<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 24, 1998
COMMISSION FILE NOS. 2-72671
811-3199
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-4
<TABLE>
<S> <C>
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933 [ ]
Pre-Effective Amendment No. _ [ ]
Post-Effective Amendment No. 27 [X]
and
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940 [ ]
Amendment No. 45 [X]
</TABLE>
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
(EXACT NAME OF REGISTRANT)
KEMPER INVESTORS LIFE INSURANCE
COMPANY
(NAME OF INSURANCE COMPANY)
<TABLE>
<S> <C>
1 Kemper Drive, Long Grove, Illinois 60049
(Address of Insurance Company's Principal Executive Offices) (Zip Code)
Insurance Company's Telephone Number, including Area Code: (847) 550-5500
</TABLE>
Debra P. Rezabek, Esq.
1 Kemper Drive
Long Grove, Illinois 60049
(Name and Address of Agent for Service)
COPIES TO:
KURT W. BERNLOHR, ESQ.
KEMPER INVESTORS LIFE INSURANCE COMPANY
1 KEMPER DRIVE
LONG GROVE, ILLINOIS 60049
JOAN E. BOROS, ESQ.
JORDEN BURT BOROS
CICCHETTI BERENSON & JOHNSON
1025 THOMAS JEFFERSON STREET, N.W.
SUITE 400E
WASHINGTON, D.C. 20007
Approximate Date of Proposed Public Offering: Continuous
It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b) of Rule 485
[X] on May 1, 1998 pursuant to paragraph (b) of Rule 485
[ ] 60 days after filing pursuant to paragraph (a)(i) of Rule 485
[ ] on (date) pursuant to paragraph (a)(i) of Rule 485
[ ] 75 days after filing pursuant to paragraph (a)(ii)
[ ] on (date) pursuant to paragraph (a)(ii) of Rule 485
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
The Registrant has registered an indefinite number of securities pursuant
to Section 24(f) of the 1940 Act.
================================================================================
<PAGE> 2
PROSPECTUS--MAY 1, 1998
- --------------------------------------------------------------------------------
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, 408A or 457 of the
Internal Revenue Code of 1986, as amended.
Purchase payments for the Contracts may be allocated to one or more of the
options under which Contract values accumulate on either a variable or fixed
basis. These options consist of the twenty-six Subaccounts of the Separate
Account and the Fixed Accumulation Option of the General Account. Each
Subaccount invests in one of the Portfolios of the following Funds:
INVESTORS FUND SERIES
<TABLE>
<S> <C>
- - Kemper Money Market - Kemper Investment Grade Bond
- - Kemper Total Return - Kemper Contrarian Value (formerly
- - Kemper High Yield Kemper Value)
- - Kemper Growth - Kemper Small Cap Value
- - Kemper Government Securities - Kemper Value & Growth
- - Kemper International - Kemper Horizon 20+
- - Kemper Small Cap Growth - Kemper Horizon 10+
- Kemper Horizon 5
</TABLE>
JANUS ASPEN SERIES
<TABLE>
<S> <C>
- - Growth - Balanced
- - Aggressive Growth - Short-Term Bond*
- - Worldwide Growth
</TABLE>
LEXINGTON NATURAL RESOURCES TRUST
LEXINGTON EMERGING MARKETS FUND
FIDELITY VARIABLE INSURANCE PRODUCTS FUND ("VIP")
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II ("VIP II")
<TABLE>
<S> <C>
- - Fidelity VIP Equity-Income - Fidelity VIP II Asset Manager
- - Fidelity VIP Growth - Fidelity VIP II Index 500
- Fidelity VIP II Contrafund
</TABLE>
* NOTE: THE JANUS ASPEN SERIES SHORT-TERM BOND SUBACCOUNT IS NOT AVAILABLE FOR
NEW CONTRACTS ISSUED ON OR AFTER MAY 1, 1998, AND KILICO INTENDS TO
LIQUIDATE THIS SUBACCOUNT AS SOON AS POSSIBLE THEREAFTER. (SEE "THE
FUNDS", PAGE 11.)
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, 1998 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 36 of this Prospectus.
THIS PROSPECTUS IS VALID ONLY IF ACCOMPANIED OR PRECEDED BY A CURRENT PROSPECTUS
FOR THE FUNDS. ALL PROSPECTUSES SHOULD BE READ AND RETAINED FOR FUTURE
REFERENCE.
THIS PROSPECTUS AND OTHER INFORMATION ABOUT THE SEPARATE ACCOUNT REQUIRED TO BE
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION (SEC) CAN BE FOUND IN THE
SEC'S WEB SITE AT HTTP://WWW.SEC.GOV.
THE CONTRACTS ARE NOT INSURED BY THE FDIC. THEY ARE OBLIGATIONS OF THE ISSUING
INSURANCE COMPANY AND ARE NOT A DEPOSIT OF, OR GUARANTEED BY, ANY BANK OR
SAVINGS INSTITUTION AND ARE SUBJECT TO RISKS, INCLUDING POSSIBLE LOSS OF
PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE> 3
TABLE OF CONTENTS
================================================================================
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DEFINITIONS................................................. 1
SUMMARY..................................................... 2
SUMMARY OF EXPENSES......................................... 4
CONDENSED FINANCIAL INFORMATION............................. 6
KILICO, THE SEPARATE ACCOUNT AND THE FUND................... 11
FIXED ACCUMULATION OPTION................................... 15
THE CONTRACTS............................................... 15
CONTRACT CHARGES AND EXPENSES............................... 20
THE ANNUITY PERIOD.......................................... 23
FEDERAL TAX MATTERS......................................... 25
DISTRIBUTION OF CONTRACTS................................... 32
VOTING RIGHTS............................................... 32
REPORTS TO CONTRACT OWNERS AND INQUIRIES.................... 33
DOLLAR COST AVERAGING....................................... 33
SYSTEMATIC WITHDRAWAL PLAN.................................. 34
PROVISIONS OF PRIOR CONTRACTS............................... 34
YEAR 2000 COMPLIANCE........................................ 35
LEGAL PROCEEDINGS........................................... 36
TABLE OF CONTENTS--STATEMENT OF ADDITIONAL INFORMATION...... 36
APPENDIX.................................................... 37
</TABLE>
<PAGE> 4
DEFINITIONS
The following terms as used in this Prospectus have the indicated meanings:
ACCUMULATION PERIOD--The period between the Date of Issue of a Contract and
the Annuity Date.
ACCUMULATION UNIT--A unit of measurement used to determine the value of
each Subaccount during the Accumulation Period.
ANNUITANT--The person designated to receive or who is actually receiving
annuity payments and upon the continuation of whose life annuity payments
involving life contingencies depend.
ANNUITY DATE--The date on which annuity payments are to commence.
ANNUITY OPTION--One of several forms in which annuity payments can be made.
ANNUITY PERIOD--The period starting on the Annuity Date.
ANNUITY UNIT--A unit of measurement used to determine the amount of
Variable Annuity payments.
BENEFICIARY--The person designated to receive any benefits under a Contract
upon the death of the Annuitant or the Owner prior to the Annuity Period.
CONTRACT--A Variable Annuity Contract offered by this Prospectus. With
respect to a Contract issued on a group basis, the certificate issued to an
individual shall be deemed for the purposes of this Prospectus to be a
Contract.
CONTRACT OWNER OR OWNER--The person designated in the Contract as having
the privileges of ownership defined in the Contract.
CONTRACT VALUE--The sum of the values of the Owner's Contract interest in
the Subaccount(s) of the Separate Account and the General Account.
CONTRACT YEAR--Period between anniversaries of the Date of Issue of a
Contract, or with respect to a Contract issued on a group basis, the period
between anniversaries of the date of issue of a certificate.
CONTRACT QUARTER--Periods between quarterly anniversaries of the Date of
Issue of the Contract, or with respect to a Contract issued on a group
basis, the period between quarterly anniversaries of the date of issue of a
certificate.
CONTRIBUTION YEAR--Each Contract Year in which a Purchase Payment is made
and each succeeding year measured from the end of the Contract Year during
which such Purchase Payment was made. For example, if a Contract Owner
makes an initial payment of $15,000 and then makes a subsequent payment of
$10,000 during the fourth Contract Year, the fifth Contract Year will be
the fifth Contribution Year for the purpose of Accumulation Units
attributable to the initial payment and the second Contribution Year with
respect to Accumulation Units attributable to the subsequent $10,000
payment.
DATE OF ISSUE--The date on which the first Contract Year commences.
DEBT--The principal of any outstanding loan from the General Account
Contract Value, plus any accrued interest. Requests for loans must be made
in writing to KILICO.
FIXED ANNUITY--An annuity under which the amount of each annuity payment
does not vary with the investment experience of a Subaccount and is
guaranteed by KILICO.
FUND OR FUNDS--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, 408A or 457 of the Internal Revenue Code.
PORTFOLIO--A series of a Fund with its own objective and policies, which
represents shares of beneficial interest in a separate portfolio of
securities and other assets. Portfolio is sometimes referred to herein as a
Fund.
1
<PAGE> 5
PURCHASE PAYMENTS--Amounts paid to KILICO by or on behalf of a Contract
Owner.
QUALIFIED PLAN CONTRACT--A Contract issued in connection with a retirement
plan which receives favorable tax treatment under Section 401, 403, 408,
408A or 457 of the Internal Revenue Code.
SEPARATE ACCOUNT--A unit investment trust registered with the Securities
and Exchange Commission under the Investment Company Act of 1940 known as
the KILICO Variable Annuity Separate Account.
SEPARATE ACCOUNT CONTRACT VALUE--The sum of the Owner's Contract interest
in the Subaccount(s).
SUBACCOUNTS--The twenty-six subdivisions of the Separate Account, the
assets of which consist solely of shares of the corresponding Portfolios.
SUBACCOUNT VALUE--The value of the Owner's Contract interest in each
Subaccount.
UNITHOLDER--The person holding the voting rights with respect to an
Accumulation or Annuity Unit.
VALUATION DATE--Each day when the New York Stock Exchange is open for
trading, as well as each day otherwise required. (See "Accumulation Unit
Value.")
VALUATION PERIOD--The interval of time between two consecutive Valuation
Dates.
VARIABLE ANNUITY--An annuity with payments varying in amount in accordance
with the investment experience of the Subaccount(s) in which the Owner's
Contract has an interest.
WITHDRAWAL CHARGE--The "contingent deferred sales charge" assessed against
certain withdrawals of Accumulation Units in their first six Contribution
Years or against certain annuitization of Accumulation Units in their first
six Contribution Years.
WITHDRAWAL VALUE--Contract Value less Debt, and any premium tax payable if
the Contract is being annuitized, minus any Withdrawal Charge applicable to
that Contract.
SUMMARY
The Contracts described in the Prospectus provide a way to invest on a
tax-deferred basis and to receive annuity benefits in accordance with the
annuity option selected and the retirement plan under which the Contract has
been purchased. The Prospectus offers both Non-Qualified Plan and Qualified Plan
Contracts. KILICO makes several underlying investment options, including
twenty-six variable Subaccounts and a Fixed Accumulation Option, available for
the Contract Owner to pursue his or her investment objectives.
The minimum initial Purchase Payment for a Non-Qualified Plan Contract is $2,500
and the minimum subsequent payment is $500. The minimum Purchase Payment for a
Qualified Plan Contract is $50. However, so long as annualized contribution
amounts from a payroll or salary deduction plan are equal to or greater than
$600, a periodic payment for a Qualified Plan Contract under $50 will be
accepted. For a Non-Qualified Plan Contract a minimum of $500 in Contract Value
must be allocated to an investment option before another investment option can
be selected. For a Qualified Plan Contract, as long as contribution amounts to a
new investment option from a payroll or salary reduction plan are equal to or
greater than $50 per month, another such investment option may be selected. The
maximum Purchase Payment for a Qualified Plan Contract is the maximum permitted
under the plan pursuant to which the Contract is issued. The Contract Owner may
make Purchase Payments to Non-Qualified Plan Contracts and Contracts issued as
Individual Retirement Annuities ("IRAs") by authorizing KILICO to draw on an
account of the Contract Owner via check or electronic debit ("Pre-Authorized
Checking [PAC] Agreement"). (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 a corresponding
Portfolio of one of the Funds. (See "The Funds" page 11.) 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> 6
Transfers between Subaccounts are permitted before and after annuitization, if
allowed by the applicable retirement plan and subject to certain limitations.
Restrictions apply to transfers out of the Fixed Accumulation Option. (See
"Transfer During Accumulation Period" and "Transfer During Annuity Period,"
pages 17 and 24, 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. Withdrawals will have tax consequences, which may include the amount
of the withdrawal being subject to income tax and in some circumstances an
additional 10% penalty tax. 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 "Asset-Based Charges Against the
Separate Account," page 20.) The Funds will incur certain management fees and
other expenses. (See "Summary of Expenses", "Investment Management Fees and
Other Expenses" and 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 annuities established under
Section 408 of the Code, including Roth IRAs established under Section 408A 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 26 and "Qualified
Plans," page 29.)
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.) In addition, a special "free look" period applies in some
circumstances to Contracts issued as individual retirement annuities under
Section 408 of the Code or as Roth IRAs under Section 408A of the Code.
3
<PAGE> 7
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>
<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, 1997)
<TABLE>
<CAPTION>
KEMPER KEMPER KEMPER KEMPER
MONEY TOTAL KEMPER KEMPER GOVERNMENT KEMPER 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..... .05 .05 .05 .05 .09 .16 .06
--- --- --- --- --- --- ---
Total
Portfolio
Annual
Expenses..... .55% .60% .65% .65% .64% .91% .71%
=== === === === === === ===
<CAPTION>
KEMPER KEMPER KEMPER KEMPER KEMPER KEMPER KEMPER
INVESTMENT CONTRARIAN SMALL VALUE+ HORIZON HORIZON HORIZON
GRADE BOND VALUE CAP VALUE GROWTH 20+ 10+ 5
---------- ---------- --------- ------ ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Management
Fees......... .60% .75% .75% .75% .60% .60% .60%
Other
Expenses..... .20 .05 .09 .09 .33 .23 .37
--- --- --- --- --- --- ---
Total
Portfolio
Annual
Expenses..... .80% .80% .84% .84% .93% .83% .97%
=== === === === === === ===
</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, 1997)
<TABLE>
<CAPTION>
JANUS JANUS JANUS LEXINGTON
JANUS AGGRESSIVE WORLDWIDE JANUS SHORT-TERM NATURAL
GROWTH(3) GROWTH(3) GROWTH(3) BALANCED(3) BOND(3) RESOURCES
--------- ---------- --------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Management
Fees......... .65% .73% .66% .76% .39% 1.00%
Other
Expenses..... .05 .03 .08 .07 .26 .25
--- --- --- --- --- ----
Total
Portfolio
Annual
Expenses..... .70% .76% .74% .83% .65% 1.25%
=== === === === === ====
<CAPTION>
FIDELITY FIDELITY FIDELITY FIDELITY
LEXINGTON VIP FIDELITY VIP II VIP II VIP II
EMERGING EQUITY- VIP ASSET INDEX CONTRA-
MARKETS INCOME(4) GROWTH(4) MANAGER(4) 500(5) FUND(4)
--------- --------- --------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Management
Fees......... .85% .50% .60% .55% .24% .60%
Other
Expenses..... .99 .08 .09 .10 .04 .11
---- --- --- --- --- ---
Total
Portfolio
Annual
Expenses..... 1.84% .58% .69% .65% .28% .71%
==== === === === === ===
</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 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, 1997 would have been .74%, .04% and .78%, respectively,
for the Growth and Aggressive Growth Portfolios; .72%, .09% and .81% for the
Worldwide Growth Portfolio; .77%, .06% and .83% for the Balanced Portfolio; and
.65%, .29% and .94% 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) 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 whereby credits realized, as a result of
uninvested cash balances were used to reduce custodian expenses. Including these
reductions, the Total Portfolio Annual Expenses for the Portfolios for the
fiscal year ended December 31, 1997 would have been .57% for the Fidelity VIP
Equity-Income Portfolio, .67% for the Fidelity VIP Growth Portfolio, .64% for
the Fidelity VIP II Asset Manager Portfolio and .68% for the Fidelity VIP II
Contrafund Portfolio.
(5) FMR agreed to reimburse a portion of the Fidelity VIP II Index 500
Portfolio's expenses during this period. Without this reimbursement, the
Management Fee, Other Expenses and Total Portfolio Annual Expenses for the
Portfolio for the fiscal year ended December 31, 1997 would have been .27%, .13%
and .40%, respectively, on an annualized basis.
4
<PAGE> 8
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:
Kemper Money Market 82 107 132 235
Kemper Total Return 83 109 135 241
Kemper High Yield 83 110 137 246
Kemper Growth 83 110 137 246
Kemper Government Securities 83 110 137 245
Kemper International 86 118 150 273
Kemper Small Cap Growth 84 112 140 252
Kemper Investment Grade Bond 85 115 145 261
Kemper Contrarian Value 85 115 145 261
Kemper Small Cap Value 85 116 147 266
Kemper Value+Growth 85 116 147 266
Kemper Horizon 20+ 86 118 151 275
Kemper Horizon 10+ 85 116 146 265
Kemper Horizon 5 86 120 153 279
Janus Growth 84 112 140 251
Janus Aggressive Growth 84 113 143 257
Janus Worldwide Growth 84 113 142 255
Janus Balanced 85 116 146 265
Janus Short-Term Bond 83 110 137 246
Lexington Natural Resources 89 128 167 307
Lexington Emerging Markets 95 145 196 364
Fidelity VIP Equity--Income 83 108 134 238
Fidelity VIP Growth 84 111 139 250
Fidelity VIP II Asset Manager 83 110 137 246
Fidelity VIP II Index 500 80 99 118 206
Fidelity VIP II Contrafund 84 112 140 252
If you do not surrender your contract: You would pay the
following expenses on a $1,000 investment, assuming 5%
annual return on assets:
Kemper Money Market 21 64 109 235
Kemper Total Return 21 65 112 241
Kemper High Yield 22 67 114 246
Kemper Growth 22 67 114 246
Kemper Government Securities 22 66 114 245
Kemper International 24 75 128 273
Kemper Small Cap Growth 22 69 117 252
Kemper Investment Grade Bond 23 71 122 261
Kemper Contrarian Value 23 71 122 261
Kemper Small Cap Value 24 73 124 266
Kemper Value+Growth 24 73 124 266
Kemper Horizon 20+ 24 75 129 275
Kemper Horizon 10+ 23 72 124 265
Kemper Horizon 5 25 77 131 279
Janus Growth 22 68 117 251
Janus Aggressive Growth 23 70 120 257
Janus Worldwide Growth 23 69 119 255
Janus Balanced 23 72 124 265
Janus Short-Term Bond 22 67 114 246
Lexington Natural Resources 28 85 145 307
Lexington Emerging Markets 34 103 175 364
Fidelity VIP Equity--Income 21 65 111 238
Fidelity VIP Growth 22 68 116 250
Fidelity VIP II Asset Manager 22 67 114 246
Fidelity VIP II Index 500 18 55 95 206
Fidelity VIP II Contrafund 22 69 117 252
</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> 9
CONDENSED FINANCIAL INFORMATION
The following condensed financial information is derived from the financial
statements of the Separate Account. The data should be read in conjunction with
the financial statements, related notes and other financial information included
in the Statement of Additional Information.
Selected data for the last ten years for accumulation units outstanding as of
the year ended December 31st for each period:
<TABLE>
<CAPTION>
FLEXIBLE PAYMENT CONTRACTS
----------------------------------------------
1997 1996+ 1995**** 1994*** 1993
---- ----- -------- ------- ----
<S> <C> <C> <C> <C> <C>
TAX QUALIFIED
Accumulation unit value at beginning of period
Kemper Money Market Subaccount.................... $ 2.297 2.208 2.111 2.051 2.014
Kemper Total Return Subaccount.................... 5.473 4.735 3.796 4.236 3.816
Kemper High Yield Subaccount...................... 5.738 5.082 4.372 4.517 3.802
Kemper Growth Subaccount.......................... 5.303 4.404 3.345 3.520 3.102
Kemper Government Securities Subaccount*.......... 1.599 1.575 1.337 1.388 1.317
Kemper International Subaccount**................. 1.590 1.379 1.234 1.293 .983
Kemper Small Cap Growth Subaccount***............. 1.686 1.330 1.033
Kemper Investment Grade Bond Subaccount+.......... 1.029 --
Kemper Contrarian Value Subaccount+............... 1.166 --
Kemper Small Cap Value Subaccount+................ 1.012 --
Kemper Value+Growth Subaccount+................... 1.138 --
Kemper Horizon 20+ Subaccount+.................... 1.146 --
Kemper Horizon 10+ Subaccount+.................... 1.106 --
Kemper Horizon 5 Subaccount+...................... 1.089 --
Janus Growth Subaccount****....................... 16.021 13.662 --
Janus Aggressive Growth Subaccount****............ 18.309 17.132 --
Janus Worldwide Growth Subaccount****............. 19.565 15.315 --
Janus Balanced Subaccount****..................... 15.059 13.092 --
Janus Short-Term Bond Subaccount****.............. 10.501 10.201 --
Lexington Natural Resources Subaccount****........ 14.211 11.315 --
Lexington Emerging Markets Subaccount****......... 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 --
Accumulation unit value at end of period
Kemper Money Market Subaccount.................... $ 2.394 2.297 2.208 2.111 2.051
Kemper Total Return Subaccount.................... 6.501 5.473 4.735 3.796 4.236
Kemper High Yield Subaccount...................... 6.341 5.738 5.082 4.372 4.517
Kemper Growth Subaccount.......................... 6.371 5.303 4.404 3.345 3.520
<CAPTION>
FLEXIBLE PAYMENT CONTRACTS
------------------------------------------
1992** 1991 1990 1989* 1988
------ ---- ---- ----- ----
<S> <C> <C> <C> <C> <C>
TAX QUALIFIED
Accumulation unit value at beginning of period
Kemper Money Market Subaccount.................... 1.966 1.875 1.751 1.621 1.523
Kemper Total Return Subaccount.................... 3.790 2.776 2.669 2.174 1.960
Kemper High Yield Subaccount...................... 3.261 2.169 2.591 2.651 2.311
Kemper Growth Subaccount.......................... 3.025 1.916 1.923 1.515 1.524
Kemper Government Securities Subaccount*.......... 1.256 1.101 1.013
Kemper International Subaccount**................. 1.000
Kemper Small Cap Growth Subaccount***.............
Kemper Investment Grade Bond Subaccount+..........
Kemper Contrarian Value Subaccount+...............
Kemper Small Cap Value Subaccount+................
Kemper Value+Growth Subaccount+...................
Kemper Horizon 20+ Subaccount+....................
Kemper Horizon 10+ Subaccount+....................
Kemper Horizon 5 Subaccount+......................
Janus Growth Subaccount****.......................
Janus Aggressive Growth Subaccount****............
Janus Worldwide Growth Subaccount****.............
Janus Balanced Subaccount****.....................
Janus Short-Term Bond Subaccount****..............
Lexington Natural Resources Subaccount****........
Lexington Emerging Markets Subaccount****.........
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
Kemper Money Market Subaccount.................... 2.014 1.966 1.875 1.751 1.621
Kemper Total Return Subaccount.................... 3.816 3.790 2.776 2.669 2.174
Kemper High Yield Subaccount...................... 3.802 3.261 2.169 2.591 2.651
Kemper Growth Subaccount.......................... 3.102 3.025 1.916 1.923 1.515
<CAPTION>
PERIODIC PAYMENT CONTRACTS
-----------------------------------------------
1997 1996+ 1995**** 1994*** 1993
---- ----- -------- ------- ----
<S> <C> <C> <C> <C> <C>
TAX QUALIFIED
Accumulation unit value at beginning of period
Kemper Money Market Subaccount.................... 2.199 2.120 2.033 1.981 1.950
Kemper Total Return Subaccount.................... 5.239 4.546 3.656 4.092 3.696
Kemper High Yield Subaccount...................... 5.493 4.879 4.210 4.363 3.683
Kemper Growth Subaccount.......................... 5.102 4.250 3.238 3.417 3.020
Kemper Government Securities Subaccount*.......... 1.566 1.547 1.317 1.371 1.305
Kemper International Subaccount**................. 1.567 1.363 1.223 1.285 .980
Kemper Small Cap Growth Subaccount***............. 1.673 1.323 1.031
Kemper Investment Grade Bond Subaccount+.......... 1.027 --
Kemper Contrarian Value Subaccount+............... 1.164 --
Kemper Small Cap Value Subaccount+................ 1.010 --
Kemper Value+Growth Subaccount+................... 1.136 --
Kemper Horizon 20+ Subaccount+.................... 1.144 --
Kemper Horizon 10+ Subaccount+.................... 1.104 --
Kemper Horizon 5 Subaccount+...................... 1.086 --
Janus Growth Subaccount****....................... 15.960 13.650 --
Janus Aggressive Growth Subaccount****............ 18.238 17.117 --
Janus Worldwide Growth Subaccount****............. 19.490 15.302 --
Janus Balanced Subaccount****..................... 15.001 13.081 --
Janus Short-Term Bond Subaccount****.............. 10.460 10.192 --
Lexington Natural Resources Subaccount****........ 14.154 11.305 --
Lexington Emerging Markets Subaccount****......... 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 --
Accumulation unit value at end of period
Kemper Money Market Subaccount.................... 2.285 2.199 2.120 2.033 1.981
Kemper Total Return Subaccount.................... 6.205 5.239 4.546 3.656 4.092
Kemper High Yield Subaccount...................... 6.052 5.493 4.879 4.210 4.363
Kemper Growth Subaccount.......................... 6.112 5.102 4.250 3.238 3.417
<CAPTION>
PERIODIC PAYMENT CONTRACTS
-------------------------------------------
1992** 1991 1990 1989* 1988
------ ---- ---- ----- ----
<S> <C> <C> <C> <C> <C>
TAX QUALIFIED
Accumulation unit value at beginning of period
Kemper Money Market Subaccount.................... 1.910 1.827 1.712 1.589 1.498
Kemper Total Return Subaccount.................... 3.682 2.705 2.609 2.131 1.927
Kemper High Yield Subaccount...................... 3.168 2.114 2.533 2.599 2.272
Kemper Growth Subaccount.......................... 2.954 1.876 1.889 1.492 1.506
Kemper Government Securities Subaccount*.......... 1.248 1.097 1.012
Kemper International Subaccount**................. 1.000
Kemper Small Cap Growth Subaccount***.............
Kemper Investment Grade Bond Subaccount+..........
Kemper Contrarian Value Subaccount+...............
Kemper Small Cap Value Subaccount+................
Kemper Value+Growth Subaccount+...................
Kemper Horizon 20+ Subaccount+....................
Kemper Horizon 10+ Subaccount+....................
Kemper Horizon 5 Subaccount+......................
Janus Growth Subaccount****.......................
Janus Aggressive Growth Subaccount****............
Janus Worldwide Growth Subaccount****.............
Janus Balanced Subaccount****.....................
Janus Short-Term Bond Subaccount****..............
Lexington Natural Resources Subaccount****........
Lexington Emerging Markets Subaccount****.........
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
Kemper Money Market Subaccount.................... 1.950 1.910 1.827 1.712 1.589
Kemper Total Return Subaccount.................... 3.696 3.682 2.705 2.609 2.131
Kemper High Yield Subaccount...................... 3.683 3.168 2.114 2.533 2.599
Kemper Growth Subaccount.......................... 3.020 2.954 1.876 1.889 1.492
</TABLE>
(CONTINUED ON NEXT PAGE)
6
<PAGE> 10
CONDENSED FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
FLEXIBLE PAYMENT CONTRACTS
----------------------------------------------
1997 1996+ 1995**** 1994*** 1993
---- ----- -------- ------- ----
<S> <C> <C> <C> <C> <C>
Kemper Government Securities Subaccount*.......... $ 1.725 1.599 1.575 1.337 1.388
Kemper International Subaccount**................. 1.723 1.590 1.379 1.234 1.293
Kemper Small Cap Growth Subaccount***............. 2.240 1.686 1.330 1.033
Kemper Investment Grade Bond Subaccount+.......... 1.111 1.029
Kemper Contrarian Value Subaccount+............... 1.505 1.166
Kemper Small Cap Value Subaccount+................ 1.220 1.012
Kemper Value+Growth Subaccount+................... 1.414 1.138
Kemper Horizon 20+ Subaccount+.................... 1.367 1.146
Kemper Horizon 10+ Subaccount+.................... 1.279 1.106
Kemper Horizon 5 Subaccount+...................... 1.215 1.089
Janus Growth Subaccount****....................... 19.471 16.021 13.662
Janus Aggressive Growth Subaccount****............ 20.423 18.309 17.132
Janus Worldwide Growth Subaccount****............. 23.663 19.565 15.315
Janus Balanced Subaccount****..................... 18.205 15.059 13.092
Janus Short-Term Bond Subaccount****.............. 11.096 10.501 10.201
Lexington Natural Resources Subaccount****........ 15.089 14.211 11.315
Lexington Emerging Markets Subaccount****......... 8.799 10.048 9.445
Fidelity VIP Equity-- Income Subaccount+.......... 26.497 20.891
Fidelity VIP Growth Subaccount+................... 37.821 30.933
Fidelity VIP II Asset Manager Subaccount+......... 20.090 16.818
Fidelity VIP II Index 500 Subaccount+............. 116.327 88.539
Fidelity VIP II Contrafund Subaccount+............ 20.220 16.450
Number of accumulation units outstanding at end of
period (000's omitted)
Kemper Money Market Subaccount.................... $ 633 770 591 733 844
Kemper Total Return Subaccount.................... 864 990 1,067 1,299 1,511
Kemper High Yield Subaccount...................... 323 422 506 532 657
Kemper Growth Subaccount.......................... 227 260 286 238 222
Kemper Government Securities Subaccount*.......... 149 165 273 237 257
Kemper International Subaccount**................. 376 429 612 625 284
Kemper Small Cap Growth Subaccount***............. 195 132 81 14
Kemper Investment Grade Bond Subaccount+.......... 13 --
Kemper Contrarian Value Subaccount+............... 59 8
Kemper Small Cap Value Subaccount+................ 3 --
Kemper Value+Growth Subaccount+................... 24 12
<CAPTION>
FLEXIBLE PAYMENT CONTRACTS
------------------------------------------
1992** 1991 1990 1989* 1988
------ ---- ---- ----- ----
<S> <C> <C> <C> <C> <C>
Kemper Government Securities Subaccount*.......... 1.317 1.256 1.101 1.013
Kemper International Subaccount**................. .983
Kemper Small Cap Growth Subaccount***.............
Kemper Investment Grade Bond Subaccount+..........
Kemper Contrarian Value Subaccount+...............
Kemper Small Cap Value Subaccount+................
Kemper Value+Growth Subaccount+...................
Kemper Horizon 20+ Subaccount+....................
Kemper Horizon 10+ Subaccount+....................
Kemper Horizon 5 Subaccount+......................
Janus Growth Subaccount****.......................
Janus Aggressive Growth Subaccount****............
Janus Worldwide Growth Subaccount****.............
Janus Balanced Subaccount****.....................
Janus Short-Term Bond Subaccount****..............
Lexington Natural Resources Subaccount****........
Lexington Emerging Markets Subaccount****.........
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)
Kemper Money Market Subaccount.................... 1,081 1,720 2,388 2,417 3,127
Kemper Total Return Subaccount.................... 1,859 1,924 2,355 2,888 3,652
Kemper High Yield Subaccount...................... 670 723 885 1,587 2,104
Kemper Growth Subaccount.......................... 303 255 251 578 489
Kemper Government Securities Subaccount*.......... 267 288 170 168
Kemper International Subaccount**................. 91
Kemper Small Cap Growth Subaccount***.............
Kemper Investment Grade Bond Subaccount+..........
Kemper Contrarian Value Subaccount+...............
Kemper Small Cap Value Subaccount+................
Kemper Value+Growth Subaccount+...................
<CAPTION>
PERIODIC PAYMENT CONTRACTS
-----------------------------------------------
1997 1996+ 1995**** 1994*** 1993
---- ----- -------- ------- ----
<S> <C> <C> <C> <C> <C>
Kemper Government Securities Subaccount*.......... 1.684 1.566 1.547 1.317 1.371
Kemper International Subaccount**................. 1.693 1.567 1.363 1.223 1.285
Kemper Small Cap Growth Subaccount***............. 2.216 1.673 1.323 1.031
Kemper Investment Grade Bond Subaccount+.......... 1.105 1.027
Kemper Contrarian Value Subaccount+............... 1.498 1.164
Kemper Small Cap Value Subaccount+................ 1.214 1.010
Kemper Value+Growth Subaccount+................... 1.407 1.136
Kemper Horizon 20+ Subaccount+.................... 1.360 1.144
Kemper Horizon 10+ Subaccount+.................... 1.273 1.104
Kemper Horizon 5 Subaccount+...................... 1.209 1.086
Janus Growth Subaccount****....................... 19.338 15.960 13.650
Janus Aggressive Growth Subaccount****............ 20.284 18.238 17.117
Janus Worldwide Growth Subaccount****............. 23.502 19.490 15.302
Janus Balanced Subaccount****..................... 18.081 15.001 13.081
Janus Short-Term Bond Subaccount****.............. 11.020 10.460 10.192
Lexington Natural Resources Subaccount****........ 14.971 14.154 11.305
Lexington Emerging Markets Subaccount****......... 8.739 10.009 9.436
Fidelity VIP Equity-- Income Subaccount+.......... 26.366 20.849
Fidelity VIP Growth Subaccount+................... 37.631 30.872
Fidelity VIP II Asset Manager Subaccount+......... 19.991 16.784
Fidelity VIP II Index 500 Subaccount+............. 115.754 88.364
Fidelity VIP II Contrafund Subaccount+............ 20.120 16.418
Number of accumulation units outstanding at end of
period (000's omitted)
Kemper Money Market Subaccount.................... 11,579 10,827 10,881 15,997 14,891
Kemper Total Return Subaccount.................... 82,149 89,982 100,774 110,428 108,395
Kemper High Yield Subaccount...................... 22,729 24,077 25,327 26,546 26,749
Kemper Growth Subaccount.......................... 54,987 58,672 60,187 58,845 50,289
Kemper Government Securities Subaccount*.......... 15,434 18,485 21,771 24,332 31,898
Kemper International Subaccount**................. 55,729 62,425 63,495 61,490 38,844
Kemper Small Cap Growth Subaccount***............. 33,789 25,931 17,371 8,304
Kemper Investment Grade Bond Subaccount+.......... 694 326
Kemper Contrarian Value Subaccount+............... 18,995 4,864
Kemper Small Cap Value Subaccount+................ 10,593 3,784
Kemper Value+Growth Subaccount+................... 4,889 986
<CAPTION>
PERIODIC PAYMENT CONTRACTS
-------------------------------------------
1992** 1991 1990 1989* 1988
------ ---- ---- ----- ----
<S> <C> <C> <C> <C> <C>
Kemper Government Securities Subaccount*.......... 1.305 1.248 1.097 1.012
Kemper International Subaccount**................. .980
Kemper Small Cap Growth Subaccount***.............
Kemper Investment Grade Bond Subaccount+..........
Kemper Contrarian Value Subaccount+...............
Kemper Small Cap Value Subaccount+................
Kemper Value+Growth Subaccount+...................
Kemper Horizon 20+ Subaccount+....................
Kemper Horizon 10+ Subaccount+....................
Kemper Horizon 5 Subaccount+......................
Janus Growth Subaccount****.......................
Janus Aggressive Growth Subaccount****............
Janus Worldwide Growth Subaccount****.............
Janus Balanced Subaccount****.....................
Janus Short-Term Bond Subaccount****..............
Lexington Natural Resources Subaccount****........
Lexington Emerging Markets Subaccount****.........
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)
Kemper Money Market Subaccount.................... 12,605 14,973 21,581 14,185 16,953
Kemper Total Return Subaccount.................... 100,100 81,776 70,620 68,024 63,669
Kemper High Yield Subaccount...................... 22,202 19,861 22,623 28,032 22,281
Kemper Growth Subaccount.......................... 42,078 28,271 22,451 19,163 17,780
Kemper Government Securities Subaccount*.......... 28,368 23,035 12,918 7,794
Kemper International Subaccount**................. 10,372
Kemper Small Cap Growth Subaccount***.............
Kemper Investment Grade Bond Subaccount+..........
Kemper Contrarian Value Subaccount+...............
Kemper Small Cap Value Subaccount+................
Kemper Value+Growth Subaccount+...................
</TABLE>
(CONTINUED ON NEXT PAGE)
7
<PAGE> 11
CONDENSED FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
FLEXIBLE PAYMENT CONTRACTS
----------------------------------------------
1997 1996+ 1995**** 1994*** 1993
---- ----- -------- ------- ----
<S> <C> <C> <C> <C> <C>
Kemper Horizon 20+ Subaccount+.................... $ -- --
Kemper Horizon 10+ Subaccount+.................... 10 10
Kemper Horizon 5 Subaccount+...................... -- --
Janus Growth Subaccount****....................... 11 9 --
Janus Aggressive Growth Subaccount****............ -- 1 --
Janus Worldwide Growth Subaccount****............. 9 3 --
Janus Balanced Subaccount****..................... 4 3 --
Janus Short-Term Bond Subaccount****.............. -- -- --
Lexington Natural Resources Subaccount****........ 7 7 --
Lexington Emerging Markets Subaccount****......... 6 1 --
Fidelity VIP Equity-- Income Subaccount+.......... 2 1
Fidelity VIP Growth Subaccount+................... -- --
Fidelity VIP II Asset Manager Subaccount+......... 1 --
Fidelity VIP II Index 500 Subaccount+............. -- --
Fidelity VIP II Contrafund Subaccount+............ -- --
NON-TAX QUALIFIED
Accumulation unit value at beginning of period
Kemper Money Market Subaccount.................... $ 2.297 2.208 2.111 2.051 2.014
Kemper Total Return Subaccount.................... 5.068 4.384 3.515 3.922 3.533
Kemper High Yield Subaccount...................... 5.494 4.865 4.186 4.325 3.640
Kemper Growth Subaccount.......................... 5.285 4.389 3.334 3.508 3.091
Kemper Government Securities Subaccount*.......... 1.599 1.575 1.337 1.388 1.317
Kemper International Subaccount**................. 1.590 1.379 1.234 1.293 .983
Kemper Small Cap Growth Subaccount***............. 1.686 1.330 1.033
Kemper Investment Grade Bond Subaccount+.......... 1.029 --
Kemper Contrarian Value Subaccount+............... 1.166 --
Kemper Small Cap Value Subaccount+................ 1.012 --
Kemper Value+Growth Subaccount+................... 1.138 --
Kemper Horizon 20+ Subaccount+.................... 1.146 --
Kemper Horizon 10+ Subaccount+.................... 1.106 --
Kemper Horizon 5 Subaccount+...................... 1.089 --
Janus Growth
Subaccount****................................... 16.021 13.662 --
Janus Aggressive Growth Subaccount****............ 18.309 17.132 --
Janus Worldwide Growth Subaccount****............. 19.565 15.315 --
Janus Balanced Subaccount****..................... 15.059 13.092 --
<CAPTION>
FLEXIBLE PAYMENT CONTRACTS
------------------------------------------
1992** 1991 1990 1989* 1988
------ ---- ---- ----- ----
<S> <C> <C> <C> <C> <C>
Kemper Horizon 20+ Subaccount+....................
Kemper Horizon 10+ Subaccount+....................
Kemper Horizon 5 Subaccount+......................
Janus Growth Subaccount****.......................
Janus Aggressive Growth Subaccount****............
Janus Worldwide Growth Subaccount****.............
Janus Balanced Subaccount****.....................
Janus Short-Term Bond Subaccount****..............
Lexington Natural Resources Subaccount****........
Lexington Emerging Markets Subaccount****.........
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
Kemper Money Market Subaccount.................... 1.966 1.875 1.751 1.621 1.523
Kemper Total Return Subaccount.................... 3.509 2.570 2.471 2.013 1.815
Kemper High Yield Subaccount...................... 3.122 2.077 2.481 2.538 2.213
Kemper Growth Subaccount.......................... 3.014 1.909 1.917 1.509 1.518
Kemper Government Securities Subaccount*.......... 1.256 1.101 1.013
Kemper International Subaccount**................. 1.000
Kemper Small Cap Growth Subaccount***.............
Kemper Investment Grade Bond Subaccount+..........
Kemper Contrarian Value Subaccount+...............
Kemper Small Cap Value Subaccount+................
Kemper Value+Growth Subaccount+...................
Kemper Horizon 20+ Subaccount+....................
Kemper Horizon 10+ Subaccount+....................
Kemper Horizon 5 Subaccount+......................
Janus Growth
Subaccount****...................................
Janus Aggressive Growth Subaccount****............
Janus Worldwide Growth Subaccount****.............
Janus Balanced Subaccount****.....................
<CAPTION>
PERIODIC PAYMENT CONTRACTS
-----------------------------------------------
1997 1996+ 1995**** 1994*** 1993
---- ----- -------- ------- ----
<S> <C> <C> <C> <C> <C>
Kemper Horizon 20+ Subaccount+.................... 1,170 406
Kemper Horizon 10+ Subaccount+.................... 1,616 634
Kemper Horizon 5 Subaccount+...................... 917 243
Janus Growth Subaccount****....................... 1,357 976 168
Janus Aggressive Growth Subaccount****............ 893 937 121
Janus Worldwide Growth Subaccount****............. 3,418 1,413 95
Janus Balanced Subaccount****..................... 661 360 132
Janus Short-Term Bond Subaccount****.............. 86 63 13
Lexington Natural Resources Subaccount****........ 347 243 58
Lexington Emerging Markets Subaccount****......... 598 443 80
Fidelity VIP Equity-- Income Subaccount+.......... 777 263
Fidelity VIP Growth Subaccount+................... 275 116
Fidelity VIP II Asset Manager Subaccount+......... 134 55
Fidelity VIP II Index 500 Subaccount+............. 295 53
Fidelity VIP II Contrafund Subaccount+............ 1,109 488
NON-TAX QUALIFIED
Accumulation unit value at beginning of period
Kemper Money Market Subaccount.................... 2.199 2.120 2.033 1.981 1.950
Kemper Total Return Subaccount.................... 4.882 4.236 3.406 3.812 3.444
Kemper High Yield Subaccount...................... 5.351 4.753 4.101 4.250 3.588
Kemper Growth Subaccount.......................... 5.095 4.244 3.233 3.412 3.015
Kemper Government Securities Subaccount*.......... 1.566 1.547 1.317 1.371 1.305
Kemper International Subaccount**................. 1.567 1.363 1.223 1.285 .980
Kemper Small Cap Growth Subaccount***............. 1.673 1.323 1.031
Kemper Investment Grade Bond Subaccount+.......... 1.027 --
Kemper Contrarian Value Subaccount+............... 1.164 --
Kemper Small Cap Value Subaccount+................ 1.010 --
Kemper Value+Growth Subaccount+................... 1.136 --
Kemper Horizon 20+ Subaccount+.................... 1.144 --
Kemper Horizon 10+ Subaccount+.................... 1.104 --
Kemper Horizon 5 Subaccount+...................... 1.086 --
Janus Growth
Subaccount****................................... 15.960 13.650 --
Janus Aggressive Growth Subaccount****............ 18.238 17.117 --
Janus Worldwide Growth Subaccount****............. 19.490 15.302 --
Janus Balanced Subaccount****..................... 15.001 13.081 --
<CAPTION>
PERIODIC PAYMENT CONTRACTS
-------------------------------------------
1992** 1991 1990 1989* 1988
------ ---- ---- ----- ----
<S> <C> <C> <C> <C> <C>
Kemper Horizon 20+ Subaccount+....................
Kemper Horizon 10+ Subaccount+....................
Kemper Horizon 5 Subaccount+......................
Janus Growth Subaccount****.......................
Janus Aggressive Growth Subaccount****............
Janus Worldwide Growth Subaccount****.............
Janus Balanced Subaccount****.....................
Janus Short-Term Bond Subaccount****..............
Lexington Natural Resources Subaccount****........
Lexington Emerging Markets Subaccount****.........
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
Kemper Money Market Subaccount.................... 1.910 1.827 1.712 1.589 1.498
Kemper Total Return Subaccount.................... 3.431 2.520 2.431 1.986 1.796
Kemper High Yield Subaccount...................... 3.086 2.059 2.467 2.532 2.214
Kemper Growth Subaccount.......................... 2.949 1.873 1.887 1.490 1.503
Kemper Government Securities Subaccount*.......... 1.248 1.097 1.012
Kemper International Subaccount**................. 1.000
Kemper Small Cap Growth Subaccount***.............
Kemper Investment Grade Bond Subaccount+..........
Kemper Contrarian Value Subaccount+...............
Kemper Small Cap Value Subaccount+................
Kemper Value+Growth Subaccount+...................
Kemper Horizon 20+ Subaccount+....................
Kemper Horizon 10+ Subaccount+....................
Kemper Horizon 5 Subaccount+......................
Janus Growth
Subaccount****...................................
Janus Aggressive Growth Subaccount****............
Janus Worldwide Growth Subaccount****.............
Janus Balanced Subaccount****.....................
</TABLE>
(CONTINUED ON NEXT PAGE)
8
<PAGE> 12
CONDENSED FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
FLEXIBLE PAYMENT CONTRACTS
----------------------------------------------
1997 1996+ 1995**** 1994*** 1993
---- ----- -------- ------- ----
<S> <C> <C> <C> <C> <C>
Janus Short-Term Bond Subaccount****.............. $ 10.239 10.201 --
Lexington Natural Resources Trust****
Subaccount....................................... 14.211 11.315 --
Lexington Emerging Markets Subaccount****......... 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 --
Accumulation unit value at end of period
Kemper Money Market Subaccount.................... $ 2.394 2.297 2.208 2.111 2.051
Kemper Total Return Subaccount.................... 6.019 5.068 4.384 3.515 3.922
Kemper High Yield Subaccount...................... 6.071 5.494 4.865 4.186 4.325
Kemper Growth Subaccount.......................... 6.350 5.285 4.389 3.334 3.508
Kemper Government Securities Subaccount*.......... 1.725 1.599 1.575 1.337 1.388
Kemper International Subaccount**................. 1.723 1.590 1.379 1.234 1.293
Kemper Small Cap Growth Subaccount***............. 2.240 1.686 1.330 1.033
Kemper Investment Grade Bond Subaccount+.......... 1.111 1.029
Kemper Contrarian Value Subaccount+............... 1.505 1.166
Kemper Small Cap Value Subaccount+................ 1.220 1.012
Kemper Value+Growth Subaccount+................... 1.414 1.138
Kemper Horizon 20+ Subaccount+.................... 1.367 1.146
Kemper Horizon 10+ Subaccount+.................... 1.279 1.106
Kemper Horizon 5 Subaccount+...................... 1.215 1.089
Janus Growth Subaccount****....................... 19.471 16.021 13.662
Janus Aggressive Growth Subaccount****............ 20.423 18.309 17.132
Janus Worldwide Growth Subaccount****............. 23.663 19.565 15.315
Janus Balanced Subaccount****..................... 18.205 15.059 13.092
Janus Short-Term Bond Subaccount****.............. 11.096 10.239 10.201
Lexington Natural Resources Trust
Subaccount****................................... 15.089 14.211 11.315
Lexington Emerging Markets Subaccount****......... 8.799 10.048 9.445
Fidelity VIP Equity-- Income Subaccount+.......... 26.497 20.891
Fidelity VIP Growth Subaccount+................... 37.821 30.933
Fidelity VIP II Asset Manager Subaccount+......... 20.090 16.818
Fidelity VIP II Index 500 Subaccount+............. 116.327 88.539
<CAPTION>
FLEXIBLE PAYMENT CONTRACTS
------------------------------------------
1992** 1991 1990 1989* 1988
------ ---- ---- ----- ----
<S> <C> <C> <C> <C> <C>
Janus Short-Term Bond Subaccount****..............
Lexington Natural Resources Trust****
Subaccount.......................................
Lexington Emerging Markets Subaccount****.........
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
Kemper Money Market Subaccount.................... 2.014 1.966 1.875 1.751 1.621
Kemper Total Return Subaccount.................... 3.533 3.509 2.570 2.471 2.013
Kemper High Yield Subaccount...................... 3.640 3.122 2.077 2.481 2.538
Kemper Growth Subaccount.......................... 3.091 3.014 1.909 1.917 1.509
Kemper Government Securities Subaccount*.......... 1.317 1.256 1.101 1.013
Kemper International Subaccount**................. .983
Kemper Small Cap Growth Subaccount***.............
Kemper Investment Grade Bond Subaccount+..........
Kemper Contrarian Value Subaccount+...............
Kemper Small Cap Value Subaccount+................
Kemper Value+Growth Subaccount+...................
Kemper Horizon 20+ Subaccount+....................
Kemper Horizon 10+ Subaccount+....................
Kemper Horizon 5 Subaccount+......................
Janus Growth Subaccount****.......................
Janus Aggressive Growth Subaccount****............
Janus Worldwide Growth Subaccount****.............
Janus Balanced Subaccount****.....................
Janus Short-Term Bond Subaccount****..............
Lexington Natural Resources Trust
Subaccount****...................................
Lexington Emerging Markets Subaccount****.........
Fidelity VIP Equity-- Income Subaccount+..........
Fidelity VIP Growth Subaccount+...................
Fidelity VIP II Asset Manager Subaccount+.........
Fidelity VIP II Index 500 Subaccount+.............
<CAPTION>
PERIODIC PAYMENT CONTRACTS
-----------------------------------------------
1997 1996+ 1995**** 1994*** 1993
---- ----- -------- ------- ----
<S> <C> <C> <C> <C> <C>
Janus Short-Term Bond Subaccount****.............. 10.460 10.192 --
Lexington Natural Resources Trust****
Subaccount....................................... 14.154 11.305 --
Lexington Emerging Markets Subaccount****......... 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 --
Accumulation unit value at end of period
Kemper Money Market Subaccount.................... 2.285 2.199 2.120 2.033 1.981
Kemper Total Return Subaccount.................... 5.781 4.882 4.236 3.406 3.812
Kemper High Yield Subaccount...................... 5.896 5.351 4.753 4.101 4.250
Kemper Growth Subaccount.......................... 6.103 5.095 4.244 3.233 3.412
Kemper Government Securities Subaccount*.......... 1.684 1.566 1.547 1.317 1.371
Kemper International Subaccount**................. 1.693 1.567 1.363 1.223 1.285
Kemper Small Cap Growth Subaccount***............. 2.216 1.673 1.323 1.031
Kemper Investment Grade Bond Subaccount+.......... 1.105 1.027
Kemper Contrarian Value Subaccount+............... 1.498 1.164
Kemper Small Cap Value Subaccount+................ 1.214 1.010
Kemper Value+Growth Subaccount+................... 1.407 1.136
Kemper Horizon 20+ Subaccount+.................... 1.360 1.144
Kemper Horizon 10+ Subaccount+.................... 1.273 1.104
Kemper Horizon 5 Subaccount+...................... 1.209 1.086
Janus Growth Subaccount****....................... 19.338 15.960 13.650
Janus Aggressive Growth Subaccount****............ 20.284 18.238 17.117
Janus Worldwide Growth Subaccount****............. 23.502 19.490 15.302
Janus Balanced Subaccount****..................... 18.081 15.001 13.081
Janus Short-Term Bond Subaccount****.............. 11.020 10.460 10.192
Lexington Natural Resources Trust
Subaccount****................................... 14.971 14.154 11.305
Lexington Emerging Markets Subaccount****......... 8.739 10.009 9.436
Fidelity VIP Equity-- Income Subaccount+.......... 26.366 20.849
Fidelity VIP Growth Subaccount+................... 37.631 30.872
Fidelity VIP II Asset Manager Subaccount+......... 19.991 16.784
Fidelity VIP II Index 500 Subaccount+............. 115.754 88.364
<CAPTION>
PERIODIC PAYMENT CONTRACTS
-------------------------------------------
1992** 1991 1990 1989* 1988
------ ---- ---- ----- ----
<S> <C> <C> <C> <C> <C>
Janus Short-Term Bond Subaccount****..............
Lexington Natural Resources Trust****
Subaccount.......................................
Lexington Emerging Markets Subaccount****.........
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
Kemper Money Market Subaccount.................... 1.950 1.910 1.827 1.712 1.589
Kemper Total Return Subaccount.................... 3.444 3.431 2.520 2.431 1.986
Kemper High Yield Subaccount...................... 3.588 3.086 2.059 2.467 2.532
Kemper Growth Subaccount.......................... 3.015 2.949 1.873 1.887 1.490
Kemper Government Securities Subaccount*.......... 1.305 1.248 1.097 1.012
Kemper International Subaccount**................. .980
Kemper Small Cap Growth Subaccount***.............
Kemper Investment Grade Bond Subaccount+..........
Kemper Contrarian Value Subaccount+...............
Kemper Small Cap Value Subaccount+................
Kemper Value+Growth Subaccount+...................
Kemper Horizon 20+ Subaccount+....................
Kemper Horizon 10+ Subaccount+....................
Kemper Horizon 5 Subaccount+......................
Janus Growth Subaccount****.......................
Janus Aggressive Growth Subaccount****............
Janus Worldwide Growth Subaccount****.............
Janus Balanced Subaccount****.....................
Janus Short-Term Bond Subaccount****..............
Lexington Natural Resources Trust
Subaccount****...................................
Lexington Emerging Markets Subaccount****.........
Fidelity VIP Equity-- Income Subaccount+..........
Fidelity VIP Growth Subaccount+...................
Fidelity VIP II Asset Manager Subaccount+.........
Fidelity VIP II Index 500 Subaccount+.............
</TABLE>
(CONTINUED ON NEXT PAGE)
9
<PAGE> 13
CONDENSED FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
FLEXIBLE PAYMENT CONTRACTS
----------------------------------------------
1997 1996+ 1995**** 1994*** 1993
---- ----- -------- ------- ----
<S> <C> <C> <C> <C> <C>
Fidelity VIP II Contrafund Subaccount+............ $ 20.220 16.450
Number of accumulation units outstanding at end of
period (000's omitted)
Kemper Money Market Subaccount.................... 4,338 4,762 5,512 6,914 7,153
Kemper Total Return Subaccount.................... 4,277 4,838 5,554 6,613 8,042
Kemper High Yield Subaccount...................... 2,096 2,440 2,821 3,621 4,517
Kemper Growth Subaccount.......................... 1,162 1,396 1,276 1,370 1,671
Kemper Government Securities Subaccount*.......... 908 1,187 1,330 1,465 2,101
Kemper International Subaccount**................. 1,006 1,190 1,257 2,450 1,712
Kemper Small Cap Growth Subaccount***............. 657 711 874 227
Kemper Investment Grade Bond Subaccount+.......... 303 68
Kemper Contrarian Value Subaccount+............... 95 238
Kemper Small Cap Value Subaccount+................ 58 7
Kemper Value+Growth Subaccount+................... 119 33
Kemper Horizon 20+ Subaccount+.................... -- --
Kemper Horizon 10+ Subaccount+.................... 9 20
Kemper Horizon 5 Subaccount+...................... 42 45
Janus Growth Subaccount****....................... 7 22 2
Janus Aggressive Growth Subaccount****............ 6 2 --
Janus Worldwide Growth Subaccount****............. 17 33 --
Janus Balanced Subaccount****..................... 13 10 4
Janus Short-Term Bond Subaccount****.............. -- -- 2
Lexington Natural Resources Trust
Subaccount****................................... 2 -- --
Lexington Emerging Markets Subaccount****......... 2 2 2
Fidelity VIP Equity-- Income Subaccount+.......... 5 1
Fidelity VIP Growth Subaccount+................... -- --
Fidelity VIP II Asset Manager Subaccount+......... 6 --
Fidelity VIP II Index 500 Subaccount+............. 13 1
Fidelity VIP II Contrafund Subaccount+............ 3 2
<CAPTION>
FLEXIBLE PAYMENT CONTRACTS
------------------------------------------
1992** 1991 1990 1989* 1988
------ ---- ---- ----- ----
<S> <C> <C> <C> <C> <C>
Fidelity VIP II Contrafund Subaccount+............
Number of accumulation units outstanding at end of
period (000's omitted)
Kemper Money Market Subaccount.................... 8,495 11,926 15,563 19,006 22,047
Kemper Total Return Subaccount.................... 8,853 9,586 10,291 12,244 15,032
Kemper High Yield Subaccount...................... 4,876 5,240 6,652 11,895 14,871
Kemper Growth Subaccount.......................... 2,032 1,773 1,955 1,931 2,890
Kemper Government Securities Subaccount*.......... 2,317 2,728 2,442 1,494
Kemper International Subaccount**................. 1,041
Kemper Small Cap Growth Subaccount***.............
Kemper Investment Grade Bond Subaccount+..........
Kemper Contrarian Value Subaccount+...............
Kemper Small Cap Value Subaccount+................
Kemper Value+Growth Subaccount+...................
Kemper Horizon 20+ Subaccount+....................
Kemper Horizon 10+ Subaccount+....................
Kemper Horizon 5 Subaccount+......................
Janus Growth Subaccount****.......................
Janus Aggressive Growth Subaccount****............
Janus Worldwide Growth Subaccount****.............
Janus Balanced Subaccount****.....................
Janus Short-Term Bond Subaccount****..............
Lexington Natural Resources Trust
Subaccount****...................................
Lexington Emerging Markets Subaccount****.........
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
-----------------------------------------------
1997 1996+ 1995**** 1994*** 1993
---- ----- -------- ------- ----
<S> <C> <C> <C> <C> <C>
Fidelity VIP II Contrafund Subaccount+............ 20.120 16.418
Number of accumulation units outstanding at end of
period (000's omitted)
Kemper Money Market Subaccount.................... 4,637 3,948 4,839 7,343 6,204
Kemper Total Return Subaccount.................... 13,699 17,433 20,342 24,773 26,640
Kemper High Yield Subaccount...................... 8,934 10,028 12,047 12,416 14,735
Kemper Growth Subaccount.......................... 11,574 14,340 16,369 19,776 17,851
Kemper Government Securities Subaccount*.......... 11,033 13,804 17,939 23,487 28,787
Kemper International Subaccount**................. 9,543 12,177 12,074 14,546 15,713
Kemper Small Cap Growth Subaccount***............. 4,509 4,091 3,022 1,242
Kemper Investment Grade Bond Subaccount+.......... 338 50
Kemper Contrarian Value Subaccount+............... 9,619 1,625
Kemper Small Cap Value Subaccount+................ 1,519 840
Kemper Value+Growth Subaccount+................... 824 454
Kemper Horizon 20+ Subaccount+.................... 83 7
Kemper Horizon 10+ Subaccount+.................... 261 229
Kemper Horizon 5 Subaccount+...................... 192 84
Janus Growth Subaccount****....................... 157 99 14
Janus Aggressive Growth Subaccount****............ 85 115 11
Janus Worldwide Growth Subaccount****............. 445 186 7
Janus Balanced Subaccount****..................... 105 42 3
Janus Short-Term Bond Subaccount****.............. 9 8 --
Lexington Natural Resources Trust
Subaccount****................................... 48 100 8
Lexington Emerging Markets Subaccount****......... 130 80 3
Fidelity VIP Equity-- Income Subaccount+.......... 120 36
Fidelity VIP Growth Subaccount+................... 39 16
Fidelity VIP II Asset Manager Subaccount+......... 56 5
Fidelity VIP II Index 500 Subaccount+............. 46 10
Fidelity VIP II Contrafund Subaccount+............ 125 47
<CAPTION>
PERIODIC PAYMENT CONTRACTS
-------------------------------------------
1992** 1991 1990 1989* 1988
------ ---- ---- ----- ----
<S> <C> <C> <C> <C> <C>
Fidelity VIP II Contrafund Subaccount+............
Number of accumulation units outstanding at end of
period (000's omitted)
Kemper Money Market Subaccount.................... 9,820 10,507 11,618 9,243 7,783
Kemper Total Return Subaccount.................... 26,043 19,953 18,485 18,671 15,835
Kemper High Yield Subaccount...................... 14,424 12,799 11,858 18,281 14,589
Kemper Growth Subaccount.......................... 15,849 9,577 7,812 5,542 9,303
Kemper Government Securities Subaccount*.......... 28,286 18,252 10,338 2,109
Kemper International Subaccount**................. 3,646
Kemper Small Cap Growth Subaccount***.............
Kemper Investment Grade Bond Subaccount+..........
Kemper Contrarian Value Subaccount+...............
Kemper Small Cap Value Subaccount+................
Kemper Value+Growth Subaccount+...................
Kemper Horizon 20+ Subaccount+....................
Kemper Horizon 10+ Subaccount+....................
Kemper Horizon 5 Subaccount+......................
Janus Growth Subaccount****.......................
Janus Aggressive Growth Subaccount****............
Janus Worldwide Growth Subaccount****.............
Janus Balanced Subaccount****.....................
Janus Short-Term Bond Subaccount****..............
Lexington Natural Resources Trust
Subaccount****...................................
Lexington Emerging Markets Subaccount****.........
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 Kemper Government Securities Subaccount commenced business on November
6, 1989.
** The Kemper International Subaccount commenced business on January 6, 1992.
*** The Kemper 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 Kemper Investment Grade Bond, Kemper Contrarian Value, Kemper Small
Cap Value, Kemper Value+Growth, Kemper Horizon 20+, Kemper Horizon 10+,
Kemper Horizon 5, 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.
The financial statements and reports of independent accountants for the KILICO
Variable Annuity Separate Account are also contained in the Statement of
Additional Information.
10
<PAGE> 14
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. Kemper Corporation is a
wholly-owned subsidiary of Zurich Holding Company of America ("ZHCA"), which is
a wholly-owned subsidiary of Zurich Insurance Company ("Zurich").
THE SEPARATE ACCOUNT
KILICO originally established the KILICO Variable Annuity Separate Account (the
"Separate Account") on May 29, 1981 pursuant to Illinois law as the KILICO Money
Market Separate Account, initially registered with the Securities and Exchange
Commission ("Commission") as an open-end, diversified management investment
company under the Investment Company Act of 1940 ("1940 Act"). On November 2,
1989, Contract Owners approved a Reorganization under which the Separate Account
was restructured as a unit investment trust registered with the Commission under
the 1940 Act. Such registration does not involve supervision by the Commission
of the management, investment practices or policies of the Separate Account or
KILICO.
The Separate Account is administered and accounted for as part of the general
business of KILICO, but the income and capital gains or capital losses, whether
or not realized, for assets allocated to the Separate Account are credited to or
charged against the assets held in the Separate Account, without regard to any
other income, capital gains or capital losses of any other separate account or
arising out of any other business which KILICO may conduct. The benefits
provided under the Contracts are obligations of KILICO. The assets of the
Separate Account are not chargeable with liabilities arising out of the business
conducted by any other separate account or out of any other business KILICO may
conduct.
The Separate Account holds assets that are segregated from all of KILICO's other
assets. The Separate Account is used to support the variable annuity contracts
described herein and certain other variable annuity contracts. The obligations
to Contract Owners and beneficiaries arising under the Contracts are general
corporate obligations of KILICO.
The Separate Account is currently divided into twenty-six Subaccounts. Each
Subaccount invests exclusively in shares of one of the corresponding Portfolios
of the Funds. Additional Subaccounts may be added in the future. Not all
Subaccounts may be available in all jurisdictions, under all Contracts or in all
retirement plans.
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
simultaneously in the Funds. Currently, neither KILICO nor the Funds foresee any
such disadvantages to variable life
11
<PAGE> 15
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 twenty-six Portfolios are summarized below:
INVESTORS FUND SERIES (FORMERLY KEMPER INVESTORS FUND)
KEMPER MONEY MARKET PORTFOLIO seeks maximum current income to the extent
consistent with stability of principal from a portfolio of high quality money
market instruments.
KEMPER 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.
KEMPER HIGH YIELD PORTFOLIO seeks to provide a high level of current income by
investing in fixed-income securities.
KEMPER GROWTH PORTFOLIO seeks maximum appreciation of capital through
diversification of investment securities having potential for capital
appreciation.
KEMPER GOVERNMENT SECURITIES PORTFOLIO seeks high current return consistent with
preservation of capital from a portfolio composed primarily of U.S. Government
securities.
KEMPER INTERNATIONAL PORTFOLIO seeks total return, a combination of capital
growth and income, principally through an internationally diversified portfolio
of equity securities.
KEMPER SMALL CAP GROWTH PORTFOLIO seeks maximum appreciation of investors'
capital from a portfolio primarily of growth stocks of smaller companies.
KEMPER INVESTMENT GRADE BOND PORTFOLIO seeks high current income by investing
primarily in a diversified portfolio of investment grade debt securities.
KEMPER CONTRARIAN VALUE PORTFOLIO seeks to achieve a high rate of total return
from a portfolio primarily of value stocks of larger companies.
KEMPER SMALL CAP VALUE PORTFOLIO seeks long-term capital appreciation from a
portfolio primarily of value stocks of smaller companies.
KEMPER VALUE+GROWTH PORTFOLIO seeks growth of capital through professional
management of a portfolio of growth and value stocks.
KEMPER HORIZON 20+ PORTFOLIO, designed for investors with approximately a 20+
year investment horizon, seeks growth of capital, with income as a secondary
objective.
KEMPER HORIZON 10+ PORTFOLIO, designed for investors with approximately a 10+
year investment horizon, seeks a balance between growth of capital and income,
consistent with moderate risk.
KEMPER HORIZON 5 PORTFOLIO, designed for investors with approximately a 5 year
investment horizon, seeks income consistent with preservation of capital, with
growth of capital as a secondary objective.
JANUS ASPEN SERIES
GROWTH PORTFOLIO seeks long-term growth of capital in a manner consistent with
the preservation of capital. It is a diversified Portfolio that pursues its
objective by investing in common stocks of companies of any size. This Portfolio
generally invests in larger, more established issuers.
AGGRESSIVE GROWTH PORTFOLIO seeks long-term growth of capital. It is a
nondiversified Portfolio that pursues its investment objective by normally
investing at least 50% of its equity assets in securities issued by medium-sized
companies as described in the fund's prospectus.
12
<PAGE> 16
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.
NOTE: THE SUBACCOUNT INVESTING IN THE JANUS ASPEN SERIES SHORT-TERM BOND
PORTFOLIO IS NOT AVAILABLE FOR NEW CONTRACTS ISSUED ON OR AFTER MAY 1, 1998. AS
SOON AS POSSIBLE AFTER MAY 1, THE JANUS ASPEN SERIES AND JANUS CAPITAL
CORPORATION, THE PORTFOLIO'S INVESTMENT ADVISER, INTEND TO SEEK APPROVAL FROM
THE SECURITIES AND EXCHANGE COMMISSION TO PERMIT KILICO AND OTHER INSURANCE
COMPANIES INVESTING IN THE PORTFOLIO TO ELIMINATE SHARES OF THE SHORT-TERM BOND
PORTFOLIO AND SUBSTITUTE SHARES OF ANOTHER INVESTMENT COMPANY. JANUS ASPEN
SERIES AND JANUS CAPITAL CORPORATION THEN INTEND TO LIQUIDATE THE PORTFOLIO. NO
SUCH SUBSTITUTION OF SECURITIES IN ANY SUBACCOUNT MAY TAKE PLACE WITHOUT PRIOR
APPROVAL OF THE SECURITIES AND EXCHANGE COMMISSION, AND UNDER SUCH REQUIREMENTS
AS IT OR OTHER REGULATORY AUTHORITIES MAY IMPOSE.
LEXINGTON NATURAL RESOURCES TRUST
This Fund seeks long-term growth of capital through investment primarily in
common stocks of companies that own or develop natural resources and other basic
commodities, or supply goods and services to such companies. Current income will
not be a factor. Total return will consist primarily of capital appreciation.
LEXINGTON EMERGING MARKETS FUND
This Fund seeks long-term growth of capital primarily through investment in
equity securities and equivalents of companies domiciled in, or doing business
in, emerging countries and emerging markets as described in the fund's
prospectus.
FIDELITY VARIABLE INSURANCE PRODUCTS FUND
FIDELITY VIP EQUITY-INCOME PORTFOLIO seeks reasonable income by investing
primarily in income-producing equity securities.
FIDELITY VIP GROWTH PORTFOLIO seeks to achieve capital appreciation.
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II
FIDELITY VIP 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.
FIDELITY VIP II INDEX 500 PORTFOLIO seeks investment results that correspond to
the total return of common stocks publicly traded in the United States, as
represented by the S&P 500.
FIDELITY VIP II CONTRAFUND PORTFOLIO seeks long-term capital appreciation.
------------------
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.
Scudder Kemper Investments, Inc. ("SKI"), an affiliate of KILICO, serves as
investment manager for each of the Kemper Portfolios. Zurich Investment
Management Limited ("ZIML"), an affiliate of SKI, serves as sub-adviser for the
Kemper International Portfolio. 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
13
<PAGE> 17
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.
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.
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
standardized "average annual total return" and nonstandardized "total return."
The Kemper High Yield Subaccount, Kemper Government Securities Subaccount,
Kemper Investment Grade Bond Subaccount and Janus Short-Term Bond Subaccount may
also advertise 'yield'. The Kemper Money Market Subaccount may advertise "yield"
and "effective yield." Each of these figures is based upon historical earnings
and is not necessarily representative of the future performance of a Subaccount.
Standardized average annual total return and nonstandardized 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. Standardized average
annual total return and nonstandardized total return will be quoted for periods
of at least one year, three years, five years and ten years, if applicable, and
a period covering the time the underlying Portfolio has been held in the
Subaccount (life of Subaccount) for standardized average annual total return or
a period covering the time the underlying Portfolio has been in existence (life
of Portfolio) for nonstandardized total return. This information will be current
for a period ending with the most recent calendar quarter for standardized
average annual total return and the most recent calendar month for
nonstandardized total return. Standardized 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.
Nonstandardized total return may include annualized and nonannualized
(cumulative) figures. Nonannualized figures represent the actual percentage
change over the applicable period.
Yield is a measure of the net dividend and interest income earned over a
specific one month or 30-day period (seven-day period for the Kemper Money
Market Subaccount) expressed as a percentage of the value of the Subaccount's
Accumulation Units. Yield is an annualized figure, which means that it is
assumed that the Subaccount generates the same level of net income over a one
year period which is compounded on a semi-annual basis. The effective yield for
the Kemper Money Market Subaccount is calculated similarly but includes the
effect of assumed compounding calculated under rules prescribed by the
Securities and Exchange Commission. The
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Kemper 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. Yield, effective yield and nonstandardized 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.
Standardized 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.
The Subaccounts may be compared to relevant indices and performance data from
independent sources. From time to time, the Separate Account may quote
information from publications such as MORNINGSTAR, INC., THE WALL STREET
JOURNAL, MONEY MAGAZINE, FORBES, BARRON'S, FORTUNE, THE CHICAGO TRIBUNE, USA
TODAY, INSTITUTIONAL INVESTOR, NATIONAL UNDERWRITER, SELLING LIFE INSURANCE,
BROKER WORLD, REGISTERED REPRESENTATIVE, INVESTMENT ADVISOR and VARDS.
Additional information concerning a Subaccount's performance and these indices
and independent sources is provided in the Statement of Additional Information.
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
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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.
Effective January 1, 1998, a Contract Owner may make Purchase Payments to
Non-Qualified Plan Contracts and Contracts issued as Individual Retirement
Annuities ("IRAs") by authorizing KILICO to draw on an account of the Contract
Owner via check or electronic debit ("Pre-Authorized Checking [PAC] Agreement").
For Purchase Payments made pursuant to a PAC Agreement, the following minimum
Purchase Payment provisions apply:
1. The minimum initial Purchase Payment to an IRA made pursuant to a PAC
Agreement is $100. The minimum initial Purchase Payment to a Non-Qualified
Plan Contract made pursuant to a PAC Agreement is $1,000 unless the Contract
Owner also owns an existing Contract, in which case the minimum is $100.
2. The minimum subsequent Purchase Payment made pursuant to a PAC Agreement is
$100.
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.
Certain contracts are no longer offered, although Purchase Payments are still
permitted under these previously issued 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. In addition, a special "free look" period applies
in some circumstances to Contracts issued as individual retirement annuities
under Section 408 of the Code or as Roth IRAs under Section 408A of the Code.
During the Accumulation Period, the Contract Owner may assign the Contract or
change a Beneficiary at any time by filing such assignment or change with
KILICO's home office at 1 Kemper Drive, Long Grove, Illinois 60049. No
assignment or Beneficiary change shall be binding on KILICO until received by
KILICO. KILICO assumes no responsibility for the validity of such assignment or
Beneficiary change. An assignment may subject the Owner to immediate tax
liability. (See "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.
A change of Beneficiary designation under a Qualified Plan Contract may be
prohibited by the provisions of the applicable plan. Generally, an interest in a
Qualified Plan Contract may not be assigned.
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
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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.
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
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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. Withdrawals will have tax consequences, which may
include the amount of the withdrawal being subject to income tax and in some
circumstances an additional 10% penalty tax. (See "Federal Tax Matters.") 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.
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.
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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.
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 Annuity Options
available in these circumstances are limited in accordance with the requirements
of Section 72(s) of the Code, as described under "Annuity Options." 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.
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 for a particular Contract Anniversary is equal to
the Contract Value on that 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 in connection with 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.
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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 the requirements of section 72(p) of the
Code, the administrative procedures then in effect as reflected under the loan
agreement used by KILICO, and, if applicable, ERISA.
CONTRACT CHARGES AND EXPENSES
Charges and deductions under the Contracts are made for KILICO's assumption of
mortality and expense risk and administrative expenses. 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.
Contracts may be available for purchase in certain group or sponsored
arrangements that qualify for reductions or eliminations of certain charges
under the Contracts. (See "F. REDUCTION OR ELIMINATION OF CERTAIN CHARGES"
below.)
A. ASSET-BASED CHARGES AGAINST THE SEPARATE ACCOUNT.
During the Accumulation Period and the Annuity Period, KILICO assesses that
portion of each Subaccount representing assets under the 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). The
administrative charge is intended to cover the average anticipated
administrative expenses to be incurred over the period the Contracts are in
force. With an administrative charge based on a percentage of assets, however,
there is not necessarily a direct relationship between the amount of the charge
and the administrative costs of a particular Contract.
These charges may be decreased by KILICO without notice but may not exceed the
rates or amount shown above.
1. 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.
The first contractual obligation assumed by KILICO is to pay a guaranteed death
benefit that may be greater than the Contract Value minus Debt. 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.
2. 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.
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3. 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. 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. The Record
Maintenance Charge is not assessed during the Annuity Period.
The Records Maintenance 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 this charge will be made at the end
of each calendar quarter and will constitute a reduction in the net assets of
each Subaccount.
At any time the Records Maintenance Charge is assessed, an equal portion of the
applicable charge will be assessed against each Subaccount in which the Contract
is participating and a number of Accumulation Units sufficient to equal the
proper portion of the charge will be redeemed from such Subaccount, or from the
General Account Contract Value if necessary to meet the assessment.
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 eliminated for Contracts with a Contract
Value equaling or exceeding $50,000 on the date of assessment.
C. 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 and distribution of the Contracts, including commissions
paid to sales personnel, and other promotion and acquisition expenses. Also,
withdrawals (which may include certain loans) will have tax consequences, which
may include the amount of the withdrawal being subject to income tax and in some
circumstances an additional 10% penalty tax. (See "Federal Tax Matters.")
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 Withdrawal 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% will be 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 Withdrawal Charge against General
Account Contract Value or 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 Owner or person designated by the Owner will
receive a check in the amount requested, if possible. 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 or recipient.
Because the Withdrawal Charge is based on the number of years elapsed since the
purchase of the General Account Value or Accumulation Units being withdrawn or
annuitized, Contract Owners may be subject to a Withdrawal Charge as indicated
above, even though the Contract may have been issued more than six 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 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
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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. In addition, the Withdrawal Charge does not apply to Contracts issued
to an officer, director or employee of KILICO and investment advisers to the
Investors Funds Series, and principal underwriter or certain affiliated
companies, or to any trust, pension, profit-sharing or other benefits plan for
such persons.
D. 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
and other expenses are set forth on page 4. 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.
E. STATE PREMIUM TAXES.
Certain state and local governments impose a premium tax ranging from 0% to 3.5%
on the amount of Purchase Payments. Where applicable, the dollar amount of state
premium taxes previously paid or payable upon annuitization by KILICO may be
charged against the Contract Value if not previously assessed, when and if the
Contract is annuitized. A summary of state premium taxes is included in
"Appendix -- State Premium Tax Chart" in the Statement of Additional
Information.
F. REDUCTION OR ELIMINATION OF CERTAIN CHARGES
Contracts may be available for purchase in certain group or sponsored
arrangements that qualify for reductions or eliminations of certain charges
under the Contracts, the time periods in which such charges apply, or both.
Group arrangements include those in which a trustee, an employer or an
association purchases Contracts covering a group of individuals. Sponsored
arrangements include those in which an employer or association allows KILICO to
offer Contracts to its employees or members on an individual basis.
In certain circumstances, the risk of adverse mortality and expense experience
associated with Contracts purchased in certain group or sponsored arrangements
may be reduced. In such event, the daily asset charge for mortality and expense
costs may likewise be reduced. The daily asset charge for administrative costs
and the Records Maintenance Charge may also be reduced or eliminated, but only
to the extent KILICO anticipates that it will incur lower administrative
expenses. In certain other circumstances, sales expenses associated with the
sale and distribution of Contracts purchased in certain group or sponsored
arrangements may be reduced or eliminated and, in such event, the Withdrawal
Charges applicable to such Contracts may likewise be reduced or eliminated.
In determining whether a group or sponsored arrangement qualifies for reduced or
eliminated charges, KILICO will consider certain factors including: (1) the size
and type of group to which sales are to be made and administrative services
provided, and the persistency expected from the group; (2) the total amount of
Purchase Payments to be received and the method in which they will be remitted;
(3) any prior or existing relationship with KILICO; (4) the level of commission
paid to selling broker-dealers; (5) the purpose for which the Contract are being
purchased, and whether that purchase makes it likely that sales costs and
administrative expenses will be reduced; and (6) the frequency of projected
surrenders or distributions.
KILICO will make any reductions or eliminations according to objective
guidelines in effect when an application for a Contract is approved. KILICO may
change these guidelines from time to time. Any variation in the charges will
reflect differences in costs or services and will be offered uniformly to all
members of the group or sponsored arrangement. In no event will a charge
reduction or elimination be permitted if it is unfairly discriminatory to any
person or prohibited by law.
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<PAGE> 26
THE ANNUITY PERIOD
Contracts may be annuitized under one of several Annuity Options. Annuity
payments will begin on the Annuity Date under the Annuity Option selected by the
Owner.
1. ANNUITY PAYMENTS.
Annuity payments will be determined on the basis of (i) the annuity table
specified in the Contract, (ii) the Annuity Option selected, and (iii) the
investment performance of the Subaccount selected. The Annuitant receives the
value of a fixed number of Annuity Units each month. The value of an Annuity
Unit will reflect the investment performance of the Subaccounts selected, and
the amount of each annuity payment will vary accordingly. Annuity payments may
be subject to a Withdrawal Charge if made within the sixth Contribution Year or
earlier. If the Owner elects an annuity which provides either an income benefit
period of five years or more, or a benefit under which payment is contingent
upon the life of the payee(s), any applicable Withdrawal Charges will be waived.
2. ANNUITY OPTIONS.
The Contract Owner may elect to have annuity payments made under any one of the
Annuity Options specified in the Contract and described below. The Contract
Owner may decide at any time (subject to the provisions of any applicable
retirement plan) to commence annuity payments. A change of Annuity Option is
permitted if made before the date annuity payments are to commence. For a
Non-Qualified Plan Contract, if no other Annuity Option is elected, monthly
annuity payments will be made in accordance with Option 3 below with a ten (10)
year period certain. For a Qualified Plan Contract, if no other Annuity Option
is elected, monthly annuity payments will be made in the form of a qualified
joint and survivor annuity with a monthly income at two-thirds of the full
amount payable during the lifetime of the surviving payee. Generally, annuity
payments will be made in monthly installments. However, if the net proceeds
available to apply under an Annuity Option are less than $2,000, KILICO shall
have the right to pay the annuity in one lump sum. In addition, if the first
payment provided would be less than $25, KILICO shall have the right to change
the frequency of payments to quarterly, semiannual or annual intervals resulting
in an initial payment of at least $25.
The amount of periodic annuity payments will depend upon (a) the type of annuity
option selected; (b) the age of the payee; and (c) the investment experience of
the Subaccounts selected. For example, if the annuity option selected is income
for a specified period, the shorter the period selected the fewer payments will
be made and those payments will have a higher value. If the annuity option
selected is life income, it is likely the payments will be in a smaller amount
than income for a short specified period. If an individual selects the life
income with installments guaranteed option, the payments will probably be in a
smaller amount than for the life income option. If an individual selects the
joint and survivor annuity option, the payments will be smaller than those
measured by an individual life income option. The age of the payee will also
influence the amount of periodic annuity payments because presumably the older
the payee, the shorter the life expectancy and the larger the payments. Finally,
if the Contract Owner participates in a Subaccount with higher investment
performance, it is likely the Contract Owner will receive a higher periodic
payment.
For Non-Qualified Plan Contracts issued on and after January 19, 1985, if the
Owner dies before the Annuity Date, Annuity Options which may be elected are
limited. The Annuity Options available are (a) Option 2 or (b) Option 1 or 3 for
a period no longer than the life expectancy of the Beneficiary (but not less
than 5 years from the Owner's death). If the Beneficiary is not an individual,
the entire interest must be distributed within 5 years of the Owner's death. The
Death Benefit distribution must begin no later than one year from the Owner's
death or such later date as prescribed by federal regulation.
OPTION 1--INCOME FOR SPECIFIED PERIOD.
An annuity payable monthly for a selected number of years ranging from five to
thirty. Upon payee's death, if the Beneficiary is a natural person, KILICO will
automatically continue payments for the remainder of the certain period to the
Beneficiary. If the Beneficiary is either an estate or trust, KILICO will pay a
commuted value of the remaining payments. Variable Annuity payments under Option
1 reflect the payment of the mortality and expense risk charge, even though
there is no life contingency risk associated with Option 1.
OPTION 2--LIFE INCOME.
An annuity payable monthly during the lifetime of the payee, terminating with
the last monthly payment due prior to the death of the payee. If this Option is
elected, annuity payments terminate automatically and
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<PAGE> 27
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.
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.
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<PAGE> 28
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.")
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 the 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.
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<PAGE> 29
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
income 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 Plan 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 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
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<PAGE> 30
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 Plan 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 his or her interest
in 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.
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.
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<PAGE> 31
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). A simplified method of determining the taxable
portion of annuity payments applies to certain Qualified Plan Contracts other
than IRAs.
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 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.
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7. LOSS OF INTEREST DEDUCTION WHERE CONTRACTS ARE HELD BY OR FOR THE BENEFIT OF
CERTAIN NON-NATURAL PERSONS
In the case of Contracts issued after June 8, 1997 to a non-natural taxpayer
(such as a corporation or a trust), or held for the benefit of such an entity,
otherwise deductible interest may no longer be deductible by the entity,
regardless of whether the interest relates to debt used to purchase or carry the
Contract. However, this interest deduction disallowance does not affect
Contracts where the income on such Contracts is treated as ordinary income that
is received or accrued by the Owner during the taxable year. Entities that are
considering purchasing the Contract, or entities that will be beneficiaries
under a Contract, should consult a tax advisor.
D. QUALIFIED PLANS
The Contracts are also designed for use in connection with retirement plans
which receive favorable treatment under sections 401, 403, 408, 408A 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). In addition, the penalty tax does not apply to certain
distributions from IRAs taken after December 31, 1997 which are used for
qualified first time home purchases or for higher education expenses. Special
conditions must be met to qualify for these two exceptions
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to the penalty tax. Contract Owners wishing to take a distribution from an IRA
for these purposes should consult their tax advisor.
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.
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 "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,
subject to the direct rollover under mandatory withholding requirements
(described below), distributions from certain other types of Qualified Plans may
be "rolled over" on a tax-deferred basis into an IRA. The Contract may not,
however, be used in connection with an "Education IRA" under section 530 of the
Code.
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.
ROTH IRAS. Recently enacted Section 408A of the Code permits eligible
individuals to contribute to a type of IRA known as a "Roth IRA." Roth IRAs
differ from other IRAs in several respects. Among the differences is that,
although contributions to a Roth IRA are never deductible, "qualified
distributions" from a Roth IRA will be excludable from income. The eligibility
and mandatory distribution requirements for Roth IRAs also differ from non-Roth
IRAs. Furthermore, a rollover may be made to a Roth IRA only if it is a
"qualified rollover contribution." A "qualified rollover contribution" is a
rollover contribution to a Roth IRA from another Roth IRA or from a non-Roth
IRA, but only if such rollover contribution meets the rollover requirements for
IRAs under section 408(d)(3) of the Code. In the case of a qualified rollover
contribution or a transfer from a non-Roth IRA to a Roth IRA, any portion of the
amount rolled over which would be includible in gross income were it not part of
a qualified rollover contribution or a nontaxable transfer will be includible in
gross income. However, the 10 percent penalty tax on premature distributions
generally will not apply to such amounts.
All or part of amounts in a non-Roth IRA may be converted into a Roth IRA. Such
a conversion can be made without taking an actual distribution from the IRA. For
example, an individual may make a conversion by notifying the IRA issuer or
trustee, whichever is applicable. The conversion of an IRA to a Roth IRA is a
special type of qualified rollover distribution. Hence, the IRA participant must
be eligible to make a qualified rollover
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distribution in order to convert an IRA to a Roth IRA. A conversion typically
will result in the inclusion of some or all of the IRA value in gross income, as
described above. Persons with adjusted gross incomes in excess of $100,000 or
who are married and file a separate return are not eligible to make a qualified
rollover contribution or a transfer in a taxable year from a non-Roth IRA to a
Roth IRA.
Any "qualified distribution" from a Roth IRA is excludible from gross income. A
"qualified distribution" is a payment or distribution which satisfies two
requirements. First, the payment or distribution must be (a) made after the
Owner attains age 59 1/2, (b) made after the Owner's death, (c) attributable to
the Owner being disabled, or (d) a qualified first-time homebuyer distribution
within the meaning of section 72(t)(2)(F) of the Code. Second, the payment or
distribution must be made in a taxable year that is at least five years after
(a) the first taxable year for which a contribution was made to any Roth IRA
established for the Owner, or (b) in the case of a payment or distribution
properly allocable to a qualified rollover contribution from a non-Roth IRA (or
income allocable thereto), the taxable year in which the rollover contribution
was made. A distribution from a Roth IRA which is not a qualified distribution
is generally taxed in the same manner as a distribution from non-Roth IRAs.
Distributions from a Roth IRA need not commence at age 70 1/2.
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.
Tax-sheltered annuity contracts must contain restrictions on withdrawals of (i)
contributions made pursuant to a salary reduction agreement in years beginning
after December 31, 1988, (ii) earnings on those contributions, and (iii)
earnings after December 31, 1988 on amounts attributable to salary reduction
contributions held as of December 31, 1998. These amounts can be paid only if
the employee has reached age 59 1/2, separated from service, died, or becomes
disabled (within the meaning of the tax law), or in the case of hardship (within
the meaning of the tax law). Amounts permitted to be distributed in the event of
hardship are limited to actual contributions; earnings thereon cannot be
distributed on account of hardship. Amounts subject to the withdrawal
restrictions applicable to section 403(b)(7) custodial accounts may be 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.
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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 and conversions of, or rollovers from
non-Roth IRAs to Roth IRAs) 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 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
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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 Kemper Money Market or Kemper 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. This privilege is designed to allow Contract Owners to
utilize "Dollar Cost Averaging", a long-term system for investing a fixed amount
of money at regular intervals over a period of time. 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 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 $500 per Subaccount or General Account. The total Contract Value in
the Kemper Money Market or Kemper Government Securities Subaccount at the time
Dollar Cost Averaging is elected must be at least equal to the amount designated
to be transferred on each Transfer Date multiplied by the duration selected.
Dollar Cost Averaging will cease automatically if the Contract Value does not
equal or exceed the amount designated to be transferred on each Transfer Date
and the remaining amount will be transferred.
Dollar Cost Averaging will terminate when (i) the number of designated monthly
transfers has been completed, (ii) the Contract Value attributable to the Kemper
Money Market or Kemper 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.
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When utilizing Dollar Cost Averaging, a Contract Owner must be invested in the
Kemper Money Market or Kemper 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.
Dollar Cost Averaging does not ensure a profit nor guarantee against loss in a
declining market. Contract Owners should consider their financial ability to
continue purchases through periods of low price levels.
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.
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.
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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, Kemper Money
Market or Kemper 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 Kemper Money Market or Kemper 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, Kemper Money Market or Kemper 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 Kemper Money Market or Kemper 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.
YEAR 2000 COMPLIANCE
Many existing computer programs were originally designed without considering the
impact of the year 2000 and currently use only two digits to identify the year
in the date field. This issue affects nearly all companies and organizations and
could cause computer applications and systems to fail or create erroneous
results to occur for any transaction with a date of January 1, 2000, or later.
Many companies must undertake major projects to address the year 2000 issue and
each company's costs and uncertainties will depend on a number of factors,
including its software and hardware, and the nature of the industry. Companies
must also coordinate with other entities with which they electronically
interact, including suppliers, customers, creditors and other financial services
institutions.
If a company does not successfully address its year 2000 issues it could face
material adverse consequences in the form of lawsuits against the company, lost
business, erroneous results and substantial operating problems after January 1,
2000.
KILICO has taken substantial steps over the last several years to ensure that
its systems will be compliant for the year 2000. Such steps have included the
replacement of older systems with new systems which are already
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<PAGE> 39
compliant. In 1996, KILICO replaced its investment accounting system and in 1997
KILICO replaced its general ledger and accounts payable system. KILICO has also
ensured that new systems developed to support new product introductions in 1996
and 1997 are already year 2000 compliant. Data processing expenses related
solely to bringing KILICO's systems in compliance with the year 2000 amounted to
$88 thousand in 1997 and KILICO anticipates that it will cost an additional $895
thousand to bring all remaining systems into compliance. KILICO has also
undertaken steps which require that all other entities with which KILICO
electronically interacts, including suppliers and other financial services
institutions, attest in writing to KILICO that their systems are year 2000
compliant.
LEGAL PROCEEDINGS
There are no material legal proceedings pending to which the Separate Account,
KILICO, IBS or SKI is a party.
TABLE OF CONTENTS--STATEMENT OF ADDITIONAL INFORMATION
The Statement of Additional Information, Table of Contents is: Services to the
Separate Account; Performance Information of Subaccounts; State Regulation;
Experts; Report of Independent Accountants, Financial Statements of the Separate
Account, Report of Independent Auditors and Financial Statements of KILICO. The
Statement of Additional Information should be read in conjunction with this
Prospectus.
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APPENDIX
KEMPER INVESTORS LIFE INSURANCE COMPANY DEFERRED FIXED AND
VARIABLE ANNUITY IRA, ROTH IRA AND SIMPLE IRA DISCLOSURE STATEMENT
This Disclosure Statement describes the statutory and regulatory provisions
applicable to the operation of Individual Retirement Annuities (IRAs), Roth
Individual Retirement Annuities (Roth IRAs) and Simple Individual Retirement
Annuities (SIMPLE IRAs). Internal Revenue Service regulations require that this
be given to each person desiring to establish an IRA, Roth IRA or a SIMPLE IRA.
Further information can be obtained from Kemper Investors Life Insurance Company
and from any district office of the Internal Revenue Service.
A. REVOCATION
Within 7 days of the date you signed your enrollment application, you may revoke
the 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), Section 408A of the Code for use as a Roth IRA, or
of Section 408(p) of the Code for use as a SIMPLE IRA, whichever is applicable.
The Contract has not been approved as to form for use as an IRA, Roth IRA or a
SIMPLE IRA by the Internal Revenue Service. Such approval by the Internal
Revenue Service is a determination only as to form of the Contract, and does not
represent a determination on the merits of the Contract.
1. The amount in your IRA, Roth IRA, and SIMPLE IRA, whichever is applicable,
must be fully vested at all times and the entire interest of the owner must be
nonforfeitable.
2. The Contract must be nontransferable by the owner.
3. The Contract must have flexible premiums.
4. For IRAs and SIMPLE IRAs, you must start receiving distributions on or before
April 1 of the year following the year in which you reach age 70 1/2 (the
required beginning date)(see "Required Distributions"). However, section
401(a)(9)(A) of the Code (relating to minimum distributions required to commence
at age 70 1/2), and the incidental death benefit requirements of section 401(a)
of the Code, do not apply to Roth IRAs.
If you die before your entire interest in your Contract is distributed, unless
otherwise permitted under applicable law, any remaining interest in the Contract
must be distributed to your beneficiary by December 31 of the calendar year
containing the fifth anniversary of your death; except that: (1) if the interest
is payable to an individual who is your designated beneficiary (within the
meaning of section 401(a)(9) of the Code), the designated beneficiary may elect
to receive the entire interest over his or her life, or over a period certain
not extending beyond his or her life expectancy, commencing on or before
December 31 of the calendar year immediately following the calendar year in
which you die; and (2) if the designated beneficiary is your spouse, the
Contract will be treated as his or her own IRA, or, where applicable, Roth IRA.
5. Except in the case of a rollover contribution or a direct transfer (see
"Rollovers and Direct Transfers"), or a contribution made in accordance with the
terms of a Simplified Employee Pension (SEP), (1) all contributions to an IRA,
including a Roth IRA, must be cash contributions which do not exceed $2,000 for
any taxable year, and (2) all contributions to a SIMPLE IRA must be cash
contributions, including matching or nonelective employer contributions (see
"SIMPLE IRAs"), which do not exceed $6,000 for any year (as adjusted for
inflation).
6. The Contract must be for the exclusive benefit of you and your beneficiaries.
C. ROLLOVERS AND DIRECT TRANSFERS FOR IRAS AND SIMPLE IRAS
1. A rollover is a tax-free transfer from one retirement program to another that
you cannot deduct on your tax return. There are two kinds of tax-free rollover
payments under an IRA. In one, you transfer amounts from one IRA to another.
With the other, you transfer amounts from a qualified employee benefit plan or
tax-sheltered annuity to an IRA. Tax-free rollovers can be made from a SIMPLE
IRA to another SIMPLE IRA or to a SIMPLE Individual Retirement Account under
section 408(p) of the Code. An individual can make a tax-free rollover to an IRA
from a SIMPLE IRA after a two-year period has expired since the individual first
participated in a SIMPLE plan.
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<PAGE> 41
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 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. CONTRIBUTION LIMITS AND ALLOWANCE OF DEDUCTION FOR IRAS
1. In general, the amount you can contribute each year to an IRA is the lesser
of $2,000 or your taxable compensation for the year. If you have more than one
IRA, the limit applies to the total contributions made to your own IRAs for the
year. Generally, if you work the amount that you earn is compensation. Wages,
salaries, tips, professional fees, bonuses and other amounts you receive for
providing personal services are compensation. If you own and operate your own
business as a sole proprietor, your net earnings reduced by your deductible
contributions on your behalf to self-employed retirement plans is compensation.
If you are an active partner in a partnership and provide services to the
partnership, your share of partnership income reduced by deductible
contributions made on your behalf to qualified retirement plans is compensation.
All taxable alimony and separate maintenance payments received under a decree of
divorce or separate maintenance is compensation.
2. Beginning in 1997, in the case of a married couple filing a joint return, up
to $2,000 can be contributed to each spouse's IRA, even if one spouse has little
or no compensation. This means that the total combined contributions that can be
made to both IRAs can be as much as $4,000 for the year. Previously, if one
spouse had no compensation or elected to be treated as having no compensation,
the total combined contributions to both IRAs could no be more than $2,250.
3. Also beginning in 1997, in the case of a married couple with unequal
compensation who file a joint return, the limit on the deductible contributions
to the IRA of the spouse with less compensation is the smaller of:
a. $2,000, or
b. The total compensation of both spouses, reduced by any deduction allowed
for contributions to IRAs of the spouse with more compensation.
The deduction for contributions to both spouses' IRAs may be further limited if
either spouse is covered by an employer retirement plan.
4. Beginning in 1998, even if your spouse is covered by an employer retirement
plan, you may be able to deduct your contributions to an IRA if you are not
covered by an employer plan. The deduction is limited to $2,000 and it must be
reduced if your adjusted gross income on a joint return is more than $150,000
but less than $160,000. Your deduction is eliminated if your income on a joint
return is $160,000 or more.
5. Contributions to your IRA can be made at any time. If you make the
contribution between January 1 and April 15, however, you may elect to treat the
contribution as made either in that year or in the preceding year. You may file
a tax return claiming a deduction for your IRA contribution before the
contribution is actually made. You must, however, make the contribution by the
due date of your return not including extensions.
6. You cannot make a contribution other than a rollover contribution to your IRA
for the year in which you reach age 70 1/2 or thereafter.
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<PAGE> 42
E. SEP-IRA'S
1. The maximum deductible contribution for a Simplified Employee Pension (SEP)
IRA is the lesser of $30,000 or 15% of compensation.
2. A SEP must be established and maintained by an employer (corporation,
partnership, sole proprietor). Information about the Kemper SEP is available
upon request.
F. SIMPLE IRAS
1. A SIMPLE IRA must be established with your employer using a qualified salary
reduction agreement.
2. You may elect to have your employer contribute to your SIMPLE IRA, under a
qualified salary reduction agreement, an amount (expressed as a percentage of
your compensation) not to exceed $6,000 (as adjusted for inflation) for the
year. In addition to these employee elective contributions, your employer is
required to make each year either (1) a matching contribution equal to up to 3
percent, and not less than 1 percent, of your SIMPLE IRA contribution for the
year, or (2) a nonelective contribution equal to 2 percent of your compensation
for the year (up to $150,000 of compensation, as adjusted for inflation). No
other contributions may be made to a SIMPLE IRA.
3. Employee elective contributions and employer contributions (i.e., matching
contributions and nonelective contributions) to your SIMPLE IRA are excluded
from your gross income.
4. To the extent an individual with a SIMPLE IRA is no longer participating in a
SIMPLE plan (e.g., the individual has terminated employment), and two years has
passed since the individual first participated in the plan, the individual may
treat the SIMPLE IRA as an IRA.
G. TAX STATUS OF THE CONTRACT AND DISTRIBUTIONS FOR IRAS AND SIMPLE IRAS
1. Earnings of your IRA annuity contract are not taxed until they are
distributed to you.
2. In general, taxable distributions are included in your gross income in the
year you receive them.
3. Distributions under your IRA are non-taxable to the extent they represent a
return of non-deductible contributions (if any). The non-taxable percentage of a
distribution is determined by dividing your total undistributed, non-deductible
IRA contributions by the value of all your IRAs (including SEPs and rollovers).
4. You cannot choose the special five-year or ten-year averaging that may apply
to lump sum distributions from qualified employer plans.
H. REQUIRED DISTRIBUTIONS FOR IRAS AND SIMPLE IRAS
You must start receiving minimum distributions required under the 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
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<PAGE> 43
accumulation. There is a 50% excise tax on any excess accumulations. If the
excess accumulation is due to reasonable error, and you have taken (or are
taking) steps to remedy the insufficient distribution, you can request that this
50% excise tax be excused by filing with your tax return an IRS Form 5329,
together with a letter of explanation and the excise tax payment.
I. ROTH IRAS
1. If your contract is a special type of individual retirement plan known as a
Roth IRA, it will be administered in accordance with the requirements of section
408A of the Code. (Except as otherwise indicated, references herein to an "IRA"
are to an "individual retirement plan," within the meaning of section
7701(a)(37) of the Code, other than a Roth IRA.) Roth IRAs are treated the same
as other IRAs, except as described here. However, the provisions of the Code
governing Roth IRAs may be modified by pending legislation. We will notify you
of any such changes.
2. The IRS is not presently accepting submissions for opinion letters approving
annuities as Roth IRAs, but will issue in the future procedures for requesting
such opinion letters. We will apply for approval as soon as possible after the
IRS issues its procedures on this matter. Such approval will be a determination
only as to the form of the annuity, and will not represent a determination of
the merits of the annuity.
3. If your Contract is a Roth IRA, we will send you a Roth IRA endorsement to be
attached to, and to amend, your contract after we obtain approval of the
endorsement from the IRS and your state insurance department. The Company
reserves the right to amend the contract as necessary or advisable from time to
time to comply with future changes in the Internal Revenue Code, regulations or
other requirements imposed by the IRS to obtain or maintain its approval of the
annuity as a Roth IRA.
4. Earnings in your Roth IRA are not taxed until they are distributed to you,
and will not be taxed if they are paid as a "qualified distribution," as
described to you in section L, below.
J. ELIGIBILITY AND CONTRIBUTIONS FOR ROTH IRAS
1. Generally, you are eligible to establish or make a contribution to your Roth
IRA on or after January 1, 1998, only if you meet certain income limits. No
deduction is allowed for contributions to your Roth IRA. Contributions to your
Roth IRA may be made even after you attain age 70 1/2.
2. The aggregate amount of contributions for any taxable year to all IRAs,
including all Roth IRAs, maintained for your benefit (the "contribution limit")
generally is the lesser of $2,000 and 100% of your compensation for the taxable
year. However, if you file a joint return and receive less compensation for the
taxable year than your spouse, the contribution limit for the taxable year is
the lesser of $2,000 and the sum of (1) your compensation for the taxable year,
and (2) your spouse's compensation for the taxable year reduced by any
deductible contributions to an IRA of your spouse, and by any contributions to a
Roth IRA for your spouse, for the taxable year.
The contribution limit for any taxable year is reduced (but not below zero) by
the amount which bears the same ratio to such amount as:
(a) the excess of (i) your adjusted gross income for the taxable year, over
(ii) the "applicable dollar amount," bears to
(b) $15,000 (or $10,000 if you are married).
For this purpose, "adjusted gross income" is determined in accordance with
section 219(g)(3) of the Code and (1) excludes any amount included in gross
income as a result of any rollover from, transfer from, or conversion of an IRA
to a Roth IRA, and (2) is reduced by any deductible IRA contribution. In
addition, the "applicable dollar amount" is equal to $150,000 for a married
individual filing a joint return, $0 for a married individual filing a separate
return, and $95,000 for any other individual.
A "qualified rollover contribution" (discussed in section K, below), and a
non-taxable transfer from another Roth IRA, are not taken into account for
purposes of determining the contribution limit.
K. ROLLOVERS, TRANSFERS AND CONVERSIONS TO ROTH IRAS
1. Rollovers And Transfers--A rollover may be made to a Roth IRA only if it is a
"qualified rollover contribution." A "qualified rollover contribution" is a
rollover to a Roth IRA from another Roth IRA or from
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an IRA, but only if such rollover contribution also meets the rollover
requirements for IRAs under section 408(d)(3). In addition, a transfer may be
made to a Roth IRA directly from another Roth IRA or from an IRA.
You may not make a qualified rollover contribution or transfer in a taxable year
from an IRA to a Roth IRA if (a) your adjusted gross income for the taxable year
exceeds $100,000 or (b) you are married and file a separate return.
The rollover requirements of section 408(d)(3) are complex and should be
carefully considered before you make a rollover. One of the requirements is that
the amount received be paid into another IRA (or Roth IRA) within 60 days after
receipt of the distribution. In addition, a rollover contribution from a Roth
IRA may be made by you only once a year. The one-year period begins on the date
you receive the Roth IRA distribution, not on the date you roll it over
(reinvest it) into another Roth IRA. If you withdraw assets from a Roth IRA, you
may roll over part of the withdrawal tax free into another Roth IRA and keep the
rest of it. A portion of the amount you keep may be included in your gross
income.
2. Taxation of Rollovers And Transfers to Roth IRAs--A qualified rollover
contribution or transfer from a Roth IRA maintained for your benefit to another
Roth IRA maintained for your benefit which meets the rollover requirements for
IRAs under section 408(d)(3) is tax-free.
In the case of a qualified rollover contribution or a transfer from an IRA
maintained for your benefit to a Roth IRA maintained for your benefit, any
portion of the amount rolled over or transferred which would be includible in
your gross income were it not part of a qualified rollover contribution or a
nontaxable transfer will be includible in your gross income. However, section
72(t) of the Code (relating to the 10 percent penalty tax on premature
distributions) will not apply. If such a rollover or transfer occurs before
January 1, 1999, any portion of the amount rolled over or transferred which is
required to be included in gross income will be so included ratably over the
4-taxable year period beginning with the taxable year in which the rollover or
transfer is made.
Pending legislation may modify these rules retroactively to January 1, 1998.
3. Transfers of Excess IRA Contributions to Roth IRAs--If, before the due date
of your federal income tax return for any taxable year (not including
extensions), you transfer, from an IRA, contributions for such taxable year (and
earnings thereon) to a Roth IRA, such amounts will not be includible in gross
income to the extent that no deduction was allowed with respect to such amount.
4. Taxation of Conversions of IRAs to Roth IRAs--All or part of amounts in an
IRA maintained for your benefit may be converted into a Roth IRA maintained for
your benefit. The conversion of an IRA to a Roth IRA is treated as special type
of qualified rollover contribution. Hence, you must be eligible to make a
qualified rollover contribution in order to convert an IRA to a Roth IRA. A
conversion typically will result in the inclusion of some or all of your IRA's
value in gross income, as described above.
A conversion of an IRA to a Roth IRA can be made without taking an actual
distribution from your IRA. For example, an individual may make a conversion by
notifying the IRA issuer or trustee, whichever is applicable.
UNDER SOME CIRCUMSTANCES, IT MIGHT NOT BE ADVISABLE TO ROLLOVER, TRANSFER, OR
CONVERT ALL OR PART OF AN IRA TO A ROTH IRA. WHETHER YOU SHOULD DO SO WILL
DEPEND ON YOUR PARTICULAR FACTS AND CIRCUMSTANCES, INCLUDING, BUT NOT LIMITED
TO, SUCH FACTORS AS WHETHER YOU QUALIFY TO MAKE SUCH A ROLLOVER, TRANSFER, OR
CONVERSION, YOUR FINANCIAL SITUATION, AGE, CURRENT AND FUTURE INCOME NEEDS,
YEARS TO RETIREMENT, CURRENT AND FUTURE TAX RATES, YOUR ABILITY AND DESIRE TO
PAY CURRENT INCOME TAXES WITH RESPECT TO AMOUNTS ROLLED OVER, TRANSFERRED, OR
CONVERTED, AND WHETHER SUCH TAXES MIGHT NEED TO BE PAID WITH WITHDRAWALS FROM
YOUR ROTH IRA (SEE DISCUSSION BELOW OF "NONQUALIFIED DISTRIBUTIONS"). YOU SHOULD
CONSULT A QUALIFIED TAX ADVISOR BEFORE ROLLING OVER, TRANSFERRING, OR CONVERTING
ALL OR PART OF AN IRA TO A ROTH IRA.
5. Separate Roth IRAs--Due to the complexity of, and proposed changes to, the
tax law, it may be advantageous to maintain amounts rolled over, transferred, or
converted from an IRA in separate Roth IRAs from those containing regular Roth
IRA contributions. For the same reason, you should consider maintaining a
separate Roth IRA for each amount rolled over, transferred, or converted from an
IRA. These considerations should be balanced against the additional costs you
may incur from maintaining multiple Roth IRAs. You
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should consult your tax advisor if you intend to contribute rollover, transfer,
or conversion amounts to your Policy, or if you intend to roll over or transfer
amounts from your Policy to another Roth IRA maintained for your benefit.
L. INCOME TAX CONSEQUENCES OF ROTH IRAS
1. Qualified Distributions--Any "qualified distribution" from a Roth IRA is
excludible from gross income. A "qualified distribution" is a payment or
distribution which satisfies two requirements. First, the payment or
distribution must be (a) made after you attain 59 1/2, (b) made after your
death, (c) attributable to your being disabled, or (d) a "qualified special
purpose distribution" (I.E., a qualified first-time homebuyer distribution under
section 72(t)(2)(F) of the Code). Second, the payment or distribution must be
made in a taxable year that is at least five years after (1) the first taxable
year for which a contribution was made to any Roth IRA established for you, or
(2) in the case of a rollover from, or a conversion of, an IRA to a Roth IRA,
the taxable year in which the rollover or conversion was made if the payment or
distribution is allocable (as determined in the manner set forth in guidance
issued by the IRS) to the rollover contribution or conversion (or to income
allocable thereto).
2. Nonqualified Distributions--A distribution from a Roth IRA which is not a
qualified distribution is taxed under section 72 (relating to annuities), except
that such distribution is treated as made first from contributions to the Roth
IRA to the extent that such distribution, when added to all previous
distributions from the Roth IRA, does not exceed the aggregate amount of
contributions to the Roth IRA. For purposes of determining the amount taxed, (a)
all Roth IRAs established for you will be treated as one contract, (b) all
distributions during any taxable year from Roth IRAs established for you will be
treated as one distribution, and (c) the value of the contract, income on the
contract, and investment in the contract, if applicable, will be computed as of
the close of the calendar year in which the taxable year begins.
An additional tax of 10% is imposed on nonqualified distributions (including
amounts deemed distributed as the result of a prohibited loan or use of your
Roth IRA as security for a loan) made before the benefited individual has
attained age 59 1/2, unless one of the exceptions discussed in Section N
applies.
M. TAX ON EXCESS CONTRIBUTIONS
1. You must pay a 6% excise tax each year on excess contributions that remain in
your 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.
N. TAX ON PREMATURE DISTRIBUTIONS
There is an additional tax on premature distributions from your IRA, Roth IRA,
or SIMPLE IRA, equal to 10% of the amount of the premature distribution that you
must include in your gross income. For premature distributions from a SIMPLE IRA
made within the first 2 years you participate in a SIMPLE plan, the additional
tax is equal to 25% of the amount of the premature distribution that must be
included in gross income. Premature distributions are generally amounts you
withdraw before you are age 59 1/2. However, the tax on premature distributions
does not apply:
1. To amounts that are rolled over tax free;
2. To a distribution which is made on or after your death, or on account of you
being disabled within the meaning of section 72(m)(7) of the Code;
3. To a distribution which is part of a series of substantially equal periodic
payments (made at least annually) over your life or your life expectancy or the
joint life or joint life expectancy of you and your beneficiary; or
4. To a distribution which is used for qualified first-time homebuyer expenses,
qualified higher education expenses, certain medical expenses, or by an
unemployed individual to pay health insurance premiums.
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O. 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, SIMPLE IRA or Roth IRA excise taxes,
you do not need Form 5329. Further information can be obtained from any district
office of the Internal Revenue Service.
P. BORROWING
If you borrow money against your Contract or use it as security for a loan, the
Contract will lose its classification as an IRA, Roth IRA, or SIMPLE IRA,
whichever is applicable, and you must include in gross income the fair market
value of the Contract as of the first day of your tax year. In addition, you may
be subject to the tax on premature distributions described above. (Note: This
Contract does not allow borrowings against it, nor may it be assigned or pledged
as collateral for a loan.)
Q. REPORTING
We will provide you with any reports required by the Internal Revenue Service.
R. ESTATE TAX
Generally, the value of your IRA, including your Roth IRA, is included in your
gross estate for federal estate tax purposes.
S. 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 *
- ------------------------------------------------------------------------------------------------------
<S> <C>
1 60
- ------------------------------------------------------------------------------------------------------
2 65
- ------------------------------------------------------------------------------------------------------
3 70
- ------------------------------------------------------------------------------------------------------
4
- ------------------------------------------------------------------------------------------------------
5
- ------------------------------------------------------------------------------------------------------
</TABLE>
* Includes applicable withdrawal charges as described in Item O below.
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
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<PAGE> 47
to the fixed account of $1,000 at the beginning of this year, must be completed
prior to your signing the enrollment application.
<TABLE>
<CAPTION>
END OF LUMP SUM TERMINATION AT LUMP SUM TERMINATION
YEAR VALUE OF CONTRACT * AGE VALUE OF CONTRACT *
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1 60
- ------------------------------------------------------------------------------------------------------
2 65
- ------------------------------------------------------------------------------------------------------
3 70
- ------------------------------------------------------------------------------------------------------
4
- ------------------------------------------------------------------------------------------------------
5
- ------------------------------------------------------------------------------------------------------
</TABLE>
* Includes applicable withdrawal charges as described in Item O below.
T. 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.
44
<PAGE> 48
GUARANTEED LUMP SUM TERMINATION OF DEFERRED FIXED AND VARIABLE ANNUITY
COMPLETELY ALLOCATED TO THE GENERAL ACCOUNT WITH 3% GUARANTEED EACH YEAR.
(TERMINATION VALUES ARE BASED ON $1,000 ANNUAL CONTRIBUTIONS AT THE BEGINNING OF
EACH YEAR.)
<TABLE>
<CAPTION>
END OF TERMINATION END OF TERMINATION END OF TERMINATION END OF TERMINATION
YEAR VALUES* YEAR VALUES* YEAR VALUES* YEAR Values*
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 $ 1,000 14 $17,371 27 $41,703 40 $ 77,436
- -----------------------------------------------------------------------------------------
2 2,000 15 18,929 28 43,991 41 80,796
- -----------------------------------------------------------------------------------------
3 3,038 16 20,534 29 46,348 42 84,256
- -----------------------------------------------------------------------------------------
4 4,130 17 22,187 30 48,775 43 87,821
- -----------------------------------------------------------------------------------------
5 5,264 18 23,889 31 51,275 44 91,492
- -----------------------------------------------------------------------------------------
6 6,442 19 25,643 32 53,850 45 95,274
- -----------------------------------------------------------------------------------------
7 7,665 20 27,449 33 56,503 46 99,169
- -----------------------------------------------------------------------------------------
8 8,932 21 29,309 34 59,235 47 103,181
- -----------------------------------------------------------------------------------------
9 10,236 22 31,225 35 62,048 48 107,313
- -----------------------------------------------------------------------------------------
10 11,580 23 33,199 36 64,947 49 111,569
- -----------------------------------------------------------------------------------------
11 12,965 24 35,232 37 67,932 50 115,953
- -----------------------------------------------------------------------------------------
12 14,390 25 37,326 38 71,007
- -----------------------------------------------------------------------------------------
13 15,859 26 39,482 39 74,174
- -----------------------------------------------------------------------------------------
</TABLE>
GUARANTEED LUMP SUM TERMINATION OF DEFERRED FIXED AND VARIABLE ANNUITY
COMPLETELY ALLOCATED TO THE GENERAL ACCOUNT WITH 3% GUARANTEED EACH YEAR.
(TERMINATION VALUES ARE BASED ON $1,000 SINGLE PREMIUM.)
<TABLE>
<CAPTION>
END OF TERMINATION END OF TERMINATION END OF TERMINATION END OF TERMINATION
YEAR VALUES* YEAR VALUES* YEAR VALUES* YEAR Values*
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 $1,000 14 $1,513 27 $2,221 40 $3,262
- -----------------------------------------------------------------------------------------
2 1,013 15 1,558 28 2,288 41 3,360
- -----------------------------------------------------------------------------------------
3 1,053 16 1,605 29 2,357 42 3,461
- -----------------------------------------------------------------------------------------
4 1,095 17 1,653 30 2,427 43 3,565
- -----------------------------------------------------------------------------------------
5 1,138 18 1,702 31 2,500 44 3,671
- -----------------------------------------------------------------------------------------
6 1,183 19 1,754 32 2,575 45 3,782
- -----------------------------------------------------------------------------------------
7 1,230 20 1,806 33 2,652 46 3,895
- -----------------------------------------------------------------------------------------
8 1,267 21 1,860 34 2,732 47 4,012
- -----------------------------------------------------------------------------------------
9 1,305 22 1,916 35 2,814 48 4,132
- -----------------------------------------------------------------------------------------
10 1,344 23 1,974 36 2,898 49 4,256
- -----------------------------------------------------------------------------------------
11 1,384 24 2,033 37 2,985 50 4,384
- -----------------------------------------------------------------------------------------
12 1,426 25 2,094 38 3,075
- -----------------------------------------------------------------------------------------
13 1,469 26 2,157 39 3,167
- -----------------------------------------------------------------------------------------
</TABLE>
* Includes applicable withdrawal charges.
45
<PAGE> 49
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1998
- --------------------------------------------------------------------------------
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, 1998. 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-19
Experts..................................................... B-19
Change of Accountants....................................... B-19
Financial Statements........................................ B-20
</TABLE>
ADV-02B
<PAGE> 50
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 Coopers & Lybrand L.L.P.,
Chicago, Illinois, for the year ended December 31, 1997. Coopers & Lybrand
L.L.P. performed the annual audit of the financial statements of the Separate
Account and KILICO for the year ended December 31, 1997.
The independent auditors for the Separate Account prior to 1997 were KPMG Peat
Marwick LLP, Chicago, Illinois, for the periods through December 31, 1996. The
firm performed the annual audit of the financial statements of the Separate
Account and KILICO for the periods through December 31, 1996.
The Contracts are sold by licensed insurance agents, where the Contracts may be
lawfully sold, who are registered representatives of broker-dealers which are
registered under the Securities Exchange Act of 1934 and are members of the
National Association of Securities Dealers, Inc. The Contracts are distributed
through the principal underwriter for the Separate Account, Investors Brokerage
Services, Inc. ("IBS"), a wholly owned subsidiary of KILICO, which enters into
selling group agreements with affiliated and unaffiliated broker-dealers.
Subject to the provisions of the Contracts, units of the Subaccounts under the
Contract are offered on a continuous basis.
KILICO pays commissions to the seller which may vary but are not anticipated to
exceed in the aggregate an amount equal to six percent (6%) of Purchase
Payments. During 1997, 1996 and 1995 KILICO incurred gross commissions payable
of approximately $14,741,000, $9,049,000 and $10,006,000 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 standardized "average annual total return" and
nonstandardized "total return" calculations in the case of all Subaccounts;
"yield" information may be provided in the case of the Kemper High Yield
Subaccount, Kemper Investment Grade Bond Subaccount, the Kemper Government
Securities Subaccount and the Janus Short-Term Bond Subaccount; and "yield" and
"effective yield" information may be provided in the case of the Kemper Money
Market Subaccount. These various measures of performance are described below.
A Subaccount's standardized average annual total return quotation is computed in
accordance with a standard method prescribed by rules of the Securities and
Exchange Commission. The standardized average annual total return for a
Subaccount for a specific period is found by first taking a hypothetical $1,000
investment in each of the Subaccount's units on the first day of the period at
the maximum offering price, which is the Accumulation Unit value per unit
("initial investment") and computing the ending redeemable value ("redeemable
value") of that investment at the end of the period. The redeemable value
reflects the effect of the applicable Withdrawal Charge that may be imposed at
the end of the period as well as all other recurring charges and fees applicable
under the 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 figures are
annualized and, therefore, represent the average annual percentage change in the
value of a Subaccount over the applicable period.
No standard formula has been prescribed for calculating nonstandardized total
return performance. Nonstandardized 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. Premium taxes are not
included in the term charges. The nonstandardized total
B-1
<PAGE> 51
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. Both annualized and nonannualized (cumulative)
nonstandardized total return figures may be provided. Annualized nonstandardized
total return figures represent the average annual percentage change in the value
of a Subaccount over the applicable period while nonannualized (cumulative)
figures represent the actual percentage change over the applicable period.
Standardized average annual total return quotations will be current to the last
day of the calendar quarter and nonstandardized total return quotations will be
current to the last day of the calendar month preceding the date on which an
advertisement is submitted for publication. Standardized average annual total
return will cover periods of one, three, five and ten years, if applicable, and
a period covering the time the underlying Portfolio has been held in a
Subaccount (life of Subaccount). Nonstandardized total return will cover periods
of one, three, five and ten years, if applicable, and a period covering the time
the underlying Portfolio held in a Subaccount has been in existence (life of
Portfolio). For those underlying Portfolios which have not been held as
Subaccounts within the Separate Account for one of the quoted periods, the
nonstandardized total return quotations will show the investment performance
such underlying Portfolios would have achieved (reduced by the applicable
charges) had they been held as Subaccounts within the Separate Account for the
period quoted.
Performance information will be shown for periods from April 6, 1982 (inception)
for the Kemper Money Market Subaccount, Kemper Total Return Subaccount and
Kemper High Yield Subaccount, and for periods from December 9, 1983 (inception)
for the Kemper Growth Subaccount. This performance information is stated to
reflect that the Separate Account was reorganized on November 3, 1989 as a unit
investment trust with Subaccounts investing in corresponding Portfolios of the
Fund. In addition, on that date the Kemper Government Securities Subaccount was
added to the Separate Account to invest in the Fund's Government Securities
Portfolio. For the Kemper Government Securities Subaccount, performance figures
will reflect investment experience as if the Kemper Government Securities
Subaccount had been available under the Contracts since September 3, 1987, the
inception date of the Kemper Government Securities Portfolio.
The yield for the Kemper High Yield Subaccount, the Kemper Investment Grade Bond
Subaccount, the Kemper Government Securities Subaccount, and the Janus
Short-Term Bond Subaccount is computed in accordance with a standard method
prescribed by rules of the Securities and Exchange Commission. The yields for
the Kemper High Yield Subaccount, the Kemper Government Securities Subaccount
and the Kemper Investment Grade Bond Subaccount, based upon the one month period
ended March 31, 1998 were 6.92%, 4.79%, and 4.09%, respectively. The yield
quotation is computed by dividing the net investment income per unit earned
during the specified one month or 30-day period by the accumulation unit values
on the last day of the period, according to the following formula that assumes a
semi-annual reinvestment of income:
<TABLE>
<CAPTION>
<S> <C> <C>
a - b
------- 6
YIELD = 2[( cd +1) - 1]
</TABLE>
a = net dividends and interest earned during the period by the Fund attributable
to the Subaccount
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of Accumulation Units outstanding during the period
d = the Accumulation Unit value per unit on the last day of the period
The yield of each Subaccount reflects the deduction of all recurring fees and
charges applicable to each Subaccount, but does not reflect the deduction of
withdrawal charges or premium taxes.
The Kemper Money Market 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
Kemper Money Market Subaccount's yield for the seven-day period ended March 31,
1998 was 3.76% and average portfolio maturity was 27 days.
B-2
<PAGE> 52
The Kemper 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 Kemper Money Market Subaccount's effective yield for
the seven day period ended March 31, 1998 was 3.83%.
In computing yield, the Separate Account follows certain standard accounting
practices specified by Securities and Exchange Commission rules. These practices
are not necessarily consistent with the accounting practices that the Separate
Account uses in the preparation of its annual and semi-annual financial
statements.
A Subaccount's performance quotations are based upon historical earnings and are
not necessarily representative of future performance. The Subaccount's units are
sold at Accumulation Unit value. Performance figures and Accumulation Unit value
will fluctuate. Factors affecting a Subaccount's performance include general
market conditions, operating expenses and investment management. Units of a
Subaccount are redeemable at Accumulation Unit value, which may be more or less
than original cost. The performance figures include the deduction of all
expenses and fees, including a prorated portion of the Records Maintenance
Charge. Redemptions within the first six years after purchase may be subject to
a Withdrawal Charge that ranges from 6% the first year to 0% after six years.
Yield, effective yield and nonstandardized total return do not reflect the
effect of the Withdrawal Charge or premium taxes that may be imposed upon the
redemption of units. Standardized average annual total return reflects the
effect of the applicable Withdrawal Charge (but not premium tax) that may be
imposed at the end of the period in question.
The Subaccounts may also provide comparative information on an annualized or
nonannualized (cumulative) basis with regard to various indexes, including the
Dow Jones Industrial Average, the Standard & Poor's 500 Stock Index, the
Consumer Price Index, the CDA Certificate of Deposit Index, the Salomon Brothers
High Grade Corporate Bond Index, the Lehman Brothers Government/Corporate Bond
Index, the Merrill Lynch Government/Corporate Master Index, the Lehman Brothers
Long Government/Corporate Bond Index, the Lehman Brothers Government/Corporate
1-3 Year Bond Index, the Standard & Poor's Midcap 400 Index, the NASDAQ
Composite Index, the Russell 2000 Index and the Morgan Stanley Capital
International Europe, Australia, Far East Index. In addition, the Subaccounts
may provide performance analysis rankings of Lipper Analytical Services, Inc.,
the VARDS Report, MORNINGSTAR, INC., Ibbotson Associates or Micropal. 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. From time to time, the Separate Account may quote information
from publications such as MORNINGSTAR, INC., THE WALL STREET JOURNAL, MONEY
MAGAZINE, FORBES, BARRON'S, FORTUNE, THE CHICAGO TRIBUNE, USA TODAY,
INSTITUTIONAL INVESTOR, NATIONAL UNDERWRITER, SELLING LIFE INSURANCE, BROKER
WORLD, REGISTERED REPRESENTATIVE, INVESTMENT ADVISOR and VARDS.
The following tables include standardized average annual total return and
nonstandardized total return quotations for various periods as of December 31,
1997, and compares these quotations to various indexes.
B-3
<PAGE> 53
PERFORMANCE FIGURES
(AS OF DECEMBER 31, 1997)
<TABLE>
<CAPTION>
STANDARDIZED
AVERAGE
NONSTANDARDIZED ANNUAL
TOTAL RETURN(1) TOTAL
----------------------- RETURN(2)
YEAR TO DATE CUMULATIVE ------------
(%) ENDING (%) ANNUALIZED ANNUALIZED
RETURN(3) VALUE(4) RETURN (%) RETURN (%) RETURN
------------ -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
KEMPER CONTRARIAN VALUE SUBACCOUNT................. 28.71%
Life of Subaccount (from 05/01/96)............... 22.99%
Life of Portfolio (from 05/01/96)................ $ 14,954 49.54% 27.28% N/A
One Year......................................... $ 12,856 28.56% 28.56% 20.31%
KEMPER VALUE+GROWTH SUBACCOUNT..................... 23.86%
Life of Subaccount (from 05/01/96)............... 18.26%
Life of Portfolio (from 05/01/96)................ $ 14,051 40.51% 22.61% N/A
One Year......................................... $ 12,370 23.70% 23.70% 15.65%
KEMPER HORIZON 20+ SUBACCOUNT...................... 18.93%
Life of Subaccount (from 05/01/96)............... 15.07%
Life of Portfolio (from 05/01/96)................ $ 13,566 35.66% 20.06% N/A
One Year......................................... $ 11,869 18.69% 18.69% 10.25%
JANUS GROWTH SUBACCOUNT............................ 21.17%
Life of Subaccount (from 09/15/95)............... 14.85%
Life of Portfolio (from 10/09/93)................ $ 18,979 89.79% 16.07% N/A
Three Year....................................... $ 18,159 81.59% 22.00% 19.59%
One Year......................................... $ 12,100 21.00% 21.00% 13.03%
FIDELITY VIP EQUITY-INCOME SUBACCOUNT.............. 26.46%
Life of Subaccount (from 05/01/96)............... 15.25%
Life of Portfolio (from 10/09/86)................ $ 39,993 299.93% 13.13% N/A
Ten Years........................................ $ 41,052 310.52% 15.16% 14.63%
Five Years....................................... $ 23,401 134.01% 18.54% 17.35%
Three Years...................................... $ 18,983 89.83% 23.82% 21.47%
One Year......................................... $ 12,630 26.30% 26.30% 18.14%
FIDELITY VIP GROWTH SUBACCOUNT..................... 21.89%
Life of Subaccount (from 05/01/96)............... 10.56%
Life of Portfolio (from 10/09/86)................ $ 43,693 336.93% 14.02% N/A
Ten Years........................................ $ 42,722 327.22% 15.61% 15.13%
Five Years....................................... $ 21,374 113.74% 16.41% 15.23%
Three Years...................................... $ 18,403 84.03% 22.54% 20.25%
One Year......................................... $ 12,173 21.73% 21.73% 13.75%
FIDELITY VIP II INDEX 500 SUBACCOUNT............... 31.00%
Life of Subaccount (from 05/01/96)............... 22.19%
Life of Portfolio (from 08/27/92)................ $ 24,512 145.12% 18.25% N/A
Five Years....................................... $ 23,156 131.56% 18.28% 17.04%
Three Years...................................... $ 21,463 114.63% 28.99% 26.66%
One Year......................................... $ 13,081 30.81% 30.81% 22.15%
</TABLE>
The performance data quoted for the Subaccounts is based on past performance and
is not representative of future
results. Investments return and principal value will fluctuate so that unit
values, when redeemed, may be worth
more or less than their original cost. Information regarding the indexes used
for comparison were obtained
from outside sources, have not been independently verified and do not reflect
the deduction of
any Contract charges or fees. See page B-15 for additional information.
B-4
<PAGE> 54
PERFORMANCE FIGURES
(AS OF DECEMBER 31, 1997)
(CONTINUED)
<TABLE>
<CAPTION>
COMPARED TO
-------------------------------------------------------------------------------------------------
DOW JONES DOW JONES STANDARD & STANDARD & CONSUMER CONSUMER
INDUSTRIAL(5) INDUSTRIAL(5) POOR'S 500(6) POOR'S 500(6) PRICE INDEX(7) PRICE INDEX(7)
CUMULATIVE % ANNUALIZED % CUMULATIVE % ANNUALIZED % CUMULATIVE % ANNUALIZED %
RETURN RETURN RETURN RETURN RETURN RETURN
------------- ------------- ------------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
KEMPER VALUE SUBACCOUNT
Life of Portfolio (from
05/01/96)................. 41.85 23.31 48.25 26.62 3.72 2.21
One Year.................... 22.64 22.64 31.01 31.01 1.70 1.70
KEMPER VALUE+GROWTH SUBACCOUNT
Life of Portfolio (from
05/01/96)................. 41.85 23.31 48.25 26.62 3.72 2.21
One Year.................... 22.64 22.64 31.01 31.01 1.70 1.70
KEMPER HORIZON 20+ SUBACCOUNT
Life of Portfolio (from
05/01/96)................. 41.85 23.31 48.25 26.62 3.72 2.21
One Year.................... 22.64 22.64 31.01 31.01 1.70 1.70
JANUS GROWTH SUBACCOUNT
Life of Portfolio (from
09/13/93)................. 117.61 19.83 110.02 18.85 11.66 2.60
Three Years................. 106.24 27.29 111.30 28.32 7.72 2.51
One Year.................... 22.64 22.64 31.01 31.01 1.70 1.70
FIDELITY VIP EQUITY-INCOME
SUBACCOUNT
Life of Portfolio (from
10/09/86)................. 340.12 14.11 311.46 13.43 47.05 3.49
Ten Years................... 307.89 15.09 292.76 14.66 39.93 3.42
Five Years.................. 139.56 19.10 122.76 17.37 13.69 2.60
Three Years................. 106.24 27.29 111.30 28.32 7.72 2.51
One Year.................... 22.64 22.64 31.01 31.01 1.70 1.70
FIDELITY VIP GROWTH SUBACCOUNT
Life of Portfolio (from
10/09/86)................. 340.12 14.11 311.46 13.43 47.05 3.49
Ten Years................... 307.89 15.09 292.76 14.66 39.93 3.42
Five Years.................. 139.56 19.10 122.72 17.37 13.69 2.60
Three Years................. 106.24 27.29 111.30 28.32 7.72 2.51
One Year.................... 22.64 22.64 31.01 31.01 1.70 1.70
FIDELITY VIP II INDEX 500
SUBACCOUNT
Life of Portfolio (from
08/27/92)................. 142.98 18.08 134.66 17.31 14.90 2.63
Five Years.................. 139.56 19.10 122.72 17.37 13.69 2.60
Three Years................. 106.24 27.29 111.30 28.32 7.72 2.51
One Year.................... 22.64 22.64 31.01 31.01 1.70 1.70
</TABLE>
The performance data quoted for the Subaccounts is based on past performance and
is not representative of future
results. Investments return and principal value will fluctuate so that unit
values, when redeemed, may be worth
more or less than their original cost. Information regarding the indexes used
for comparison were obtained
from outside sources, have not been independently verified and do not reflect
the deduction of
any Contract charges or fees. See page B-15 for additional information.
B-5
<PAGE> 55
PERFORMANCE FIGURES
(AS OF DECEMBER 31, 1997)
(CONTINUED)
<TABLE>
<CAPTION>
STANDARDIZED
AVERAGE
ANNUAL
NONSTANDARDIZED TOTAL
TOTAL RETURN(1) RETURN(2)
-------------------------------- --------------
YEAR TO DATE (%) ENDING CUMULATIVE (%) ANNUALIZED (%) ANNUALIZED (%)
RETURN(3) VALUE(4) RETURN RETURN RETURN
---------------- -------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
KEMPER MONEY MARKET SUBACCOUNT(20)..... 3.91%
Life of Subaccount (from 04/06/82)... 4.56%
Life of Portfolio (from 04/06/82).... $22,581 125.81% 5.32% N/A
Ten Years............................ $15,065 50.65% 4.18% 2.92%
Five Years........................... $11,565 15.65% 2.95% 0.07%
Three Years.......................... $11,156 11.56% 3.72% 0.09%
One Year............................. $10,360 3.60% 3.60% -4.60%
KEMPER HIGH YIELD SUBACCOUNT(19)....... 10.18%
Life of Subaccount (from 04/06/82)... 11.76%
Life of Portfolio (from 04/06/82).... $60,215 502.15% 12.09% N/A
Ten Years............................ $26,401 164.01% 10.19% 9.29%
Five Years........................... $16,290 62.90% 10.25% 8.05%
Three Years.......................... $14,305 43.05% 12.68% 9.63%
One Year............................. $10,995 9.95% 9.95% 2.05%
KEMPER GOVERNMENT SECURITIES
SUBACCOUNT........................... 7.56%
Life of Subaccount (from 11/03/89)... 5.45%
Life of Portfolio (from 09/03/87).... $19,032 90.32% 6.43% N/A
Ten Years............................ $18,975 89.75% 6.61% 5.87%
Five Years........................... $12,790 27.90% 5.04% 2.86%
Three Years.......................... $12,728 27.28% 8.37% 5.46%
One Year............................. $10,734 7.34% 7.34% -0.32%
KEMPER INVESTMENT GRADE BOND
SUBACCOUNT........................... 7.63%
Life of Subaccount (from 05/01/96)... 2.19%
Life of Portfolio (from 05/01/96).... $11,033 10.33% 6.07% N/A
One Year............................. $10,750 7.50% 7.50% 0.55%
JANUS SHORT-TERM BOND SUBACCOUNT....... 5.35%
Life of Subaccount (from 09/15/95)... 1.77%
Life of Portfolio (from 09/13/93).... $11,630 16.30% 3.58% N/A
Three Year........................... $11,658 16.58% 5.25% 3.06%
One Year............................. $10,522 5.22% 5.22% -1.50%
</TABLE>
The performance data quoted for the Subaccounts is based on past performance and
is not representative of future
results. Investments return and principal value will fluctuate so that unit
values, when redeemed, may be worth
more or less than their original cost. Information regarding the indexes used
for comparison were obtained
from outside sources, have not been independently verified and do not reflect
the deduction of
any Contract charges or fees. See page B-15 for additional information.
B-6
<PAGE> 56
PERFORMANCE FIGURES
(AS OF DECEMBER 31, 1997)
(CONTINUED)
<TABLE>
<CAPTION>
COMPARED TO
----------------------------------------------------------------------------------------------------------
SALOMON BROS SALOMON BROS LEHMAN BROS.
CDA CERT CDA CERT HIGH GRADE HIGH GRADE GOVT/CORP
CONSUMER CONSUMER OF DEPOSIT OF DEPOSIT CORP BOND CORP BOND BOND
PRICE INDEX(7) PRICE INDEX(7) INDEX(8) INDEX(8) INDEX(9) INDEX(9) INDEX(10)
CUMULATIVE % ANNUALIZED % CUMULATIVE % ANNUALIZED % CUMULATIVE % ANNUALIZED % CUMULATIVE %
RETURN RETURN RETURN RETURN RETURN RETURN RETURN
-------------- -------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
KEMPER MONEY MARKET
SUBACCOUNT(20)
Life of Portfolio
(from
04/06/82)........ N/A N/A N/A N/A N/A N/A N/A
Ten Years.......... 39.93 3.42 80.38 6.08 180.09 10.85 N/A
Five Years......... 13.69 2.60 27.98 5.06 55.46 9.23 N/A
Three Years........ 7.72 2.51 18.39 5.79 45.69 13.36 N/A
One Year........... 1.70 1.70 5.77 5.77 12.96 12.96 N/A
KEMPER HIGH YIELD
SUBACCOUNT(19)
Life of Portfolio
(from
04/06/82)........ N/A N/A N/A N/A N/A N/A N/A
Ten Years.......... 39.93 3.42 N/A N/A N/A N/A 139.88
Five Years......... 13.69 2.60 N/A N/A N/A N/A 44.29
Three Years........ 7.72 2.51 N/A N/A N/A N/A 34.68
One Year........... 1.70 1.70 N/A N/A N/A N/A 9.76
KEMPER GOVERNMENT
SECURITIES
SUBACCOUNT
Life of Portfolio
(from
09/03/87)........ N/A N/A N/A N/A 191.45 10.91 N/A
10 Years........... 39.93 3.42 N/A N/A 180.09 10.85 139.88
Five Years......... 13.69 2.60 N/A N/A 55.46 9.23 44.29
Three Years........ 7.72 2.51 N/A N/A 45.69 13.36 34.68
One Year........... 1.70 1.70 N/A N/A 12.96 12.96 9.76
KEMPER INVESTMENT
GRADE BOND
SUBACCOUNT
Life of Portfolio
(from
05/01/96)........ 3.72 2.21 N/A N/A 22.33 12.85 16.45
One Year........... 1.70 1.70 N/A N/A 12.96 12.96 9.76
JANUS SHORT-TERM BOND
SUBACCOUNT
Life of Portfolio
(from
09/13/93)........ 11.66 2.60 N/A N/A 36.64 7.53 N/A
Three Year......... 7.72 2.51 N/A N/A 45.69 13.36 N/A
One Year........... 1.70 1.70 N/A N/A 12.96 12.96 N/A
<CAPTION>
COMPARED TO
------------
LEHMAN BROS.
GOVT/CORP
BOND
INDEX(10)
ANNUALIZED %
RETURN
------------
<S> <C>
KEMPER MONEY MARKET
SUBACCOUNT(20)
Life of Portfolio
(from
04/06/82)........ N/A
Ten Years.......... N/A
Five Years......... N/A
Three Years........ N/A
One Year........... N/A
KEMPER HIGH YIELD
SUBACCOUNT(19)
Life of Portfolio
(from
04/06/82)........ N/A
Ten Years.......... 9.14
Five Years......... 7.61
Three Years........ 10.43
One Year........... 9.76
KEMPER GOVERNMENT
SECURITIES
SUBACCOUNT
Life of Portfolio
(from
09/03/87)........ N/A
10 Years........... 9.14
Five Years......... 7.61
Three Years........ 10.43
One Year........... 9.76
KEMPER INVESTMENT
GRADE BOND
SUBACCOUNT
Life of Portfolio
(from
05/01/96)........ 9.57
One Year........... 9.76
JANUS SHORT-TERM BOND
SUBACCOUNT
Life of Portfolio
(from
09/13/93)........ N/A
Three Year......... N/A
One Year........... N/A
</TABLE>
The performance data quoted for the Subaccounts is based on past performance and
is not representative of future
results. Investment return and principal value will fluctuate so that unit
values, when redeemed, may be worth
more or less than their original cost. Information regarding the indexes used
for comparison were obtained
from outside sources, have not been independently verified and do not reflect
the deduction of
any Contract charges or fees. See page B-15 for additional information.
B-7
<PAGE> 57
PERFORMANCE FIGURES
(AS OF DECEMBER 31, 1997)
(CONTINUED)
<TABLE>
<CAPTION>
COMPARED TO
--------------------------------------------------------------------------------------
LEHMAN BROS
MERRILL LYNCH MERRILL LYNCH LEHMAN BROS LEHMAN BROS GOVT/CORP
GOVT/CORP GOVT/CORP LONG GOVT/CORP LONG GOVT/CORP 1-3 YEAR
MASTER INDEX(11) MASTER INDEX(11) BOND INDEX(12) BOND INDEX(12) BOND INDEX(13)
CUMULATIVE % ANNUALIZED % CUMULATIVE % ANNUALIZED % CUMULATIVE %
RETURN RETURN RETURN RETURN RETURN
---------------- ---------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
KEMPER MONEY MARKET SUBACCOUNT(20)
Life of Portfolio (from
04/06/82)....................... N/A N/A N/A N/A N/A
Ten Years......................... N/A N/A N/A N/A N/A
Five Years........................ N/A N/A N/A N/A N/A
Three Years....................... N/A N/A N/A N/A N/A
One Year.......................... N/A N/A N/A N/A N/A
KEMPER HIGH YIELD SUBACCOUNT(19)
Life of Portfolio (from
04/06/82)....................... N/A N/A N/A N/A N/A
Ten Years......................... 140.51 9.17 N/A N/A N/A
Five Years........................ 44.49 7.64 N/A N/A N/A
Three Years....................... 36.50 10.39 N/A N/A N/A
One Year.......................... 9.78 9.78 N/A N/A N/A
KEMPER GOVERNMENT SECURITIES
SUBACCOUNT
Life of Portfolio (from
09/03/87)....................... N/A N/A N/A N/A N/A
Ten Years......................... 140.51 9.17 N/A N/A N/A
Five Years........................ 44.49 7.64 N/A N/A N/A
Three Years....................... 36.50 10.39 N/A N/A N/A
One Year.......................... 9.78 9.78 N/A N/A N/A
KEMPER INVESTMENT GRADE BOND
SUBACCOUNT
Life of Portfolio (from
05/01/96)....................... N/A N/A N/A N/A N/A
One Year.......................... 9.78 9.78 N/A N/A N/A
JANUS SHORT-TERM BOND SUBACCOUNT
Life of Portfolio (from
09/13/93)....................... N/A N/A N/A N/A N/A
Three Year........................ N/A N/A N/A N/A N/A
One Year.......................... N/A N/A N/A N/A N/A
<CAPTION>
COMPARED TO
--------------
LEHMAN BROS
GOVT/CORP
1-3 YEAR
BOND INDEX(13)
ANNUALIZED %
RETURN
--------------
<S> <C>
KEMPER MONEY MARKET SUBACCOUNT(20)
Life of Portfolio (from
04/06/82)....................... N/A
Ten Years......................... N/A
Five Years........................ N/A
Three Years....................... N/A
One Year.......................... N/A
KEMPER HIGH YIELD SUBACCOUNT(19)
Life of Portfolio (from
04/06/82)....................... N/A
Ten Years......................... N/A
Five Years........................ N/A
Three Years....................... N/A
One Year.......................... N/A
KEMPER GOVERNMENT SECURITIES
SUBACCOUNT
Life of Portfolio (from
09/03/87)....................... N/A
Ten Years......................... N/A
Five Years........................ N/A
Three Years....................... N/A
One Year.......................... N/A
KEMPER INVESTMENT GRADE BOND
SUBACCOUNT
Life of Portfolio (from
05/01/96)....................... N/A
One Year.......................... N/A
JANUS SHORT-TERM BOND SUBACCOUNT
Life of Portfolio (from
09/13/93)....................... N/A
Three Year........................ N/A
One Year.......................... N/A
</TABLE>
The performance data quoted for the Subaccounts is based on past performance and
is not representative of future
results. Investment return and principal value will fluctuate so that unit
values, when redeemed, may be worth
more or less than their original cost. Information regarding the indexes used
for comparison were obtained
from outside sources, have not been independently verified and do not reflect
the deduction of
any Contract charges or fees. See page B-15 for additional information.
B-8
<PAGE> 58
PERFORMANCE FIGURES
(AS OF DECEMBER 31, 1997)
(CONTINUED)
<TABLE>
<CAPTION>
STANDARDIZED
AVERAGE
NONSTANDARDIZED ANNUAL
TOTAL RETURN(1) TOTAL
------------------------ RETURN(2)
CUMULATIVE ANNUALIZED ------------
YEAR TO DATE(%) (%) (%) ANNUALIZED
RETURN(3) ENDING VALUE(4) RETURN RETURN (%) RETURN
--------------- --------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
KEMPER GROWTH SUBACCOUNT................ 19.78%
Life of Subaccount (from 12/09/83).... 13.35%
Life of Portfolio (from 12/09/83)..... $60,828 508.28% 13.70% N/A
Ten Years............................. $40,345 303.45% 14.97% 14.31%
Five Years............................ $20,065 100.65% 14.94% 12.67%
Three Years........................... $18,794 87.94% 23.41% 20.26%
One Year.............................. $11,953 19.53% 19.53% 10.91%
FIDELITY VIP II CONTRAFUND SUBACCOUNT... 22.55%
Life of Subaccount (from 05/01/96).... 16.15%
Life of Portfolio (from 01/03/95)..... $20,193 101.93% 26.45% N/A
One Year.............................. $12,240 22.40% 22.40% 14.50%
LEXINGTON NATURAL RESOURCES
SUBACCOUNT............................ 5.77%
Life of Subaccount (from 09/15/95).... 10.53%
Life of Portfolio (10/14/91).......... $16,182 61.82% 8.05% N/A
Five Year............................. $15,563 55.63% 9.25% 8.07%
Three Year............................ $15,243 52.43% 15.09% 12.90%
One Year.............................. $10,566 5.66% 5.66% -0.98%
</TABLE>
<TABLE>
<CAPTION>
COMPARED TO
--------------------------------------------------------------------------------------------
STANDARD & STANDARD &
STANDARD & CONSUMER POOR'S POOR'S
STANDARD & POOR'S 500 CONSUMER PRICE INDEX MIDCAP MIDCAP
POOR'S 500 (5) (6) PRICE INDEX (7) (7) INDEX (14) INDEX (14)
CUMULATIVE % ANNUALIZED % CUMULATIVE % ANNUALIZED % CUMULATIVE % ANNUALIZED %
RETURN RETURN RETURN RETURN RETURN RETURN
-------------- ------------ --------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
KEMPER GROWTH
SUBACCOUNT
Life of Portfolio
(from 12/09/83)..... 487.82 13.42 60.14 3.41 N/A N/A
Ten Years............. 292.76 14.66 39.93 3.42 492.25 19.47
Five Years............ 122.72 17.37 13.69 2.60 107.64 15.74
Three Years........... 111.30 28.32 7.72 2.51 96.75 25.32
One Year.............. 48.25 26.62 3.72 2.21 30.44 30.44
FIDELITY VIP II
CONTRAFUND SUBACCOUNT
Life of Portfolio
(from 01/03/95)..... 111.37 28.39 N/A N/A 98.39 25.74
One Year.............. 48.25 26.62 3.72 2.21 30.44 30.44
LEXINGTON NATURAL
RESOURCES SUBACCOUNT
Life of Portfolio
(from 10/14/91)..... 151.10 15.97 18.00 2.70 155.79 16.31
Five Year............. 122.72 17.37 13.69 2.60 107.64 15.74
Three Year............ 111.30 28.32 7.72 2.51 96.75 25.32
One Year.............. 48.25 26.62 3.72 2.21 30.44 30.44
<CAPTION>
COMPARED TO
---------------------------
NASDAQ NASDAQ
COMPOS (15) COMPOS (15)
CUMULATIVE % ANNUALIZED %
RETURN RETURN
------------ ------------
<S> <C> <C>
KEMPER GROWTH
SUBACCOUNT
Life of Portfolio
(from 12/09/83)..... 459.82 13.03
Ten Years............. 375.19 16.86
Five Years............ 131.97 18.33
Three Years........... 108.83 27.83
One Year.............. 21.64 21.64
FIDELITY VIP II
CONTRAFUND SUBACCOUNT
Life of Portfolio
(from 01/03/95)..... 111.19 28.40
One Year.............. 21.64 21.64
LEXINGTON NATURAL
RESOURCES SUBACCOUNT
Life of Portfolio
(from 10/14/91)..... 198.74 19.25
Five Year............. 131.97 18.33
Three Year............ 108.83 27.83
One Year.............. 21.64 21.64
</TABLE>
The performance data quoted for the Subaccounts is based on past performance and
is not representative of future
results. Investments return and principal value will fluctuate so that unit
values, when redeemed, may be worth
more or less than their original cost. Information regarding the indexes used
for comparison were obtained
from outside sources, have not been independently verified and do not reflect
the deduction of
any Contract charges or fees. See page B-15 for additional information.
B-9
<PAGE> 59
PERFORMANCE FIGURES
(AS OF DECEMBER 31, 1997)
(CONTINUED)
<TABLE>
<CAPTION>
STANDARDIZED
AVERAGE
NONSTANDARDIZED ANNUAL
TOTAL RETURN(1) TOTAL
----------------------- RETURN(2)
YEAR TO DATE CUMULATIVE ------------
(%) ENDING (%) ANNUALIZED ANNUALIZED
RETURN(3) VALUE(4) RETURN (%) RETURN (%) RETURN
------------ -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
KEMPER SMALL CAP GROWTH SUBACCOUNT.................... 32.48%
Life of Subaccount (from 05/01/94).................. 22.17%
Life of Portfolio (from 05/01/94)................... $22,085 120.85% 24.11% N/A
Three Years......................................... $21,442 114.42% 28.92% 26.35%
One Year............................................ $13,232 32.32% 32.32% 23.77%
KEMPER SMALL CAP VALUE SUBACCOUNT..................... 20.18%
Life of Subaccount (from 05/01/96).................. 8.21%
Life of Portfolio (from 05/01/96)................... $12,117 21.17% 12.19% N/A
One Year............................................ $12,004 20.04% 20.04% 12.43%
JANUS AGGRESSIVE GROWTH SUBACCOUNT.................... 11.21%
Life of Subaccount (from 09/15/95).................. 7.13%
Life of Portfolio (from 09/13/93)................... $20,083 100.83% 17.61% N/A
Three Year.......................................... $14,871 48.70% 14.14% 11.75%
One Year............................................ $11,105 11.05% 11.05% 3.65%
</TABLE>
<TABLE>
<CAPTION>
COMPARED TO
-------------------------------------------------------------------------------------------
CONSUMER PRICE CONSUMER PRICE RUSSELL 2000 RUSSELL 2000 NASDAQ NASDAQ
INDEX(7) INDEX(7) INDEX(16) INDEX(16) COMPOS(15) COMPOS(15)
CUMULATIVE % ANNUALIZED % CUMULATIVE % ANNUALIZED % CUMULATIVE % ANNUALIZED %
RETURN RETURN RETURN RETURN RETURN RETURN
-------------- -------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
KEMPER SMALL CAP GROWTH SUBACCOUNT
Life of Portfolio (from
05/01/94)..................... 9.91 2.61 72.03 15.96 112.01 22.77
Three Years..................... 7.72 2.51 74.56 20.42 108.83 27.83
One Year........................ 1.70 1.70 20.52 20.52 21.64 21.64
KEMPER SMALL CAP VALUE SUBACCOUNT
Life of Portfolio (from
05/01/96)..................... 3.72 2.21 24.76 14.98 30.90 17.51
One Year........................ 1.70 1.70 20.52 20.52 21.64 21.64
JANUS AGGRESSIVE GROWTH SUBACCOUNT
Life of Portfolio (from
09/13/93)..................... 11.66 2.60 77.33 14.26 112.12 19.12
Three Year...................... 7.72 2.51 74.56 20.42 108.83 27.83
One Year........................ 1.70 1.70 20.52 20.52 21.64 21.64
</TABLE>
The performance data quoted for the Subaccounts is based on past performance and
is not representative of future
results. Investments return and principal value will fluctuate so that unit
values, when redeemed, may be worth
more or less than their original cost. Information regarding the indexes used
for comparison were obtained
from outside sources, have not been independently verified and do not reflect
the deduction of
any Contract charges or fees. See page B-15 for additional information.
B-10
<PAGE> 60
PERFORMANCE FIGURES
(AS OF DECEMBER 31, 1997)
(CONTINUED)
<TABLE>
<CAPTION>
STANDARDIZED
AVERAGE
ANNUAL
NONSTANDARDIZED TOTAL
TOTAL RETURN(1) RETURN(2)
-------------------------------- ------------
YEAR TO DATE(%) CUMULATIVE (%) ANNUALIZED (%) ANNUALIZED
RETURN(3) ENDING VALUE(4) RETURN RETURN (%) RETURN
--------------- --------------- -------------- -------------- ----------
<S> <C> <C> <C> <C> <C>
KEMPER INTERNATIONAL
SUBACCOUNT(18)................. 8.06%
Life of Subaccount (from
01/06/92).................... 7.78%
Life of Portfolio (from
01/06/92).................... $16,818 68.18% 9.07% N/A
Five Years..................... $17,159 71.59% 11.40% 9.85%
Three Years.................... $13,786 37.86% 11.30% 8.65%
One Year....................... $10,789 7.89% 7.89% 0.64%
JANUS WORLDWIDE GROWTH
SUBACCOUNT(18)................. 20.58%
Life of Subaccount (from
09/15/95).................... 19.58%
Life of Portfolio (from
09/13/93).................... $22,902 129.02% 21.26% N/A
Three Year..................... $19,265 92.65% 24.43% 22.02%
One Year....................... $12,042 20.42% 20.42% 12.57%
LEXINGTON EMERGING MARKETS(18)
SUBACCOUNT..................... -12.69%
Life of Subaccount (from
09/15/95).................... -7.85%
Life of Portfolio (from
03/30/94).................... $ 8,543 -14.57% -4.10% N/A
Three Year..................... $ 8,753 -12.47% -4.34% -6.48%
One Year....................... $ 8,722 -12.78% -12.78% -18.29%
</TABLE>
<TABLE>
<CAPTION>
COMPARED TO
------------------------------------------------------------------
STANDARD & STANDARD & CONSUMER PRICE CONSUMER PRICE
POOR'S 500(6) POOR'S 500(6) INDEX(7) INDEX(7)
CUMULATIVE % ANNUALIZED % CUMULATIVE % ANNUALIZED %
RETURN RETURN RETURN RETURN
------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
KEMPER INTERNATIONAL SUBACCOUNT(18)
Life of Portfolio (from 01/06/92).................... 132.57 15.15 17.06 2.67
Five Years........................................... 122.72 17.37 13.69 2.60
Three Years.......................................... 111.30 28.32 7.72 2.51
One Year............................................. 48.25 26.62 3.72 2.21
JANUS WORLDWIDE GROWTH SUBACCOUNT(18)
Life of Portfolio (from 09/13/93).................... 110.02 18.85 11.66 2.60
Three Year........................................... 111.30 28.32 7.72 2.51
One Year............................................. 48.25 26.62 3.72 2.21
LEXINGTON EMERGING MARKETS SUBACCOUNT(18)
Life of Portfolio (from 03/30/94).................... 117.80 23.03
Three Year........................................... 111.30 28.32 7.72 2.51
One Year............................................. 48.25 26.62 3.72 2.21
</TABLE>
The performance data quoted for the Subaccounts is based on past performance and
is not representative of future
results. Investment return and principal value will fluctuate so that unit
values, when redeemed, may be worth
more or less than their original cost. Information regarding the indexes used
for comparison were obtained
from outside sources, have not been independently verified and do not reflect
the deduction of
any Contract charges or fees. See page B-15 for additional information.
B-11
<PAGE> 61
PERFORMANCE FIGURES
(AS OF DECEMBER 31, 1997)
(CONTINUED)
<TABLE>
<CAPTION>
COMPARED TO
-------------------------------------------------------------------
MORGAN STANLEY MORGAN STANLEY
MORGAN STANLEY MORGAN STANLEY INTER'L WORLD INTER'L WORLD
EAFE INDEX (17) EAFE INDEX (17) INDEX (21) INDEX (21)
CUMULATIVE % ANNUALIZED % CUMULATIVE % ANNUALIZED %
RETURN RETURN RETURN RETURN
--------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
KEMPER INTERNATIONAL SUBACCOUNT(18)
Life of Portfolio (from 01/06/92).......... 53.34 7.40 72.34 9.52
Five Years................................. 73.96 11.71 88.40 13.51
Three Years................................ 21.09 6.59 51.41 14.84
One Year................................... 2.06 2.06 14.17 14.17
JANUS WORLDWIDE GROWTH SUBACCOUNT(18)
Life of Portfolio (from 09/13/93).......... 55.92 10.89
Three Year................................. 21.09 6.59 51.41 14.84
One Year................................... 2.06 2.06 14.17 14.17
LEXINGTON EMERGING MARKETS SUBACCOUNT(18)
Life of Portfolio (from 03/30/94).......... 26.35 6.43 55.72 12.51
Three Year................................. 21.09 6.59 51.41 14.84
One Year................................... 2.06 2.06 14.17 14.17
</TABLE>
The performance data quoted for the Subaccounts is based on past performance and
is not representative of future
results. Investment return and principal value will fluctuate so that unit
values, when redeemed, may be worth
more or less than their original cost. Information regarding the indexes used
for comparison were obtained
from outside sources, have not been independently verified and do not reflect
the deduction of
any Contract charges or fees. See page B-15 for additional information.
B-12
<PAGE> 62
PERFORMANCE FIGURES
(AS OF DECEMBER 31, 1997)
(CONTINUED)
<TABLE>
<CAPTION>
STANDARDIZED
AVERAGE
ANNUAL
NONSTANDARDIZED TOTAL
TOTAL RETURN(1) RETURN(2)
---------------------------------- --------------
YEAR TO DATE ENDING CUMULATIVE (%) ANNUALIZED (%) ANNUALIZED (%)
(%) RETURN(3) VALUE(4) RETURN RETURN RETURN
------------- -------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
KEMPER TOTAL RETURN SUBACCOUNT(19)......... 18.42%
Life of Subaccount (from 04/06/82)....... 11.58%
Life of Portfolio (from 04/06/82)........ $61,440 514.40% 12.24% N/A
Ten Years................................ $31,816 218.16% 12.27% 11.02%
Five Years............................... $16,583 65.83% 10.65% 7.72%
Three Years.............................. $16,870 68.70% 19.04% 15.41%
One Year................................. $11,810 18.10% 18.10% 8.99%
KEMPER HORIZON 10+ SUBACCOUNT.............. 15.27%
Life of Subaccount (from 05/01/96)....... 10.80%
Life of Portfolio (from 05/01/96)........ $12,698 26.98% 15.39% N/A
One Year................................. $11,508 15.08% 15.08% 7.20%
KEMPER HORIZON 5 SUBACCOUNT................ 11.25%
Life of Subaccount (from 05/01/96)....... 6.91%
Life of Portfolio (from 05/01/96)........ $12,049 20.49% 11.82% N/A
One Year................................. $11,098 10.98% 10.98% 2.70%
JANUS BALANCED SUBACCOUNT.................. 20.53%
Life of Subaccount (from 09/15/95)....... 14.82%
Life of Portfolio (from 09/13/93)........ $18,047 80.47% 14.72% N/A
Three Year............................... $16,987 69.87% 19.32% 17.01%
One Year................................. $12,036 20.36% 20.36% 12.44%
FIDELITY VIP II ASSET MANAGER SUBACCOUNT... 19.10%
Life of Subaccount (from 05/01/96)....... 12.44%
Life of Portfolio (from 09/06/89)........ $25,025 150.25% 11.65% N/A
Five Years............................... $17,188 71.88% 11.44% 10.18%
Three Years.............................. $15,513 55.13% 15.76% 13.38%
One Year................................. $11,892 18.92% 18.92% 10.92%
</TABLE>
<TABLE>
<CAPTION>
COMPARED TO
----------------------------------------------------------------------------------------------
CONSUMER CONSUMER LEHMAN BROS LEHMAN BROS
STANDARD & STANDARD & PRICE PRICE GOVT/CORP 1-3 GOVT/CORP 1-3
POOR'S 500(6) POOR'S 500(6) INDEX(7) INDEX(7) YEAR BOND(13) YEAR BOND(13)
CUMULATIVE % ANNUALIZED % CUMULATIVE % ANNUALIZED % CUMULATIVE % ANNUALIZED %
RETURN RETURN RETURN RETURN RETURN RETURN
------------- ------------- ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
KEMPER TOTAL RETURN
SUBACCOUNT(19)
Life of Portfolio (from
04/06/82)................... N/A N/A N/A N/A N/A N/A
Ten Years..................... 292.76 14.66 39.93 3.42 103.34 7.35
Five Years.................... 122.72 17.37 13.69 2.60 32.09 5.72
Three Years................... 111.30 28.32 7.72 2.51 24.45 7.56
One Year...................... 31.01 31.01 2.06 2.06 6.66 6.66
KEMPER HORIZON 10+ SUBACCOUNT
Life of Portfolio (from
05/01/96)................... 48.25 26.62 3.72 2.21 11.59 6.80
One Year...................... 31.01 31.01 2.06 2.06 6.66 6.66
KEMPER HORIZON 5 SUBACCOUNT
Life of Portfolio (from
05/01/96)................... 48.25 26.62 3.72 2.21 11.59 6.80
One Year...................... 31.01 31.01 2.06 2.06 6.66 6.66
JANUS BALANCED SUBACCOUNT
Life of Portfolio (from
09/13/93)................... 110.02 18.85 11.66 2.60 N/A N/A
Three Year.................... 111.30 28.32 7.72 2.51 24.44 7.56
One Year...................... 31.01 31.01 2.06 2.06 6.66 6.66
FIDELITY VIP II ASSET MANAGER
SUBACCOUNT
Life of Portfolio (from
09/06/89)................... 177.87 13.07 29.83 3.19 N/A N/A
Five Years.................... 122.72 17.37 13.69 2.60 32.09 5.72
Three Years................... 111.30 28.32 7.72 2.51 24.45 7.56
One Year...................... 31.01 31.01 2.06 2.06 6.66 6.66
</TABLE>
The performance data quoted for the Subaccounts is based on past performance and
is not representative of future
results. Investment return and principal value will fluctuate so that unit
values, when redeemed, may be worth
more or less than their original cost. Information regarding the indexes used
for comparison were obtained
from outside sources, have not been independently verified and do not reflect
the deduction of
any Contract charges or fees. See page B-15 for additional information.
B-13
<PAGE> 63
PERFORMANCE FIGURES
(AS OF DECEMBER 31, 1997)
(CONTINUED)
<TABLE>
<CAPTION>
COMPARED TO
-------------------------------------------------------------------------
MERRILL LYNCH MERRILL LYNCH LEHMAN BROS LEHMAN BROS
GOVT/CORP GOVT/CORP GOVT/CORP GOVT/CORP
MASTER INDEX (11) MASTER INDEX (11) BOND INDEX (10) BOND INDEX (10)
CUMULATIVE % ANNUALIZED % CUMULATIVE % ANNUALIZED %
RETURN RETURN RETURN RETURN
----------------- ----------------- --------------- ---------------
<S> <C> <C> <C> <C>
KEMPER TOTAL RETURN SUBACCOUNT(19)
Life of Portfolio (from 04/06/82)....... N/A N/A N/A N/A
Ten Years............................... 140.51 9.17 139.88 9.14
Five Years.............................. 44.49 7.64 44.24 7.61
Three Years............................. 36.50 10.39 34.68 10.43
One Year................................ 9.78 9.78 9.76 9.76
KEMPER HORIZON 10+ SUBACCOUNT
Life of Portfolio (from 05/01/96)....... 18.07 10.48 16.45 9.57
One Year................................ 9.78 9.78 9.76 9.76
KEMPER HORIZON 5 SUBACCOUNT
Life of Portfolio (from 05/01/96)....... 18.07 10.48 16.45 9.57
One Year................................ 9.78 9.78 9.76 9.76
JANUS BALANCED SUBACCOUNT
Life of Portfolio (from 09/13/93)....... N/A N/A N/A N/A
Three Year.............................. 36.50 10.39 34.68 10.43
One Year................................ 9.78 9.78 9.76 9.76
FIDELITY VIP II ASSET MANAGER SUBACCOUNT
Life of Portfolio (from 09/06/89)....... N/A N/A N/A N/A
Five Years.............................. 44.49 7.64 44.24 7.61
Three Years............................. 36.50 10.39 34.68 10.43
One Year................................ 9.78 9.78 9.76 9.76
</TABLE>
The performance data quoted for the Subaccounts is based on past performance and
is not representative of future
results. Investment return and principal value will fluctuate so that unit
values, when redeemed, may be worth
more or less than their original cost. Information regarding the indexes used
for comparison were obtained
from outside sources, have not been independently verified and do not reflect
the deduction of
any Contract charges or fees. See page B-15 for additional information.
B-14
<PAGE> 64
PERFORMANCE FIGURES--NOTES
* N/A Not Applicable
(1) The Nonstandardized total Return figures quoted are based on a hypothetical
$10,000 initial investment and assumes the deduction of all recurring
charges and fees applicable under the Contract except for the Withdrawal
Charge and any charge for applicable premium taxes which may be imposed in
certain states.
(2) The Standardized Average Annual Total Return figures quoted are based on a
hypothetical $1,000 initial investment and assumes the deduction of all
recurring charges and fees applicable under the Contract including the
applicable Withdrawal Charge that may be imposed at the end of the quoted
period. Premium taxes are not reflected.
(3) The Year to Date percentage return figures quoted are based on the change
in unit values.
(4) The Ending Values quoted are based on a $10,000 initial investment and
assumes the deduction of all recurring charges and fees applicable under
the Contract except for the Withdrawal Charge and any charge for applicable
premium taxes which may be imposed in certain states.
(5) 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.
(6) 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.
(7) 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.
(8) 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.
(9) 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.
(10) 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.
(11) The Merrill Lynch Government/Corporate Master Index is based upon the total
returns 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).
(12) 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.
(13) 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.
(14) 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.
(15) 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.
(16) 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.
(17) The Morgan Stanley 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.
(18) There are special risks associated with investing in non-U.S. companies,
including fluctuating foreign currency exchange rates, foreign governmental
regulations and differing degrees of liquidity that may adversely affect
portfolio securities.
(19) The high yield potential offered by these Subaccounts reflect the
substantial risks associated with investments in high-yield bonds.
(20) An investment in the Kemper Money Market Subaccount is neither insured nor
guaranteed by the U.S. government. There can be no assurance that the
Kemper Money Market Portfolio will be able to maintain a stable net asset
value of $1.00 per share.
(21) 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.
B-15
<PAGE> 65
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, 1997.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
KEMPER TOTAL RETURN SUBACCOUNT
NON-
YEAR QUALIFIED QUALIFIED
ENDED TOTAL TOTAL
12/31 VALUE VALUE
- ----- --------- ---------
<C> <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
1997 .................... 61,440 57,204
</TABLE>
<TABLE>
<CAPTION>
KEMPER HIGH YIELD SUBACCOUNT
NON-
YEAR QUALIFIED QUALIFIED
ENDED TOTAL TOTAL
12/31 VALUE VALUE
- ----- --------- ---------
<C> <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
1997 .................... 60,215 58,651
</TABLE>
<TABLE>
<CAPTION>
KEMPER INTERNATIONAL SUBACCOUNT
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ----- ---------
<C> <S> <C>
1992 ................................ $ 9,803
1993 ................................ 12,836
1994 ................................ 12,187
1995 ................................ 13,559
1996 ................................ 15,576
1997 ................................ 16,818
</TABLE>
<TABLE>
<CAPTION>
KEMPER SMALL CAP GROWTH SUBACCOUNT
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ----- ---------
<C> <S> <C>
1994 ................................ $10,296
1995 ................................ 13,208
1996 ................................ 16,680
1997 ................................ 22,085
</TABLE>
<TABLE>
<CAPTION>
KEMPER GROWTH SUBACCOUNT
NON-
YEAR QUALIFIED QUALIFIED
ENDED TOTAL TOTAL
12/31 VALUE VALUE
- ----- --------- ---------
<C> <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
1997 .................... 60,828 60,741
</TABLE>
<TABLE>
<CAPTION>
KEMPER MONEY MARKET SUBACCOUNT
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ----- ---------
<C> <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
1997 ................................ 22,581
</TABLE>
B-16
<PAGE> 66
<TABLE>
<CAPTION>
KEMPER GOVERNMENT SECURITIES
SUBACCOUNT
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ----- ---------
<C> <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
1997 ................................ 19,032
</TABLE>
<TABLE>
<CAPTION>
KEMPER CONTRARIAN VALUE SUBACCOUNT
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ----- ---------
<C> <S> <C>
1996 ................................ $11,628
1997 ................................ 14,954
</TABLE>
<TABLE>
<CAPTION>
KEMPER INVESTMENT GRADE BOND
SUBACCOUNT
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ----- ---------
<C> <S> <C>
1996 ................................ $10,260
1997 ................................ 11,033
</TABLE>
<TABLE>
<CAPTION>
KEMPER HORIZON 20+ SUBACCOUNT
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ----- ---------
<C> <S> <C>
1996 ................................ $11,422
1997 ................................ 13,566
</TABLE>
<TABLE>
<CAPTION>
KEMPER HORIZON 5 SUBACCOUNT
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ----- ---------
<C> <S> <C>
1996 ................................ $10,850
1997 ................................ 12,049
</TABLE>
<TABLE>
<CAPTION>
KEMPER SMALL CAP VALUE SUBACCOUNT
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ----- ---------
<C> <S> <C>
1996 ................................ $10,091
1997 ................................ 12,117
</TABLE>
<TABLE>
<CAPTION>
KEMPER VALUE + GROWTH SUBACCOUNT
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ----- ---------
<C> <S> <C>
1996 ................................ $11,354
1997 ................................ 14,051
</TABLE>
<TABLE>
<CAPTION>
KEMPER HORIZON 10+ SUBACCOUNT
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ----- ---------
<C> <S> <C>
1996 ................................ $11,028
1997 ................................ 12,689
</TABLE>
<TABLE>
<CAPTION>
JANUS GROWTH SUBACCOUNT*
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ----- ---------
<C> <S> <C>
1995 ................................ $10,327
1996 ................................ 12,062
1997 ................................ 14,602
</TABLE>
<TABLE>
<CAPTION>
JANUS WORLDWIDE GROWTH SUBACCOUNT*
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ----- ---------
<C> <S> <C>
1995 ................................ $10,425
1996 ................................ 13,266
1997 ................................ 15,984
</TABLE>
<TABLE>
<CAPTION>
JANUS SHORT-TERM BOND SUBACCOUNT*
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ----- ---------
<C> <S> <C>
1995 ................................ $10,236
1996 ................................ 10,496
1997 ................................ 11,047
</TABLE>
<TABLE>
<CAPTION>
LEXINGTON EMERGING MARKETS
SUBACCOUNT*
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ----- ---------
<C> <S> <C>
1995 ................................ $ 9,547
1996 ................................ 10,111
1997 ................................ 8,820
</TABLE>
<TABLE>
<CAPTION>
JANUS AGGRESSIVE GROWTH SUBACCOUNT*
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ----- ---------
<C> <S> <C>
1995 ................................ $10,552
1996 ................................ 11,231
1997 ................................ 12,477
</TABLE>
B-17
<PAGE> 67
<TABLE>
<CAPTION>
JANUS BALANCED SUBACCOUNT*
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ----- ---------
<C> <S> <C>
1995 ................................ $10,547
1996 ................................ 12,082
1997 ................................ 14,549
</TABLE>
<TABLE>
<CAPTION>
LEXINGTON NATURAL RESOURCES
SUBACCOUNT*
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ----- ---------
<C> <S> <C>
1995 ................................ $10,032
1996 ................................ 12,556
1997 ................................ 13,272
</TABLE>
<TABLE>
<CAPTION>
FIDELITY VIP EQUITY-INCOME SUBACCOUNT
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ----- ---------
<C> <S> <C>
1996 ................................ $10,687
1997 ................................ 13,502
</TABLE>
<TABLE>
<CAPTION>
FIDELITY VIP II ASSET MANAGER SUBACCOUNT
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ----- ---------
<C> <S> <C>
1996 ................................ $10,916
1997 ................................ 12,987
</TABLE>
<TABLE>
<CAPTION>
FIDELITY VIP II CONTRAFUND SUBACCOUNT
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ----- ---------
<C> <S> <C>
1996 ................................ $11,145
1997 ................................ 13,646
</TABLE>
<TABLE>
<CAPTION>
FIDELITY VIP GROWTH SUBACCOUNT
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ----- ---------
<C> <S> <C>
1996 ................................ $10,347
1997 ................................ 12,599
</TABLE>
<TABLE>
<CAPTION>
FIDELITY VIP II INDEX 500 SUBACCOUNT
QUALIFIED
AND NON-
YEAR QUALIFIED
ENDED TOTAL
12/31 VALUE
- ----- ---------
<C> <S> <C>
1996 ................................ $11,366
1997 ................................ $14,874
</TABLE>
TAX-DEFERRED ACCUMULATION
<TABLE>
<CAPTION>
TAX-DEFERRED NON-QUALIFIED CONVENTIONAL
RETIREMENT ANNUITY ANNUITY SAVINGS PLAN
BEFORE-TAX CONTRIBUTIONS AFTER-TAX CONTRIBUTIONS
AND TAX-DEFERRED EARNINGS. AND TAX-DEFERRED EARNINGS. AFTER-TAX
-------------------------------- -------------------------------- 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 that the return
B-18
<PAGE> 68
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 sheet of KILICO as of December 31, 1997 and the related
consolidated statements of operations, stockholder's equity, and cash flows for
the year ended December 31, 1997 have been included herein and in the
registration statement in reliance upon the report of Coopers & Lybrand L.L.P.,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing. The
consolidated balance sheet of KILICO as of December 31, 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 the year ended
December 31, 1995 have been included herein and in the registration statement in
reliance upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing. The report of KPMG Peat Marwick LLP covering
KILICO's financial statements referred to above contains an explanatory
paragraph that states as a result of the acquisition of its parent, Kemper
Corporation, the consolidated financial information for the period after the
acquisition is presented on a different cost basis than that for the period
before the acquisition and, therefore, is not comparable.
The statements of assets and liabilities and contract owners' equity of the
Separate Account as of December 31, 1997 and the related statements of
operations for the year then ended and the statements of changes in contract
owners' equity for the year then ended has been included herein in reliance upon
the report of Coopers & Lybrand L.L.P., independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
The statement of changes in contract owners' equity of the Separate Account for
the year ended December 31, 1996 has been included herein 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.
CHANGE OF ACCOUNTANTS
On September 12, 1997, Kemper Investors Life Insurance Company ("KILICO")
appointed the accounting firm of Coopers & Lybrand L.L.P. as independent
accountants for the year ended December 31, 1997 to replace KPMG Peat Marwick
LLP effective with such appointment. KILICO's Board of Directors approved the
selection of Coopers & Lybrand L.L.P. as the new independent accountants.
Management had not consulted with Coopers & Lybrand L.L.P. on any accounting,
auditing or reporting matter, prior to that time.
During the two most recent fiscal years ended December 31, 1996, there have been
no disagreements with KPMG Peat Marwick LLP on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure or any reportable events. KPMG Peat Marwick LLP's report on the
financial statements for the past two years contained no adverse opinion or
disclaimer of opinion and was not qualified or modified as to uncertainty, audit
scope or accounting principles.
B-19
<PAGE> 69
There were no disagreements with Coopers & Lybrand L.L.P. on accounting or
financial disclosures for the year ended December 31, 1997.
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-20
<PAGE> 70
REPORT OF INDEPENDENT ACCOUNTANTS
THE BOARD OF DIRECTORS OF
KEMPER INVESTORS LIFE INSURANCE COMPANY AND
CONTRACT OWNERS OF KILICO VARIABLE ANNUITY SEPARATE ACCOUNT:
We have audited the accompanying statements of assets and liabilities and
contract owners' equity of the Kemper Money Market Subaccount, Kemper Money
Market Subaccount #2, Kemper Total Return Subaccount, Kemper High Yield
Subaccount, Kemper Growth Subaccount, Kemper Government Securities Subaccount,
Kemper International Subaccount, Kemper Small Cap Growth Subaccount, Kemper
Investment Grade Bond Subaccount, Kemper Contrarian Value Subaccount, Kemper
Small Cap Value Subaccount, Kemper Value+Growth Subaccount, Kemper Horizon 20+
Subaccount, Kemper Horizon 10+ Subaccount, and Kemper Horizon 5 Subaccount
(investment options within the Investors Fund Series), Short-Term Bond
Subaccount and Growth Subaccount, Aggressive Growth Subaccount, Worldwide Growth
Subaccount, and Balanced Subaccount (investment options within the Janus Aspen
Series), Natural Resources Subaccount and Emerging Markets Subaccount
(investment options within the Lexington Funds), Fidelity VIP Equity-Income
Subaccount, Fidelity VIP Growth Subaccount, Fidelity VIP II Asset Manager
Subaccount, Fidelity VIP II Index 500 Subaccount and Fidelity VIP II Contrafund
Subaccount (investment options within the Fidelity VIP Funds), of KILICO
Variable Annuity Separate Account as of December 31, 1997 and the related
statements of operations and the statements of changes in contract owners'
equity for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit. The statement of
changes in contract owners' equity for the year ended December 31, 1996 was
audited by other auditors, whose report, dated March 26, 1997, expressed an
unqualified opinion on that statement.
We conducted our audit 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, 1997 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 audit provides a
reasonable basis for our opinion.
In our opinion, the December 31, 1997 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, 1997 and
the results of their operations and changes in their contract owners' equity for
the year then ended in conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Chicago, Illinois
February 20, 1998
B-21
<PAGE> 71
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Kemper Investors Life Insurance Company:
We have audited the accompanying statement of changes in contract owners' equity
of the Kemper Money Market Subaccount, Kemper Money Market Subaccount #2, Kemper
Total Return Subaccount, Kemper High Yield Subaccount, Kemper Growth Subaccount,
Kemper Government Securities Subaccount, Kemper International Subaccount, Kemper
Small Cap Growth Subaccount, Kemper Investment Grade Bond Subaccount, Kemper
Contrarian Value Subaccount, Kemper Small Cap Value Subaccount, Kemper
Value+Growth Subaccount, Kemper Horizon 20+ Subaccount, Kemper Horizon 10+
Subaccount, and Kemper Horizon 5 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 and Emerging Markets Subaccount (investment options within the
Lexington Funds), and Fidelity VIP Equity-Income Subaccount, Fidelity VIP Growth
Subaccount, Fidelity VIP II Asset Manager Subaccount, Fidelity VIP II Index 500
Subaccount and Fidelity VIP II Contrafund Subaccount (investment options within
the Fidelity VIP Funds), of KILICO Variable Annuity Separate Account (the
Account) for the year ended December 31, 1996. This financial statement is the
responsibility of the Account's management. Our responsibility is to express an
opinion on this financial statement based on our audit.
We conducted our audit 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 statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statement referred to above presents fairly, in
all material respects, the changes in contract owners' equity of the subaccounts
of KILICO Variable Annuity Separate Account for the year ended December 31, 1996
in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Chicago, Illinois
March 26, 1997
B-22
<PAGE> 72
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES AND CONTRACT OWNERS' EQUITY
DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
INVESTORS FUND SERIES
----------------------------------------------------------------------------------------------
KEMPER KEMPER KEMPER KEMPER KEMPER
MONEY MONEY TOTAL HIGH KEMPER GOVERNMENT KEMPER
MARKET MARKET RETURN YIELD GROWTH SECURITIES INTERNATIONAL
SUBACCOUNT SUBACCOUNT #2 SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ------------- ---------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Investments in underlying
portfolio funds, at current
values....................... $73,754 6,379 743,633 306,171 527,701 72,906 160,865
Dividends and other
receivables.................. 200 17 142 40 69 5 28
------- ----- ------- ------- ------- ------ -------
Total assets............ 73,954 6,396 743,775 306,211 527,770 72,911 160,893
------- ----- ------- ------- ------- ------ -------
LIABILITIES AND CONTRACT OWNERS'
EQUITY
Liabilities:
Mortality and expense risk
and administrative
charges.................... 82 -- 796 327 564 78 172
Other........................ 118 2 195 63 106 12 125
------- ----- ------- ------- ------- ------ -------
Total liabilities....... 200 2 991 390 670 90 297
------- ----- ------- ------- ------- ------ -------
Contract owners' equity........ $73,754 6,394 742,784 305,821 527,100 72,821 160,596
======= ===== ======= ======= ======= ====== =======
ANALYSIS OF CONTRACT OWNERS'
EQUITY
Excess of proceeds from units
sold over payments for units
redeemed..................... $ 3,881 5,218 203,480 96,788 187,968 39,559 107,157
Accumulated net investment
income (loss)................ 69,873 1,176 301,262 181,924 202,725 30,968 7,987
Accumulated net realized gain
on sales of investments...... -- -- 88,300 6,525 61,033 1,024 18,107
Unrealized appreciation of
investments.................. -- -- 149,742 20,584 75,374 1,270 27,345
------- ----- ------- ------- ------- ------ -------
Contract owners' equity........ $73,754 6,394 742,784 305,821 527,100 72,821 160,596
======= ===== ======= ======= ======= ====== =======
</TABLE>
See accompanying notes to financial statements.
B-23
<PAGE> 73
<TABLE>
<CAPTION>
INVESTORS FUND SERIES
-------------------------------------------------------------------------------------------------------
KEMPER KEMPER KEMPER KEMPER KEMPER
SMALL CAP INVESTMENT CONTRARIAN SMALL CAP VALUE + KEMPER KEMPER KEMPER
GROWTH GRADE BOND VALUE VALUE GROWTH HORIZON 20+ HORIZON 10+ HORIZON 5
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ---------- ---------- ---------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
112,970 5,463 78,165 33,296 27,952 6,474 9,169 4,902
25 1 20 14 21 5 4 3
------- ----- ------ ------ ------ ----- ----- -----
112,995 5,464 78,185 33,310 27,973 6,479 9,173 4,905
------- ----- ------ ------ ------ ----- ----- -----
115 5 68 35 29 7 10 5
17 1 35 25 23 4 3 2
------- ----- ------ ------ ------ ----- ----- -----
132 6 103 60 52 11 13 7
------- ----- ------ ------ ------ ----- ----- -----
112,863 5,458 78,082 33,250 27,921 6,468 9,160 4,898
======= ===== ====== ====== ====== ===== ===== =====
72,054 5,144 64,882 28,513 23,759 5,342 7,793 4,402
7,311 (37) (395) (220) (224) (86) (83) (47)
11,120 73 2,762 1,143 618 177 138 98
22,378 278 10,833 3,814 3,768 1,035 1,312 445
------- ----- ------ ------ ------ ----- ----- -----
112,863 5,458 78,082 33,250 27,921 6,468 9,160 4,898
======= ===== ====== ====== ====== ===== ===== =====
</TABLE>
B-24
<PAGE> 74
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES AND CONTRACT OWNERS' EQUITY (CONTINUED)
DECEMBER 31, 1997
(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................................. $1,052 29,665 19,983 91,502 14,188
Dividends and other receivables.................. -- 13 1 2 --
------ ------ ------ ------ ------
Total assets.............................. 1,052 29,678 19,984 91,504 14,188
------ ------ ------ ------ ------
LIABILITIES AND CONTRACT OWNERS' EQUITY
Liabilities:
Mortality and expense risk and administrative
charges...................................... 1 31 21 98 15
Other.......................................... -- -- 3 10 18
------ ------ ------ ------ ------
Total liabilities......................... 1 31 24 108 33
------ ------ ------ ------ ------
Contract owners' equity.......................... 1,051 29,647 19,960 91,396 14,155
====== ====== ====== ====== ======
ANALYSIS OF CONTRACT OWNERS' EQUITY
Excess of proceeds from units sold over payments
for units redeemed............................. 984 23,713 17,788 78,783 11,699
Accumulated net investment income (loss)......... 188 668 (344) 278 293
Accumulated net realized gain on sales of
investments.................................... 3 916 205 1,909 258
Unrealized appreciation (depreciation) of
investments.................................... (124) 4,350 2,311 10,426 1,905
------ ------ ------ ------ ------
Contract owners' equity.......................... $1,051 29,647 19,960 91,396 14,155
====== ====== ====== ====== ======
</TABLE>
See accompanying notes to financial statements.
B-25
<PAGE> 75
<TABLE>
<CAPTION>
FIDELITY VIP FUNDS
LEXINGTON FUNDS ---------------------------------------------------------
----------------------------- FIDELITY VIP FIDELITY VIP II
NATURAL EMERGING EQUITY- FIDELITY VIP ASSET
RESOURCES MARKETS INCOME GROWTH MANAGER
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ---------- ------------ ------------ ---------------
<S> <C> <C> <C> <C> <C>
6,068 6,437 23,871 11,821 3,936
1 2 3 5 --
----- ------ ------ ------ ------
6,069 6,439 23,874 11,826 3,936
----- ------ ------ ------ ------
7 7 25 13 3
1 1 3 2 --
----- ------ ------ ------ ------
8 8 28 15 3
----- ------ ------ ------ ------
6,061 6,431 23,846 11,811 3,933
===== ====== ====== ====== ======
5,012 7,642 20,467 10,306 3,523
135 (158) 518 27 114
952 155 60 54 63
(38) (1,208) 2,801 1,424 233
----- ------ ------ ------ ------
6,061 6,431 23,846 11,811 3,933
===== ====== ====== ====== ======
<CAPTION>
FIDELITY VIP FUNDS
---------------------------------------
FIDELITY VIP II FIDELITY VIP II
INDEX 500 CONTRAFUND
SUBACCOUNT SUBACCOUNT
--------------- ---------------
<S> <C> <C>
41,103 24,913
3 --
------ ------
41,106 24,913
------ ------
42 27
7 3
------ ------
49 30
------ ------
41,057 24,883
====== ======
36,011 20,548
(95) 70
640 1,250
4,501 3,015
------ ------
41,057 24,883
====== ======
</TABLE>
B-26
<PAGE> 76
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
INVESTORS FUND SERIES
----------------------------------------------------------------------------------------------
KEMPER KEMPER KEMPER KEMPER
MONEY MONEY TOTAL KEMPER KEMPER GOVERNMENT KEMPER
MARKET MARKET RETURN HIGH YIELD GROWTH SECURITIES INTERNATIONAL
SUBACCOUNT SUBACCOUNT #2 SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ------------- ---------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Dividends and capital gains
distributions.................. $3,938 374 107,616 23,900 112,090 6,229 9,141
Expenses:
Mortality and expense risk and
administrative charges....... 999 1 9,756 3,824 6,893 1,011 2,301
------ --- ------- ------ ------- ----- ------
Net investment income (loss)..... 2,939 373 97,860 20,076 105,197 5,218 6,840
------ --- ------- ------ ------- ----- ------
Net realized and unrealized gain
(loss) on investments:
Net realized gain (loss) on
sales of investments......... -- -- 21,466 5,634 13,791 (133) 9,738
Change in unrealized
appreciation (depreciation)
of investments............... -- -- 1,837 2,376 (29,191) 284 (2,788)
------ --- ------- ------ ------- ----- ------
Net realized and unrealized gain
(loss) on investments.......... -- -- 23,303 8,010 (15,400) 151 6,950
------ --- ------- ------ ------- ----- ------
Net increase in contract owners'
equity resulting from
operations..................... $2,939 373 121,163 28,086 89,797 5,369 13,790
====== === ======= ====== ======= ===== ======
</TABLE>
See accompanying notes to financial statements.
B-27
<PAGE> 77
<TABLE>
<CAPTION>
INVESTORS FUND SERIES
-------------------------------------------------------------------------------------------------------
KEMPER KEMPER KEMPER KEMPER KEMPER KEMPER
SMALL CAP INVESTMENT CONTRARIAN SMALL CAP KEMPER HORIZON HORIZON KEMPER
GROWTH GRADE BOND VALUE VALUE VALUE+GROWTH 20+ 10+ HORIZON 5
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ---------- ---------- ---------- ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
8,510 28 303 181 121 40 60 29
1,226 54 621 357 282 98 113 62
------ --- ------ ----- ----- --- ----- ---
7,284 (26) (318) (176) (161) (58) (53) (33)
------ --- ------ ----- ----- --- ----- ---
8,226 71 2,750 1,194 619 161 129 97
8,507 248 9,122 3,077 3,038 777 945 320
------ --- ------ ----- ----- --- ----- ---
16,733 319 11,872 4,271 3,657 938 1,074 417
------ --- ------ ----- ----- --- ----- ---
24,017 293 11,554 4,095 3,496 880 1,021 384
====== === ====== ===== ===== === ===== ===
</TABLE>
B-28
<PAGE> 78
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF OPERATIONS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997
(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........................ $ 173 741 -- 1,073 347
Expenses:
Mortality and expense risk and
administrative charges............. 11 312 299 902 132
----- ----- ----- ----- -----
Net investment income (loss)........... 162 429 (299) 171 215
----- ----- ----- ----- -----
Net realized and unrealized gain (loss)
on investments:
Net realized gain (loss) on sales of
investments........................ 7 842 (203) 1,845 169
Change in unrealized appreciation
(depreciation) of investments...... (122) 3,150 2,471 7,685 1,431
----- ----- ----- ----- -----
Net realized and unrealized gain (loss)
on investments....................... (115) 3,992 2,268 9,530 1,600
----- ----- ----- ----- -----
Net increase (decrease) in contract
owners' equity resulting from
operations........................... $ 47 4,421 1,969 9,701 1,815
===== ===== ===== ===== =====
</TABLE>
See accompanying notes to financial statements.
B-29
<PAGE> 79
<TABLE>
<CAPTION>
LEXINGTON FUNDS FIDELITY VIP FUNDS
----------------------------- ---------------------------------------------------------
FIDELITY VIP FIDELITY VIP II
NATURAL EMERGING EQUITY- FIDELITY VIP ASSET
RESOURCES MARKETS INCOME GROWTH MANAGER
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ---------- ------------ ------------ ---------------
<S> <C> <C> <C> <C>
210 -- 751 193 149
53 103 200 145 28
---- ------ ----- ----- ---
157 (103) 551 48 121
---- ------ ----- ----- ---
892 84 47 55 51
(630) (1,081) 2,403 1,302 170
---- ------ ----- ----- ---
262 (997) 2,450 1,357 221
---- ------ ----- ----- ---
419 (1,100) 3,001 1,405 342
==== ====== ===== ===== ===
<CAPTION>
FIDELITY VIP FUNDS
---------------------------------------
FIDELITY VIP II FIDELITY VIP II
INDEX 500 CONTRAFUND
SUBACCOUNT SUBACCOUNT
--------------- ---------------
<S> <C>
297 345
350 232
----- -----
(53) 113
----- -----
616 1,235
4,109 2,307
----- -----
4,725 3,542
----- -----
4,672 3,655
===== =====
</TABLE>
B-30
<PAGE> 80
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF CHANGES IN CONTRACT OWNERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
INVESTORS FUND SERIES
----------------------------------------------------------------------------------------------
KEMPER KEMPER KEMPER KEMPER KEMPER
MONEY MONEY TOTAL HIGH KEMPER GOVERNMENT KEMPER
MARKET MARKET RETURN YIELD GROWTH SECURITIES INTERNATIONAL
SUBACCOUNT SUBACCOUNT #2 SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ------------- ---------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Operations:
Net investment income (loss)... $ 2,939 373 97,860 20,076 105,197 5,218 6,840
Net realized gain (loss) on
sales of investments......... -- -- 21,466 5,634 13,791 (133) 9,738
Change in unrealized
appreciation (depreciation)
of investments............... -- -- 1,837 2,376 (29,191) 284 (2,788)
------- ------- ------- ------- ------- ------- -------
Net increase in contract
owners' equity resulting
from operations............ 2,939 373 121,163 28,086 89,797 5,369 13,790
------- ------- ------- ------- ------- ------- -------
Account unit transactions:
Proceeds from units sold....... 21,938 7,884 36,774 26,456 32,804 6,125 14,396
Net transfers (to) from
affiliated divisions and
subaccounts.................. 7,054 (10,145) (30,823) (473) (35,916) (6,847) (14,865)
Payments for units redeemed.... (17,525) (213) (75,741) (34,745) (43,779) (11,513) (15,633)
------- ------- ------- ------- ------- ------- -------
Net increase (decrease) in
contract owners' equity
from account unit
transactions............... 11,467 (2,474) (69,790) (8,762) (46,891) (12,235) (16,102)
------- ------- ------- ------- ------- ------- -------
Total increase (decrease) in
contract owners' equity........ 14,406 (2,101) 51,373 19,324 42,906 (6,866) (2,312)
Beginning of period.............. 59,348 8,495 691,411 286,497 484,194 79,687 162,908
------- ------- ------- ------- ------- ------- -------
End of period.................... $73,754 6,394 742,784 305,821 527,100 72,821 160,596
======= ======= ======= ======= ======= ======= =======
</TABLE>
See accompanying notes to financial statements.
B-31
<PAGE> 81
<TABLE>
<CAPTION>
INVESTORS FUND SERIES
---------------------------------------------------------------------------------------------------------
KEMPER KEMPER KEMPER KEMPER
SMALL CAP INVESTMENT CONTRARIAN SMALL CAP KEMPER KEMPER KEMPER KEMPER
GROWTH GRADE BOND VALUE VALUE VALUE+GROWTH HORIZON 20+ HORIZON 10+ HORIZON 5
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ---------- ---------- ---------- ------------ ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
7,284 (26) (318) (176) (161) (58) (53) (33)
8,226 71 2,750 1,194 619 161 129 97
8,507 248 9,122 3,077 3,038 777 945 320
------- ----- ------ ------ ------ ----- ----- -----
24,017 293 11,554 4,095 3,496 880 1,021 384
------- ----- ------ ------ ------ ----- ----- -----
14,943 1,403 16,729 8,235 8,265 1,223 1,730 1,182
11,461 2,113 31,875 9,674 7,531 1,114 1,220 1,152
(6,408) (224) (2,935) (1,625) (1,266) (179) (395) (200)
------- ----- ------ ------ ------ ----- ----- -----
19,996 3,292 45,669 16,284 14,530 2,158 2,555 2,134
------- ----- ------ ------ ------ ----- ----- -----
44,013 3,585 57,223 20,379 18,026 3,038 3,576 2,518
68,850 1,873 20,859 12,871 9,895 3,430 5,584 2,380
------- ----- ------ ------ ------ ----- ----- -----
112,863 5,458 78,082 33,250 27,921 6,468 9,160 4,898
======= ===== ====== ====== ====== ===== ===== =====
</TABLE>
B-32
<PAGE> 82
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENTS OF CHANGES IN CONTRACT OWNERS' EQUITY (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997
(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)............................. $ 162 429 (299) 171 215
Net realized gain (loss) on sales of investments......... 7 842 (203) 1,845 169
Change in unrealized appreciation (depreciation) of
investments............................................ (122) 3,150 2,471 7,685 1,431
------ ------ ------- ------ ------
Net increase (decrease) in contract owners' equity
resulting from operations............................ 47 4,421 1,969 9,701 1,815
------ ------ ------- ------ ------
Account unit transactions:
Proceeds from units sold................................. 171 5,841 4,838 22,435 3,378
Net transfers (to) from affiliated divisions and
subaccounts............................................ 199 2,785 (5,126) 29,266 3,103
Payments for units redeemed.............................. (110) (1,058) (953) (1,854) (370)
------ ------ ------- ------ ------
Net increase (decrease) in contract owners' equity from
account unit transactions............................ 260 7,568 (1,241) 49,847 6,111
------ ------ ------- ------ ------
Total increase in contract owners' equity.................. 307 11,989 728 59,548 7,926
Beginning of period...................................... 744 17,658 19,232 31,848 6,229
------ ------ ------- ------ ------
End of period............................................ $1,051 29,647 19,960 91,396 14,155
====== ====== ======= ====== ======
</TABLE>
See accompanying notes to financial statements.
B-33
<PAGE> 83
<TABLE>
<CAPTION>
LEXINGTON FUNDS FIDELITY VIP FUNDS
- ---------------------------- -------------------------------------------------------------------------------------
FIDELITY VIP FIDELITY VIP II
NATURAL EMERGING EQUITY- FIDELITY VIP ASSET FIDELITY VIP II FIDELITY VIP II
RESOURCES MARKETS INCOME GROWTH MANAGER INDEX 500 CONTRAFUND
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ---------- ------------ ------------ --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
157 (103) 551 48 121 (53) 113
892 84 47 55 51 616 1,235
(630) (1,081) 2,403 1,302 170 4,109 2,307
----- ------ ------ ------ ----- ------ ------
419 (1,100) 3,001 1,405 342 4,672 3,655
----- ------ ------ ------ ----- ------ ------
1,518 1,388 5,558 3,160 598 10,482 6,527
(317) 1,173 9,699 3,345 2,439 21,366 6,530
(509) (298) (676) (175) (449) (1,182) (638)
----- ------ ------ ------ ----- ------ ------
692 2,263 14,581 6,330 2,588 30,666 12,419
----- ------ ------ ------ ----- ------ ------
1,111 1,163 17,582 7,735 2,930 35,338 16,074
4,950 5,268 6,264 4,076 1,003 5,719 8,809
----- ------ ------ ------ ----- ------ ------
6,061 6,431 23,846 11,811 3,933 41,057 24,883
===== ====== ====== ====== ===== ====== ======
</TABLE>
B-34
<PAGE> 84
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
-----------------------------------------------------------------
KEMPER KEMPER KEMPER KEMPER
MONEY MONEY TOTAL HIGH KEMPER
MARKET MARKET RETURN YIELD GROWTH
SUBACCOUNT SUBACCOUNT #2 SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Operations:
Net investment income (loss)....... $ 2,493 243 33,796 21,101 57,547
Net realized gain (loss) on sales
of investments................... -- -- 17,341 4,321 11,516
Change in unrealized appreciation
(depreciation) of investments.... -- -- 42,597 5,924 10,026
-------- ------ ------- ------- -------
Net increase in contract owners'
equity resulting from
operations..................... 2,493 243 93,734 31,346 79,089
-------- ------ ------- ------- -------
Account unit transactions:
Proceeds from units sold........... 22,801 12,928 47,161 36,482 43,192
Net transfers (to) from affiliated
divisions and subaccounts........ (7,498) (6,807) (27,829) (7,862) (9,293)
Payments for units redeemed........ (16,282) (184) (78,322) (28,503) (41,011)
-------- ------ ------- ------- -------
Net increase (decrease) in
contract owners' equity from
account unit transactions...... (979) 5,937 (58,990) 117 (7,112)
-------- ------ ------- ------- -------
Total increase (decrease) in contract
owners' equity..................... 1,514 6,180 34,744 31,463 71,977
Beginning of period.................. 57,834 2,315 656,667 255,034 412,217
-------- ------ ------- ------- -------
End of period........................ $ 59,348 8,495 691,411 286,497 484,194
======== ====== ======= ======= =======
<CAPTION>
INVESTORS FUND SERIES
--------------------------
KEMPER
GOVERNMENT KEMPER
SECURITIES INTERNATIONAL
SUBACCOUNT SUBACCOUNT
---------- -------------
<S> <C> <C>
Operations:
Net investment income (loss)....... 4,982 942
Net realized gain (loss) on sales
of investments................... 117 5,409
Change in unrealized appreciation
(depreciation) of investments.... (4,343) 14,729
------- -------
Net increase in contract owners'
equity resulting from
operations..................... 756 21,080
------- -------
Account unit transactions:
Proceeds from units sold........... 7,926 20,272
Net transfers (to) from affiliated
divisions and subaccounts........ (9,264) 819
Payments for units redeemed........ (10,724) (13,606)
------- -------
Net increase (decrease) in
contract owners' equity from
account unit transactions...... (12,062) 7,485
------- -------
Total increase (decrease) in contract
owners' equity..................... (11,306) 28,565
Beginning of period.................. 90,993 134,343
------- -------
End of period........................ 79,687 162,908
======= =======
</TABLE>
- ---------------
(a) For the period from May 1, 1996 (commencement of operations) to December 31,
1996.
See accompanying notes to financial statements.
B-35
<PAGE> 85
<TABLE>
<CAPTION>
INVESTORS FUND SERIES
- --------------------------------------------------------------------------------------------------------------------------
KEMPER KEMPER KEMPER KEMPER KEMPER
SMALL CAP INVESTMENT CONTRARIAN SMALL CAP VALUE + KEMPER KEMPER KEMPER
GROWTH GRADE BOND VALUE VALUE GROWTH HORIZON 20+ HORIZON 10+ HORIZON 5
SUBACCOUNT SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A)
- ---------- ------------- ------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
478 (11) (77) (44) (63) (28) (30) (14)
2,710 2 12 (51) (1) 16 9 1
8,276 30 1,711 737 730 258 367 125
------ ----- ------ ------ ----- ----- ----- -----
11,464 21 1,646 642 666 246 346 112
------ ----- ------ ------ ----- ----- ----- -----
13,879 1,262 9,908 6,111 6,223 2,580 4,108 1,453
11,423 632 9,522 6,244 3,214 620 1,206 887
(3,253) (42) (217) (126) (208) (16) (76) (72)
------ ----- ------ ------ ----- ----- ----- -----
22,049 1,852 19,213 12,229 9,229 3,184 5,238 2,268
------ ----- ------ ------ ----- ----- ----- -----
33,513 1,873 20,859 12,871 9,895 3,430 5,584 2,380
35,337 -- -- -- -- -- -- --
------ ----- ------ ------ ----- ----- ----- -----
68,850 1,873 20,859 12,871 9,895 3,430 5,584 2,380
====== ===== ====== ====== ===== ===== ===== =====
</TABLE>
B-36
<PAGE> 86
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 affiliated divisions 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-37
<PAGE> 87
<TABLE>
<CAPTION>
LEXINGTON FUNDS FIDELITY VIP FUNDS
----------------------- -----------------------------------------------------------------------------------
FIDELITY VIP FIDELITY VIP II
NATURAL EMERGING EQUITY- FIDELITY VIP ASSET FIDELITY VIP II FIDELITY VIP II
RESOURCES MARKETS INCOME GROWTH MANAGER INDEX 500 CONTRAFUND
SUBACCOUNT SUBACCOUNT SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A)
---------- ---------- ------------- ------------- --------------- --------------- ---------------
<S> <C> <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-38
<PAGE> 88
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. Kemper Corporation
was acquired by an investor group led by Zurich Insurance Company ("Zurich") on
January 4, 1996. Effective February 27, 1998, KILICO and Kemper Corporation
became wholly-owned subsidiaries of Zurich.
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
a total of twenty-eight subaccounts with various subaccount options available to
Contract Owners depending upon their respective Contracts. A total of only
twenty-six subaccount options are presented in the accompanying financial
statements, (the Kemper Money Market Subaccounts represent one subaccount), as
available subaccount options to Contract Owners. PASSPORT Contract Owners have
two additional subaccounts which invest exclusively in the shares of subaccounts
in the Investors Fund Series which are not reflected in the accompanying
financial statements. Each subaccount invests exclusively in the shares of 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, all of which are open-end diversified management investment companies.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principals requires management to make estimates and assumptions that
could affect the reported amounts of assets and liabilities as well as the
disclosure of contingent amounts at the date of the financial statements. As a
result, actual results reported as income and expenses could differ from the
estimates reported in the accompanying financial statements.
SECURITY VALUATION
The investments are stated at current value which is based on the closing bid
price, net asset value, at December 31, 1997.
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 a first in, first out ("FIFO") 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-39
<PAGE> 89
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(1) GENERAL INFORMATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In early 1998, the Clinton Administration's Fiscal Year 1999 Budget was released
and contained certain proposals to change the taxation of non-qualified fixed
and variable annuities. It is currently unknown whether such proposals will be
adopted, amended or omitted in the final 1999 budget approved by Congress.
(2) SUMMARY OF INVESTMENTS
Investments, at cost, at December 31, 1997, are as follows (in thousands):
<TABLE>
<CAPTION>
SHARES
OWNED COST
------- ----------
<S> <C> <C>
INVESTMENTS
INVESTORS FUND SERIES:
Kemper Money Market Subaccount (Money Market and Money
Market #2 Subaccounts).................................... 80,133 $ 80,133
Kemper Total Return Subaccount.............................. 263,494 593,891
Kemper High Yield Subaccount................................ 236,229 285,587
Kemper Growth Subaccount.................................... 175,849 452,327
Kemper Government Securities Subaccount..................... 60,389 71,636
Kemper International Subaccount............................. 99,620 133,520
Kemper Small Cap Growth Subaccount.......................... 57,375 90,592
Kemper Investment Grade Bond Subaccount..................... 4,886 5,185
Kemper Contrarian Value Subaccount.......................... 51,507 67,332
Kemper Small Cap Value Subaccount........................... 27,124 29,482
Kemper Value+Growth Subaccount.............................. 19,616 24,184
Kemper Horizon 20+ Subaccount............................... 4,700 5,439
Kemper Horizon 10+ Subaccount............................... 7,114 7,857
Kemper Horizon 5 Subaccount................................. 4,006 4,457
JANUS ASPEN SERIES FUND:
Short-Term Bond Subaccount.................................. 118 1,176
Growth Subaccount........................................... 1,605 25,315
Aggressive Growth Subaccount................................ 972 17,672
Worldwide Growth Subaccount................................. 3,912 81,076
Balanced Subaccount......................................... 812 12,283
LEXINGTON FUNDS:
Natural Resources Subaccount................................ 407 6,106
Emerging Markets Subaccount................................. 722 7,645
FIDELITY VIP FUNDS:
Fidelity VIP Equity-Income Subaccount....................... 983 21,070
Fidelity VIP Growth Subaccount.............................. 319 10,397
Fidelity VIP II Asset Manager Subaccount.................... 219 3,703
Fidelity VIP II Index 500 Subaccount........................ 359 36,602
Fidelity VIP II Contrafund Subaccount....................... 1,249 21,898
----------
TOTAL INVESTMENTS................................... $2,096,565
==========
</TABLE>
The underlying investments of the Fund's subaccounts are summarized below.
INVESTORS FUND SERIES
KEMPER MONEY MARKET SUBACCOUNT: This subaccount invests primarily in short-term
obligations of major banks and corporations. The Kemper Money Market Subaccount
represents the ADVANTAGE III Kemper Money Market Subaccount and the PASSPORT
Kemper Money Market Subaccount #1. Kemper 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
B-40
<PAGE> 90
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(2) SUMMARY OF INVESTMENTS (CONTINUED)
only available to PASSPORT individual and group variable and market value
adjusted deferred annuity contracts.
KEMPER TOTAL RETURN SUBACCOUNT: This subaccount'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 subaccount may also make private
placement investments (which are normally restricted securities).
KEMPER HIGH YIELD SUBACCOUNT: This subaccount 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.
KEMPER GROWTH SUBACCOUNT: This subaccount'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).
KEMPER GOVERNMENT SECURITIES SUBACCOUNT: This subaccount invests primarily in
U.S. Government securities. The subaccount will also invest in fixed-income
securities other than U.S. Government securities and will engage in options and
financial futures transactions.
KEMPER INTERNATIONAL SUBACCOUNT: This subaccount'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.
KEMPER SMALL CAP GROWTH SUBACCOUNT: This subaccount'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 subaccount'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.
KEMPER INVESTMENT GRADE BOND SUBACCOUNT: This subaccount seeks high current
income by investing primarily in a diversified portfolio of investment grade
debt securities. At least 65% of the subaccount's total assets will be invested
in investment grade corporate debt securities, U.S. Government or Canadian
Government agencies and commercial paper. The subaccount may also invest in
preferred stocks. The subaccount may also invest up to 35% of its total assets
in below investment grade debt and will also engage in options and financial
futures transactions.
KEMPER CONTRARIAN VALUE (FORMERLY VALUE) SUBACCOUNT: This subaccount seeks to
achieve a high rate of total return. The subaccount invests primarily in a
diversified portfolio of the common stocks of larger listed companies, which are
believed to be undervalued.
KEMPER SMALL CAP VALUE SUBACCOUNT: This subaccount seeks long-term capital
appreciation. The subaccount invests primarily in a diversified portfolio of
small company equity securities with market capitalization of $100 million to
$1.0 billion, which are believed to be undervalued.
KEMPER VALUE+GROWTH SUBACCOUNT: This subaccount seeks growth of capital through
professional management of a portfolio of growth and value stocks. These stocks
include stocks of large established companies, as well as stocks of small
companies. The subaccount may also engage in options and financial futures
transactions.
KEMPER HORIZON 20+ SUBACCOUNT: This subaccount is designed for investors with
approximately a 20+ year investment horizon and seeks growth of capital, with
income as a secondary objective. The subaccount invests approximately 80% of its
total assets in a variety of equity securities and 20% in a variety of fixed
income securities.
KEMPER HORIZON 10+ SUBACCOUNT: This subaccount is designed for investors with
approximately a 10+ year investment horizon and seeks a balance between growth
of capital and income, consistent with moderate risk.
B-41
<PAGE> 91
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(2) SUMMARY OF INVESTMENTS (CONTINUED)
The subaccount invests approximately 60% of its total assets in a variety of
equity securities and 40% in a variety of fixed income securities.
KEMPER HORIZON 5 SUBACCOUNT: This subaccount is designed for investors with
approximately a 5 year investment horizon, and seeks income consistent with a
preservation of capital, with growth of capital as a secondary objective. The
subaccount invests approximately 40% of its total assets in a variety of equity
securities and 60% in a variety of fixed income securities.
JANUS ASPEN SERIES
SHORT-TERM BOND SUBACCOUNT: This subaccount 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 SUBACCOUNT: This subaccount seeks long-term growth of capital by
investing primarily in common stocks with an emphasis on companies with larger
market capitalizations.
AGGRESSIVE GROWTH SUBACCOUNT: This subaccount is a nondiversified portfolio that
seeks long-term growth of capital by investing primarily in common stocks. The
common stocks held by the subaccount will normally have an average market
capitalization between $1 billion and $5 billion.
WORLDWIDE GROWTH SUBACCOUNT: This subaccount seeks long-term growth of capital
by investing primarily in common stocks of foreign and domestic companies.
BALANCED SUBACCOUNT: This subaccount seeks long-term growth of capital balanced
by current income. The subaccount normally invests 40%-60% of its assets in
equity securities selected for their growth potential and 40%-60% in
fixed-income securities.
LEXINGTON FUNDS
NATURAL RESOURCES SUBACCOUNT: This subaccount 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.
EMERGING MARKETS SUBACCOUNT: This subaccount 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
FIDELITY VIP EQUITY-INCOME SUBACCOUNT: This subaccount seeks reasonable income
by investing primarily in income-producing equity securities. This subaccount
normally invests at least 65% of the subaccount's total assets in income
producing common or preferred stocks. The fund has the flexibility, however, to
invest the balance in all types of domestic and foreign securities, including
bonds.
FIDELITY VIP GROWTH SUBACCOUNT: This subaccount seeks to achieve capital
appreciation. This subaccount invests primarily in common stocks, however, the
subaccount is not restricted to any one type of security and may pursue capital
appreciation through the purchase of bonds and preferred stocks.
FIDELITY VIP II ASSET MANAGER SUBACCOUNT: This subaccount seeks to obtain high
total return with reduced risk over the long-term by allocating its assets among
a variety of stocks, bonds and short-term instruments.
FIDELITY VIP II INDEX 500 SUBACCOUNT: This subaccount 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. This subaccount normally invests
80% of its total assets in equity securities of companies that comprise the S&P
500.
B-42
<PAGE> 92
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(2) SUMMARY OF INVESTMENTS (CONTINUED)
FIDELITY VIP II CONTRAFUND SUBACCOUNT: This subaccount seeks long-term capital
appreciation. This subaccount invests mainly in equity securities of companies
whose value FMR believes is not fully recognized by the public. The subaccount
also has the flexibility to invest in any type of security that may produce
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 Kemper 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. The records maintenance charge
for both ADVANTAGE III and PASSPORT contracts are waived for all individual
contracts whose investment value exceeds $50,000 on the date of assessment.
For contracts issued prior to May 1, 1994, KILICO has undertaken to reimburse
each of the ADVANTAGE III Kemper Money Market, Kemper Total Return, Kemper High
Yield, and Kemper 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 subaccount,
charges for taxes, extraordinary expenses, and brokerage and transaction costs
are excluded. During the year ended December 31, 1997, 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.
Scudder Kemper Investments, Inc. ("SKI"), formerly Zurich Kemper Investments,
Inc., an affiliated company, is the investment manager of the Investors Fund
Series portfolios.
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. Each of these entities are not affiliated with
KILICO.
Investors Brokerage Services, Inc. ("IBS"), a wholly-owned subsidiary of KILICO,
is the principal underwriter for the Separate Account.
(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.
B-43
<PAGE> 93
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(5) CONTRACT OWNERS' EQUITY
The Contract Owners' equity is affected by the investment results of, and
contract charges to, each subaccount. 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-44
<PAGE> 94
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Contract Owners' equity at December 31, 1997, 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 CONTRACTS
INVESTORS FUND SERIES
KEMPER MONEY MARKET SUBACCOUNT
Flexible Payment, Qualified............................. 633 $2.394 $ 1,514
Flexible Payment, Nonqualified.......................... 4,338 2.394 10,385
Periodic Payment, Qualified............................. 11,579 2.285 26,456
Periodic Payment, Nonqualified.......................... 4,637 2.285 10,595
--------
48,950
--------
KEMPER TOTAL RETURN SUBACCOUNT
Flexible Payment, Qualified............................. 864 6.501 5,617
Flexible Payment, Nonqualified.......................... 4,277 6.019 25,743
Periodic Payment, Qualified............................. 82,149 6.205 509,698
Periodic Payment, Nonqualified.......................... 13,699 5.781 79,191
--------
620,249
--------
KEMPER HIGH YIELD SUBACCOUNT
Flexible Payment, Qualified............................. 323 6.341 2,047
Flexible Payment, Nonqualified.......................... 2,096 6.071 12,726
Periodic Payment, Qualified............................. 22,729 6.052 137,554
Periodic Payment, Nonqualified.......................... 8,934 5.896 52,674
--------
205,001
--------
KEMPER GROWTH SUBACCOUNT
Flexible Payment, Qualified............................. 227 6.371 1,449
Flexible Payment, Nonqualified.......................... 1,162 6.350 7,374
Periodic Payment, Qualified............................. 54,987 6.112 336,083
Periodic Payment, Nonqualified.......................... 11,574 6.103 70,642
--------
415,548
--------
KEMPER GOVERNMENT SECURITIES SUBACCOUNT
Flexible Payment, Qualified............................. 149 1.725 257
Flexible Payment, Nonqualified.......................... 908 1.725 1,566
Periodic Payment, Qualified............................. 15,434 1.684 25,992
Periodic Payment, Nonqualified.......................... 11,033 1.684 18,581
--------
46,396
--------
KEMPER INTERNATIONAL SUBACCOUNT
Flexible Payment, Qualified............................. 376 1.723 649
Flexible Payment, Nonqualified.......................... 1,006 1.723 1,734
Periodic Payment, Qualified............................. 55,729 1.693 94,356
Periodic Payment, Nonqualified.......................... 9,543 1.693 16,157
--------
112,896
--------
KEMPER SMALL CAP GROWTH SUBACCOUNT
Flexible Payment, Qualified............................. 195 2.240 436
Flexible Payment, Nonqualified.......................... 657 2.240 1,471
Periodic Payment, Qualified............................. 33,789 2.216 74,872
Periodic Payment, Nonqualified.......................... 4,509 2.216 9,992
--------
86,771
--------
</TABLE>
B-45
<PAGE> 95
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
CONTRACT
NUMBER UNIT OWNERS'
OF UNITS VALUE EQUITY
-------- ------ --------
<S> <C> <C> <C>
KEMPER INVESTMENT GRADE BOND SUBACCOUNT
Flexible Payment, Qualified............................... 13 $1.111 $ 15
Flexible Payment, Nonqualified............................ 303 1.111 337
Periodic Payment, Qualified............................... 694 1.105 767
Periodic Payment, Nonqualified............................ 338 1.105 374
-------
1,493
-------
KEMPER CONTRARIAN VALUE SUBACCOUNT
Flexible Payment, Qualified............................... 59 1.505 89
Flexible Payment, Nonqualified............................ 95 1.505 143
Periodic Payment, Qualified............................... 18,994 1.498 28,446
Periodic Payment, Nonqualified............................ 9,619 1.498 14,405
-------
43,083
-------
KEMPER SMALL CAP VALUE SUBACCOUNT
Flexible Payment, Qualified............................... 3 1.220 4
Flexible Payment, Nonqualified............................ 58 1.220 71
Periodic Payment, Qualified............................... 10,592 1.214 12,855
Periodic Payment, Nonqualified............................ 1,519 1.214 1,843
-------
14,773
-------
KEMPER VALUE+GROWTH SUBACCOUNT
Flexible Payment, Qualified............................... 24 1.414 33
Flexible Payment, Nonqualified............................ 119 1.414 169
Periodic Payment, Qualified............................... 4,889 1.407 6,880
Periodic Payment, Nonqualified............................ 824 1.407 1,160
-------
8,242
-------
KEMPER HORIZON 20+ SUBACCOUNT
Flexible Payment, Qualified............................... -- -- --
Flexible Payment, Nonqualified............................ -- -- --
Periodic Payment, Qualified............................... 1,170 1.360 1,592
Periodic Payment, Nonqualified............................ 83 1.360 113
-------
1,705
-------
KEMPER HORIZON 10+ SUBACCOUNT
Flexible Payment, Qualified............................... 10 1.279 12
Flexible Payment, Nonqualified............................ 9 1.279 11
Periodic Payment, Qualified............................... 1,616 1.273 2,057
Periodic Payment, Nonqualified............................ 261 1.273 332
-------
2,412
-------
KEMPER HORIZON 5 SUBACCOUNT
Flexible Payment, Qualified............................... -- -- --
Flexible Payment, Nonqualified............................ 42 1.215 50
Periodic Payment, Qualified............................... 917 1.209 1,108
Periodic Payment, Nonqualified............................ 192 1.209 232
-------
1,390
-------
</TABLE>
B-46
<PAGE> 96
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 SUBACCOUNT
Flexible Payment, Qualified............................... -- $ -- $ --
Flexible Payment, Nonqualified............................ -- -- --
Periodic Payment, Qualified............................... 86 11.020 951
Periodic Payment, Nonqualified............................ 9 11.020 100
-------
1,051
-------
GROWTH SUBACCOUNT
Flexible Payment, Qualified............................... 11 19.471 211
Flexible Payment, Nonqualified............................ 7 19.471 144
Periodic Payment, Qualified............................... 1,357 19.338 26,251
Periodic Payment, Nonqualified............................ 157 19.338 3,041
-------
29,647
-------
AGGRESSIVE GROWTH SUBACCOUNT
Flexible Payment, Qualified............................... -- 20.423 4
Flexible Payment, Nonqualified............................ 6 20.423 119
Periodic Payment, Qualified............................... 893 20.284 18,115
Periodic Payment, Nonqualified............................ 85 20.284 1,722
-------
19,960
-------
WORLDWIDE GROWTH SUBACCOUNT
Flexible Payment, Qualified............................... 9 23.663 213
Flexible Payment, Nonqualified............................ 17 23.663 395
Periodic Payment, Qualified............................... 3,418 23.502 80,333
Periodic Payment, Nonqualified............................ 445 23.502 10,455
-------
91,396
-------
BALANCED SUBACCOUNT
Flexible Payment, Qualified............................... 4 18.205 68
Flexible Payment, Nonqualified............................ 13 18.205 229
Periodic Payment, Qualified............................... 661 18.081 11,952
Periodic Payment, Nonqualified............................ 105 18.081 1,906
-------
14,155
-------
LEXINGTON FUNDS
NATURAL RESOURCES SUBACCOUNT
Flexible Payment, Qualified............................... 7 15.089 111
Flexible Payment, Nonqualified............................ 2 15.089 25
Periodic Payment, Qualified............................... 347 14.971 5,200
Periodic Payment, Nonqualified............................ 48 14.971 725
-------
6,061
-------
EMERGING MARKETS SUBACCOUNT
Flexible Payment, Qualified............................... 6 8.799 51
Flexible Payment, Nonqualified............................ 2 8.799 17
Periodic Payment, Qualified............................... 598 8.739 5,224
Periodic Payment, Nonqualified............................ 130 8.739 1,139
-------
6,431
-------
</TABLE>
B-47
<PAGE> 97
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
CONTRACT
NUMBER UNIT OWNERS'
OF UNITS VALUE EQUITY
-------- ------- ----------
<S> <C> <C> <C>
FIDELITY VIP FUNDS
FIDELITY VIP EQUITY-INCOME SUBACCOUNT
Flexible Payment, Qualified............................ 2 $26.497 $ 59
Flexible Payment, Nonqualified......................... 5 26.497 123
Periodic Payment, Qualified............................ 777 26.366 20,490
Periodic Payment, Nonqualified......................... 120 26.366 3,174
----------
23,846
----------
FIDELITY VIP GROWTH SUBACCOUNT
Flexible Payment, Qualified............................ -- 37.821 --
Flexible Payment, Nonqualified......................... -- 37.821 --
Periodic Payment, Qualified............................ 275 37.631 10,339
Periodic Payment, Nonqualified......................... 39 37.631 1,472
----------
11,811
----------
FIDELITY VIP II ASSET MANAGER SUBACCOUNT
Flexible Payment, Qualified............................ -- 20.090 10
Flexible Payment, Nonqualified......................... 6 20.090 121
Periodic Payment, Qualified............................ 134 19.991 2,674
Periodic Payment, Nonqualified......................... 56 19.991 1,128
----------
3,933
----------
FIDELITY VIP II INDEX 500 SUBACCOUNT
Flexible Payment, Qualified............................ 0 116.327 15
Flexible Payment, Nonqualified......................... 13 116.327 1,569
Periodic Payment, Qualified............................ 295 115.754 34,187
Periodic Payment, Nonqualified......................... 46 115.754 5,286
----------
41,057
----------
FIDELITY VIP II CONTRAFUND SUBACCOUNT
Flexible Payment, Qualified............................ -- 20.220 --
Flexible Payment, Nonqualified......................... 3 20.220 51
Periodic Payment, Qualified............................ 1,109 20.120 22,308
Periodic Payment, Nonqualified......................... 125 20.120 2,524
----------
24,883
----------
TOTAL ADVANTAGE III CONTRACT OWNERS' EQUITY......... $1,883,140
==========
</TABLE>
B-48
<PAGE> 98
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
CONTRACT
NUMBER UNIT OWNERS'
OF UNITS VALUE EQUITY
-------- ------- ----------
<S> <C> <C> <C>
PASSPORT CONTRACTS
INVESTORS FUND SERIES
KEMPER MONEY MARKET #1 SUBACCOUNT
Qualified............................................ 4,222 $ 1.199 $ 5,062
Nonqualified......................................... 16,465 1.199 19,742
----------
24,804
----------
KEMPER MONEY MARKET #2 SUBACCOUNT
Qualified............................................ 1,654 1.292 2,136
Nonqualified......................................... 3,297 1.292 4,258
----------
6,394
----------
KEMPER TOTAL RETURN SUBACCOUNT
Qualified............................................ 17,721 1.685 29,869
Nonqualified......................................... 54,980 1.685 92,666
----------
122,535
----------
KEMPER HIGH YIELD SUBACCOUNT
Qualified............................................ 13,014 1.883 24,501
Nonqualified......................................... 40,535 1.883 76,319
----------
100,820
----------
KEMPER GROWTH SUBACCOUNT
Qualified............................................ 15,200 2.066 31,410
Nonqualified......................................... 38,784 2.066 80,142
----------
111,552
----------
KEMPER GOVERNMENT SECURITIES SUBACCOUNT
Qualified............................................ 4,153 1.359 5,644
Nonqualified......................................... 15,292 1.359 20,781
----------
26,425
----------
KEMPER INTERNATIONAL SUBACCOUNT
Qualified............................................ 7,020 1.698 11,921
Nonqualified......................................... 21,070 1.698 35,779
----------
47,700
----------
KEMPER SMALL CAP GROWTH SUBACCOUNT
Qualified............................................ 3,122 2.220 6,930
Nonqualified......................................... 8,632 2.220 19,162
----------
26,092
----------
</TABLE>
B-49
<PAGE> 99
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
CONTRACT
NUMBER UNIT OWNERS'
OF UNITS VALUE EQUITY
-------- ------- ----------
<S> <C> <C> <C>
KEMPER INVESTMENT GRADE BOND SUBACCOUNT
Qualified............................................ 918 $ 1.106 $ 1,014
Nonqualified......................................... 2,668 1.106 2,951
----------
3,965
----------
KEMPER CONTRARIAN VALUE SUBACCOUNT
Qualified............................................ 6,437 1.499 9,650
Nonqualified......................................... 16,911 1.499 25,349
----------
34,999
----------
KEMPER SMALL CAP VALUE SUBACCOUNT
Qualified............................................ 3,943 1.215 4,789
Nonqualified......................................... 11,269 1.215 13,688
----------
18,477
----------
KEMPER VALUE+GROWTH SUBACCOUNT
Qualified............................................ 3,897 1.408 5,489
Nonqualified......................................... 10,075 1.408 14,190
----------
19,679
----------
KEMPER HORIZON 20+ SUBACCOUNT
Qualified............................................ 1,058 1.361 1,440
Nonqualified......................................... 2,441 1.361 3,323
----------
4,763
----------
KEMPER HORIZON 10+ SUBACCOUNT
Qualified............................................ 1,090 1.274 1,389
Nonqualified......................................... 4,206 1.274 5,359
----------
6,748
----------
KEMPER HORIZON 5 SUBACCOUNT
Qualified............................................ 276 1.210 334
Nonqualified......................................... 2,623 1.210 3,174
----------
3,508
----------
TOTAL PASSPORT CONTRACT OWNERS' EQUITY............ $ 558,461
==========
</TABLE>
B-50
<PAGE> 100
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors and Stockholder's
Kemper Investors Life Insurance Company:
We have audited the accompanying consolidated balance sheet of Kemper Investors
Life Insurance Company and subsidiaries as of December 31, 1997, and the related
consolidated statements of operations, stockholder's equity, and cash flows for
the year then ended. 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 audit. The
financial statements of Kemper Investors Life Insurance Company and subsidiaries
for the period from January 4, 1996 to December 31, 1996 (post-acquisition
basis) and for the year ended December 31, 1995 (pre-acquisition basis), were
audited by other auditors, whose unqualified report, dated March 21, 1997,
included an explanatory paragraph that described the acquisition of Kemper
Investors Life Insurance Company as discussed in Note 1 to the financial
statements.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Kemper
Investors Life Insurance Company and subsidiaries as of December 31, 1997, and
the results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Chicago, Illinois
March 18, 1998
B-51
<PAGE> 101
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors and Stockholder
Kemper Investors Life Insurance Company:
We have audited the accompanying consolidated balance sheet of Kemper Investors
Life Insurance Company and subsidiaries as of December 31, 1996 and the related
consolidated statements of operations, stockholder's equity, and cash flows for
the period from January 4, 1996 to December 31, 1996 (post-acquisition), and for
the year ended December 31, 1995 (pre-acquisition). In connection with our
audits of the consolidated financial statements, we have also audited the
financial statement schedules as of December 31, 1996 and 1995 as listed in the
accompanying index. These consolidated financial statements and the financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and schedules 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 the results of their operations and their cash flows for the
post-acquisition period, in conformity with generally accepted accounting
principles. Also, in our opinion, the aforementioned pre-acquisition
consolidated financial statements present fairly, in all material respects, the
results of their operations and their cash flows for the pre-acquisition period,
in conformity with generally accepted accounting principles. Further, in our
opinion, the aforementioned financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
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 Corporation, the parent 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-52
<PAGE> 102
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Fixed maturities, available for sale, at fair value
(amortized cost: December 31, 1997, $3,644,075; December
31, 1996, $3,929,650)..................................... $3,668,643 $3,866,431
Short-term investments...................................... 236,057 71,696
Joint venture mortgage loans................................ 72,663 110,971
Third-party mortgage loans.................................. 102,974 106,585
Other real estate-related investments....................... 44,409 50,157
Policy loans................................................ 282,439 288,302
Equity securities........................................... 24,839 9,910
Other invested assets....................................... 20,820 13,597
----------- ----------
Total investments................................. 4,452,844 4,517,649
Cash........................................................ 23,868 2,776
Accrued investment income................................... 117,789 115,199
Goodwill.................................................... 229,393 244,688
Value of business acquired.................................. 138,482 189,639
Deferred insurance acquisition costs........................ 59,459 26,811
Deferred income taxes....................................... 39,993 --
Reinsurance recoverable..................................... 382,609 427,165
Receivable on sales of securities........................... 20,076 32,569
Other assets and receivables................................ 3,187 34,117
Assets held in separate accounts............................ 5,121,950 2,127,247
----------- ----------
Total assets...................................... $10,589,650 $7,717,860
=========== ==========
LIABILITIES
Future policy benefits...................................... $3,856,871 $4,256,521
Ceded future policy benefits................................ 382,609 427,165
Benefits and funds payable.................................. 150,524 36,142
Other accounts payable and liabilities...................... 212,133 59,462
Deferred income taxes....................................... -- 60,362
Liabilities related to separate accounts.................... 5,121,950 2,127,247
----------- ----------
Total liabilities................................. 9,724,087 6,966,899
----------- ----------
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.................................. 806,538 761,538
Unrealized gain (loss) on investments....................... 12,637 (47,498)
Retained earnings........................................... 43,888 34,421
----------- ----------
Total stockholder's equity........................ 865,563 750,961
----------- ----------
Total liabilities and stockholder's equity........ $10,589,650 $7,717,860
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
B-53
<PAGE> 103
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------
PREACQUISITION
--------------
1997 1996 1995
-------- -------- --------------
<S> <C> <C> <C>
REVENUE
Net investment income....................................... $296,195 $299,688 $ 348,448
Realized investment gains (losses).......................... 10,546 13,602 (318,700)
Premium income.............................................. 22,239 7,822 236
Separate account fees and charges........................... 85,413 25,309 21,909
Other income................................................ 11,087 9,786 16,192
-------- -------- ---------
Total revenue..................................... 425,480 356,207 68,085
-------- -------- ---------
BENEFITS AND EXPENSES
Interest credited to policyholders.......................... 199,782 223,094 237,984
Claims incurred and other policyholder benefits............. 28,372 14,255 7,631
Taxes, licenses and fees.................................... 52,608 2,173 6,912
Commissions................................................. 32,602 25,962 24,881
Operating expenses.......................................... 36,837 24,678 20,837
Deferral of insurance acquisition costs..................... (38,177) (27,820) (36,870)
Amortization of insurance acquisition costs................. 3,204 2,316 14,423
Amortization of value of business acquired.................. 24,948 21,530 --
Amortization of goodwill.................................... 15,295 10,195 --
-------- -------- ---------
Total benefits and expenses....................... 355,471 296,383 275,798
-------- -------- ---------
Income (loss) before income tax expense (benefit)........... 70,009 59,824 (207,713)
Income tax expense (benefit)................................ 31,292 25,403 (74,664)
-------- -------- ---------
Net income (loss)................................. $ 38,717 $ 34,421 $(133,049)
======== ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
B-54
<PAGE> 104
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(in thousands)
<TABLE>
<CAPTION>
PREACQUISITION
--------------
DECEMBER 31 DECEMBER 31 JANUARY 4 DECEMBER 31
1997 1996 1996 1995
----------- ----------- --------- -----------
<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..... 761,538 743,104 491,994 491,994
Capital contributions from parent................... 45,000 18,434 -- --
Adjustment to reflect purchase accounting method.... -- -- 251,110 --
-------- -------- -------- ---------
End of period............................. 806,538 761,538 743,104 491,994
-------- -------- -------- ---------
UNREALIZED GAIN (LOSS) ON INVESTMENTS, beginning of
period............................................ (47,498) -- 68,502 (236,443)
Unrealized gain (loss) on revaluation of
investments, net.................................. 60,135 (47,498) -- 304,945
Adjustment to reflect purchase accounting method.... -- -- (68,502) --
-------- -------- -------- ---------
End of period............................. 12,637 (47,498) -- 68,502
-------- -------- -------- ---------
RETAINED EARNINGS, beginning of period.............. 34,421 -- 42,880 175,929
Net income (loss)................................... 38,717 34,421 -- (133,049)
Dividends to parent................................. (29,250) -- -- --
Adjustment to reflect purchase accounting method.... -- -- (42,880) --
-------- -------- -------- ---------
End of period............................. 43,888 34,421 -- 42,880
-------- -------- -------- ---------
Total stockholder's equity................ $865,563 $750,961 $745,604 $ 605,876
======== ======== ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
B-55
<PAGE> 105
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------------
PREACQUISITION
--------------
1997 1996 1995
--------- ----------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)...................................... $ 38,717 $ 34,421 $(133,049)
Reconcilement of net income (loss) to net cash
provided:
Realized investment losses (gains)................... (10,546) (13,602) 318,700
Interest credited and other charges.................. 198,206 230,298 237,984
Deferred insurance acquisition costs................. (34,973) (25,504) (22,447)
Amortization of value of business acquired........... 24,948 21,530 --
Amortization of goodwill............................. 15,295 10,195 --
Amortization of discount and premium on
investments....................................... 17,866 25,743 4,586
Deferred income taxes................................ (99,370) (897) 38,423
Net change in current Federal income taxes........... 97,386 108,806 (86,990)
Benefits and premium taxes due related to separate
account bank-owned life insurance................. 180,546 -- --
Other, net........................................... 17,168 (22,283) (29,905)
--------- ----------- ---------
Net cash provided from operating activities..... 445,243 368,707 327,302
--------- ----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash from investments sold or matured:
Fixed maturities held to maturity.................... 229,208 264,383 320,143
Fixed maturities sold prior to maturity.............. 633,872 891,995 297,637
Mortgage loans, policy loans and other invested
assets............................................ 131,866 168,727 450,573
Cost of investments purchased or loans originated:
Fixed maturities..................................... (606,028) (1,369,091) (549,867)
Mortgage loans, policy loans and other invested
assets............................................ (76,350) (119,044) (131,966)
Short-term investments, net............................ (164,361) 300,819 (168,351)
Net change in receivable and payable for securities
transactions......................................... 29,746 (31,667) (1,397)
Net reductions in other assets......................... 244 115 1,996
--------- ----------- ---------
Net cash provided by investing activities....... 178,197 106,237 218,768
--------- ----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Policyholder account balances:
Deposits............................................. 145,687 141,159 247,778
Withdrawals.......................................... (745,510) (700,084) (755,917)
Capital contributions from parent...................... 45,000 18,434 --
Dividends to parent.................................... (29,250) -- --
Other.................................................. (18,275) 42,512 (35,309)
--------- ----------- ---------
Net cash used in financing activities........... (602,348) (497,979) (543,448)
--------- ----------- ---------
Net increase (decrease) in cash............ 21,092 (23,035) 2,622
CASH, beginning of period................................ 2,776 25,811 23,189
--------- ----------- ---------
CASH, end of period...................................... $ 23,868 $ 2,776 $ 25,811
========= =========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
B-56
<PAGE> 106
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 that change in control, Zurich and Insurance Partners owned 80
percent and 20 percent, respectively, of Kemper and therefore the Company. On
February 27, 1998, Zurich acquired Insurance Partner's remaining 20 percent
interest for cash. As a result of this transaction, Kemper and the Company
became wholly-owned subsidiaries of Zurich.
The financial statements include the accounts of the Company on a consolidated
basis. All significant intercompany balances and transactions have been
eliminated. Certain reclassifications have been made to the 1996 and 1995
consolidated financial statements in order for them to conform to the 1997
presentation.
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 years ended December 31, 1996 and 1997, 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 where appropriate 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 values as of the acquisition date. The difference between
the cost of acquiring the Company and the net fair values of the Company's
assets and liabilities as of the acquisition date has been recorded as goodwill.
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 began to amortize goodwill during 1996 on a straight-line basis over
twenty-five years. In December of 1997, the Company changed its amortization
period to twenty years in order to conform to Zurich's accounting practices and
policies. As a result of the change in amortization periods, the Company
recorded an increase in goodwill amortization expense of $5.1 million during
1997.
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, 1997, 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.
B-57
<PAGE> 107
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
A 15 percent discount rate was used to determine such value and represents the
rate of return required by Zurich and Insurance Partners to invest in the
business being acquired. In selecting the rate of return used to value the
policies purchased, the Company considered the magnitude of the risks associated
with each of the actuarial assumptions used in determining expected future cash
flows, the cost of capital available to fund the acquisition, the perceived
likelihood of changes in insurance regulations and tax laws, the complexity of
the Company's business, and the prices paid (i.e., discount rates used in
determining other life insurance company valuations) on similar blocks of
business sold in recent periods.
The value of the business acquired is amortized over the estimated contract life
of the business acquired in relation to the present value of estimated gross
profits using current assumptions based on an interest rate equal to the
liability or contract rate on the value of business acquired. The estimated
amortization and accretion of interest for the value of business acquired for
each of the years through December 31, 2002 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 (actual)...................................... $190,222 $(31,427) $ 9,897 $168,692
1997 (actual)...................................... 168,692 (34,906) 9,958 143,744
1998............................................... 143,744 (25,633) 8,933 127,044
1999............................................... 127,044 (23,701) 7,873 111,216
2000............................................... 111,216 (21,668) 6,876 96,424
2001............................................... 96,424 (19,122) 5,973 83,275
2002............................................... 83,275 (17,835) 5,134 70,574
</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, 1997 and
1996, this adjustment increased (decreased) the value of business acquired by
$(5.3) million and $20.9 million, respectively, and stockholder's equity by
approximately $(3.4) 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, variable life insurance and interest-sensitive life
insurance products consists of investment income, and policy charges such as
mortality, expense and surrender charges and expense loads for premium taxes on
certain contracts. 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".)
B-58
<PAGE> 108
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, principally commission expense and certain
policy issuance and underwriting expenses, have been deferred to the extent they
are recoverable from estimated future gross profits on the related contracts and
policies. The deferred insurance acquisition costs for annuities, separate
account business and interest-sensitive life insurance products are being
amortized over the estimated contract life in relation to the present value of
estimated gross profits. Deferred insurance acquisition costs related to such
interest-sensitive products also reflect the estimated impact of unrealized
gains or losses on fixed maturities held as available for sale in the investment
portfolio, through a credit or charge to stockholder's equity, net of income
tax. The deferred insurance acquisition costs for term-life insurance products
are being amortized over the premium paying period of the policies.
FUTURE POLICY BENEFITS
Liabilities for future policy benefits related to annuities and
interest-sensitive life contracts reflect net premiums received plus interest
credited during the contract accumulation period and the present value of future
payments for contracts that have annuitized. Current interest rates credited
during the contract accumulation period range from 3.0 percent to 7.3 percent.
Future minimum guaranteed interest rates vary from 3.0 percent to 4.0 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 and equity securities 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 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; 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
B-59
<PAGE> 109
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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.
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 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 amounted to $108.8 million and $25.2 million, respectively. The Company
paid Federal income taxes of $29.0 million and $28.1 million directly to the
United States Treasury Department during 1997 and 1996, respectively.
B-60
<PAGE> 110
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, 1997
U.S. treasury securities and obligations of U.S.
government agencies and authorities............... $ 6,258 $ 6,298 $ 4 $ (44)
Obligations of states and political subdivisions,
special revenue and nonguaranteed................. 29,330 29,308 160 (138)
Debt securities issued by foreign governments....... 92,563 92,722 188 (347)
Corporate securities................................ 1,861,655 1,846,588 24,733 (9,666)
Mortgage and asset-backed securities................ 1,678,837 1,669,159 10,035 (357)
---------- ---------- ------- --------
Total fixed maturities....................... $3,668,643 $3,644,075 $35,120 $(10,552)
========== ========== ======= ========
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)
========== ========== ======= ========
</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 $220.0 million real estate portfolio at December 31, 1997 consists
of joint venture and third-party mortgage loans and other real estate-related
investments. At December 31, 1997 and 1996, total impaired real estate-related
loans were as follows:
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31
1997 1996
(in millions) ----------- -----------
<S> <C> <C>
Impaired loans without reserves--gross...................... $39.3 $39.8
Impaired loans with reserves--gross......................... 2.2 7.6
----- -----
Total gross impaired loans........................... 41.5 47.4
Reserves related to impaired loans.......................... (2.1) (4.4)
----- -----
Net impaired loans................................... $39.4 $43.0
===== =====
</TABLE>
B-61
<PAGE> 111
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, 1997 and 1996, the Company's deficit
in equity investments considered in determining reserves and write-downs
amounted to $0 and $5.9 million, respectively. The Company had an average
balance of $45.2 million and $30.8 million in impaired loans for 1997 and 1996,
respectively. Cash payments received on impaired loans are generally applied to
reduce the outstanding loan balance.
At December 31, 1997 and December 31, 1996, loans on nonaccrual status, before
reserves and write-downs, amounted to $47.4 million and $43.5 million,
respectively. The Company's nonaccrual loans are generally included in impaired
loans.
At December 31, 1997, securities carried at approximately $6.3 million were on
deposit with governmental agencies as required by law.
Proceeds from sales of investments in fixed maturities prior to maturity were
$633.9 million, $892.0 million and $297.6 million during 1997, 1996 and 1995,
respectively. Gross gains of $3.1 million, $9.9 million and $21.2 million and
gross losses of $13.7 million, $16.2 million and $11.9 million were realized on
sales and write-downs of fixed maturities in 1997, 1996 and 1995, respectively.
The carrying value and amortized cost of fixed maturity investments, by
contractual maturity at December 31, 1997, are shown below. Actual maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties and
because mortgage-backed and asset-backed securities provide for periodic
payments throughout their life.
<TABLE>
<CAPTION>
CARRYING AMORTIZED
VALUE COST VALUE
(in thousands) -------- ----------
<S> <C> <C>
One year or less............................................ $ 47,724 $ 47,797
Over one year through five.................................. 649,279 648,291
Over five years through ten................................. 988,849 984,495
Over ten years.............................................. 303,954 294,333
Securities not due at a single maturity date, primarily
mortgage and
asset-backed securities(1)................................ 1,678,837 1,669,159
---------- ----------
Total fixed maturities............................... $3,668,643 $3,644,075
========== ==========
</TABLE>
- ---------------
(1) Weighted average maturity of 3.8 years.
The sources of net investment income were as follows:
<TABLE>
<CAPTION>
PREACQUISITION
--------------
1997 1996 1995
(in thousands) -------- -------- --------------
<S> <C> <C> <C>
Interest and dividends on fixed maturities.............. $250,170 $250,683 $269,934
Dividends on equity securities.......................... 2,123 646 681
Income from short-term investments...................... 4,128 9,130 13,159
Income from mortgage loans.............................. 16,283 20,257 40,494
Income from policy loans................................ 20,549 20,700 19,658
Income from other real estate-related investments....... 6,631 4,917 15,565
Income from other loans and investments................. 2,045 2,480 1,555
-------- -------- --------
Total investment income.......................... 301,929 308,813 361,046
Investment expense...................................... (5,734) (9,125) (12,598)
-------- -------- --------
Net investment income............................ $296,195 $299,688 $348,448
======== ======== ========
</TABLE>
B-62
<PAGE> 112
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, 1997, 1996 and 1995,
were as follows:
<TABLE>
<CAPTION>
REALIZED GAINS (LOSSES)
-----------------------------------------------
PREACQUISITION
--------------
1997 1996 1995
(in thousands) -------- ------- --------------
<S> <C> <C> <C>
Real estate-related....................................... $ 19,758 $17,462 $(325,611)
Fixed maturities.......................................... (10,656) (6,344) 9,336
Equity securities......................................... 914 -- (346)
Other..................................................... 530 2,484 (2,079)
-------- ------- ---------
Realized investment gains (losses) before income tax
expense (benefit).................................... 10,546 13,602 (318,700)
Income tax expense (benefit) 3,691 4,761 (111,545)
-------- ------- ---------
Net realized investment gains (losses).................. $ 6,855 $ 8,841 $(207,155)
======== ======= =========
</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, 1997,
1996 and 1995 were as follows:
<TABLE>
<CAPTION>
CHANGE IN UNREALIZED GAINS (LOSSES)
---------------------------------------------------------
PREACQUISITION
--------------
DECEMBER 31 DECEMBER 31 JANUARY 4 DECEMBER 31
1997 1996 1996 1995
(in thousands) ------------ ------------ ---------- --------------
<S> <C> <C> <C> <C>
Fixed maturities.................................... $ 87,787 $(63,219) $ $351,964
Equity and other securities......................... (103) 1,256 -- 180
Adjustment to deferred insurance acquisition
costs............................................. (2,325) 1,307 -- (14,277)
Adjustment to value of business acquired............ (26,209) 20,947 -- --
-------- -------- -- --------
Unrealized gain (loss) before income tax
expense........................................ 59,150 (39,709) -- 337,867
Income tax expense (benefit)........................ (985) 7,789 -- 32,922
-------- -------- -- --------
Net unrealized gain (loss) on investments.... $ 60,135 $(47,498) $-- $304,945
======== ======== == ========
</TABLE>
(4) UNCONSOLIDATED INVESTEES
At December 31, 1997 and 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, 1997 and December 31, 1996, the Company's net equity
investment in unconsolidated investees amounted to $19.3 million and $11.7
million, respectively. The Company's share of net income related to such
unconsolidated investees amounted to $835 thousand and $223 thousand in 1997 and
1996, respectively, and a net loss of $453 thousand in 1995.
(5) CONCENTRATION OF CREDIT RISK
The Company generally strives to maintain a diversified invested asset
portfolio; however, certain concentrations of credit risk exist in mortgage and
asset-backed securities and real estate.
B-63
<PAGE> 113
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) CONCENTRATION OF CREDIT RISK (CONTINUED)
Approximately 35.1 percent of the Company's investment-grade fixed maturities at
December 31, 1997 were mortgage-backed securities, down from 36.4 percent at
December 31, 1996, due to sales and paydowns during 1997. These investments
consist primarily of marketable mortgage pass-through securities issued by the
Government National Mortgage Association, the Federal National Mortgage
Association or the Federal Home Loan Mortgage Corporation and other
investment-grade securities collateralized by mortgage pass-through securities
issued by these entities. The Company has not made any investments in
interest-only or other similarly volatile tranches of mortgage-backed
securities. The Company's mortgage-backed investments are generally AAA credit
quality.
Approximately 10.8 percent and 8.8 percent of the Company's investment-grade
fixed maturities at December 31, 1997 and 1996, respectively, consisted of
corporate asset-backed securities. The majority of the Company's investments in
asset-backed securities were backed by home equity loans (27.7%), auto loans
(22.3%), manufactured housing loans (17.2%), equipment loans (13.7%), and
commercial mortgage backed securities (10.7%).
The Company's real estate portfolio is distributed by geographic location and
property type, as shown in the following two tables:
<TABLE>
<S> <C>
GEOGRAPHIC DISTRIBUTION AS OF
DECEMBER 31, 1997
California......................... 38.2%
Hawaii............................. 14.2
Colorado........................... 9.8
Oregon............................. 9.2
Washington......................... 9.1
Florida............................ 6.4
Texas.............................. 5.1
Michigan........................... 3.7
Ohio............................... 3.3
Illinois........................... 1.0
-----
Total........................... 100.0%
=====
DISTRIBUTION BY PROPERTY TYPE AS OF
DECEMBER 31, 1997
Hotel.............................. 41.3%
Land............................... 28.2
Residential........................ 13.1
Retail............................. 3.3
Office............................. 3.1
Industrial......................... .9
Other.............................. 10.1
-----
Total........................... 100.0%
=====
</TABLE>
Undeveloped land represented approximately 28.2 percent of the Company's real
estate portfolio at December 31, 1997. 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 mortgage 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, 1997, loans to and investments in joint ventures in which
Patrick M. Nesbitt or his affiliates ("Nesbitt"), a third-party real estate
developer, have ownership interests constituted approximately $88.2 million, or
40.1 percent, of the Company's real estate portfolio. The Nesbitt ventures
consist of nine hotel properties and two office buildings. At December 31, 1997,
the Company did not have any Nesbitt-related off-balance-sheet legal funding
commitments outstanding.
B-64
<PAGE> 114
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 1997, loans to a master limited partnership (the "MLP") between
subsidiaries of Kemper and subsidiaries of Lumbermens Mutual Casualty Company
("Lumbermens"), a former affiliate, constituted approximately $60.5 million, or
27.5 percent, of the Company's real estate portfolio. Kemper's interest is 75
percent at December 31, 1997. At December 31, 1997, MLP-related commitments
accounted for approximately $7.4 million of the Company's off-balance-sheet
legal commitments, which the Company expects to fund.
At December 31, 1997, the Company no longer had any outstanding loans or
investments in projects with the Prime Group, Inc. or its affiliates, as all
such investments have been sold or written-down to zero. However, the Company
continues to have Prime Group-related commitments, which accounted for $25.7
million of the Company's off-balance-sheet legal commitments at December 31,
1997. The Company does not expect to fund any of these commitments.
(6) INCOME TAXES
Income tax expense (benefit) was as follows for the years ended December 31,
1997, 1996 and 1995:
<TABLE>
<CAPTION>
PREACQUISITION
--------------
1997 1996 1995
(in thousands) -------- ------- --------------
<S> <C> <C> <C>
Current................................................. $130,662 $26,300 $(113,087)
Deferred................................................ (99,370) (897) 38,423
-------- ------- ---------
Total......................................... $ 31,292 $25,403 $ (74,664)
======== ======= =========
</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 each filed 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 1997, 1996 and 1995 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 1997, 1996, and 1995 to income (loss) before
income tax expense (benefit).
<TABLE>
<CAPTION>
PREACQUISITION
--------------
1997 1996 1995
(in thousands) ------- ------- --------------
<S> <C> <C> <C>
Computed expected tax expense (benefit).................. $24,503 $20,938 $(72,700)
Difference between "expected" and actual tax expense
(benefit):
State taxes............................................ 1,801 913 (1,370)
Amortization of goodwill............................... 5,353 3,568 --
Foreign tax credit..................................... (278) -- (183)
Other, net............................................. (87) (16) (411)
------- ------- --------
Total actual tax expense (benefit)............. $31,292 $25,403 $(74,664)
======= ======= ========
</TABLE>
Deferred tax assets and liabilities are generally determined based on the
difference between the financial statement and tax basis 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 valuation allowance is subject to future adjustments based upon, among other
items, the Company's estimates of future operating earnings and capital gains.
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,
B-65
<PAGE> 115
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) INCOME TAXES (CONTINUED)
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.
The tax effects of temporary differences that give rise to significant portions
of the Company's net deferred Federal tax asset or liability were as follows:
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31 JANUARY 4
1997 1996 1996
(in thousands) ----------- ------------ ---------
<S> <C> <C> <C>
Deferred Federal tax assets:
Deferred insurance acquisition costs...................... $ 75,522 $ 4,520 $ --
Unrealized losses on investments.......................... -- 16,624 --
Life policy reserves...................................... 43,337 46,452 46,654
Unearned revenue.......................................... 37,243 -- --
Real estate-related....................................... 13,400 20,642 27,736
Other investment-related.................................. 3,298 5,409 1,773
Other..................................................... 4,371 3,639 9,750
-------- -------- --------
Total deferred Federal tax assets...................... 177,171 97,286 85,913
Valuation allowance....................................... (15,201) (31,825) (15,201)
-------- -------- --------
Total deferred Federal tax assets after valuation
allowance............................................ 161,970 65,461 70,712
-------- -------- --------
Deferred Federal tax liabilities:
Value of business acquired................................ 48,469 66,373 66,578
Deferred insurance acquisition costs...................... 20,811 9,384 --
Depreciation and amortization............................. 20,201 15,473 15,490
Other investment-related.................................. 18,774 28,855 37,919
Unrealized gains on investments........................... 9,002 -- --
Other..................................................... 4,720 5,738 4,197
-------- -------- --------
Total deferred Federal tax liabilities................. 121,977 125,823 124,184
-------- -------- --------
Net deferred Federal tax assets (liabilities)............... $ 39,993 $(60,362) $(53,472)
======== ======== ========
</TABLE>
The net deferred tax assets relate primarily to unearned revenue and the tax on
deferred insurance acquisition costs ("DAC Tax") associated with $2.7 billion of
new 1997 sales from a non-registered individual and group variable bank-owned
life insurance contract ("BOLI"). As a result of proposed tax law changes, as
more fully discussed below, the level of DAC Tax experienced in 1997 is not
anticipated to occur in future periods and it is expected that the Company will
return to its normalized earnings patterns in 1998. Management believes that it
is more likely, than not, that the results of future operations will generate
sufficient taxable income over the ten year amortization period of the unearned
revenue and DAC Tax to realize such deferred tax assets.
In early 1998, the Clinton Administration's Fiscal Year 1998 Budget ("Budget")
was released and contained certain proposals to change the taxation of
non-qualified fixed and variable annuities and variable life insurance
contracts, including BOLI. It is currently unknown whether or not such proposals
will be accepted, amended or omitted in the final 1999 Budget approved by
Congress. If the current Budget proposals are accepted, certain of the Company's
non-qualified fixed and variable annuities and certain of its variable life
insurance products, including BOLI and the non-registered individual variable
universal life insurance contracts introduced during 1997, may no longer be tax
advantaged products and therefore no longer attractive to those customers who
purchase them because of their favorable tax attributes. Additionally, sales of
such products during 1998 may also be negatively impacted until the likelihood
of the current proposals being enacted into law has been determined.
B-66
<PAGE> 116
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) INCOME TAXES (CONTINUED)
The tax returns through the year 1986 have been examined by the Internal Revenue
Service ("IRS"). Changes proposed are not material to the Company's financial
position. The tax returns for the years 1987 through 1993 are currently under
examination by the IRS.
(7) RELATED-PARTY TRANSACTIONS
The Company received cash capital contributions of $45.0 million and $18.4
million during 1997 and 1996, respectively. The Company paid cash dividends of
$29.3 million to Kemper during 1997.
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, 1997 and December 31, 1996, joint venture
mortgage loans totaled $72.7 million and $111.0 million, respectively, and
during 1997, 1996 and 1995, the Company earned interest income on these joint
venture loans of $7.5 million, $9.5 million and $19.6 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 Scudder Kemper Investments, Inc. ("SKI"), formerly Zurich Kemper
Investments, Inc., an affiliated company, and the information systems of Kemper
Service Company ("KSvC"), an SKI subsidiary, based on the Company's share of
administrative, legal, marketing, investment management, information systems and
operation and support services. During 1997, 1996 and 1995, expenses allocated
to the Company from SKI and KSvC amounted to $114 thousand, $1.7 million and
$4.4 million, respectively. The Company also paid to SKI investment management
fees of $3.5 million, $3.6 million and $3.4 million during 1997, 1996 and 1995,
respectively. In addition, expenses allocated to the Company from FKLA during
1997, 1996 and 1995 amounted to $30.0 million, $10.5 million and $14.3 million,
respectively.
During 1995, the Company sold certain mortgages and real estate-related
investments, net of reserves, amounting to approximately $3.5 million 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 an affiliated non-life
realty subsidiary for cash. The Company also paid to Kemper real estate
subsidiaries $2.2 million, $1.8 million and $1.8 million in 1997, 1996 and 1995,
respectively, 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 Fidelity Life Association, a Mutual Legal
Reserve Company ("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, 1997 and 1996, the reinsurance recoverable related to the
fixed-rate annuity liabilities ceded to FLA amounted to $382.6 million and
$427.2 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
B-67
<PAGE> 117
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(8) REINSURANCE (CONTINUED)
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. Premiums assumed during 1997 under the terms of the treaty amounted to
$21.1 million and the face amount which remained outstanding at December 31,
1997 amounted to $12.6 billion.
The Company's retention limit on term life insurance prior to 1997 was $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. Effective January 1, 1997, the Company ceded 90 percent of all new
term life insurance premiums to outside reinsurers. Term life reserves ceded to
outside reinsurers on the Company's direct business amounted to approximately
$139 thousand and $102 thousand as of December 31, 1997 and 1996, respectively.
During December 1997, the Company entered into a funds held reinsurance
agreement with a Zurich affiliated company, EPICENTRE Reinsurance (Bermuda)
Limited ("EPICENTRE"). Under the terms of this agreement, the Company ceded, on
a yearly renewable term basis, ninety percent of the net amount at risk (death
benefit payable to the insured less the insured's separate account cash
surrender value) related to a new product developed in 1997, a non-registered
variable bank-owned life insurance contract ("BOLI"), which is held in the
Company's separate accounts. During 1997, the Company issued $59.3 billion (face
amount) of new BOLI business and ceded $51.1 billion (face amount) to EPICENTRE
under the terms of the treaty. During 1997, the Company also ceded $24.3 million
of separate account fees (cost of insurance charges) to EPICENTRE. The Company
has also withheld approximately $23.4 million of such funds due to EPICENTRE
under the terms of the reinsurance agreement as a component of benefits and
funds payable in the accompanying consolidated balance sheet as of December 31,
1997.
(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 $1.9 million and $1.7 million at December 31, 1997 and 1996,
respectively.
The discount rate used in determining the allocated postretirement benefit
obligation was 7.25 percent and 7.75 percent for 1997 and 1996, respectively.
The assumed health care trend rate used was based on projected experience for
1997 and 1998, 8 percent in 1999, gradually declining to 5.0 percent by the year
2002 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, 1997 and 1996 by $242 thousand and $191 thousand, respectively.
The Company also provides certain severance-related policies to provide
benefits, generally limited in time, to former or inactive employees after
employment but before retirement.
(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.
B-68
<PAGE> 118
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(10) COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
Although neither 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
1997 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, 1997.
(11) FINANCIAL INSTRUMENTS--OFF-BALANCE-SHEET RISK
At December 31, 1997, the Company had future legal loan commitments and stand-by
financing agreements totaling $75.3 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 $21.2 million
of these arrangements. These commitments are included in the Company's analysis
of real estate-related reserves and write-downs. The fair values of loan
commitments and standby financing agreements are estimated in conjunction with
and using the same methodology as the fair value estimates of mortgage loans and
other real estate-related investments.
(12) 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
B-69
<PAGE> 119
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(12) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
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 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, SKI.
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 were
estimated based upon the investments observable market price, net of estimated
costs to sell. The estimates of fair value should be used with care given the
inherent difficulty of estimating the fair value of real estate due to the lack
of a liquid quotable market.
Other loans and investments: The carrying amounts reported in the consolidated
balance sheet for these instruments approximate fair values. The fair values of
policy loans were estimated by discounting the expected future cash flows using
an interest rate charged on policy loans for similar policies currently being
issued.
Life policy benefits: Fair values of the life policy benefits regarding
investment contracts (primarily deferred annuities) and universal life contracts
were estimated by discounting gross benefit payments, net of contractual
premiums, using the average crediting rate currently being offered in the
marketplace for similar contracts with maturities consistent with those
remaining for the contracts being valued. The Company had projected its future
average crediting rate in 1997 and 1996 to be 5.25 percent and 4.75 percent,
respectively, while the assumed average market crediting rate was 6.0 percent
and 5.8 percent in 1997 and 1996, respectively.
The carrying values and estimated fair values of the Company's financial
instruments at December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------ ------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
(in thousands) ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Financial instruments recorded as assets:
Fixed maturities............................ $3,668,643 $3,668,643 $3,866,431 $3,866,431
Cash and short-term investments............. 259,925 259,925 74,472 74,472
Mortgage loans and other real estate-related
assets................................... 220,046 220,046 267,713 267,713
Policy loans................................ 282,439 282,439 288,302 288,302
Equity securities........................... 24,839 24,839 9,910 9,910
Other invested assets....................... 20,820 24,404 13,597 13,597
Financial instruments recorded as liabilities:
Life policy benefits, excluding term life
reserves................................. 3,846,023 4,050,852 4,249,264 4,101,588
</TABLE>
(13) 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 1998 is $58.4 million. The
Company paid cash dividends of $29.3 million to Kemper during 1997. The Company
paid no cash dividends in 1996 or 1995.
B-70
<PAGE> 120
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(13) STOCKHOLDER'S EQUITY--RETAINED EARNINGS (CONTINUED)
The Company's net income (loss) and capital and surplus as determined in
accordance with statutory accounting principles were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
(in thousands) -------- -------- --------
<S> <C> <C> <C>
Net income (loss)........................................... $ 58,372 $ 37,287 $(64,707)
======== ======== ========
Statutory capital and surplus............................... $476,924 $411,837 $383,374
======== ======== ========
</TABLE>
(14) UNAUDITED INTERIM FINANCIAL INFORMATION
The following table sets forth the Company's unaudited quarterly financial
information:
(in thousands)
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
- ------------- -------- ------- ------------ -----------
<S> <C> <C> <C> <C>
1997 OPERATING SUMMARY
Net investment income............................. $74,249 $74,050 $72,950 $ 74,946
Realized investment gains (losses)................ 889 8,161 (3,032) 4,528
Premium income.................................... 5,008 4,121 3,938 9,172
Separate account fees and other income............ 8,909 12,961 12,215 62,415(1)
------- ------- ------- --------
Total revenue............................. 89,055 99,293 86,071 151,061
------- ------- ------- --------
Interest credited and benefits to policyholders... 57,859 56,643 57,965 55,687
Commissions, taxes, licenses and fees............. 8,023 9,475 8,389 59,323(1)
Operating expenses................................ 7,175 8,780 10,014 10,868
Net deferral of insurance acquisition costs....... (7,216) (6,877) (7,471) (13,409)
Amortization of value of business acquired........ 4,821 6,991 6,743 6,393
Amortization of goodwill.......................... 2,547 2,552 2,549 7,647(2)
------- ------- ------- --------
Total benefits and expenses............... 73,209 77,564 78,189 126,509
------- ------- ------- --------
Income before income tax expense.................. 15,846 21,729 7,882 24,552
Income tax expense................................ 5,678 8,723 3,778 13,113
------- ------- ------- --------
Net income................................ $10,168 $13,006 $ 4,104 $ 11,439
======= ======= ======= ========
1996 OPERATING SUMMARY
Net investment income............................. $72,302 $74,647 $76,070 $ 76,669
Realized investment gains (losses)................ (1,248) (2,439) 13,518 3,771
Premium income.................................... 130 109 150 7,433(3)
Separate account fees and other income............ 8,028 9,419 8,478 9,170
------- ------- ------- --------
Total revenue............................. 79,212 81,736 98,216 97,043
------- ------- ------- --------
Interest credited and benefits to policyholders... 58,296 57,335 57,512 64,206
Commissions, taxes, licenses and fees............. 6,868 6,486 6,819 7,962
Operating expenses................................ 5,440 4,920 6,974 7,344
Net deferral of insurance acquisition costs....... (5,032) (7,302) (5,434) (7,736)
Amortization of value of business acquired........ 4,234 2,787 11,582 2,927
Amortization of goodwill.......................... 2,547 2,552 2,549 2,547
------- ------- ------- --------
Total benefits and expenses............... 72,353 66,778 80,002 77,250
------- ------- ------- --------
Income before income tax expense.................. 6,859 14,958 18,214 19,793
Income tax expense................................ 3,513 6,402 7,391 8,097
------- ------- ------- --------
Net income................................ $ 3,346 $ 8,556 $10,823 $ 11,696
======= ======= ======= ========
</TABLE>
B-71
<PAGE> 121
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ---------------
Notes:
(1) Reflects premium tax expense loads received and premium taxes incurred of
$49.1 million related to new BOLI sales of $2.6 billion in the fourth
quarter of 1997.
(2) Reflects the effect of the change in amortization of goodwill from 25 to 20
years.
(3) Reflects the assumption of term life insurance business from FKLA.
B-72
<PAGE> 122
APPENDIX
STATE PREMIUM TAX CHART
<TABLE>
<CAPTION>
RATE OF TAX
------------------------------------
QUALIFIED NON-QUALIFIED
PLANS PLANS
STATE --------- -------------
<S> <C> <C>
California.................................................. .50% 2.35%*
District of Columbia........................................ 2.25% 2.25%*
Kentucky.................................................... 2.00%* 2.00%*
Maine....................................................... -- 2.00%
Nevada...................................................... -- 3.50%*
South Dakota................................................ -- 1.25%
West Virginia............................................... 1.00% 1.00%
Wyoming..................................................... -- 1.00%
</TABLE>
* Taxes become due when annuity benefits commence, rather than when the
premiums are collected. At the time of annuitization, the premium tax
payable will be charged against the Contract Value.
B-73
<PAGE> 123
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(A) FINANCIAL STATEMENTS:
(1) Financial Statements included in Part A of the Registration
Statement: Condensed Financial Information
(2) Financial Statements included in Part B of the Registration
Statement:
(i) KILICO Variable Annuity Separate Account
Reports of Independent Public Accountants
Statements of Assets and Liabilities and Contract Owners' Equity
as of December 31, 1997
Statements of Operations for the Year Ended December 31, 1997
Statements of Changes in Contract Owners' Equity for the Years
Ended December 31, 1997 and 1996
Notes to Combined Financial Statements
(ii) Kemper Investors Life Insurance Company
Reports of Independent Public Accountants
Kemper Investors Life Insurance Company and Subsidiaries
Consolidated Balance Sheets as of December 31, 1997 and 1996
Kemper Investors Life Insurance Company and Subsidiaries
Consolidated Statement of Operations, years ended December 31,
1997, 1996 and 1995
Kemper Investors Life Insurance Company and Subsidiaries
Consolidated Statement of Stockholder's Equity, years ended
December 31, 1997, 1996 and January 4, 1996, and 1995
Kemper Investors Life Insurance Company and Subsidiaries
Consolidated Statement of Cash Flows, years ended December 31,
1997, 1996 and 1995
Notes to Consolidated Financial Statements
(B) EXHIBITS:
<TABLE>
<S> <C>
(5)1.1 A copy of resolution of the Board of Directors of Kemper
Investors Life Insurance Company dated September 13, 1977.
(5)1.2 A copy of Record of Action of Kemper Investors Life
Insurance Company dated April 15, 1983.
2. Not Applicable.
(3)3.1 Distribution Agreement between Investors Brokerage Services,
Inc. and KILICO.
(1)3.2 Addendum to Selling Group Agreement of Kemper Financial
Services, Inc.
(6)3.3 Selling Group Agreement of Investors Brokerage Services,
Inc.
(6)3.4 General Agent Agreement.
(7)4. Form of Variable Annuity Contract.
(7)5. Form of application.
(3)6.1 Kemper Investors Life Insurance Company articles of
incorporation.
(6)6.2 Kemper Investors Life Insurance Company bylaws.
7. Inapplicable.
(2)8.1 Fund Participation Agreement among KILICO, Lexington Natural
Resources Trust and Lexington Management Corporation.
(2)8.2 Fund Participation Agreement among KILICO, Lexington
Emerging Markets Fund and Lexington Management Corporation.
</TABLE>
C-1
<PAGE> 124
<TABLE>
<S> <C>
(2)8.3 Fund Participation Agreement among KILICO, Janus Aspen Series and Janus Capital Corporation.
(7)8.3(a) Service Agreement between KILICO and Janus Capital Corporation.
(4)8.4(a) Fund Participation Agreement among KILICO, Fidelity Variable Insurance Products Fund and Fidelity
Distributors Corporation.
8.4(b) Form of Amendment to Fund Participation Agreement among KILICO, Fidelity Variable Insurance Products Fund and
Fidelity Distributors Corporation.
(4)8.5(a) Fund Participation Agreement among KILICO, Fidelity Variable Insurance Products Fund II and Fidelity
Distributors Corporation.
8.5(b) Form of Amendment to Fund Participation Agreement among KILICO, Fidelity Variable Insurance Products Fund II
and Fidelity Distributors Corporation.
(7)9. Opinion and Consent of Counsel.
10.1 Consents of Coopers & Lybrand L.L.P., Independent Accountants.
10.2 Consent of KPMG Peat Marwick LLP, Independent Auditors.
11. Inapplicable.
12. Inapplicable.
(8)13. Schedules for Computation of Performance Information.
(9)14. Organizational Chart.
(9)17.1 Schedule IV: Reinsurance (year ended December 31, 1997).
(9)17.2 Schedule V: Valuation and qualifying accounts (year ended December 31, 1997).
(6)17.3 Schedule V: Valuation and qualifying accounts (year ended December 31, 1996).
(10)17.4 Schedule V: Valuation and qualifying accounts (year ended December 31, 1995).
</TABLE>
- ---------------
(1) Incorporated by reference to Post-Effective Amendment No. 22 to the
Registration Statement on Form N-4 filed on or about April 27, 1995.
(2) Incorporated by reference to Post-Effective Amendment No. 23 to the
Registration Statement on Form N-4 filed on or about September 14, 1995.
(3) Incorporated by reference to Exhibits filed with the Registration Statement
on Form S-1 for KILICO (File No. 333-02491) filed on or about April 12,
1996.
(4) Incorporated by reference to Post-Effective Amendment No. 24 to the
Registration Statement on Form N-4 filed on or about April 26, 1996.
(5) Incorporated by reference to the Registration Statement on Form N-4 (File
No. 333-22375) filed on or about February 26, 1997.
(6) Incorporated by reference to Amendment No. 2 to the Registration Statement
on Form S-1 (File No. 333-02491) filed on or about April 23, 1997.
(7) Incorporated by reference to Amendment No. 25 to the Registration Statement
on Form N-4 (File No. 2-72671) filed on or about April 28, 1997.
(8) Incorporated by reference to Amendment No. 26 to the Registration Statement
on Form N-4 (File No. 2-72671) filed on or about November 3, 1997.
(9) Incorporated by reference to Post-Effective Amendment No. 11 to the
Registration Statement on Form N-4 for KILICO Variable Annuity Separate
Account (File No. 33-43501) filed on or about April 16, 1998.
(10) Incorporated by reference to Amendment No. 1 to the Registration Statement
on Form S-1 (File No. 333-02491) filed on or about April 25, 1996.
C-2
<PAGE> 125
ITEM 25. DIRECTORS AND OFFICERS OF KEMPER INVESTORS LIFE INSURANCE COMPANY
The directors and principal officers of KILICO are listed below
together with their current positions. The address of each officer and
director is 1 Kemper Drive, Long Grove, Illinois 60049.
<TABLE>
<CAPTION>
OFFICE WITH KILICO
NAME ------------------
<S> <C>
John B. Scott................................ President, Chief Executive Officer and Director
Frederick L. Blackmon........................ Senior Vice President and Chief Financial Officer
James E. Hohmann............................. Senior Vice President and Chief Actuary
William H. Bolinder.......................... Chairman of the Board and Director
David A. Bowers.............................. Director
Loren J. Alter............................... Director
Markus Rohrbasser............................ Director
Eliane C. Frye............................... Executive Vice President
Debra P. Rezabek............................. Senior Vice President, General Counsel, and Corporate
Secretary
James C. Harkensee........................... Senior Vice President
Edward K. Loughridge......................... Senior Vice President and Corporate Development
Officer
Phillip D. Meserve........................... Senior Vice President
Kenneth M. Sapp.............................. Senior Vice President
George Vlaisavljevich........................ Senior Vice President
</TABLE>
ITEM 26. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE INSURANCE
COMPANY OR REGISTRANT
See Exhibit 14 for organizational charts of persons controlled or
under common control with Kemper Investors Life Insurance Company.
Investors Brokerage Services, Inc. and Investors Brokerage Services
Insurance Agency, Inc. are wholly owned subsidiaries of KILICO.
ITEM 27. NUMBER OF CONTRACT OWNERS
At March 20, 1998, the Registrant had approximately 133,413 qualified
and non-qualified Advantage III Contract Owners.
ITEM 28. INDEMNIFICATION
To the extent permitted by law of the State of Illinois and subject to
all applicable requirements thereof, Article VI of the By-Laws of Kemper
Investors Life Insurance Company ("KILICO") provides for the
indemnification of any person against all expenses (including attorneys
fees), judgments, fines, amounts paid in settlement and other costs
actually and reasonably incurred by him in connection with any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative in which he is a party or is threatened to
be made a party by reason of his being or having been a director, officer,
employee or agent of KILICO, or serving or having served, at the request of
KILICO, as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, or by reason of his
holding a fiduciary position in connection with the management or
administration of retirement, pension, profit sharing or other benefit
plans including, but not limited to, any fiduciary liability under the
Employee Retirement Income Security Act of 1974 and any amendment thereof,
if he acted in good faith and in a manner he reasonably believed to be in
and not opposed to the best interests of KILICO, and with respect to any
criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction, or upon a plea of NOLO CONTENDERE
or its equivalent, shall not, of itself, create a presumption that he did
not act in good faith and in a manner which he reasonably believed to be in
or not opposed to the best interests of KILICO, and, with respect to any
criminal action or proceeding, had reasonable cause to believe that his
conduct was unlawful. No indemnification shall be made in respect of any
claim, issue or matter as to which a director or officer shall have been
adjudged to be liable for negligence or misconduct in the performance of
his duty to the company, unless and only to the extent that the court in
which such action or suit was brought or other court of competent
jurisdiction shall determine upon application that, despite the
adjudication of liability but in view of all the circumstances of the case,
he is fairly and reasonably entitled to indemnity for such expenses as the
court shall deem proper.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers, employees
or agents of KILICO pursuant to the foregoing provisions, or otherwise,
C-3
<PAGE> 126
KILICO has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in
that Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by KILICO
of expenses incurred or paid by a director, officer, employee of agent of
KILICO in the successful defense of any action, suit or proceeding) is
asserted by such director, officer, employee or agent of KILICO in
connection with variable annuity contracts, KILICO will, unless in the
opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question
whether such indemnification by KILICO is against public policy as
expressed in that Act and will be governed by the final adjudication of
such issue.
ITEM 29.(A) PRINCIPAL UNDERWRITER
Investors Brokerage Services, Inc., a wholly owned subsidiary of
Kemper Investors Life Insurance Company, acts as principal underwriter for
KILICO Variable Annuity Separate Account, KILICO Variable Separate Account,
KILICO Variable Separate Account-2, Kemper Investors Life Insurance Company
Variable Annuity Account C and FKLA Variable Separate Account.
ITEM 29.(B) INFORMATION REGARDING PRINCIPAL UNDERWRITER, INVESTORS BROKERAGE
SERVICES, INC.
The address of each officer is 1 Kemper Drive, Long Grove, IL 60049.
<TABLE>
<CAPTION>
POSITION AND OFFICES
NAME WITH UNDERWRITER
---- --------------------
<S> <C>
John B. Scott....................................... Chairman and Director
Otis R. Heldman, Jr................................. President and Director
Debra P. Rezabek.................................... Secretary
Phillip D. Meserve.................................. Director
Eliane C. Frye...................................... Director
Michael A. Kelly.................................... Vice President
Robert A. Daniel.................................... Vice President/Treasurer
Frank J. Julian..................................... Assistant Secretary
George Vlaisavljevich............................... Director
</TABLE>
ITEM 29.(C)
Inapplicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
Accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the Rules
promulgated thereunder are maintained by Kemper Investors Life Insurance
Company at its home office at 1 Kemper Drive, Long Grove, Illinois 60049
and at 222 South Riverside Plaza, Chicago, Illinois 60606-5808.
ITEM 31. MANAGEMENT SERVICES
Inapplicable.
ITEM 32. UNDERTAKINGS AND REPRESENTATIONS
Representation Regarding Fees and Charges Pursuant to Section 26 of
the Investment Company Act of 1940
Kemper Investors Life Insurance Company ("KILICO") represents that the
fees and charges deducted under the Contract, in the aggregate, are
reasonable in relation to the services rendered, the expenses expected to
be incurred, and the risks assumed by KILICO.
C-4
<PAGE> 127
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act of
1940, the Registrant, KILICO Variable Annuity Separate Account, certifies that
it meets the requirements of Securities Act Rule 485(b) for effectiveness of
this Amendment to the Registration Statement and has duly caused this Amendment
to the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Long Grove and State of Illinois on
the 23rd day of April, 1998.
KILICO VARIABLE ANNUITY SEPARATE
ACCOUNT
(Registrant)
By: Kemper Investors Life Insurance
Company
BY: /s/ JOHN B. SCOTT
--------------------------------------
John B. Scott,
Chief Executive Officer and
President
KEMPER INVESTORS LIFE INSURANCE
COMPANY
(Depositor)
BY: /s/ JOHN B. SCOTT
--------------------------------------
John B. Scott,
Chief Executive Officer and
President
As required by the Securities Act of 1933, this Amendment to the Registration
Statement has been signed below by the following directors and principal
officers of Kemper Investors Life Insurance Company in the capacities indicated
on the 23rd day of April, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ JOHN B. SCOTT Chief Executive Officer, President and Director
- ----------------------------------------------------- (Principal Executive Officer)
John B. Scott
/s/ W. H. BOLINDER Chairman of the Board and Director
- -----------------------------------------------------
William H. Bolinder
/s/ FREDERICK L. BLACKMON Senior Vice President and Chief Financial
- ----------------------------------------------------- Officer
Frederick L. Blackmon (Principal Financial Officer and
Principal Accounting Officer)
/s/ LOREN J. ALTER Director
- -----------------------------------------------------
Loren J. Alter
/s/ DAVID A. BOWERS Director
- -----------------------------------------------------
David A. Bowers
Director
- -----------------------------------------------------
Markus Rohrbasser
</TABLE>
C-5
<PAGE> 128
EXHIBIT INDEX
<TABLE>
<S> <C>
8.4(b) Form of Amendment to Fund Participation Agreement among
KILICO, Fidelity Variable Insurance Products Fund and
Fidelity Distributors Corporation.
8.5(b) Form of Amendment to Fund Participation Agreement among
KILICO, Fidelity Variable Insurance Products Fund II and
Fidelity Distributors Corporation.
10.1 Consents of Coopers & Lybrand L.L.P., Independent
Accountants
10.2 Consent of KPMG Peat Marwick LLP, Independent Auditors
</TABLE>
<PAGE> 1
EXHIBIT 8.4(b)
AMENDMENT TO
PARTICIPATION AGREEMENT
Among
VARIABLE INSURANCE PRODUCTS FUND
FIDELITY DISTRIBUTORS CORPORATION
and
KEMPER INVESTORS LIFE INSURANCE COMPANY
THIS AMENDMENT, made and entered into as of the 1st day of May, 1998,
is made a part of the PARTICIPATION AGREEMENT (hereinafter the "Agreement"),
made and entered into as of the 1st day of May, 1996 by and among KEMPER
INVESTORS LIFE INSURANCE COMPANY (hereinafter the "Company"), an Illinois
corporation, on its own behalf and on behalf of each segregated asset account of
the Company set forth on Schedule A hereto as may be amended from time to time
(each such account hereinafter referred to as the "Account"), and the VARIABLE
INSURANCE PRODUCTS FUND, an unincorporated business trust organized under the
laws of the Commonwealth of Massachusetts (hereinafter the "Fund") and FIDELITY
DISTRIBUTORS CORPORATION (hereinafter the "Underwriter"), a Massachusetts
corporation.
WHEREAS, the Fund is registered as an open-end management investment
company under the Investment Company Act of 1940, as amended (hereinafter the
"1940 Act") and its shares are registered under the Securities Act of 1933, as
amended (hereinafter the "1933 Act"); and
WHEREAS, the beneficial interest in the Fund is divided into several
series of shares, each representing the interest in a particular managed
portfolio of securities and other assets, any one or more of which may be made
available under the Agreement (each such series hereinafter referred to as a
"Portfolio"); and
WHEREAS, the Company has registered certain variable life contracts
under the 1933 Act; and
WHEREAS, the Company has organized a segregated asset account,
established by resolution of the Board of Directors of the Company, to set aside
and invest assets attributable to the aforesaid variable life contracts, and has
registered such Account as a unit investment trust under the 1940 Act; and
<PAGE> 2
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase shares in the Portfolios on behalf
of the Account to fund certain of the aforesaid variable life contracts and the
Underwriter is authorized to sell such shares to unit investment trusts such as
the Account at net asset value; and
WHEREAS, the Company, the Fund and the Underwriter thereby desire to
amend the AGREEMENT to effect such changes;
NOW, THEREFORE, in consideration of their mutual promises, the Company,
the Fund and the Underwriter hereby agree as follows:
1. Schedule A Separate Accounts and Associated Contracts to the
AGREEMENT is hereby deleted in its entirety and replaced with the attached new
Schedule A (As amended May 1, 1998) Separate Accounts and Associated Contracts.
2. SCHEDULE C to the AGREEMENT is hereby deleted in its entirety and
replaced with the attached new SCHEDULE C (As amended May 1, 1998).
3. Except as amended hereby by this AMENDMENT, all other provisions,
conditions and terms of the AGREEMENT shall continue in full force and effect.
IN WITNESS WHEREOF, each of the parties hereto has caused this
Amendment to be executed in its name and on its behalf by its duly authorized
representative and its seal to be hereunder affixed hereto as of the date first
specified above.
KEMPER INVESTORS LIFE INSURANCE COMPANY
By:
---------------------------------------------
Otis R. Heldman, Jr., Marketing Officer
[Signatures Continued on Next Page]
2
<PAGE> 3
VARIABLE INSURANCE PRODUCTS FUND
By:
---------------------------------------------
Robert C. Pozen, Senior Vice President
FIDELITY DISTRIBUTORS CORPORATION
By:
---------------------------------------------
Kevin J. Kelly, Vice President
3
<PAGE> 4
Schedule A
(As amended May 1, 1998)
Separate Accounts and Associated Contracts
Name of Separate Account and Policy Form Numbers of Contracts Funded
Date Established by Board of Directors by Separate Account
KILICO Variable Annuity Separate Kemper Advantage III (Policy Form Series
Account (May 29, 1981) L-1000)
KILICO Variable Separate Account Kemper Power V (Policy Form Series
(January 22, 1987) S-6003)
4
<PAGE> 5
SCHEDULE C
(As amended May 1, 1998)
Other investment companies currently available under variable annuities or
variable life insurance issued by the Company:
Kemper Advantage III
Investors Fund Series (formerly Kemper Investors Fund)
Kemper Money Market Portfolio
Kemper Total Return Portfolio
Kemper High Yield Portfolio
Kemper Growth Portfolio (formerly Equity Portfolio)
Kemper Government Securities Portfolio
Kemper International Portfolio
Kemper Small Cap Growth Portfolio (formerly Small Capitalization
Equity Portfolio)
Kemper Investment Grade Bond Portfolio
Kemper Small Cap Value Portfolio
Kemper Contrarian Value Portfolio (formerly Value Portfolio)
Kemper Horizon 5 Portfolio
Kemper Horizon 10+ Portfolio
Kemper Horizon 20 + Portfolio
Kemper Value & Growth Portfolio
Janus Aspen Series
Aggressive Growth Portfolio
Growth Portfolio
Worldwide Growth Portfolio
Balanced Portfolio
Short-Term Bond Portfolio
Lexington Natural Resources Trust
Lexington Emerging Markets Fund
Fidelity Insurance Products Fund II
Asset Manager Portfolio
Index 500 Portfolio
Contrafund Portfolio
5
<PAGE> 6
SCHEDULE C
(As amended May 1, 1998)
(Continued)
Kemper Power V
Investors Fund Series (formerly Kemper Investors Fund)
Kemper Money Market Portfolio
Kemper Total Return Portfolio
Kemper High Yield Portfolio
Kemper Growth Portfolio
Kemper Government Securities Portfolio
Kemper International Portfolio Kemper
Small Cap Growth Portfolio
American Skandia Trust
Lord Abbett Growth and Income Portfolio
JanCap Growth Portfolio
T. Rowe Price International Equity Portfolio
T. Rowe Price Asset Allocation Portfolio
Founders Capital Appreciation Portfolio
INVESCO Equity Income Portfolio
PIMCO Total Return Bond Portfolio
PIMCO Limited Maturity Bond Portfolio
Neuberger & Berman Mid-Cap Growth Portfolio
Fidelity Variable Insurance Products Fund II
Contrafund Portfolio
Index 500 Portfolio
Fidelity Variable Insurance Products Fund III
Growth Opportunities Portfolio
Scudder Variable Life Investment Fund
International (B-Shares) Portfolio
Growth and Income (B-Shares) Portfolio
6
<PAGE> 1
EXHIBIT 8.5(b)
AMENDMENT TO
PARTICIPATION AGREEMENT
Among
VARIABLE INSURANCE PRODUCTS FUND II,
FIDELITY DISTRIBUTORS CORPORATION
and
KEMPER INVESTORS LIFE INSURANCE COMPANY
THIS AMENDMENT, made and entered into as of the 1st day of May, 1998,
is made a part of the PARTICIPATION AGREEMENT (hereinafter the "Agreement"),
made and entered into as of the 1st day of May, 1996 by and among KEMPER
INVESTORS LIFE INSURANCE COMPANY (hereinafter the "Company"), an Illinois
corporation, on its own behalf and on behalf of each segregated asset account of
the Company set forth on Schedule A hereto as may be amended from time to time
(each such account hereinafter referred to as the "Account"), and the VARIABLE
INSURANCE PRODUCTS FUND II, an unincorporated business trust organized under the
laws of the Commonwealth of Massachusetts (hereinafter the "Fund") and FIDELITY
DISTRIBUTORS CORPORATION (hereinafter the "Underwriter"), a Massachusetts
corporation.
WHEREAS, the Fund is registered as an open-end management investment
company under the Investment Company Act of 1940, as amended (hereinafter the
"1940 Act") and its shares are registered under the Securities Act of 1933, as
amended (hereinafter the "1933 Act"); and
WHEREAS, the beneficial interest in the Fund is divided into several
series of shares, each representing the interest in a particular managed
portfolio of securities and other assets, any one or more of which may be made
available under the Agreement (each such series hereinafter referred to as a
"Portfolio"); and
WHEREAS, the Company has registered certain variable life contracts
under the 1933 Act; and
WHEREAS, the Company has organized a segregated asset account,
established by resolution of the Board of Directors of the Company, to set aside
and invest assets attributable to the aforesaid variable life contracts, and has
registered such Account as a unit investment trust under the 1940 Act; and
<PAGE> 2
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase shares in the Portfolios on behalf
of the Account to fund certain of the aforesaid variable life contracts and the
Underwriter is authorized to sell such shares to unit investment trusts such as
the Account at net asset value; and
WHEREAS, the Company, the Fund and the Underwriter thereby desire to
amend the AGREEMENT to effect such changes;
NOW, THEREFORE, in consideration of their mutual promises, the Company,
the Fund and the Underwriter hereby agree as follows:
1. Schedule A Separate Accounts and Associated Contracts to the
AGREEMENT is hereby deleted in its entirety and replaced with the attached new
Schedule A (As amended May 1, 1998) Separate Accounts and Associated Contracts.
2. SCHEDULE C to the AGREEMENT is hereby deleted in its entirety and
replaced with the attached new SCHEDULE C (As amended May 1, 1998).
3. Except as amended hereby by this AMENDMENT, all other provisions,
conditions and terms of the AGREEMENT shall continue in full force and effect.
IN WITNESS WHEREOF, each of the parties hereto has caused this
Amendment to be executed in its name and on its behalf by its duly authorized
representative and its seal to be hereunder affixed hereto as of the date first
specified above.
KEMPER INVESTORS LIFE INSURANCE COMPANY
By:
--------------------------------------------
Otis R. Heldman, Jr., Marketing Officer
[Signatures Continued on Next Page]
2
<PAGE> 3
VARIABLE INSURANCE PRODUCTS FUND II
By:
--------------------------------------------
Robert C. Pozen, Senior Vice President
FIDELITY DISTRIBUTORS CORPORATION
By:
--------------------------------------------
Kevin J. Kelly, Vice President
3
<PAGE> 4
Schedule A
(As amended May 1, 1998)
Separate Accounts and Associated Contracts
Name of Separate Account and Policy Form Numbers of Contracts Funded
Date Established by Board of Directors by Separate Account
KILICO Variable Annuity Separate Kemper Advantage III (Policy Form Series
Account (May 29, 1981) L-1000)
KILICO Variable Separate Account Kemper Power V (Policy Form Series
(January 22, 1987) S-6003)
4
<PAGE> 5
SCHEDULE C
(As amended May 1, 1998)
Other investment companies currently available under variable annuities or
variable life insurance issued by the Company:
Kemper Advantage III
Investors Fund Series (formerly Kemper Investors Fund)
Kemper Money Market Portfolio
Kemper Total Return Portfolio
Kemper High Yield Portfolio
Kemper Growth Portfolio (formerly Equity Portfolio)
Kemper Government Securities Portfolio
Kemper International Portfolio
Kemper Small Cap Growth Portfolio (formerly Small Capitalization
Equity Portfolio)
Kemper Investment Grade Bond Portfolio
Kemper Small Cap Value Portfolio
Kemper Contrarian Value Portfolio (formerly Value Portfolio)
Kemper Horizon 5 Portfolio
Kemper Horizon 10+ Portfolio
Kemper Horizon 20 + Portfolio
Kemper Value & Growth Portfolio
Janus Aspen Series
Aggressive Growth Portfolio
Growth Portfolio
Worldwide Growth Portfolio
Balanced Portfolio
Short-Term Bond Portfolio
Lexington Natural Resources Trust
Lexington Emerging Markets Fund
Fidelity Insurance Products Fund
Equity-Income Portfolio
Growth Portfolio
5
<PAGE> 6
SCHEDULE C
(As amended May 1, 1998)
(Continued)
Kemper Power V
Investors Fund Series (formerly Kemper Investors Fund)
Kemper Money Market Portfolio
Kemper Total Return Portfolio
Kemper High Yield Portfolio
Kemper Growth Portfolio
Kemper Government Securities Portfolio
Kemper International Portfolio
Kemper Small Cap Growth Portfolio
American Skandia Trust
Lord Abbett Growth and Income Portfolio
JanCap Growth Portfolio
T. Rowe Price International Equity Portfolio
T. Rowe Price Asset Allocation Portfolio
Founders Capital Appreciation Portfolio
INVESCO Equity Income Portfolio
PIMCO Total Return Bond Portfolio
PIMCO Limited Maturity Bond Portfolio
Neuberger & Berman Mid-Cap Growth Portfolio
Fidelity Variable Insurance Products Fund
Equity-Income Portfolio
High Income Portfolio
Fidelity Variable Insurance Products Fund III
Growth Opportunities Portfolio
Scudder Variable Life Investment Fund
International (B-Shares) Portfolio
Growth and Income (B-Shares) Portfolio
6
<PAGE> 1
Exhibit 10.1
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors of
Kemper Investors Life Insurance Company and
Contract Owners of KILICO Periodic Payment Variable Annuity Contracts
We consent to the inclusion in this registration statement on Form N-4 (File
Nos. 2-72671 and 811-3199) of our report dated February 20, 1998, on our audit
of the financial statements of KILICO Variable Annuity Separate Account
and to the reference to our firm under the caption "Experts".
Coopers & Lybrand L.L.P.
Chicago, Illinois
April 24, 1998
<PAGE> 2
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors of
Kemper Investors Life Insurance Company and
Contract Owners of KILICO Periodic Payment Variable Annuity Contracts
We consent to the inclusion in this registration statement on Form N-4 (File
Nos. 2-72671 and 811-3199) of our report dated March 18, 1998, on our audit
of the consolidated financial statements of Kemper Investors Life
Insurance Company and to the reference to our firm under the caption "Experts".
Coopers & Lybrand L.L.P.
Chicago, Illinois
April 24, 1998
<PAGE> 1
EXHIBIT 10.2
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Kemper Investors Life Insurance Company
We consent to the use of our reports included herein on the consolidated
financial statements of Kemper Investors Life Insurance Company (KILICO) and on
the financial statement of the subaccounts of KILICO Variable Annuity Separate
Account and to the references to our firm under the headings "Experts" in the
prospectus and the Statement of Additional Information and "Services to the
Separate Account" in the Statement of Additional Information. Our report on
KILICO's financial statements dated March 21, 1997, contains an explanatory
paragraph that states as a result of the acquisition of its parent, Kemper
Corporation, the consolidated financial information for the periods after the
acquisition is presented on a different cost basis than that for the periods
before the acquisition and, therefore, is not comparable.
KPMG PEAT MARWICK LLP
Chicago, Illinois
April 24, 1998
