............. 2,728 2,442 1,494
IFS International Subaccount**....................
IFS Small Cap Growth Subaccount***................
Janus Growth****..................................
Janus Aggressive Growth****.......................
Janus Worldwide Growth****........................
Janus Balanced****................................
Janus Short-Term Bond****.........................
Lexington Natural Resources Trust****.............
Lexington Emerging Markets****....................
Fidelity VIP Equity-- Income Subaccount+..........
Fidelity VIP Growth Subaccount+...................
Fidelity VIP II Asset Manager Subaccount+.........
Fidelity VIP II Index 500 Subaccount+.............
Fidelity VIP II Contrafund Subaccount+............

<CAPTION>
PERIODIC PAYMENT CONTRACTS
----------------------------------------------
1996+ 1995**** 1994*** 1993 1992**
----- -------- ------- ---- ------
<S> <C> <C> <C> <C> <C>
IFS Government Securities Subaccount*............. 13,804 17,939 23,487 28,787 28,286
IFS International Subaccount**.................... 12,177 12,074 14,546 15,713 3,646
IFS Small Cap Growth Subaccount***................ 4,091 3,022 1,242
Janus Growth****.................................. 99 14
Janus Aggressive Growth****....................... 115 11
Janus Worldwide Growth****........................ 186 7
Janus Balanced****................................ 42 3
Janus Short-Term Bond****......................... 8 --
Lexington Natural Resources Trust****............. 100 8
Lexington Emerging Markets****.................... 80 3
Fidelity VIP Equity-- Income Subaccount+.......... 36
Fidelity VIP Growth Subaccount+................... 16
Fidelity VIP II Asset Manager Subaccount+......... 5
Fidelity VIP II Index 500 Subaccount+............. 10
Fidelity VIP II Contrafund Subaccount+............ 47

<CAPTION>
PERIODIC PAYMENT CONTRACTS
------------------------------------------
1991 1990 1989* 1988 1987
---- ---- ----- ---- ----
<S> <C> <C> <C> <C> <C>
IFS Government Securities Subaccount*............. 18,252 10,338 2,109
IFS International Subaccount**....................
IFS Small Cap Growth Subaccount***................
Janus Growth****..................................
Janus Aggressive Growth****.......................
Janus Worldwide Growth****........................
Janus Balanced****................................
Janus Short-Term Bond****.........................
Lexington Natural Resources Trust****.............
Lexington Emerging Markets****....................
Fidelity VIP Equity-- Income Subaccount+..........
Fidelity VIP Growth Subaccount+...................
Fidelity VIP II Asset Manager Subaccount+.........
Fidelity VIP II Index 500 Subaccount+.............
Fidelity VIP II Contrafund Subaccount+............
</TABLE>

* The Government Securities Subaccount commenced business on November 6,
1989.

** The International Subaccount commenced business on January 6, 1992.
*** The Small Cap Growth Subaccount commenced business on May 2, 1994.
**** The Janus Growth, Aggressive Growth, Worldwide Growth, Balanced, and
Short-Term Bond Subaccounts and the Lexington Natural Resources Trust and
Emerging Markets Subaccounts were available under the Contracts on
September 15, 1995.
+ The Fidelity VIP Equity-Income, Fidelity VIP Growth, Fidelity VIP II Asset
Manager, Fidelity VIP II Index 500 and Fidelity VIP II Contrafund
Subaccounts were available under the Contracts on May 1, 1996.

Note: The Investors Fund Series (IFS) was formerly known as the Kemper Investors
Fund.

The financial statements and report of independent auditors for the KILICO
Variable Annuity Separate Account are also contained in the Statement of
Additional Information.

9
<PAGE> 12

KILICO, THE SEPARATE ACCOUNT AND THE FUND

KEMPER INVESTORS LIFE INSURANCE COMPANY

Kemper Investors Life Insurance Company ("KILICO"), 1 Kemper Drive, Long Grove,
Illinois 60049, was organized in 1947 and is a stock life insurance company
organized under the laws of the State of Illinois. KILICO offers annuity and
life insurance products and is admitted to do business in the District of
Columbia and all states except New York. KILICO is a wholly-owned subsidiary of
Kemper Corporation, a nonoperating holding company. Zurich Insurance Company
("Zurich"), Insurance Partners, L.P. ("I.P."), and Insurance Partners Offshore
(Bermuda), L.P. (together with IP, "Insurance Partners") indirectly and directly
own 80 percent and 20 percent, respectively, of Kemper Corporation.

THE SEPARATE ACCOUNT

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

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

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

Nineteen Subaccounts of the Separate Account are available under the Contracts.
Each Subaccount invests exclusively in shares of one of the corresponding
Portfolios of the Funds. Additional Subaccounts may be added in the future.

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

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

THE FUNDS

The Separate Account invests in shares of the Investors Fund Series (formerly
Kemper Investors Fund), the Janus Aspen Series, the Lexington Natural Resources
Trust, the Lexington Emerging Markets Fund, the Fidelity Variable Insurance
Products Fund and the Fidelity Variable Insurance Products Fund II, open-end,
management investment companies. Registration of the Funds by the Securities and
Exchange Commission does not involve supervision of their management, investment
practices or policies by the Commission. The Funds are designed to provide
investment vehicles for variable life insurance and variable annuity contracts
and, in the case of the Janus Aspen Series, certain qualified retirement plans.
Shares of the Funds are sold only to insurance company separate accounts and
qualified retirement plans. In addition to selling shares to separate accounts
of KILICO and its affiliates, shares of the Funds may be sold to separate
accounts of insurance companies not affiliated with KILICO. It is conceivable
that in the future it may be disadvantageous for variable life insurance
separate accounts and variable annuity separate accounts of companies
unaffiliated with KILICO, or for variable life insurance separate accounts,
variable annuity separate accounts and qualified retirement plans to invest
simulta-

10
<PAGE> 13

neously in the Funds. Currently, neither KILICO nor the Funds foresee any such
disadvantages to variable life insurance owners, variable annuity owners or
qualified retirement plans. Management of the Funds has an obligation to monitor
events to identify material conflicts between such owners and determine what
action, if any, should be taken. In addition, if KILICO believes that a Fund's
response to any of those events or conflicts insufficiently protects Contract
Owners, it will take appropriate action on its own.

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

The nineteen Portfolios are summarized below:

INVESTORS FUND SERIES (FORMERLY KEMPER INVESTORS FUND)

MONEY MARKET PORTFOLIO seeks maximum current income to the extent consistent
with stability of principal from a portfolio of high quality money market
instruments that mature in twelve months or less.

TOTAL RETURN PORTFOLIO seeks a high total return, a combination of income and
capital appreciation, by investing in a combination of debt securities and
common stocks.

HIGH YIELD PORTFOLIO seeks to provide a high level of current income by
investing in fixed-income securities.

GROWTH PORTFOLIO seeks maximum appreciation of capital through diversification
of investment securities having potential for capital appreciation.

GOVERNMENT SECURITIES PORTFOLIO seeks high current return consistent with
preservation of capital from a portfolio composed primarily of U.S. Government
securities.

INTERNATIONAL PORTFOLIO seeks total return, a combination of capital growth and
income, principally through an internationally diversified portfolio of equity
securities.

SMALL CAP GROWTH PORTFOLIO seeks maximum appreciation of investors' capital.

JANUS ASPEN SERIES

GROWTH PORTFOLIO seeks long-term growth of capital in a manner consistent with
the preservation of capital. It is a diversified Portfolio that pursues its
objective by investing in common stocks of companies of any size. This Portfolio
generally invests in larger, more established issuers.

AGGRESSIVE GROWTH PORTFOLIO seeks long-term growth of capital. It is a
nondiversified Portfolio that pursues its investment objective by normally
investing at least 50% of its equity assets in securities issued by medium-sized
companies as described in the fund's prospectus.

WORLDWIDE GROWTH PORTFOLIO seeks long-term growth of capital in a manner
consistent with the preservation of capital. It is a diversified Portfolio that
pursues its objective primarily through investments in common stocks of foreign
and domestic issuers.

BALANCED PORTFOLIO seeks long-term capital growth, consistent with preservation
of capital and balanced by current income. It is a diversified Portfolio that,
under normal circumstances, pursues its objective by investing 40-60% of its
assets in securities selected primarily for their growth potential and 40-60% of
its assets in securities selected primarily for their income potential.

SHORT-TERM BOND PORTFOLIO seeks as high a level of current income as is
consistent with preservation of capital. This Portfolio pursues its objective by
investing primarily in short- and intermediate-term fixed-income securities.

LEXINGTON NATURAL RESOURCES TRUST

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

11
<PAGE> 14

LEXINGTON EMERGING MARKETS FUND

This Fund seeks long-term growth of capital primarily through investment in
equity securities and equivalents of companies domiciled in, or doing business
in, emerging countries and emerging markets as described in the fund's
prospectus.

FIDELITY VARIABLE INSURANCE PRODUCTS FUND

EQUITY-INCOME PORTFOLIO seeks reasonable income by investing primarily in
income-producing equity securities.

GROWTH PORTFOLIO seeks to achieve capital appreciation.

FIDELITY VARIABLE INSURANCE PRODUCTS FUND II

ASSET MANAGER PORTFOLIO seeks to obtain high total return with reduced risk over
the long-term by allocating its assets among stocks, bonds and short-term
instruments.

INDEX 500 PORTFOLIO seeks investment results that correspond to the total return
of common stocks publicly traded in the United States, as represented by the S&P
500.

CONTRAFUND PORTFOLIO seeks long-term capital appreciation.

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

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

Zurich Kemper Investments, Inc. ("ZKI"), an affiliate of KILICO, is the
investment manager for the IFS Money Market, IFS Total Return, IFS High Yield,
Growth, IFS Government Securities, IFS International and IFS Small Cap Growth
Portfolios. 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 and Small Cap Growth Portfolios. Under the terms of
the Sub-Advisory Agreement between ZIML and ZKI for the Total Return, High
Yield, Growth and Small Cap Growth 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 Portfolio, 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. Janus Capital Corporation is the investment adviser for the five
available Portfolios of the Janus Aspen Series. Lexington Management Corporation
is the investment adviser for the Lexington Natural Resources Trust and the
Lexington Emerging Markets Fund. Fidelity Management & Research Company ("FMR")
is the investment adviser for the available Portfolios of the Fidelity Variable
Insurance Products Fund and Fidelity Variable Insurance Products Fund II. The
investment advisers are paid fees for their services by the Funds they manage.
KILICO may receive compensation from the investment advisers of the Funds for
services related to the Funds. Such compensation will be consistent with the
services rendered or the cost savings resulting from the arrangement.

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

INVESTORS FUND SERIES (FORMERLY KEMPER INVESTORS FUND)

For its services, ZKI is paid a management fee based upon the average daily net
assets of such IFS 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%) and Small Cap Growth (.65 of
1%). 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 and Total Return; and .30% for the High
Yield Portfolio.

12
<PAGE> 15

JANUS ASPEN SERIES

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

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

However, Janus Capital Corporation has agreed to reduce each of the above
Portfolios' advisory fees to the extent that such fee exceeds the effective rate
of the Janus retail fund corresponding to such Portfolio. The effective rate is
the advisory fee calculated by the corresponding retail fund as of the last day
of each calendar quarter (expressed as an annual rate). The effective rate for
the Growth Portfolio, the Aggressive Growth Portfolio, the Worldwide Growth
Portfolio and the Balanced Portfolio for the period ended December 31, 1996 was
.65%, .72%, .66% and .79%, respectively.

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

LEXINGTON NATURAL RESOURCES TRUST

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

LEXINGTON EMERGING MARKETS FUND

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

FIDELITY VARIABLE INSURANCE PRODUCTS FUND & FIDELITY VARIABLE INSURANCE PRODUCTS
FUND II

Fidelity Management & Research Company ("FMR") receives a monthly advisory fee
for each Portfolio. The fee for the Fidelity Asset Manager Portfolio, the
Fidelity Equity-Income Portfolio, the Fidelity Contrafund Portfolio and the
Fidelity Growth Portfolio is calculated by adding a group fee rate to an
individual fund fee rate, and multiplying the result by each fund's average net
assets. The group fee rate, which is based on the average net assets of all the
mutual funds advised by FMR, cannot rise above 0.52% for each of these
portfolios, and it drops as total assets under management increase. The
individual fund fee rates are as follows: Equity-Income Portfolio .20%, Growth
Portfolio .30%, Asset Manager Portfolio .30%, and Contrafund Portfolio .30%. For
the period ended December 31, 1996, the Portfolios' management fees were as
follows: Equity-Income Portfolio .51%, Growth Portfolio .61%, Asset Manager
Portfolio .64%, Index 500 Portfolio .28% and Contrafund Portfolio .61%. FMR also
receives a monthly advisory fee for the Fidelity Index 500 Portfolio at the
annual rate of 0.28% of the fund's average net assets.

CHANGE OF INVESTMENTS

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

13
<PAGE> 16

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

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

PERFORMANCE INFORMATION

From time to time, the Separate Account may advertise several types of
performance information for the Subaccounts. All Subaccounts may advertise
"average annual total return" and "total return." The IFS High Yield Subaccount,
IFS Government Securities Subaccount and Janus Short-Term Bond Subaccount may
also advertise 'yield'. The IFS Money Market Subaccount may advertise "yield"
and "effective yield." Each of these figures is based upon historical earnings
and is not necessarily representative of the future performance of a Subaccount.
Average annual total return and total return calculations measure the net income
of a Subaccount plus the effect of any realized or unrealized appreciation or
depreciation of the underlying investments in the Subaccount for the period in
question. Average annual total return will be quoted for periods of at least one
year, five years if applicable, and the life of Subaccount, ending with the most
recent calendar quarter. Average annual total return figures are annualized and,
therefore, represent the average annual percentage change in the value of an
investment in a Subaccount over the applicable period. Total return figures are
not annualized and represent the actual percentage change over the applicable
period. Yield is a measure of the net dividend and interest income earned over a
specific one month or 30-day period (seven-day period for the IFS Money Market
Subaccount) expressed as a percentage of the value of the Subaccount's
Accumulation Units. Yield is an annualized figure, which means that it is
assumed that the Subaccount generates the same level of net income over a one
year period which is compounded on a semi-annual basis. The effective yield for
the IFS Money Market Subaccount is calculated similarly but includes the effect
of assumed compounding calculated under rules prescribed by the Securities and
Exchange Commission. The IFS Money Market Subaccount's effective yield will be
slightly higher than its yield due to this compounding effect. The Subaccounts'
units are sold at Accumulation Unit value. The Subaccounts' performance figures
and Accumulation Unit values will fluctuate. Units of the Subaccounts are
redeemable by an investor at Accumulation Unit value, which may be more or less
than original cost. The performance figures include the deduction of all
expenses and fees, including a prorated portion of the Records Maintenance
Charge. Redemptions within the first six years after purchase may be subject to
a Withdrawal Charge that ranges from 6% the first year to 0% after six years;
however, the aggregate Withdrawal Charge will not exceed 7.25% of aggregate
Purchase Payments under the Contract. Yield, effective yield and total return
figures do not include the effect of any Withdrawal Charge that may be imposed
upon the redemption of units, and thus may be higher than if such charges were
deducted. Average annual total return figures include the effect of the
applicable Withdrawal Charge that may be imposed at the end of the period in
question. Additional information concerning a Subaccount's performance appears
in the Statement of Additional Information. The Subaccounts may provide
comparative information with regard to the Dow Jones Industrial Average, the
Standard & Poor's 500 Stock Index, the Consumer Price Index, the CDA Certificate
of Deposit Index, the Lehman Brothers Government and Corporate Bond Index, the
Salomon Brothers High Grade Corporate Bond Index and the Merrill Lynch
Government/Corporate Master Index, the CDA Mutual Fund--International Index, and
the Morgan Stanley Capital International Europe, Australia, Far East Index, and
may provide Lipper Analytical Services, Inc., the VARDS Report and Morningstar,
Inc. performance analysis rankings. In addition, the Subaccounts may provide
comparative information with regard to the Standard & Poor's Midcap Index,
Lehman Brothers Government/Corporate 1-3 Year Bond Index, Lehman Brothers Long
Government/Corporate Bond Index, Russell 2000 Index and the NASDAQ Composite
Index and the Morgan Stanley International World Index and may provide Ibbotson
Associates or Micropal performance analysis rankings. From time to time, the
Separate Account may quote information from publications such as MORNINGSTAR,
INC., THE WALL STREET JOURNAL, MONEY MAGAZINE, FORBES, BARRON'S, FORTUNE,

14
<PAGE> 17

THE CHICAGO TRIBUNE, USA TODAY, INSTITUTIONAL INVESTOR, REGISTERED
REPRESENTATIVE, INVESTMENT ADVISOR AND VARDS.

FIXED ACCUMULATION OPTION

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

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

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

THE CONTRACTS

A. GENERAL INFORMATION.

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

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

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

During the Accumulation Period, the Contract Owner may assign the Contract or
change a Beneficiary at any time by filing such assignment or change with
KILICO's home office at 1 Kemper Drive, Long Grove, Illinois

15
<PAGE> 18

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 Contract. If a
Beneficiary is not named, or if no named Beneficiary survives the Annuitant, the
Beneficiary shall be the Annuitant's or Owner's estate.

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

B. THE ACCUMULATION PERIOD.

1. APPLICATION OF PURCHASE PAYMENTS.

Purchase Payments are allocated to the Subaccount(s) or General Account as
selected by the Contract Owner. The amount of each Purchase Payment credited to
a Subaccount will be based on the next computed value of an Accumulation Unit
following receipt of payment in proper form by KILICO. The value of an
Accumulation Unit is determined when the net asset values of the Portfolios of
the Fund are calculated, which is generally at 3:00 p.m. Chicago time on each
day that the New York Stock Exchange is open for trading. Purchase Payments
allocated to the General Account will begin earning interest one day after
receipt in proper form. However, with respect to initial Purchase Payments, the
amount will be credited only after an affirmative determination by KILICO to
issue the Contract, but no later than the second day following receipt of the
Purchase Payment. After the initial purchase, the number of Accumulation Units
credited is determined by dividing the Purchase Payment amount allocated to a
Subaccount by the Accumulation Unit value which is next computed following
receipt by KILICO of any Purchase Payment in good funds. Purchase Payments will
not be received except on those days when the New York Stock Exchange is open
for trading. A Contract Owner is limited to allocating Contract Value to a
maximum of 18 allocation options over the life of a Contract, including the
General Account and loan account.

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

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

2. ACCUMULATION UNIT VALUE.

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

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

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

16
<PAGE> 19

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

(1) is the net result of:

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

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

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

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

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

3. CONTRACT VALUE.

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

4. TRANSFER DURING ACCUMULATION PERIOD.

During the Accumulation Period, a Contract Owner may transfer the Contract Value
among the Subaccounts and the Fixed Accumulation Option subject to the following
provisions: (i) The General Account Contract Value, less Debt, may be
transferred one time during the Contract Year to one or more Subaccounts in the
thirty day period following an anniversary of a Contract Year or the thirty day
period following the date of the confirmation statement provided for the period
through the anniversary date, if later; and (ii) A Contract Owner is limited to
allocating Contract Value to a maximum of 18 allocation options over the life of
a Contract, including the General Account and loan account.

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

5. WITHDRAWAL DURING ACCUMULATION PERIOD.

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

A Contract Owner may withdraw up to 10% of the Contract Value less Debt in any
Contract Year without assessment of any charge. If the Contract Owner withdraws
an amount in excess of 10% of the Contract Value in any Contract Year, the
amount withdrawn in excess of 10% is subject to a Withdrawal Charge. The
Withdrawal Charge starts at 6% in the first Contribution Year and reduces by 1%
each Contribution Year, so that there is no charge against Accumulation Units
withdrawn in their seventh and later Contribution Years. However, in no event
shall the aggregate Withdrawal Charges assessed against a Contract exceed 7.25%
of the aggregate Purchase Payments made under the Contract.

17
<PAGE> 20

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

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

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

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

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

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

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

6. DEATH BENEFIT.

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

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

18
<PAGE> 21

For Contracts issued on or after March 1, 1997 as Individual Retirement
Annuities, Simplified Employee Pensions or Non-Qualified Plan Contracts, subject
to state approval, the death benefit will be determined as follows. If death
occurs prior to the deceased's attainment of age 90, the death benefit will be
the greater of (a) the total amount of Purchase Payments less Debt and less the
aggregate amount of all previous partial withdrawals, (b) the Contract Value as
of the day written proof of death is received by KILICO, less Debt or (c) the
Greatest Anniversary Value immediately preceding the date of death, less Debt.
For purposes of this paragraph, the Greatest Anniversary Value is equal to the
highest Anniversary Value determined from the following. An Anniversary Value is
calculated for each contract anniversary prior to the deceased's attainment of
age 81. The Anniversary Value is equal to the Contract Value on a contract
anniversary, increased by the dollar amount of any Purchase Payments made since
that anniversary and reduced by any withdrawals since that anniversary. If death
occurs on or after the deceased's attainment of age 90, the death benefit will
be the Contract Value as of the day written proof of death is received by
KILICO, less Debt.

7. LOANS.

The Owner of a Contract issued as a tax sheltered annuity under Section 403(b)
of the Code or as a qualified plan under Section 401 of the Code may request a
loan any time during the accumulation period. Loans are made from the General
Account and are limited to the General Account Contract Value minus any
withdrawal charge that would apply to the Contract Value and minus interest on
the loan for the remainder of the Contract Year. In general, loans may not
exceed 50% of the Contract Value, or, if less, $50,000. The minimum loan is
$1,000.

For non-ERISA loans, the loan interest rate is 5.5% per year. For loans issued
under ERISA plans, the loan interest rate will vary based on current rates.
Interest that is not paid when due is added to the loan and will bear interest
at the same rate as the loan. While the loan is outstanding, the portion of the
General Account Contract Value that equals the debt will earn interest at a rate
2.5% less than the loan rate.

Loans must be repaid in substantially equal quarterly payments within 5 years.
Loans used to purchase the principal residence of the Owner must be repaid
within 30 years.

If a loan payment is not made when due, interest will continue to accrue. On
403(b) Contracts, to the extent permitted by law, the amount of the defaulted
payment plus accrued interest will be deducted from the Contract and paid to
KILICO. Any loan payment which is not made when due, plus interest, will be
treated as a distribution as permitted by law, may be taxable to the borrower,
and may be subject to early withdrawal tax penalty.

If there is an outstanding loan balance when the Contract is surrendered or
annuitized, or when a death benefit is paid, the amount payable will be reduced
by the amount of the loan outstanding plus accrued interest. Any loans made
under a Contract will be subject to administrative procedures then in effect as
reflected under the loan agreement used by KILICO.

CONTRACT CHARGES AND EXPENSES

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

A. CHARGES AGAINST THE SEPARATE ACCOUNT.

During the Accumulation Period and the Annuity Period, KILICO assesses that
portion of each Subaccount representing assets under Periodic Payment Contracts
with a daily asset charge for mortality and expense risks and administrative
costs, which amounts to an aggregate of one and three-tenths percent (1.30%) per
annum (consisting of approximately .70% for mortality risks, approximately .30%
for expense risks and approximately .30% for administrative costs). Flexible
Payment Contracts, which are no longer offered, have a daily asset charge of
1.00%. The administrative charge is intended to cover the average anticipated

19
<PAGE> 22

administrative expenses to be incurred over the period the Contracts are in
force. With an administrative charge based on a percentage of assets, however,
there is not necessarily a direct relationship between the amount of the charge
and the administrative costs of a particular account. Additionally, KILICO
deducts an annual Records Maintenance Charge of $36 (assessed ratably each
quarter) for each Contract as described below. The Records Maintenance Charge is
not assessed during the Annuity Period.

These charges may be decreased by KILICO without notice but may not exceed the
rate or amount shown above.

1. RECORDS MAINTENANCE CHARGE.

KILICO will assess an annual Records Maintenance Charge of $36 (assessed ratably
each quarter) during the Accumulation Period against each Contract which has
participated in one or more of the Subaccounts during the calendar year whether
or not any Purchase Payments have been made during the year. This charge is to
reimburse KILICO for expenses incurred in establishing and maintaining the
records relating to a Contract's participation in the Separate Account. The
imposition of the Records Maintenance Charge will be made at the end of each
calendar quarter and will constitute a reduction in the net assets of each
Subaccount. For Contracts issued on or after March 1, 1997 as Individual
Retirement Annuities, Simplified Employee Pensions or Non-Qualified Plan
Contracts, the Records Maintenance Charge will be waived for Contracts with a
Contract Value equaling or 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 Contract
is participating and a number of Accumulation Units sufficient to equal the
proper portion of the charge will be redeemed from each Subaccount, or from the
General Account Contract Value if necessary to meet the assessment.

2. MORTALITY RISK.

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

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

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

3. EXPENSE RISK.

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

4. ADMINISTRATIVE COSTS.

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

B. WITHDRAWAL CHARGE.

No sales charge is deducted from any Purchase Payment. However, a contingent
deferred sales charge ("Withdrawal Charge") will be used to cover expenses
relating to the sale of the Contracts, including commissions

20
<PAGE> 23

paid to sales personnel, and other promotion and acquisition expenses. Also,
withdrawals (which may include certain loans) may be subject to certain adverse
tax consequences. (See "Taxation of Partial and Full Withdrawals.")

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

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

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

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

The Withdrawal Charges are intended to compensate KILICO for expenses in
connection with distribution of the Contracts.

The Withdrawal Charge also applies at the time of annuitization to amounts
attributable to Accumulation Units in their sixth Contribution Year or earlier.
The amount annuitized is subject to the Withdrawal Charge, as applicable. There
shall be no Withdrawal Charge assessed upon annuitization so long as annuity
payments provide for payment under Annuity Options 2, 3 or 4, or payments under
Annuity Option 1 are scheduled to continue for at least five years. Effective
September 4, 1990, for Qualified Plan Contracts, Withdrawal Charges will be
waived if a Contract is surrendered in the sixth Contract Year or later when the
Annuitant is at least 59 1/2 years old at the time of such surrender.

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

C. INVESTMENT MANAGEMENT FEES AND OTHER EXPENSES.

The net asset value of each of the Portfolios of the Funds reflects investment
management fees and certain general operating expenses already deducted from the
assets of the Portfolios. Subject to certain limitations, these fees and
expenses are indirectly borne by the Contract Owners. Investment management fees
are described on page 12. Further detail about fees and expenses of the
Portfolios is provided in the attached Prospectuses for the Funds and in the
Funds' Statements of Additional Information.

D. STATE PREMIUM TAXES.

Certain state and local governments impose a premium tax ranging from 0% to 3.5%
on the amount of Purchase Payments. Where applicable, the dollar amount of state
premium taxes previously paid or payable

21
<PAGE> 24

upon annuitization by KILICO may be charged against the Contract Value if not
previously assessed, when and if the Contract is annuitized. See
"Appendix--State Premium Tax Chart" in the Statement of Additional Information.

THE ANNUITY PERIOD

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

1. ANNUITY PAYMENTS.

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

2. ANNUITY OPTIONS.

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

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

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

OPTION 1--INCOME FOR SPECIFIED PERIOD.

An annuity payable monthly for a selected number of years ranging from five to
thirty. Upon payee's death, if the Beneficiary is a natural person, KILICO will
automatically continue payments for the remainder of the certain period to the
Beneficiary. If the Beneficiary is either an estate or trust, KILICO will pay a
commuted

22
<PAGE> 25

value of the remaining payments. Variable Annuity payments under Option 1
reflect the payment of the mortality and expense risk charge, even though there
is no life contingency risk associated with Option 1.

OPTION 2--LIFE INCOME.

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

OPTION 3--LIFE INCOME WITH INSTALLMENTS GUARANTEED.

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

OPTION 4--JOINT AND SURVIVOR ANNUITY.

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

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

3. ALLOCATION OF ANNUITY.

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

4. TRANSFER DURING ANNUITY PERIOD.

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

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

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

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

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.

23
<PAGE> 26

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

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

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

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

6. FIRST PERIODIC PAYMENT.

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

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

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

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

7. SUBSEQUENT PERIODIC PAYMENTS.

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

8. FIXED ANNUITY PAYMENTS.

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

9. DEATH BENEFIT.

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

24
<PAGE> 27

FEDERAL TAX MATTERS

A. INTRODUCTION

The following discussion of the federal income tax treatment of the Contract 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 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 contract. In addition, KILICO MAKES NO GUARANTEE REGARDING ANY
TAX TREATMENT--FEDERAL, STATE, OR LOCAL--OF ANY CONTRACT OR OF ANY TRANSACTION
INVOLVING A CONTRACT.

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 Contract. 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 Contract Value of a Non-Qualified Plan Contract is generally not taxable
to the Contract Owner or Annuitant until received, either in the form of annuity
payments, as contemplated by the Contract, or in some other form of
distribution. However, certain requirements must be satisfied in order for this
general rule to apply, including: (1) the Contract 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 Contract Owner, must be
considered the owner of the assets of the Separate Account for federal tax
purposes, and (4) the Contract must provide for appropriate amortization,
through annuity payments, of the contract'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 such Contracts is taxed as ordinary
income that is received or accrued by the Contract Owner during the taxable
year. There are several exceptions to this general rule for non-natural Contract
Owners. First, Contracts will generally be treated as held by a natural person
if the nominal owner is a trust or other entity which holds the Contract 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 Contract under a
non-qualified deferred compensation arrangement for its employees.

In addition, exceptions to the general rule for non-natural Contract Owners will
apply with respect to (1) Contracts acquired by an estate of a decedent by
reason of the death of the decedent, (2) certain Qualified Contracts, (3)
certain Contracts purchased by employers upon the termination of certain
qualified plans, (4) certain Contracts used in connection with structured
settlement agreements, and (5) Contracts 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 Contract and substantially equal periodic payments are
made, not less frequently than annually, during the annuity period.

DIVERSIFICATION REQUIREMENTS. For a Contract 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

25
<PAGE> 28

comply with these diversification standards, a Contract would not be treated as
an annuity contract for federal income tax purposes and the Contract Owner would
generally be taxable currently on the excess of the Contract Value over the
Purchase Payments paid for the Contract.

Although KILICO does not control the investments of the Funds, it expects that
the Funds 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 Contract 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 Contract has the choice of many more investment
options to which to allocate Purchase Payments and Contract Values, and may be
able to transfer among investment options more frequently than in such rulings.
These differences could result in the Contract 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 Contract as necessary to attempt to prevent the Contract Owner
from being considered the owner of the assets of the Separate Account.

DELAYED ANNUITY DATES. If the Contract'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 Contract would not be treated as an annuity for
federal income tax purposes. In that event, the income and gains under the
Contract could be currently includible in the Contract Owner's income.

The remainder of this discussion assumes that the Contract will be treated as an
annuity contract 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 Contract, amounts
received are includible in income to the extent the Contract 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 "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
Contract 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 Contracts) less any amounts previously received
from the Contract which were not included in income.

Other than in the case of certain Qualified Plan Contracts, any amount received
as a loan under a Contract, and any assignment or pledge (or agreement to assign
or pledge) any portion of the Contract Value, is treated as a withdrawal of such
amount or portion. (Loans, assignments and pledges are permitted only in limited
circumstances under Qualified Plan Contracts.) 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 Contract 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 Contract Value and the "investment in the contract" at the time of transfer.
In such case, the transferee's investment in the contract will be increased to
reflect the increase in the transferor's income.

26
<PAGE> 29

The Contract provides a death benefit that in certain circumstances may exceed
the greater of the Purchase Payments and the Contract 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
Contract.

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 Contract 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 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 Contract unless the payment is: (a) received on or after the
Contract Owner reaches age 59 1/2; (b) attributable to the Contract Owner's
becoming disabled (as defined in the tax law); (c) made to a Beneficiary on or
after the death of the Contract Owner or, if the Contract 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
Contract 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 Contracts,
is discussed below.)

6. AGGREGATION OF CONTRACTS

In certain circumstances, the amount of an Annuity Payment or a withdrawal from
a Non-Qualified Plan Contract that is includible in income may be determined by
combining some or all of the Non-Qualified Plan Contracts owned by an
individual. For example, if a person purchases a Contract 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

27
<PAGE> 30

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 Contracts 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 contracts are referred to as "Qualified Plan
Contracts." Numerous special tax rules apply to the participants in Qualified
Plans and to Qualified Plan Contracts. Therefore, no attempt is made in this
Prospectus to provide more than general information about use of the Contract
with the various types of Qualified Plans.

The tax rules applicable to Qualified Plans vary according to the type of plan
and the terms and conditions of the plan itself. For example, for both
withdrawals and annuity payments under certain Qualified Plan Contracts, there
may be no "investment in the contract" and the total amount received may be
taxable. Also, loans from Qualified Plan Contracts, where allowed, are subject
to a variety of limitations, including restrictions as to the amount that may be
borrowed, the duration of the loan, and the manner in which the loan must be
repaid. (Owners should always consult their tax advisors and retirement plan
fiduciaries prior to exercising their loan privileges.) Both the amount of the
contribution that may be made, and the tax deduction or exclusion that the Owner
may claim for such contribution, are limited under Qualified Plans. If this
Contract is used 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 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 Contract 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 Contracts (but not section 457 plan Contracts). (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 Contract Owner reaches age 59 1/2, (b) received on or after the
Contract Owner's death or because of the Contract 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 Contract Owner or for the joint lives (or joint life expectancies) of the
Contract 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 Contracts (although, in the case
of plans qualified under sections 401 and 403, exception "c" above for
substantially equal periodic payments applies only if the Contract Owner has
separated from service).

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

28
<PAGE> 31

1. QUALIFIED PLAN TYPES

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

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 contract
value. The Contract provides a death benefit that in certain circumstances may
exceed the greater of the Purchase Payments and the Contract Value. It is
possible that the Contract's death benefit could be viewed as violating the
prohibition on investment in life insurance contracts with the result that the
Contract 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 Contract's death benefit for purposes of the tax rules
governing IRAs (which would include SEP-IRAs). Employers and employees intending
to use the Contract 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 Contract's death benefit for purposes of the tax rules
governing IRAs (which would include SIMPLE IRAs). Employers and employees
intending to use the Contract in connection with such plans should 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 Contracts in order to
provide benefits under the plans. The Contract provides a death benefit that in
certain circumstances may exceed the greater of the Purchase Payments and the
Contract Value. It is possible that such death benefit could be characterized as
an incidental death benefit. There are limitations on the amount of incidental
benefits that may be provided under pension and profit sharing plans. In
addition, the provision of such benefits may result in current taxable income to
participants. Employers intending to use the Contract in connection with such
plans should seek competent advice.

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

29
<PAGE> 32

Tax-sheltered annuity contracts must contain restrictions on withdrawals of (i)
contributions made pursuant to a salary reduction agreement in years beginning
after December 31, 1988, (ii) earnings on those contributions, and (iii)
earnings after 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 Contract 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 Contract purchased by a
state or local government or a tax-exempt organization will not be treated as an
annuity contract for federal income tax purposes. Those who intend to use the
Contracts in connection with such plans should seek competent advice.

2. DIRECT ROLLOVERS

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

Under these requirements, federal income tax equal to 20% of the eligible
rollover distribution will be withheld from the amount of the distribution.
Unlike withholding on certain other amounts distributed from the Contract,
discussed below, 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 Contract 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%.

DISTRIBUTION OF CONTRACTS

The Contracts are sold by licensed insurance agents, where the Contracts may be
lawfully sold, who are registered representatives of broker-dealers which are
registered under the Securities Exchange Act of 1934 and are members of the
National Association of Securities Dealers, Inc. In addition to commissions,
KILICO may, from time to time, pay or allow additional promotional incentives,
in the form of cash or other compensation, to broker-dealers that sell the
Contracts. In some instances, such other incentives may be offered only to
certain licensed broker-dealers that sell or are expected to sell during
specified time periods certain minimum amounts of the Contracts or other
contracts issued by KILICO. The Contracts are distributed through the principal
underwriter for the Separate Account, which is Investors Brokerage Services,
Inc. ("IBS"), a wholly owned subsidiary of KILICO, which enters into selling
group agreements with affiliated and unaffiliated broker-dealers. All of the
investment options are not available to all Contract Owners. The investment
options are available only under Contracts that are sold or serviced by
broker-dealers that have entered into a selling group

30
<PAGE> 33

agreement that authorizes the sale of Contracts with all of the investment
options. Other distributors may sell and service contracts with limited
investment options.

VOTING RIGHTS

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

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

REPORTS TO CONTRACT OWNERS AND INQUIRIES

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

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

DOLLAR COST AVERAGING

A Contract Owner may predesignate a portion of the Contract Value under a
Contract attributable to the Money Market or Government Securities Subaccount to
be automatically transferred on a monthly basis for a specified duration to one
or more of the other Subaccounts and the General Account during the Accumulation
Period. A Contract Owner may predesignate a portion of the Contract Value under
the Contract attributable to the General Account to be automatically transferred
on a monthly or quarterly basis for a specified duration of at least one year to
one or more of the Subaccounts during the Accumulation Period. A Contract Owner
is limited to allocating Contract Value to a maximum of 18 allocation options
over the life of a Contract, including the General Account and loan account. A
Contract Owner may enroll in this program at the time the Contract is issued or
anytime thereafter by properly completing the Dollar Cost Averaging enrollment
form and returning it to KILICO at its home office at least five (5) business
days prior to the second Tuesday of a month which is the date that all dollar
cost averaging transfers will be made ("Transfer Date").

Transfers will be made in the amounts designated by the Contract Owner and must
be at least $100 per Subaccount or General Account. The total Contract Value in
the Money Market or Government Securities Subaccount at the time Dollar Cost
Averaging is elected must be at least equal to the amount designated to be
transferred on each Transfer Date multiplied by the duration selected. Dollar
Cost Averaging will cease automatically if the Contract Value does not equal or
exceed the amount designated to be transferred on each Transfer Date and the
remaining amount will be transferred.

31
<PAGE> 34

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

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

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

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

SYSTEMATIC WITHDRAWAL PLAN

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

PROVISIONS OF PRIOR CONTRACTS

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

FIXED ACCUMULATION OPTIONS. Fixed accumulations and benefits under the prior
contracts are provided in two Fixed Accumulation Options of the General Account.
Any portion of the purchase payment allocated to a Fixed Accumulation Option is
credited with interest daily at a rate declared by KILICO in its sole
discretion, but not less than 4%.

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

32
<PAGE> 35

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

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

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

LOANS. For non-ERISA loans, the loan interest rate is 6%. While the loan is
outstanding, the portion of the General Account Contract Value that equals the
debt will earn interest at a rate 2% less than loan rate.

RECORDS MAINTENANCE CHARGE. KILICO will assess an annual Records Maintenance
Charge of $25 during the Accumulation period against each contract which has
participated in one or more of the Subaccounts during the calendar year whether
or not any purchase payments have been made during the year. The imposition of
the Records Maintenance Charge will be made on December 31st of each year.

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

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

Transfers will be made in the amounts designated by the Contract Owner and must
be at least $100 per Subaccount or General Account I or II. The total Contract
Value in General Account I, the Money Market or Government Securities Subaccount
at the time Dollar Cost Averaging is elected must be at least equal to the
amount designated to be transferred on each transfer date multiplied by the
duration selection. Dollar Cost Averaging will cease automatically if the
Contract value does not equal or exceed the amount designated to be transferred
on each Transfer Date and the remaining amount will be transferred.

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

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

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

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

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

LEGAL PROCEEDINGS

There are no material legal proceedings pending to which the Separate Account,
KILICO, IBS or ZKI is a party.

33
<PAGE> 36

TABLE OF CONTENTS--STATEMENT OF ADDITIONAL INFORMATION

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

34
<PAGE> 37

APPENDIX

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 IRA). 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 Contract and receive back 100% of your money. To do so, wire Kemper
Investors Life Insurance Company, 1 Kemper Drive, Long Grove, Illinois 60049, or
call 1-800-621-5001.

B. STATUTORY REQUIREMENTS

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

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

2. The Contract must be nontransferable by the owner.

3. The Contract must have flexible premiums.

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

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

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

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

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

35
<PAGE> 38

or part of the premium for this Contract used as a SIMPLE IRA may be paid from a
rollover from a SIMPLE IRA or SIMPLE Individual Retirement Account or, to the
extent permitted by law, from a direct transfer from a SIMPLE IRA or SIMPLE
Individual Retirement Account.

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.

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.

36
<PAGE> 39

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

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

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

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

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

I. TAX ON EXCESS CONTRIBUTIONS

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

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

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.

37
<PAGE> 40

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 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 Contract, the Contract 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
Contract.

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 Contract or use it as security for a loan, the
Contract 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
Contract does not allow borrowings against it, nor may it be assigned or pledged
as collateral for a loan.)

N. FINANCIAL DISCLOSURE

1. If contributions to the Contract are made by other than rollover
contributions and direct transfers, the following information based on the
charts shown on the next pages, which assumes you were to make a level
contribution to the fixed account at the beginning of each year of $1,000 must
be completed prior to your signing the enrollment application.

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

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

38
<PAGE> 41

2. If contributions to the Contract are made by rollover contributions and/or
direct transfers, the following information, based on the charts shown on the
next page, and all of which assumes you make one contribution to the fixed
account of $1,000 at the beginning of this year, must be completed prior to your
signing the enrollment application.

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

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

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

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

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

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

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

39
<PAGE> 42

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

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

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

* Includes applicable withdrawal charges.

40
<PAGE> 43

STATEMENT OF ADDITIONAL INFORMATION

MAY 1, 1997

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

PERIODIC PAYMENT

VARIABLE ANNUITY CONTRACTS

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

KEMPER ADVANTAGE III

ISSUED BY

KEMPER INVESTORS LIFE INSURANCE COMPANY

IN CONNECTION WITH

KILICO VARIABLE ANNUITY SEPARATE ACCOUNT

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

This Statement of Additional Information is not a prospectus. This Statement of
Additional Information should be read in conjunction with the Prospectus of the
Separate Account dated May 1, 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-11
Experts..................................................... B-11
Financial Statements........................................ B-11
</TABLE>

ADV-02B
<PAGE> 44

SERVICES TO THE SEPARATE ACCOUNT

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

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

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 $9,049,000, $10,006,000 and $13,085,000 respectively, to
licensed insurance agents.

PERFORMANCE INFORMATION OF SUBACCOUNTS

As described in the prospectus, a Subaccount's historical performance may be
shown in the form of "average annual total return" and "total return"
calculations in the case of all Subaccounts; "yield" information may be provided
in the case of the IFS High Yield Subaccount, the IFS Government Securities
Subaccount and the Janus Short-Term Bond Subaccount; and "yield" and "effective
yield" information may be provided in the case of the IFS Money Market
Subaccount. These various measures of performance are described below.

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

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

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

B-1
<PAGE> 45

and Exchange Commission. The yields for the IFS High Yield Subaccount and the
IFS Government Securities Subaccount, based upon the one month period ended
March 31, 1997 were 7.45% and 5.20%, 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:

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

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

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

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

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

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

The IFS Money Market Subaccount's yield is computed in accordance with a
standard method prescribed by rules of the Securities and Exchange Commission.
Under that method, the current yield quotation is based on a seven-day period
and computed as follows: the net change in the Accumulation Unit Value during
the period is divided by the Accumulation Unit Value at the beginning of the
period ("base period return") and the result is divided by 7 and multiplied by
365 and the current yield figure carried to the nearest one-hundredth of one
percent. Realized capital gains or losses and unrealized appreciation or
depreciation of the Account's portfolio are not included in the calculation. The
IFS Money Market Subaccount's yield for the seven-day period ended March 31,
1997 was 3.61% and average portfolio maturity was 21 days.

The IFS 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) / (7) - 1. The IFS Money Market Subaccount's effective yield for the
seven day period ended March 31, 1997 was 3.67%.

In computing yield, the Separate Account follows certain standard accounting
practices specified by Securities and Exchange Commission rules. These practices
are not necessarily consistent with the accounting practices that the Separate
Account uses in the preparation of its annual and semi-annual financial
statements.

A Subaccount's performance quotations are based upon historical earnings and are
not necessarily representative of future performance. The Subaccount's units are
sold at Accumulation Unit value. Performance figures and Accumulation Unit value
will fluctuate. Factors affecting a Subaccount's performance include general
market conditions, operating expenses and investment management. Units of a
Subaccount are redeemable at Accumulation Unit value, which may be more or less
than original cost. The performance figures include the deduction of all
expenses and fees, including a prorated portion of the Records Maintenance
Charge. Redemptions within the first six years after purchase may be subject to
a Withdrawal Charge that ranges from 6% the first year to 0% after six years;
however, the aggregate Withdrawal Charge will not exceed 7.25% of aggregate
Purchase Payments under the Contract. Yield, effective yield and total return do
not reflect the effect of the Withdrawal Charge or premium taxes that may be
imposed upon the redemption of units. Average annual total return reflects the
effect of the applicable Withdrawal Charge (but not premium tax) that may be
imposed at the end of the period in question.

The figures below show performance information for periods from March 5, 1982
(inception) for the IFS Money Market Subaccount, IFS Total Return Subaccount and
IFS High Yield Subaccount and for periods from December 9, 1983 (inception) for
the IFS Growth Subaccount to December 31, 1996. This performance information is
stated to reflect that the Separate Account was reorganized on November 3, 1989
as a unit investment trust with Subaccounts investing in corresponding
Portfolios of the IFS Fund. In addition, on that date the IFS Government
Securities Subaccount was added to the Separate Account to invest in the IFS
Fund's Government Securities Portfolio. For the IFS Government Securities
Subaccount, performance figures will reflect investment experience as if the IFS
Government Securities Subaccount had been available under the Contracts since
September 3, 1987, the inception date of the IFS Government Securities
Portfolio. For the Janus Growth Subaccount, Janus Aggressive Growth Subaccount,
Janus Worldwide Growth Subaccount, Janus Balanced Subaccount, Janus Short-Term
Bond Subaccount, Lexington Natural Resources Subaccount and Lexington Emerging
Markets Subaccount, the figures below show performance information for the
period from Septem-

B-2
<PAGE> 46

ber 15, 1995, the date these Subaccounts were available under the Contracts.
Performance of the Subaccounts will vary from time to time, and these results
are not necessarily representative of future results. Performance information is
also shown for 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 $10,000 fully allocated to each Separate Account and
the deduction of all expenses and fees, including a prorated portion of the $36
annual Records Maintenance Charge. No withdrawals are assumed. The percentage
increases are determined by subtracting the initial Purchase Payment from the
ending value and dividing the remainder by the beginning value.

Comparative information for certain Subaccounts with respect to the Dow Jones
Industrial Average, the Standard & Poor's 500 Stock Index, the Consumer Price
Index, the CDA Certificate of Deposit Index, the Lehman Brothers Government and
Corporate Bond Index, the Salomon Brothers High Grade Corporate Bond Index and
the Merrill Lynch Government/Corporate Master Index is also included.
Comparative information may be shown for the IFS International Subaccount with
respect to the CDA Mutual Fund International Index and the Morgan Stanley
Capital International Europe Australia Far East Index. The IFS Total Return, IFS
Growth, and IFS Small Cap Growth Subaccounts, the Lexington Natural Resources
Trust and Lexington Emerging Markets Subaccount, the Janus Subaccounts,
excluding the Short-Term Bond Subaccount, and the Fidelity Subaccounts are
compared to, and the IFS International Subaccount may be compared to, the Dow
Jones Industrial Average and the Standard & Poor's 500 Stock Index because these
indices are generally considered representative of the U. S. stock market in
general. The Consumer Price Index is generally considered to be a measure of
inflation and thus the performance of the IFS Money Market, IFS Total Return,
IFS High Yield, IFS Growth, IFS Small Cap Growth and IFS Government Securities
Subaccounts, the Janus Subaccounts, the Lexington Subaccounts and the Fidelity
Subaccounts is compared to, and the IFS International Subaccount may be compared
to, that index. The IFS High Yield and IFS Government Securities Subaccounts and
the Janus Short-Term Bond Subaccount are compared to the Lehman Brothers
Government and Corporate Bond Index, the Salomon Brothers High Grade Corporate
Bond Index and the Merrill Lynch Government/Corporate Master Index because such
indices are generally considered to represent the performance of intermediate
and long term bonds during various market cycles. The IFS Money Market
Subaccount is also compared to the CDA Certificate of Deposit Index because
certificates of deposit represent an alternative current income producing
product. The IFS 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
IFS International Subaccount also may be compared to the Morgan Stanley Capital
International Europe Australia Far East Index because the index is an unmanaged
index that is considered to be generally representative of major non-United
States stock markets. The Janus Growth, Janus Aggressive Growth, Janus Worldwide
Growth, Janus Balanced, Janus Short-Term Bond, Lexington Natural Resources and
Lexington Emerging Markets Subaccounts may also be compared to the Standard &
Poor's Midcap Index, the Lehman Brothers Government/Corporate 1-3 Year Bond
Index, the Lehman Brothers Long Government/Corporate Bond Index, the Russell
2000 Index, and the NASDAQ Composite Index. In addition, the Janus Worldwide
Growth Subaccount's performance may also be compared to the Morgan Stanley
International World Index. The Fidelity Contrafund Subaccount's performance may
be compared to the Standard & Poor's Midcap Index. Please note the differences
and similarities between the investments which a Subaccount may purchase and the
investments measured by the indexes which are described below. In particular, it
should be noted that certificates of deposit may offer fixed or variable yields
and principal is guaranteed and may be insured. The units of the Subaccounts are
not insured. Also, the value of the Subaccounts will fluctuate.

B-3
<PAGE> 47
<TABLE>
<CAPTION>
VALUES OF INITIAL $10,000 INVESTMENT IN
SUBACCOUNTS--AS OF DECEMBER 31, 1996
-------------------------------------------------------- COMPARED TO
NON- NON- ---------------------
QUALIFIED QUALIFIED QUALIFIED QUALIFIED DOW JONES STANDARD
ENDING PERCENTAGE ENDING PERCENTAGE INDUSTRIAL & POOR'S
TOTAL RETURN TABLE VALUE INCREASE VALUE INCREASE AVERAGE(1) 500(2)
------------------ --------- ---------- --------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
IFS GROWTH SUBACCOUNT
Life of Subaccount(4)........ 50,798 407.98 50,725 407.25 411.74 348.69
Ten years.................... 33,823 238.23 33,823 238.23 240.11 205.88
Five years................... 17,118 71.18 17,118 71.18 103.49 77.60
One year..................... 11,979 19.79 11,979 19.79 26.01 20.26
IFS TOTAL RETURN SUBACCOUNT
Life of Subaccount(5)........ 51,903 419.03 48,327 383.27 698.69 577.46
Ten years.................... 26,688 166.78 26,688 166.78 240.11 205.88
Five years................... 14,050 40.50 14,050 40.50 103.49 77.60
One year..................... 11,493 14.92 11,493 14.92 26.01 20.26
IFS INTERNATIONAL SUBACCOUNT
Life of Subaccount(14)....... 15,576 55.76 15,576 55.76 101.50 77.52
One year..................... 11,479 14.79 11,479 14.79 26.01 20.26
IFS SMALL CAP GROWTH SUBACCOUNT
Life of Subaccount(15)....... 16,680 66.80 16,680 66.80 74.23 63.51
One Year..................... 12,622 26.22 12,622 26.22 26.01 20.26

COMPARED TO
-----------------
CONSUMER
PRICE EAFE
TOTAL RETURN TABLE INDEX(3) (13)
------------------ -------- ----
<S> <C> <C>
IFS GROWTH SUBACCOUNT
Life of Subaccount(4)........ 57.47 591.59
Ten years.................... 43.68 131.08
Five years................... 15.11 50.25
One year..................... 3.31 6.36
IFS TOTAL RETURN SUBACCOUNT
Life of Subaccount(5)........ 68.11 781.60
Ten years.................... 43.68 131.08
Five years................... 15.11 50.25
One year..................... 3.31 6.36
IFS INTERNATIONAL SUBACCOUNT
Life of Subaccount(14)....... 15.11 50.25
One year..................... 3.31 6.36
IFS SMALL CAP GROWTH SUBACCOUNT
Life of Subaccount(15)....... 8.08 18.74
One Year..................... 3.31 6.36
</TABLE>
<TABLE>
<CAPTION>
COMPARED TO
VALUES OF INITIAL $10,000 INVESTMENT IN ----------------------------------
SUBACCOUNTS--AS OF DECEMBER 31, 1996 SALOMON
----------------------------------------------- BROS.
NON- NON- CDA HIGH GRADE
QUALIFIED QUALIFIED QUALIFIED QUALIFIED CONSUMER CERT. CORP.
TOTAL RETURN ENDING PERCENTAGE ENDING PERCENTAGE PRICE OF DEPOSIT BOND
TABLE VALUE INCREASE VALUE INCREASE INDEX(3) INDEX(6) INDEX(7)
- --------------------- --------- ---------- --------- ---------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
IFS MONEY MARKET
SUBACCOUNT
Life of
Subaccount(10)... 21,755 117.55 21,755 117.55 68.11 N/A 570.60
Ten years.......... 15,283 52.83 15,283 52.83 43.68 N/A 147.34
Five years......... 11,369 13.69 11,369 13.69 15.11 22.57 50.52
One year........... 10,340 3.40 10,340 3.40 3.31 4.98 1.39
IFS HIGH YIELD
SUBACCOUNT
Life of
Subaccount(11)... 54,669 446.69 53,249 432.49 68.11 N/A 570.60
Ten years.......... 25,061 150.61 25,061 150.61 43.68 N/A 147.34
Five years......... 17,194 71.94 17,194 71.94 15.11 22.57 50.52
One year........... 11,234 12.34 11,234 12.34 3.31 4.98 1.39
IFS GOVERNMENT
SECURITIES
SUBACCOUNT
Life of
Subaccount(12)... 17,711 77.11 17,711 77.11 39.16 70.67 158.01
Five years......... 12,432 24.32 12,432 24.32 15.11 22.57 50.52
One year........... 10,102 1.02 10,102 1.02 3.31 4.98 1.39

<CAPTION>
COMPARED TO
-------------------------

LEHMAN MERRILL
BROS. LYNCH
GOVT./CORP. GOVT./CORP.
TOTAL RETURN BOND MASTER
TABLE INDEX(8) INDEX(9)
- --------------------- ----------- -----------
<S> <C> <C>
IFS MONEY MARKET
SUBACCOUNT
Life of
Subaccount(10)... 399.28 398.53
Ten years.......... 123.56 123.68
Five years......... 41.43 41.74
One year........... 2.90 2.91
IFS HIGH YIELD
SUBACCOUNT
Life of
Subaccount(11)... 399.28 398.53
Ten years.......... 123.56 123.68
Five years......... 41.43 41.74
One year........... 2.90 2.91

IFS GOVERNMENT
SECURITIES
SUBACCOUNT
Life of
Subaccount(12)... 126.33 127.03
Five years......... 41.43 41.74
One year........... 2.90 2.91
</TABLE>
<TABLE>
<CAPTION>
VALUES OF INITIAL $10,000
INVESTMENT IN
SUBACCOUNTS--AS OF DECEMBER 31, COMPARED TO
1996 -----------------------------------
----------------------------------------------- MORGAN LEHMAN
NON- NON- STANLEY STANDARD BROS. LONG
QUALIFIED QUALIFIED QUALIFIED QUALIFIED INTERNAT. & POOR'S GOVT./CORP.
ENDING PERCENTAGE ENDING PERCENTAGE WORLD MIDCAP BOND
TOTAL RETURN VALUE INCREASE VALUE INCREASE INDEX(17) INDEX(18) INDEX(19)
TABLE --------- ---------- --------- ---------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
JANUS GROWTH
Life of the Subaccount(16)... 12,062 20.62 12,062 20.62 17.69 17.95 9.68
One year..................... 11,675 16.75 11,675 16.75 11.72 17.32 0.14
JANUS AGGRESSIVE GROWTH
Life of the Subaccount(16)... 11,231 12.31 11,231 12.31 17.69 17.95 9.68
One year..................... 10,639 6.39 10,639 6.39 11.72 17.32 0.14
JANUS WORLDWIDE GROWTH
Life of the Subaccount(16)... 13,266 32.66 13,266 32.66 17.69 17.95 9.68
One year..................... 12,721 27.21 12,721 27.21 11.72 17.32 0.14
JANUS BALANCED
Life of the Subaccount(16)... 12,082 20.82 12,082 20.82 17.69 17.95 9.68
One year..................... 11,232 12.32 11,232 12.32 11.72 17.32 0.14

COMPARED TO
--------------------------------------
LEHMAN
BROS.
GOVT./CORP. RUSSELL
1-3 YR. BOND 2000 NASDAQ
TOTAL RETURN INDEX(20) INDEX(21) COMPOS.(22)
TABLE ------------ --------- -----------
<S> <C> <C> <C>
JANUS GROWTH
Life of the Subaccount(16)... 8.27 15.37 22.83
One year..................... 5.14 14.76 22.71
JANUS AGGRESSIVE GROWTH
Life of the Subaccount(16)... 8.27 15.37 22.83
One year..................... 5.14 15.76 22.71
JANUS WORLDWIDE GROWTH
Life of the Subaccount(16)... 8.27 15.37 22.83
One year..................... 5.14 14.76 22.71
JANUS BALANCED
Life of the Subaccount(16)... 8.27 15.37 22.83
One year..................... 5.14 14.76 22.71
</TABLE>

B-4
<PAGE> 48
<TABLE>
<CAPTION>
VALUES OF INITIAL $10,000
INVESTMENT IN
SUBACCOUNTS -- AS OF DECEMBER 31, COMPARED TO
1996 -------------------------------------
------------------------------------------------ Morgan Lehman
Non- Non- Stanley Standard Bros. Long
Qualified Qualified Qualified Qualified Internat. & Poor's Govt./Corp.
TOTAL RETURN Ending Percentage Ending Percentage World Midcap Bond
TABLE Value Increase Value Increase Index(17) Index(18) Index(19)
- ------------ --------- ---------- --------- ---------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
JANUS SHORT-TERM BOND
Life of the Subaccount(16)... 10,496 4.96 10,496 4.96 17.69 17.95 9.68
One year..................... 10,251 2.51 10,251 2.51 11.72 17.32 0.14
LEXINGTON NATURAL RESOURCES
Life of the Subaccount(16)... 12,556 25.56 12,556 25.56 17.69 17.95 9.68
One year..................... 12,506 25.06 12,506 25.06 11.72 17.32 0.14
LEXINGTON EMERGING MARKETS
Life of the Subaccount(16)... 10,111 1.11 10,111 1.11 17.69 17.95 9.68
One year..................... 10,589 5.89 10,589 5.89 11.72 17.32 0.14
FIDELITY VIP EQUITY-INCOME
SUBACCOUNT
Life of Subaccount(23)....... 10,687 6.87 10,687 6.87 5.45 7.81 N/A
FIDELITY VIP GROWTH SUBACCOUNT
Life of Subaccount(23)....... 10,347 3.47 10,347 3.47 5.45 7.81 N/A
FIDELITY VIP II ASSET MANAGER
SUBACCOUNT
Life of Subaccount(23)....... 10,916 9.16 10,916 9.16 5.45 7.81 N/A
FIDELITY VIP II INDEX 500
SUBACCOUNT
Life of Subaccount(23)....... 11,366 13.66 11,366 13.66 5.45 7.81 N/A
FIDELITY VIP II CONTRAFUND
SUBACCOUNT
Life of Subaccount(23)....... 11,145 11.45 11,145 11.45 5.45 7.81 N/A

<CAPTION>
COMPARED TO
---------------------------------------
Lehman
Bros.
Govt./Corp. Russell
TOTAL RETURN 1-3 yr. Bond 2000 NASDAQ
TABLE Index(20) Index(21) Compos.(22)
- ------------ ------------ ----------- -----------
<S> <C> <C> <C>
JANUS SHORT-TERM BOND
Life of the Subaccount(16)... 8.27 15.37 22.83
One year..................... 5.14 14.76 22.71
LEXINGTON NATURAL RESOURCES
Life of the Subaccount(16)... 8.27 15.37 22.83
One year..................... 5.14 14.76 22.71
LEXINGTON EMERGING MARKETS
Life of the Subaccount(16)... 8.27 15.37 22.83
One year..................... 5.14 14.76 22.71
FIDELITY VIP EQUITY-INCOME
SUBACCOUNT
Life of Subaccount(23)....... N/A 4.11 8.44
FIDELITY VIP GROWTH SUBACCOUNT
Life of Subaccount(23)....... N/A 4.11 8.44
FIDELITY VIP II ASSET MANAGER
SUBACCOUNT
Life of Subaccount(23)....... N/A 4.11 8.44
FIDELITY VIP II INDEX 500
SUBACCOUNT
Life of Subaccount(23)....... N/A 4.11 8.44
FIDELITY VIP II CONTRAFUND
SUBACCOUNT
Life of Subaccount(23)....... N/A 4.11 8.44
</TABLE>

<TABLE>
<CAPTION>
AVERAGE ANNUAL
TOTAL RETURN COMPARED TO
(BASED ON $1,000 -----------------------------------------
INVESTMENT) STANDARD
--------------------- DOW JONES & POOR'S CONSUMER
AVERAGE ANNUAL TOTAL NON- INDUSTRIAL 500 STOCK PRICE EAFE
RETURN TABLE QUALIFIED QUALIFIED AVERAGE(1) INDEX(2) INDEX(3) (13)
-------------------- --------- --------- ---------- --------- -------- ----
<S> <C> <C> <C> <C> <C> <C>
IFS GROWTH SUBACCOUNT
Life of Subaccount(4).................................... 12.90% 12.88% 13.31 12.18 3.54 15.96
Ten years................................................ 12.34 12.34 13.02 11.83 3.69 8.74
Five years............................................... 9.04 9.04 15.26 12.17 2.85 8.48
One year................................................. 11.13 11.13 26.01 20.26 3.31 6.36
IFS TOTAL RETURN SUBACCOUNT
Life of Subaccount(5).................................... 11.16% 10.57% 15.04 13.77 3.57 15.81
Ten years................................................ 9.02 9.02 13.02 11.83 3.69 8.74
Five years............................................... 4.08 4.08 15.26 12.17 2.85 8.48
One year................................................. 5.92 5.92 26.01 20.26 3.31 6.36
IFS INTERNATIONAL SUBACCOUNT
Life of Subaccount(14)................................... 7.70% 7.70% 15.02 12.20 2.86 8.51
One year................................................. 7.00 7.00 26.01 20.26 3.31 6.36
IFS SMALL CAP GROWTH SUBACCOUNT
Life of Subaccount(15)................................... 18.38% 18.38% 23.15 20.25 2.96 6.65
One year................................................. 18.00 18.00 26.01 20.26 3.31 6.36
</TABLE>
<TABLE>
<CAPTION>
COMPARED TO
AVERAGE ANNUAL --------------------------------------------
TOTAL RETURN LEHMAN
(BASED ON $1,000 SALOMON BROS. BROS.
INVESTMENT) CONSUMER HIGH GRADE GOVT./CORP.
AVERAGE ANNUAL TOTAL ----------------------------- PRICE CORP. BOND BOND
RETURN TABLE QUALIFIED NON-QUALIFIED INDEX(3) INDEX(7) INDEX(8)
-------------------- --------- ------------- -------- ------------- -----------
<S> <C> <C> <C> <C> <C>
IFS HIGH YIELD SUBACCOUNT
Life of Subaccount(11).......... 11.89% 11.68% 3.57% 13.70% 11.46%
Ten years....................... 8.77 8.77 3.69 9.48 8.38
Five years...................... 9.32 9.32 2.85 8.52 7.18
One year........................ 4.02 4.02 3.31 1.39 2.90
IFS GOVERNMENT SECURITIES
SUBACCOUNT
Life of Subaccount(12).......... 5.63% 5.63% 3.61% 10.70% 9.15%
Five years...................... 2.30 2.30 2.85 8.52 7.18
One year........................ (6.30) (6.30) 3.31 1.39 2.90

<CAPTION>
COMPARED TO
-------------

MERRILL LYNCH
GOVT./CORP.
AVERAGE ANNUAL TOTAL MASTER
RETURN TABLE INDEX(9)
-------------------- -------------
<S> <C>
IFS HIGH YIELD SUBACCOUNT
Life of Subaccount(11).......... 11.44%
Ten years....................... 8.38
Five years...................... 7.22
One year........................ 2.90
IFS GOVERNMENT SECURITIES
SUBACCOUNT
Life of Subaccount(12).......... 9.19%
Five years...................... 7.22
One year........................ 2.90
</TABLE>

B-5
<PAGE> 49
<TABLE>
<CAPTION>
COMPARED TO
-------------------------------------------------
AVERAGE ANNUAL LEHMAN
TOTAL RETURN MORGAN LEHMAN BROS.
(BASED ON $1,000 STANLEY STANDARD BROS. LONG GOVT./CORP.
INVESTMENT) INTERNAT. & POOR'S GOVT./CORP. 1-3 YR.
AVERAGE ANNUAL TOTAL ------------------------- WORLD MIDCAP BOND BOND
RETURN TABLE QUALIFIED NON-QUALIFIED INDEX(17) INDEX(18) INDEX(19) INDEX(20)
-------------------- --------- ------------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
JANUS GROWTH
Life of the Subaccount(16)... 10.20% 10.20% 13.43 13.62% 7.41% 6.34%
One year..................... 8.94 8.94 11.72 17.32 0.14 5.14

JANUS AGGRESSIVE GROWTH
Life of the Subaccount(16)... 4.18% 4.18% 13.43 13.62% 7.41% 6.34%
One year..................... (0.75) (0.75) 11.72 17.32 0.14 5.14

JANUS WORLDWIDE GROWTH
Life of the Subaccount(16)... 18.68% 18.68% 13.43% 13.62% 7.41% 6.34%
One year..................... 18.94 18.94 11.72 17.32 0.14 5.14

JANUS BALANCED
Life of the Subaccount(16)... 10.59% 10.59% 13.43 13.62% 7.41% 6.34%
One year..................... 4.89 4.89 11.72 17.32 0.14 5.14

JANUS SHORT-TERM BOND
Life of the Subaccount(16)... (0.94)% (0.94)% 13.43 13.62% 7.41% 6.34%
One year..................... (4.07) (4.07) 11.72 17.32 0.14 5.14

LEXINGTON NATURAL RESOURCES
Life of the Subaccount(16)... 14.10% 14.10% 13.43 13.62% 7.41% 6.34%
One year..................... 17.13 17.13 11.72 17.32 0.14 5.14

LEXINGTON EMERGING MARKETS
Life of the Subaccount(16)... (4.01)% (4.01)% 13.43 13.62% 7.41% 6.34%
One year..................... (1.42) (1.42) 11.72 17.32 0.14 5.14

FIDELITY VIP EQUITY-INCOME
SUBACCOUNT
Life of Subaccount(23)....... 0.25% 0.25% 5.45 7.81 N/A N/A

FIDELITY VIP GROWTH SUBACCOUNT
Life of Subaccount(23)....... (4.34) (4.34) 5.45 7.81 N/A N/A

FIDELITY VIP II ASSET MANAGER
SUBACCOUNT
Life of Subaccount(23)....... 3.43 3.43 5.45 7.81 N/A N/A

FIDELITY VIP II INDEX 500
SUBACCOUNT
Life of Subaccount(23)....... 10.18 10.18 5.45 7.81 N/A N/A

FIDELITY VIP CONTRAFUND
SUBACCOUNT
Life of Subaccount(23)....... 7.08 7.08 5.45 7.81 N/A N/A

<CAPTION>
COMPARED TO
-----------------------

RUSSELL
AVERAGE ANNUAL TOTAL 2000 NASDAQ
RETURN TABLE INDEX(21) COMPOS.(22)
-------------------- --------- -----------
<S> <C> <C>
JANUS GROWTH
Life of the Subaccount(16)... 11.70% 17.24%
One year..................... 14.76 22.71
JANUS AGGRESSIVE GROWTH
Life of the Subaccount(16)... 11.70% 17.24%
One year..................... 14.76 22.71
JANUS WORLDWIDE GROWTH
Life of the Subaccount(16)... 11.70% 17.24%
One year..................... 14.76 22.71
JANUS BALANCED
Life of the Subaccount(16)... 11.70% 17.24%
One year..................... 14.76 22.71
JANUS SHORT-TERM BOND
Life of the Subaccount(16)... 11.70% 17.24%
One year..................... 14.76 22.71
LEXINGTON NATURAL RESOURCES
Life of the Subaccount(16)... 11.70% 17.24%
One year..................... 14.76 22.71
LEXINGTON EMERGING MARKETS
Life of the Subaccount(16)... 11.70% 17.24%
One year..................... 14.76 22.71
FIDELITY VIP EQUITY-INCOME
SUBACCOUNT
Life of Subaccount(23)....... 4.11 8.44
FIDELITY VIP GROWTH SUBACCOUNT
Life of Subaccount(23)....... 4.11 8.44
FIDELITY VIP II ASSET MANAGER
SUBACCOUNT
Life of Subaccount(23)....... 4.11 8.44
FIDELITY VIP II INDEX 500
SUBACCOUNT
Life of Subaccount(23)....... 4.11 8.44
FIDELITY VIP CONTRAFUND
SUBACCOUNT
Life of Subaccount(23)....... 4.11 8.44
</TABLE>

<TABLE>
<CAPTION>
YIELD INFORMATION QUALIFIED AND NON-QUALIFIED
----------------- ---------------------------
<S> <C>
IFS HIGH YIELD SUBACCOUNT
30 day period ended 3/31/97............................... 7.45%

IFS GOVERNMENT SECURITIES SUBACCOUNT
30 day period ended 3/31/97............................... 5.20%

IFS MONEY MARKET SUBACCOUNT
7 day period ended 3/31/97................................ 3.61%
</TABLE>

* N/A Not Available

Information for the indices used for comparisons have been provided by the Funds
and has not been independently verified.

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

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

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

B-6
<PAGE> 50

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

(14) From January 6, 1992 to December 31, 1996.

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

(16) From September 15, 1995 to December 31, 1996.

(17) The Morgan Stanley International World Index is an arithmetic, market
value-weighted average of the performance of over 1,470 securities listed on the
stock exchanges of Australia, Austria, Belgium, Canada, Denmark, Finland,
France, Germany, Hong Kong, Italy, Japan, Netherlands, New Zealand, Norway,
Singapore/Malaysia, South Africa Gold, Spain, Switzerland, United Kingdom, and
the United States. The Index is calculated on a total return basis, which
includes reinvestment of gross dividends before deduction of withholding taxes.
The index covers about 60% of the issues listed on the exchanges of the
countries included.

(18) The Standard & Poor's Midcap 400 Index is a capitalization-weighted index
that measures the performance of the mid-range sector of the U.S. stock market
where the median market capitalization is approximately $700 million. The index
was developed with a base level of 100 as of December 31, 1990.

(19) The Lehman Brothers Long Government/Corporate Bond Index is composed of all
bonds covered by the Lehman Brothers Government/Corporate Bond Index with
maturities of 10 years or greater. Total return comprises price
appreciation/depreciation and income as a percentage of the original investment.
Indexes are balanced monthly by market capitalization.

(20) The Lehman Brothers Government/Corporate 1-3 Year Bond Index is composed of
all bonds covered by the Lehman Brothers Government/Corporate Bond Index with
maturities between one and three years.

(21) The Russell 2000 Index is comprised of the smallest 2000 companies in the
Russell 3000 Index, representing approximately 11% of the Russell 3000 total
market capitalization. The index was developed with a base value of 135.00 as of
December 31, 1986.

(22) The NASDAQ Composite Index is a broad-based capitalization-weighted index
of all NASDAQ stocks. The index was developed with a base level of 100 as of
February 5, 1971.

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

B-7
<PAGE> 51

The following tables illustrate an assumed $10,000 investment in shares of
certain Subaccounts. The ending value does not include the effect of the
applicable Withdrawal Charge that may be imposed at the end of the period, and
thus may be higher than if such charge were deducted. Each table covers the
period from commencement of operations of the Subaccount to December 31, 1996.
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
IFS TOTAL RETURN SUBACCOUNT
NON-
YEAR QUALIFIED QUALIFIED
ENDED TOTAL TOTAL
12/31 VALUE VALUE
- ----- --------- ---------
<S> <C> <C>
1982 .................... $12,336 $11,769
1983 .................... 14,313 13,211
1984 .................... 13,427 12,508
1985 .................... 17,019 15,853
1986 .................... 19,328 18,003
1987 .................... 19,188 17,872
1988 .................... 21,207 19,752
1989 .................... 25,945 24,164
1990 .................... 26,889 25,043
1991 .................... 36,583 34,069
1992 .................... 36,703 34,179
1993 .................... 40,598 37,805
1994 .................... 36,253 33,758
1995 .................... 45,056 41,953
1996 .................... 51,903 48,327
</TABLE>

<TABLE>
<CAPTION>
IFS HIGH YIELD SUBACCOUNT
NON-
YEAR QUALIFIED QUALIFIED
ENDED TOTAL TOTAL
12/31 VALUE VALUE
- ----- --------- ---------
<S> <C> <C>
1982 .................... $12,363 $11,920
1983 .................... 14,000 13,427
1984 .................... 15,557 15,155
1985 .................... 18,686 18,203
1986 .................... 21,710 21,149
1987 .................... 22,693 22,105
1988 .................... 25,944 25,273
1989 .................... 25,278 24,624
1990 .................... 21,092 20,546
1991 .................... 31,597 30,778
1992 .................... 36,712 35,760
1993 .................... 43,466 42,338
1994 .................... 41,931 40,843
1995 .................... 48,576 47,315
1996 .................... 54,699 53,249
</TABLE>

<TABLE>
<CAPTION>
IFS INTERNATIONAL SUBACCOUNT
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ----- ---------
<S> <C>
1992 .................... $ 9,803
1993 .................... 12,836
1994 .................... 12,187
1995 .................... 13,559
1996 .................... 15,576
</TABLE>

<TABLE>
<CAPTION>
IFS SMALL CAP GROWTH SUBACCOUNT
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ----- ---------
<S> <C>
1994 .................... $10,296
1995 .................... 13,208
1996 .................... 16,680
</TABLE>

<TABLE>
<CAPTION>
IFS GROWTH SUBACCOUNT
NON-
YEAR QUALIFIED QUALIFIED
ENDED TOTAL TOTAL
12/31 VALUE VALUE
- ----- --------- ---------
<S> <C> <C>
1983 .................... $10,290 $10,271
1984 .................... 11,254 11,237
1985 .................... 13,898 13,877
1986 .................... 14,986 14,965
1987 .................... 15,043 15,022
1988 .................... 14,908 14,887
1989 .................... 18,871 18,844
1990 .................... 18,736 18,709
1991 .................... 29,479 29,437
1992 .................... 30,123 30,080
1993 .................... 34,063 34,011
1994 .................... 32,261 32,215
1995 .................... 42,330 42,269
1996 .................... 50,798 50,725
</TABLE>

<TABLE>
<CAPTION>
IFS MONEY MARKET SUBACCOUNT
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ----- ---------
<S> <C>
1982 .................... $10,747
1983 .................... 11,575
1984 .................... 12,630
1985 .................... 13,479
1986 .................... 14,185
1987 .................... 14,922
1988 .................... 15,827
1989 .................... 17,045
1990 .................... 18,195
1991 .................... 19,003
1992 .................... 19,385
1993 .................... 19,661
1994 .................... 20,157
1995 .................... 21,001
1996 .................... 21,755
</TABLE>

<TABLE>
<CAPTION>
IFS GOVERNMENT SECURITIES
SUBACCOUNT
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ----- ---------
<S> <C>
1987 .................... $10,030
1988 .................... 10,232
1989 .................... 11,437
1990 .................... 12,396
1991 .................... 14,084
1992 .................... 14,708
1993 .................... 15,559
1994 .................... 14,925
1995 .................... 17,511
1996 .................... 17,711
</TABLE>

B-8
<PAGE> 52
<TABLE>
<CAPTION>
JANUS GROWTH*
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ----- ---------
<S> <C>
1995 ................................ 10,327
1996 ................................ 12,062

<CAPTION>
JANUS WORLDWIDE GROWTH*
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ---- -----
<S> <C>
1995 ................................ 10,425
1996 ................................ 13,266
<CAPTION>
JANUS SHORT-TERM BOND*
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ---- -----
<S> <C>
1995 ................................ 10,236
1996 ................................ 10,496
<CAPTION>
LEXINGTON EMERGING MARKETS*
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ---- -----
<S> <C>
1995 ................................ 9,547
1996 ................................ 10,111
<CAPTION>
JANUS AGGRESSIVE GROWTH*
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ---- -----
<S> <C>
1995 ................................ 10,552
1996 ................................ 11,231
<CAPTION>
JANUS BALANCED*
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ---- -----
<S> <C>
1995 ................................ 10,547
1996 ................................ 12,082
<CAPTION>
LEXINGTON NATURAL RESOURCES*
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ---- -----
<S> <C>
1995 ................................ 10,032
1996 ................................ 12,556
<CAPTION>
FIDELITY VIP EQUITY-INCOME SUBACCOUNT
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ---- -----
<S> <C>
1996 ................................ 10,687
<CAPTION>
FIDELITY VIP II ASSET MANAGER SUBACCOUNT
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ---- -----
<S> <C>
1996 ................................ 10,916
<CAPTION>
FIDELITY VIP II CONTRAFUND SUBACCOUNT
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ---- -----
<S> <C>
1996 ................................ 11,145
<CAPTION>
FIDELITY VIP GROWTH SUBACCOUNT
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ---- -----
<S> <C>
1996 ................................ 10,347
<CAPTION>
FIDELITY VIP II INDEX 500 SUBACCOUNT
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ---- -----
<S> <C>
1996 ................................ 11,366
</TABLE>

B-9
<PAGE> 53

The following table compares the performance of the Subaccounts over various
periods with that of other variable annuity funds within the categories
described below according to data reported by Lipper Analytical Services, Inc.
("Lipper"), New York, New York, mutual fund reporting service. Lipper rankings
are based on changes in net asset value, with all income and capital gain
dividends reinvested. Such calculations do not include the effect of any sales
charges and include the deduction of mortality and expense risk charges and
other asset based charges. Future performance cannot be guaranteed. Lipper
publishes performance analyses on a regular basis from which the following
rankings were derived.

<TABLE>
<CAPTION>
LIPPER VARIABLE ANNUITY
PERFORMANCE ANALYSIS
------------------------
2/29/96 2/29/92
TO TO
SUBACCOUNT 2/28/97 2/28/97
---------- -------- --------
<S> <C> <C>
IFS Total Return (Q)........................................ 16.04 48.65
IFS Total Return (NQ)....................................... 16.04 48.65
IFS High Yield (Q).......................................... 11.65 63.45
IFS High Yield (NQ)......................................... 11.65 63.45
IFS Growth (Q).............................................. 18.26 77.82
IFS Growth (NQ)............................................. 18.26 77.82
IFS Money Market (Q)........................................ 3.64 15.26
IFS Money Market (NQ)....................................... 3.64 15.26
IFS Government Securities (Q & NQ).......................... 3.67 29.75
IFS International (Q & NQ).................................. 12.56 53.18
IFS Small Cap Growth (Q & NQ)............................... 25.79 N/A
</TABLE>

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

TAX-DEFERRED ACCUMULATION

<TABLE>
<CAPTION>
TAX-DEFERRED NON-QUALIFIED
RETIREMENT ANNUITY ANNUITY CONVENTIONAL
BEFORE-TAX CONTRIBUTIONS AFTER-TAX CONTRIBUTIONS SAVINGS PLAN
AND TAX-DEFERRED EARNINGS. AND TAX-DEFERRED EARNINGS. AFTER-TAX
-------------------------------- -------------------------------- CONTRIBUTIONS
TAXABLE LUMP TAXABLE LUMP AND TAXABLE
NO WITHDRAWALS SUM WITHDRAWAL NO WITHDRAWALS SUM WITHDRAWAL EARNINGS.
-------------- -------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
10 Years............... $ 36,256 $ 25,017 $ 25,017 $ 22,395 $ 21,974
20 Years............... 114,532 79,027 79,027 64,795 59,581
30 Years............... 283,522 195,630 195,630 150,385 123,940
</TABLE>

This chart compares the accumulation of monthly contributions into a
Tax-Deferred Retirement Annuity (such as a SIMPLE IRA or a Section 403(b)
annuity) through a payroll reduction program, a Non-Qualified Annuity and a
Conventional Savings Plan. Before-tax contributions to the Tax-Deferred
Retirement Annuity are $200 per month and the entire amount of a taxable lump
sum withdrawal will be subject to income tax. After-tax contributions to the
Non-Qualified Annuity and the Conventional Savings Plan are $138 per month. Only
the gain in the Non-Qualified Annuity will be subject to income tax in a taxable
lump sum withdrawal. The chart assumes a 31% federal marginal tax rate,
representative of the target market, and an 8% annual return. Tax rates are
subject to change as is the tax-deferred treatment of the Contracts.
Tax-deferred retirement accumulations, as well as the income on Non-Qualified
Annuities, are taxed as ordinary income upon withdrawal. A 10% tax penalty may
apply to early withdrawals. See "Federal Income Taxes" in the prospectus. The
chart does not reflect the following charges and expenses under Kemper Advantage
III: 1.00% mortality and expense risk; .30% administration charges; 6% maximum
deferred withdrawal charge; and $36 annual records maintenance charge. The
tax-deferred accumulation would be reduced if these charges were reflected. No
implication is intended by the use of these assumptions that the return shown is
guaranteed in any way or

B-10
<PAGE> 54

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

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

STATE REGULATION

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

EXPERTS

The 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 Contracts and also
reflect assets attributable to other variable annuity contracts offered by
KILICO through the Separate Account.

B-11
<PAGE> 55

INDEPENDENT AUDITORS' REPORT

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 options within the Investors Fund Series), Short-Term Bond
Subaccount, Growth Subaccount, Aggressive Growth Subaccount, Worldwide Growth
Subaccount, and Balanced Subaccount (investment options within the Janus Aspen
Series) Natural Resources Subaccount, Emerging Markets Subaccount (investment
options within the Lexington Funds), Equity Income Subaccount, Growth
Subaccount, Asset Manager Subaccount, Index 500 Subaccount, Contrafund
Subaccount (investment options within the Fidelity VIP Funds) 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
transfer agents. 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 subaccounts of KILICO
Variable Annuity Separate Account 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-12
<PAGE> 56

------------------
THIS PAGE INTENTIONALLY
LEFT BLANK
------------------

B-13
<PAGE> 57

KILICO VARIABLE ANNUITY SEPARATE ACCOUNT

STATEMENTS OF ASSETS AND LIABILITIES AND CONTRACT OWNERS' EQUITY

DECEMBER 31, 1996
(IN THOUSANDS)

<TABLE>
<CAPTION>
INVESTORS FUND SERIES
----------------------------------------------------
MONEY MONEY TOTAL HIGH
MARKET MARKET RETURN YIELD
SUBACCOUNT SUBACCOUNT #2 SUBACCOUNT SUBACCOUNT
---------- ------------- ---------- ----------
<S> <C> <C> <C> <C>
ASSETS
Investments in underlying portfolio funds, at current
values................................................. $59,117 8,476 693,657 286,846
Dividends and other receivables........................... 296 19 19 2
------- ----- ------- -------
Total assets...................................... 59,413 8,495 693,676 286,848
------- ----- ------- -------
LIABILITIES AND CONTRACT OWNERS' EQUITY
Liabilities:
Mortality and expense risk and administrative charges.. 65 -- 2,187 304
Other.................................................. -- -- 78 47
------- ----- ------- -------
Total liabilities................................. 65 -- 2,265 351
------- ----- ------- -------
Contract owners' equity................................... $59,348 8,495 691,411 286,497
======= ===== ======= =======
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
Accumulated net investment income (loss).................. 66,934 803 203,402 161,848
Accumulated net realized gain (loss) on sales of
investments............................................ -- -- 66,834 891
Unrealized appreciation of investments.................... -- -- 147,905 18,208
------- ----- ------- -------
Contract owners' equity................................... $59,348 8,495 691,411 286,497
======= ===== ======= =======
</TABLE>

See accompanying notes to financial statements.

B-14
<PAGE> 58

<TABLE>
<CAPTION>
INVESTORS FUND SERIES
----------------------------------------------------
GOVERNMENT SMALL CAP
GROWTH SECURITIES INTERNATIONAL GROWTH
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ---------- ------------- ----------
<S> <C> <C> <C>
484,754 79,836 163,108 68,928
2 -- 2 --
------- ------ ------- ------
484,756 79,836 163,110 68,928
------- ------ ------- ------
520 87 178 72
42 62 24 6
------- ------ ------- ------
562 149 202 78
------- ------ ------- ------
484,194 79,687 162,908 68,850
======= ====== ======= ======
234,859 51,794 123,259 52,058
97,528 25,750 1,147 27
47,242 1,157 8,369 2,894
104,565 986 30,133 13,871
------- ------ ------- ------
484,194 79,687 162,908 68,850
======= ====== ======= ======
</TABLE>

B-15
<PAGE> 59

KILICO VARIABLE ANNUITY SEPARATE ACCOUNT

STATEMENTS OF ASSETS AND LIABILITIES AND CONTRACT OWNERS' EQUITY (CONTINUED)

DECEMBER 31, 1996
(IN THOUSANDS)

<TABLE>
<CAPTION>
JANUS ASPEN SERIES
------------------------------------------------------------------
SHORT-TERM AGGRESSIVE WORLDWIDE
BOND GROWTH GROWTH GROWTH BALANCED
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
ASSETS
Investments in underlying portfolio
funds, at current values.............. $745 17,676 19,252 31,880 6,235
Dividends and other receivables.......... -- 1 -- 1 --
---- ------ ------ ------ ------
Total assets..................... 745 17,677 19,252 31,881 6,235
---- ------ ------ ------ ------
LIABILITIES AND CONTRACT OWNERS' EQUITY
Liabilities:
Mortality and expense risk and
administrative charges.............. 1 19 19 33 6
Other................................. -- -- 1 -- --
---- ------ ------ ------ ------
Total liabilities................ 1 19 20 33 6
---- ------ ------ ------ ------
Contract owners' equity.................. $744 17,658 19,232 31,848 6,229
==== ====== ====== ====== ======
ANALYSIS OF CONTRACT OWNERS' EQUITY
Excess of proceeds from units sold over
payments for units redeemed........... 724 16,145 19,029 28,936 5,588
Accumulated net investment income
(loss)................................ 26 239 (45) 107 78
Accumulated net realized gain (loss) on
sales of investments.................. (4) 74 408 64 89
Unrealized appreciation (depreciation) of
investments........................... (2) 1,200 (160) 2,741 474
---- ------ ------ ------ ------
Contract owners' equity.................. $744 17,658 19,232 31,848 6,229
==== ====== ====== ====== ======
</TABLE>

See accompanying notes to financial statements.

B-16
<PAGE> 60

<TABLE>
<CAPTION>
LEXINGTON FUNDS FIDELITY VIP FUNDS
----------------------- --------------------------------------------------------------
NATURAL EMERGING EQUITY ASSET
RESOURCES MARKETS INCOME GROWTH MANAGER INDEX 500 CONTRAFUND
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
4,955 5,273 6,271 4,080 1,004 5,725 8,819
-- -- -- -- -- -- --
----- ----- ----- ----- ----- ----- -----
4,955 5,273 6,271 4,080 1,004 5,725 8,819
----- ----- ----- ----- ----- ----- -----
5 5 7 4 1 6 10
-- -- -- -- -- -- --
----- ----- ----- ----- ----- ----- -----
5 5 7 4 1 6 10
----- ----- ----- ----- ----- ----- -----
4,950 5,268 6,264 4,076 1,003 5,719 8,809
===== ===== ===== ===== ===== ===== =====
4,320 5,379 5,886 3,976 935 5,345 8,129
(22) (55) (33) (21) (7) (42) (43)
60 71 13 (1) 12 24 15
592 (127) 398 122 63 392 708
----- ----- ----- ----- ----- ----- -----
4,950 5,268 6,264 4,076 1,003 5,719 8,809
===== ===== ===== ===== ===== ===== =====
</TABLE>

B-17
<PAGE> 61

KILICO VARIABLE ANNUITY SEPARATE ACCOUNT

STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)

See accompanying notes to financial statements.

B-18
<PAGE> 62

<TABLE>
<CAPTION>
INVESTORS FUND SERIES
-------------------------------------------------------
GOVERNMENT SMALL CAP
GROWTH SECURITIES INTERNATIONAL GROWTH
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
------------- ---------- ------------- ----------
<S> <C> <C> <C>
63,740 6,220 3,133 1,209
6,193 1,238 2,191 731
------ ------
57,547 4,982 942 478
------ ------
11,516 117 5,409 2,710
10,026 (4,343) 14,729 8,276
------ ------
21,542 (4,226) 20,138 10,986
------ ------
79,089 756 21,080 11,464
====== ======
</TABLE>

B-19
<PAGE> 63

KILICO VARIABLE ANNUITY SEPARATE ACCOUNT

STATEMENTS OF OPERATIONS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)

<TABLE>
<CAPTION>
JANUS ASPEN SERIES
------------------------------------------------------------------
SHORT-TERM AGGRESSIVE
BOND GROWTH GROWTH WORLDWIDE BALANCED
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Dividends and capital gains distributions......... $30 352 104 311 124
Expenses:
Mortality and expense risk and administrative
charges....................................... 7 152 155 205 57
--- ----- ---- ----- ---
Net investment income (loss)...................... 23 200 (51) 106 67
--- ----- ---- ----- ---
Net realized and unrealized gain (loss) on
investments:
Net realized gain (loss) on sales of
investments................................... (4) 74 408 64 89
Change in unrealized appreciation (depreciation)
of investments................................ -- 1,182 (267) 2,686 415
--- ----- ---- ----- ---
Net realized and unrealized gain (loss) on
investments..................................... (4) 1,256 141 2,750 504
--- ----- ---- ----- ---
Net increase (decrease) in contract owners' equity
resulting from operations....................... $19 1,456 90 2,856 571
=== ===== ==== ===== ===
</TABLE>

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

See accompanying notes to financial statements.

B-20
<PAGE> 64

<TABLE>
<CAPTION>
LEXINGTON FUNDS FIDELITY VIP FUNDS
----------------------- -----------------------------------------------------------------------------
NATURAL EMERGING EQUITY ASSET
RESOURCES MARKETS INCOME GROWTH MANAGER INDEX 500 CONTRA
SUBACCOUNT SUBACCOUNT SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A)
---------- ---------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
16 -- -- -- -- -- --
39 61 33 21 7 42 43
--- ---- --- --- --- --- ---
(23) (61) (33) (21) (7) (42) (43)
--- ---- --- --- --- --- ---
60 71 13 (1) 12 24 15
570 (138) 398 122 63 392 708
--- ---- --- --- --- --- ---
630 (67) 411 121 75 416 723
--- ---- --- --- --- --- ---
607 (128) 378 100 68 374 680
=== ==== === === === === ===
</TABLE>

B-21
<PAGE> 65

KILICO VARIABLE ANNUITY SEPARATE ACCOUNT

STATEMENTS OF CHANGES IN CONTRACT OWNERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)

<TABLE>
<CAPTION>
INVESTORS FUND SERIES
----------------------------------------------------
MONEY MONEY TOTAL
MARKET MARKET RETURN HIGH YIELD
SUBACCOUNT SUBACCOUNT #2 SUBACCOUNT SUBACCOUNT
---------- ------------- ---------- ----------
<S> <C> <C> <C> <C>
Operations:
Net investment income (loss)......................... $ 2,493 243 33,796 21,101
Net realized gain (loss) on sales of investments..... -- -- 17,341 4,321
Change in unrealized appreciation (depreciation) of
investments ...................................... -- -- 42,597 5,924
-------- ------ ------- -------
Net increase in contract owners' equity
resulting from operations....................... 2,493 243 93,734 31,346
-------- ------ ------- -------
Account unit transactions:
Proceeds from units sold............................. 22,801 12,928 47,161 36,482
Net transfers (to) from affiliate and subaccounts.... (7,498) (6,807) (27,829) (7,862)
Payments for units redeemed.......................... (16,282) (184) (78,322) (28,503)
-------- ------ ------- -------
Net increase (decrease) in contract owners' equity
from account unit transactions.................. (979) 5,937 (58,990) 117
-------- ------ ------- -------
Total increase (decrease) in contract owners' equity... 1,514 6,180 34,744 31,463
Beginning of period.................................. 57,834 2,315 656,667 255,034
-------- ------ ------- -------
End of period........................................ $ 59,348 8,495 691,411 286,497
======== ====== ======= =======
</TABLE>

See accompanying notes to financial statements.

B-22
<PAGE> 66

<TABLE>
<CAPTION>
INVESTORS FUND SERIES
----------------------------------------------------
GOVERNMENT SMALL CAP
GROWTH SECURITIES INTERNATIONAL GROWTH
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ---------- ------------- ----------
<S> <C> <C> <C>
57,547 4,982 942 478
11,516 117 5,409 2,710
10,026 (4,343) 14,729 8,276
------- ------- ------- ------
79,089 756 21,080 11,464
------- ------- ------- ------
43,192 7,926 20,272 13,879
(9,293) (9,264) 819 11,423
(41,011) (10,724) (13,606) (3,253)
------- ------- ------- ------
(7,112) (12,062) 7,485 22,049
------- ------- ------- ------
71,977 (11,306) 28,565 33,513
412,217 90,993 134,343 35,337
------- ------- ------- ------
484,194 79,687 162,908 68,850
======= ======= ======= ======
</TABLE>

B-23
<PAGE> 67

KILICO VARIABLE ANNUITY SEPARATE ACCOUNT

STATEMENTS OF CHANGES IN CONTRACT OWNERS' EQUITY (CONTINUED)

FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)

<TABLE>
<CAPTION>
JANUS ASPEN SERIES
-----------------------------------------------------------------
SHORT-TERM AGGRESSIVE WORLDWIDE
BOND GROWTH GROWTH GROWTH BALANCED
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Operations:
Net investment income (loss)............... $ 23 200 (51) 106 67
Net realized gain (loss) on sales of
investments............................. (4) 74 408 64 89
Change in unrealized appreciation
(depreciation) of investments........... -- 1,182 (267) 2,686 415
---- ------ ------ ------ -----
Net increase (decrease) in contract
owners' equity resulting from
operations............................ 19 1,456 90 2,856 571
---- ------ ------ ------ -----
Account unit transactions:
Proceeds from units sold................... 127 3,853 4,122 6,384 1,760
Net transfers (to) from affiliate and
subaccounts............................. 489 10,206 13,087 21,474 2,401
Payments for units redeemed................ (48) (445) (335) (477) (400)
---- ------ ------ ------ -----
Net increase in contract owners' equity
from account unit transactions........ 568 13,614 16,874 27,381 3,761
---- ------ ------ ------ -----
Total increase in contract owners' equity.... 587 15,070 16,964 30,237 4,332
Beginning of period........................ 157 2,588 2,268 1,611 1,897
---- ------ ------ ------ -----
End of period.............................. $744 17,658 19,232 31,848 6,229
==== ====== ====== ====== =====
</TABLE>

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

See accompanying notes to financial statements.

B-24
<PAGE> 68

<TABLE>
<CAPTION>
LEXINGTON FUNDS FIDELITY VIP FUNDS
----------------------- -----------------------------------------------------------------------------
NATURAL EMERGING EQUITY ASSET
RESOURCES MARKETS INCOME GROWTH MANAGER INDEX 500 CONTRA
SUBACCOUNT SUBACCOUNT SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A)
---------- ---------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
(23) (61) (33) (21) (7) (42) (43)
60 71 13 (1) 12 24 15
570 (138) 398 122 63 392 708
----- ----- ----- ----- ----- ----- -----
607 (128) 378 100 68 374 680
----- ----- ----- ----- ----- ----- -----
593 1,057 1,035 998 61 763 1,565
3,294 3,734 5,040 3,000 1,055 4,601 6,767
(292) (191) (189) (22) (181) (19) (203)
----- ----- ----- ----- ----- ----- -----
3,595 4,600 5,886 3,976 935 5,345 8,129
----- ----- ----- ----- ----- ----- -----
4,202 4,472 6,264 4,076 1,003 5,719 8,809
748 796 -- -- -- -- --
----- ----- ----- ----- ----- ----- -----
4,950 5,268 6,264 4,076 1,003 5,719 8,809
===== ===== ===== ===== ===== ===== =====
</TABLE>

B-25
<PAGE> 69

KILICO VARIABLE ANNUITY SEPARATE ACCOUNT

STATEMENTS OF CHANGES IN CONTRACT OWNERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)

<TABLE>
<CAPTION>
INVESTORS FUND SERIES
----------------------------------------------------
MONEY MONEY TOTAL
MARKET MARKET RETURN HIGH YIELD
SUBACCOUNT SUBACCOUNT #2 SUBACCOUNT SUBACCOUNT
---------- ------------- ---------- ----------
<S> <C> <C> <C> <C>
Operations:
Net investment income (loss)............................ $ 2,985 140 9,834 18,691
Net realized gain (loss) on sales of investments........ -- -- 5,320 1,290
Change in unrealized appreciation of investments........ -- -- 119,468 15,252
-------- ------ -------- --------
Net increase in contract owners' equity resulting
from operations................................. 2,985 140 134,622 35,233
-------- ------ -------- --------
Account unit transactions:
Proceeds from units sold................................ 7,440 1,994 47,745 21,167
Net transfers (to) from affiliate and subaccounts....... (14,703) (3,412) (21,697) 13,859
Payments for units redeemed............................. (16,838) (92) (87,868) (32,713)
-------- ------ -------- --------
Net increase (decrease) in contract owners' equity
from account unit transactions.................. (24,101) (1,510) (61,820) 2,313
-------- ------ -------- --------
Total increase (decrease) in contract owners' equity...... (21,116) (1,370) 72,802 37,546
Beginning of period..................................... 78,950 3,685 583,865 217,488
-------- ------ -------- --------
End of period........................................... $ 57,834 2,315 656,667 255,034
======== ====== ======== ========
</TABLE>

See accompanying notes to financial statements.

B-26
<PAGE> 70

<TABLE>
<CAPTION>
INVESTORS FUND SERIES
----------------------------------------------------
GOVERNMENT SMALL CAP
GROWTH SECURITIES INTERNATIONAL GROWTH
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ---------- ------------- ----------
<S> <C> <C> <C>
20,654 4,658 1,112 (290)
5,966 (1) 605 261
67,323 10,500 11,955 5,307
------- ------- ------- ------
93,943 15,157 13,672 5,278
------- ------- ------- ------
35,473 5,546 17,837 6,412
1,693 (6,225) (6,157) 12,876
(39,162) (14,994) (13,593) (2,032)
------- ------- ------- ------
(1,996) (15,673) (1,913) 17,256
------- ------- ------- ------
91,947 (516) 11,759 22,534
320,270 91,509 122,584 12,803
------- ------- ------- ------
412,217 90,993 134,343 35,337
======= ======= ======= ======
</TABLE>

B-27
<PAGE> 71

KILICO VARIABLE ANNUITY SEPARATE ACCOUNT

STATEMENTS OF CHANGES IN CONTRACT OWNERS' EQUITY (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)

<TABLE>
<CAPTION>
JANUS ASPEN SERIES
--------------------------------------------------------------
SHORT-TERM AGGRESSIVE WORLDWIDE
BOND GROWTH GROWTH GROWTH BALANCED
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Operations:
Net investment income................................. $ 3 39 6 1 11
Net realized gain (loss) on sales of investments...... -- -- -- -- --
Change in unrealized appreciation (depreciation) of
investments........................................ (2) 18 107 55 59
---- ----- ----- ----- -----
Net increase in contract owners' equity resulting
from operations............................... 1 57 113 56 70
---- ----- ----- ----- -----
Account unit transactions:
Proceeds from units sold.............................. 1 304 198 186 182
Net transfers (to) from affiliate and subaccounts..... 155 2,234 1,957 1375 1650
Payments for units redeemed........................... -- (7) -- (6) (5)
---- ----- ----- ----- -----
Net increase in contract owners' equity from
account unit transactions..................... 156 2,531 2,155 1,555 1,827
---- ----- ----- ----- -----
Total increase in contract owners' equity............... 157 2,588 2,268 1,611 1,897
Beginning of period................................... -- -- -- -- --
---- ----- ----- ----- -----
End of period......................................... $157 2,588 2,268 1,611 1,897
==== ===== ===== ===== =====
</TABLE>

See accompanying notes to financial statements.

B-28
<PAGE> 72

<TABLE>
<CAPTION>
LEXINGTON FUNDS FIDELITY VIP FUNDS
----------------------- --------------------------------------------------------------
NATURAL EMERGING EQUITY ASSET
RESOURCES MARKETS INCOME GROWTH MANAGER INDEX 500 CONTRAFUND
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
1 6 -- -- -- -- --
-- -- -- -- -- -- --
22 11 -- -- -- -- --
--- --- -- -- -- -- --
23 17 -- -- -- -- --
--- --- -- -- -- -- --
57 23 -- -- -- -- --
680 756 -- -- -- -- --
(12) -- -- -- -- -- --
--- --- -- -- -- -- --
725 779 -- -- -- -- --
--- --- -- -- -- -- --
748 796 -- -- -- -- --
-- -- -- -- -- -- --
--- --- -- -- -- -- --
748 796 -- -- -- -- --
=== === == == == == ==
</TABLE>

B-29
<PAGE> 73

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
Subaccounts. For the ADVANTAGE III contracts, up to 19 Subaccounts may be
available to Contract Owners depending upon their respective Contracts. Each
Subaccount invests exclusively in a corresponding portfolio of one of the
underlying investment funds; the Investors Fund Series, the Janus Aspen Series,
the Lexington Funds, and the Fidelity VIP Funds. Fourteen Subaccounts are
available to Contract Owners and each Subaccount invests exclusively in a
corresponding Portfolio of the Investors Fund Series, an open-end diversified
management investment company.

ESTIMATES

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

B-30
<PAGE> 74

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(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
INVESTORS FUND SERIES:
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

JANUS ASPEN SERIES FUND:
Short-Term Bond Portfolio................................... 75 747
Growth Portfolio............................................ 1,140 16,476
Aggressive Growth Portfolio................................. 1,056 19,412
Worldwide Growth Portfolio.................................. 1,640 29,139
Balanced Portfolio.......................................... 422 5,761
LEXINGTON FUNDS:
Natural Resources Portfolio................................. 347 4,363
Emerging Markets Portfolio.................................. 523 5,400
FIDELITY VIP FUNDS:
Equity Income Portfolio..................................... 298 5,873
Growth Portfolio............................................ 131 3,958
Asset Manager Portfolio..................................... 59 941
Index 500 Portfolio......................................... 64 5,333
Contrafund Portfolio........................................ 533 8,111
----------
TOTAL INVESTMENTS................................... $1,634,568
==========
</TABLE>

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

INVESTORS FUND SERIES

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.

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).

B-31
<PAGE> 75

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(2) SUMMARY OF INVESTMENTS (CONTINUED)
GOVERNMENT SECURITIES PORTFOLIO: This Portfolio invests primarily in U.S.
Government securities. The Portfolio will also invest in fixed-income securities
other than U.S. Government securities and will engage in options and financial
futures transactions.

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.

JANUS ASPEN SERIES

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

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

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

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

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

LEXINGTON FUNDS

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

LEXINGTON EMERGING MARKETS PORTFOLIO: This Portfolio seeks long-term growth of
capital primarily through investment in equity securities of companies domiciled
in, or doing business in, emerging countries and emerging markets.

FIDELITY VIP FUNDS

EQUITY-INCOME PORTFOLIO: This Portfolio seeks reasonable income by investing
primarily in income-producing equity securities.

GROWTH PORTFOLIO: This Portfolio seeks to achieve capital appreciation.

ASSET MANAGER PORTFOLIO: This Portfolio seeks to obtain high total return with
reduced risk over the long-term by allocating its assets among stocks, bonds and
short-term instruments.

INDEX 500 PORTFOLIO: This Portfolio seeks investment results that correspond to
the total return of common stocks publicly traded in the United States, as
represented by the S&P 500.

B-32
<PAGE> 76

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(2) SUMMARY OF INVESTMENTS (CONTINUED)
CONTRAFUND PORTFOLIO: This Portfolio seeks long-term capital appreciation.

(3) TRANSACTIONS WITH AFFILIATES

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

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

For contracts issued prior to May 1, 1994, KILICO has undertaken to reimburse
each of the ADVANTAGE III Money Market, Total Return, High Yield, and Equity
Subaccounts whose direct and indirect operating expenses exceed eighty
hundredths of one percent (.80%) of average daily net assets. In determining
reimbursement of direct and indirect operating expenses, for each Subaccount,
charges for mortality and expense risks and administrative expenses, and records
maintenance charges are excluded and, for each Portfolio, charges for taxes,
extraordinary expenses, and brokerage and transaction costs are excluded. During
the year ended December 31, 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 portfolios. In connection with the acquisition of Kemper
Corporation on January 4, 1996, Zurich also acquired 100% of ZKI.

Janus Capital Corporation is the investment manager of the Janus Aspen Series
Fund Portfolios, Lexington Management Corporation is the investment manager for
the Lexington Fund Portfolios and Fidelity Investments is the investment manager
for the Fidelity VIP Funds.

(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-33
<PAGE> 77

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
INVESTORS FUND SERIES
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-34
<PAGE> 78

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

<TABLE>
<CAPTION>
CONTRACT
NUMBER UNIT OWNERS'
OF UNITS VALUE EQUITY
-------- ------- --------
<S> <C> <C> <C>
JANUS ASPEN SERIES FUND
SHORT-TERM BOND
Flexible Payment, Qualified............................... -- $ -- $ --
Flexible Payment, Nonqualified............................ -- -- --
Periodic Payment, Qualified............................... 63 10.460 660
Periodic Payment, Nonqualified............................ 8 10.460 84
-------
744
-------
GROWTH
Flexible Payment, Qualified............................... 9 16.021 145
Flexible Payment, Nonqualified............................ 22 16.021 353
Periodic Payment, Qualified............................... 976 15.960 15,579
Periodic Payment, Nonqualified............................ 99 15.960 1,581
-------
17,658
-------
AGGRESSIVE GROWTH
Flexible Payment, Qualified............................... 1 18.309 15
Flexible Payment, Nonqualified............................ 2 18.309 31
Periodic Payment, Qualified............................... 937 18.238 17,089
Periodic Payment, Nonqualified............................ 115 18.238 2,097
-------
19,232
-------
WORLDWIDE GROWTH
Flexible Payment, Qualified............................... 3 19.565 54
Flexible Payment, Nonqualified............................ 33 19.565 637
Periodic Payment, Qualified............................... 1,413 19.490 27,537
Periodic Payment, Nonqualified............................ 186 19.490 3,620
-------
31,848
-------
BALANCED
Flexible Payment, Qualified............................... 3 15.059 40
Flexible Payment, Nonqualified............................ 10 15.059 148
Periodic Payment, Qualified............................... 360 15.001 5,406
Periodic Payment, Nonqualified............................ 42 15.001 635
-------
6,229
-------
LEXINGTON FUNDS
NATURAL RESOURCES
Flexible Payment, Qualified............................... 7 14.211 103
Flexible Payment, Nonqualified............................ -- -- --
Periodic Payment, Qualified............................... 243 14.154 3,435
Periodic Payment, Nonqualified............................ 100 14.154 1,412
-------
4,950
-------
EMERGING MARKETS
Flexible Payment, Qualified............................... 1 10.048 12
Flexible Payment, Nonqualified............................ 2 10.048 19
Periodic Payment, Qualified............................... 443 10.009 4,432
Periodic Payment, Nonqualified............................ 80 10.009 805
-------
5,268
-------
</TABLE>

B-35
<PAGE> 79

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

<TABLE>
<CAPTION>
CONTRACT
NUMBER UNIT OWNERS'
OF UNITS VALUE EQUITY
-------- ------- ----------
<S> <C> <C> <C>
FIDELITY VIP FUNDS
EQUITY INCOME
Flexible Payment, Qualified............................ 1 $20.891 $ 24
Flexible Payment, Nonqualified......................... 1 20.891 22
Periodic Payment, Qualified............................ 263 20.849 5,477
Periodic Payment, Nonqualified......................... 36 20.849 741
----------
6,264
----------
GROWTH
Flexible Payment, Qualified............................ -- -- --
Flexible Payment, Nonqualified......................... -- -- --
Periodic Payment, Qualified............................ 116 30.872 3,569
Periodic Payment, Nonqualified......................... 16 30.872 507
----------
4,076
----------
ASSET MANAGER
Flexible Payment, Qualified............................ -- 16.818 9
Flexible Payment, Nonqualified......................... -- -- --
Periodic Payment, Qualified............................ 55 16.784 915
Periodic Payment, Nonqualified......................... 5 16.784 79
----------
1,003
----------
INDEX 500
Flexible Payment, Qualified............................ -- -- --
Flexible Payment, Nonqualified......................... 1 88.539 110
Periodic Payment, Qualified............................ 53 88.364 4,695
Periodic Payment, Nonqualified......................... 10 88.364 914
----------
5,719
----------
CONTRAFUND
Flexible Payment, Qualified............................ -- -- --
Flexible Payment, Nonqualified......................... 2 16.450 30
Periodic Payment, Qualified............................ 488 16.418 8,009
Periodic Payment, Nonqualified......................... 47 16.418 770
----------
8,809
----------
TOTAL ADVANTAGE III CONTRACT OWNERS' EQUITY.............. $1,550,240
----------
</TABLE>

B-36
<PAGE> 80

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
--------
TOTAL PASSPORT CONTRACT OWNERS' EQUITY................... $402,950
========
</TABLE>

B-37
<PAGE> 81

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

THE BOARD OF DIRECTORS AND STOCKHOLDERS
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). These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

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 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

B-38
<PAGE> 82

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.

B-39
<PAGE> 83

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.

B-40
<PAGE> 84

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.

B-41
<PAGE> 85

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.

B-42
<PAGE> 86

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.

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.

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

B-43
<PAGE> 87

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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

B-44
<PAGE> 88

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.

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.

B-45
<PAGE> 89

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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.

B-46
<PAGE> 90

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 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>

B-47
<PAGE> 91

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(3) INVESTED ASSETS AND RELATED INCOME (CONTINUED)
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.

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>

B-48
<PAGE> 92

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
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.

B-49
<PAGE> 93

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(4) UNCONSOLIDATED INVESTEES (CONTINUED)
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 AND INTEREST RATE RISK

The Company generally strives to maintain a diversified invested asset
portfolio; however, certain concentrations of risk exist in the Company's
ownership of mortgage-backed and asset-backed securities and real estate.

Approximately 36.4 percent of the Company'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 had an
average yield of 6.83 percent during 1996 and consisted primarily of marketable
mortgage pass-through securities issued by the Government National Mortgage
Association, the Federal National Mortgage Association or the Federal Home Loan
Mortgage Corporation and other investment-grade securities collateralized by
mortgage pass-through securities issued by these entities. The Company has not
made any investments in interest-only or other similarly volatile tranches of
mortgage-backed securities. The Company's mortgage-backed investments are
generally of AAA credit quality, and the markets for these investments have been
and are expected to remain liquid. The Company plans to continue to reduce its
holding of such investments over time.

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

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 the Company's fixed maturity investments as of January 4, 1996 became
the Company'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 the
Company'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.

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 the Company'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, the Company had unamortized premiums and discounts of $24.7
million and $5.7 million, respectively, related to mortgage-backed and
asset-backed securities. The Company 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 the Company in 1996.

B-50
<PAGE> 94

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(5) CONCENTRATION OF CREDIT AND INTEREST RATE RISK (CONTINUED)
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.

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,

B-51
<PAGE> 95

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

(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 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.

B-52
<PAGE> 96

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(6) INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant portions
of the Company's net deferred Federal tax liability were as follows:

<TABLE>
<CAPTION>
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.

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

B-53
<PAGE> 97

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(7) RELATED-PARTY TRANSACTIONS (CONTINUED)
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 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.

B-54
<PAGE> 98

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(9) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (CONTINUED)
The discount rate used in determining the allocated postretirement benefit
obligation was 7.75 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 1995, the Company adopted certain severance-related policies to provide
benefits, generally limited in time, to former or inactive employees after
employment but before retirement. The effect of adopting these policies was
immaterial.

(10) COMMITMENTS AND CONTINGENT LIABILITIES

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

Although none of the Company or its joint venture projects have been identified
as a "potentially responsible party" under Federal environmental guidelines,
inherent in the ownership of or lending to real estate projects is the
possibility that environmental pollution conditions may exist on or near or
relate to properties owned or previously owned on properties securing loans.
Where the Company has presently identified remediation costs, they have been
taken into account in determining the cash flows and resulting valuations of the
related real estate assets. Based on the Company's receipt and review of
environmental reports on most of the projects in which it is involved, the
Company believes its environmental exposure would be immaterial to its
consolidated results of operations. However, the Company may be required in the
future to take actions to remedy environmental exposures, and there can be no
assurance that material environmental exposures will not develop or be
identified in the future. The amount of future environmental costs is impossible
to estimate due to, among other factors, the unknown magnitude of possible
exposures, the unknown timing and extent of corrective actions that may be
required, the determination of the Company's liability in proportion to others
and the extent such costs may be covered by insurance or various environmental
indemnification agreements.

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

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

B-55
<PAGE> 99

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(11) FINANCIAL INSTRUMENTS--OFF BALANCE-SHEET (CONTINUED)
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 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.

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

B-56
<PAGE> 100

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(13) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
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. 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.

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>

B-57
<PAGE> 101

APPENDIX

STATE PREMIUM TAX CHART

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

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

B-58