<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL , 1998
COMMISSION FILE NOS. 333-22375
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. 3 [X]
Post-Effective Amendment No. _ [ ]
and
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940 [ ]
Amendment No. 44 [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:
FRANK JULIAN, 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: As soon as practicable after
the effective date of this filing.
Title of Securities Being Registered:
Units of interest in Separate Account under the Contracts
- -- No filing fee is due because an indefinite number of shares is deemed to have
been registered in reliance on Section 24(f) of the Investment Company Act of
1940.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
<PAGE> 2
CROSS-REFERENCE SHEET
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
REGISTRATION STATEMENT ON FORM N-4
<TABLE>
<CAPTION>
N-4 ITEM NO. LOCATION IN PROSPECTUS
------------ ----------------------
<S> <C> <C>
PART A
Item 1. Cover Page................................... Cover Page
Item 2. Definitions.................................. Definitions
Item 3. Synopsis..................................... Summary; Summary of Expenses;
Example
Item 4. Condensed Financial Information.............. Condensed Financial Information
Item 5. General Description of Registrant, Depositor
and Portfolio Companies.................... KILICO, the MVA Option, the Separate
Account and the Funds; Fixed Account
Option; Voting Rights
Item 6. Deductions and Expenses...................... Contract Charges and Expenses
Item 7. General Description of Variable
Annuity Contracts.......................... The Contracts
Item 8. Annuity Period............................... The Annuity Period
Item 9. Death Benefit................................ The Annuity Period; The Accumulation
Period
Item 10. Purchases and Contract Value................. KILICO, the MVA Option, the Separate
Account and the Funds; The Contracts
Item 11. Redemptions.................................. The Contracts; The Accumulation Period
Item 12. Taxes........................................ Federal Income Taxes
Item 13. Legal Proceedings............................ Legal Proceedings
Item 14. Table of Contents of the Statement of
Additional Information..................... Table of Contents
PART B
Item 15. Cover Page................................... Cover Page
Item 16. Table of Contents............................ Table of Contents
Item 17. General Information and History.............. Not Applicable
Item 18. Services..................................... Services to the Separate Account
Item 19. Purchase of Securities Being Offered......... Not Applicable
Item 20. Underwriters................................. Services to the Separate Account
Item 21. Calculation of Performance Data.............. Performance Information of
Subaccounts
Item 22. Annuity Payments............................. Not Applicable
Item 23. Financial Statements......................... Financial Statements
PART C
</TABLE>
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C to this Registration Statement.
<PAGE> 3
PROSPECTUS--
- --------------------------------------------------------------------------------
INDIVIDUAL AND GROUP VARIABLE, FIXED AND MARKET
VALUE ADJUSTED DEFERRED ANNUITY CONTRACTS
- --------------------------------------------------------------------------------
ISSUED BY
KEMPER INVESTORS LIFE INSURANCE COMPANY
IN CONNECTION WITH
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
HOME OFFICE: 1 KEMPER DRIVE, LONG GROVE, ILLINOIS 60049 (847) 550-5500
The types of Variable, Fixed and Market Value Adjusted Deferred Annuity
Contracts ("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 408 or 408A of the Internal Revenue Code of
1986, as amended. Depending upon particular state requirements, participation in
a group contract will be accounted for by the issuance of a certificate and
participation in an individual contract will be accounted for by the issuance of
an individual annuity contract. The certificate and individual annuity contract
and values thereunder are hereafter both referred to in terms of the "Contract".
Purchase payments for the Contracts may be allocated to one or more of the
options under which Contract values accumulate on a variable basis, a fixed
basis, or a fixed basis subject to a market value adjustment. These options
consist of the twenty-nine Subaccounts of the Separate Account, the Fixed
Account Option and the Market Value Adjustment Option ("MVA Option"). Each
Subaccount invests in one of the Portfolios of the following funds: the
Investors Fund Series ("IFS"), the Scudder Variable Life Investment Fund
("Scudder VLIF"), the Janus Aspen Series ("Janus") and the Warburg Pincus Trust
("Warburg").
The following Portfolios of the Investors Fund Series are available under the
Contracts: Kemper Money Market, Kemper Government Securities, Kemper Investment
Grade Bond, Kemper Global Income, Kemper Horizon 5, Kemper High Yield, Kemper
Horizon 10+, Kemper Total Return, Kemper Horizon 20+, Kemper Value+Growth,
Kemper Blue Chip, Kemper International, Kemper Contrarian Value (formerly Kemper
Value), Kemper Small Cap Value, Kemper Small Cap Growth, Kemper Growth, Kemper
Global Blue Chip, Kemper International Growth and Income, Kemper-Dreman High
Return Equity and Kemper-Dreman Financial Services. Class A Shares of the
following Portfolios of the Scudder Variable Life Investment Fund are available
under the Contracts: Scudder VLIF Global Discovery, Scudder VLIF Growth and
Income, Scudder VLIF International and Scudder VLIF Capital Growth. The
following Portfolios of the Janus Aspen Series are available under the
Contracts: Janus Growth and Janus Growth and Income. The following Portfolios of
the Warburg Pincus Trust are available under the Contracts: Warburg Emerging
Markets and Warburg Post-Venture Capital.
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 Account or
one or more Guarantee Periods of the MVA Option will accumulate on a fixed
basis.
This Prospectus is designed to provide you with certain essential information
that you should know before investing. A Statement of Additional Information
dated has been filed with the Securities and Exchange Commission
and is incorporated herein by reference. A Statement of Additional Information
is available without charge 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 56 of this Prospectus.
THIS PROSPECTUS IS VALID ONLY IF ACCOMPANIED OR PRECEDED BY A CURRENT PROSPECTUS
FOR THE INVESTORS FUND SERIES, SCUDDER VARIABLE LIFE INVESTMENT FUND, JANUS
ASPEN SERIES AND WARBURG PINCUS TRUST. 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> 4
TABLE OF CONTENTS
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<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DEFINITIONS................................................. 1
SUMMARY..................................................... 2
SUMMARY OF EXPENSES......................................... 4
KILICO, THE MVA OPTION, THE SEPARATE ACCOUNT AND THE
FUNDS..................................................... 6
FIXED ACCOUNT OPTION........................................ 12
THE CONTRACTS............................................... 12
CONTRACT CHARGES AND EXPENSES............................... 19
THE ANNUITY PERIOD.......................................... 22
FEDERAL INCOME TAXES........................................ 25
DISTRIBUTION OF CONTRACTS................................... 30
VOTING RIGHTS............................................... 30
REPORTS TO CONTRACT OWNERS AND INQUIRIES.................... 31
DOLLAR COST AVERAGING....................................... 31
SYSTEMATIC WITHDRAWAL PLAN.................................. 32
EXPERTS..................................................... 32
LEGAL MATTERS............................................... 32
SPECIAL CONSIDERATIONS...................................... 32
AVAILABLE INFORMATION....................................... 32
BUSINESS.................................................... 33
PROPERTIES.................................................. 39
LEGAL PROCEEDINGS........................................... 39
SELECTED FINANCIAL DATA..................................... 40
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 41
DIRECTORS AND EXECUTIVE OFFICERS OF KILICO.................. 53
EXECUTIVE COMPENSATION...................................... 55
TABLE OF CONTENTS--STATEMENT OF ADDITIONAL INFORMATION...... 56
FINANCIAL STATEMENTS........................................ 56
CHANGE OF ACCOUNTANTS....................................... 56
</TABLE>
<PAGE> 5
DEFINITIONS
The following terms as used in this Prospectus have the indicated meanings:
ACCUMULATED GUARANTEE PERIOD VALUE--The sum of an Owner's Guarantee Period
Values.
ACCUMULATION PERIOD--The period between the Date of Issue of a 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, Fixed and Market Value Adjusted Annuity Contract
offered by this Prospectus.
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 Separate Account
Contract Value, Accumulated Guarantee Period Value and Fixed Account
Contract Value.
CONTRACT YEAR--Period between anniversaries of the Date of Issue of a
Contract.
CONTRACT QUARTER--Periods between quarterly anniversaries of the Date of
Issue of the Contract.
CONTRIBUTION YEAR--Each one year period following the date a Purchase
Payment is made.
DATE OF ISSUE--The date on which the first Contract Year commences.
FIXED ACCOUNT--The General Account of KILICO to which a Contract Owner may
allocate all or a portion of Purchase Payments or Contract Value. KILICO
guarantees a minimum rate of interest on Purchase Payments allocated to the
Fixed Account.
FIXED ACCOUNT CONTRACT VALUE--The value of the Owner's Contract interest in
the Fixed Account.
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, Scudder Variable Life Investment
Fund, Janus Aspen Series and Warburg Pincus Trust including any Portfolios
thereunder.
GENERAL ACCOUNT--All the assets of KILICO other than those allocated to any
separate account.
GUARANTEED INTEREST RATE--The rate of interest established by KILICO for a
given Guarantee Period.
GUARANTEE PERIOD--A period of time during which an amount is to be credited
with a Guaranteed Interest Rate. Guarantee Period options may have
durations of from one to ten years, as offered by KILICO and as elected by
the Owner.
GUARANTEE PERIOD VALUE--The Guarantee Period Value is the sum of the
Owner's: (1) Purchase Payment allocated or amount transferred to a
Guarantee Period; plus (2) interest credited; minus (3) withdrawals,
previously assessed Withdrawal Charges and transfers; and (4) as adjusted
for any applicable Market Value Adjustment previously made.
KILICO--Kemper Investors Life Insurance Company, whose Home Office is at 1
Kemper Drive, Long Grove, Illinois 60049.
MARKET ADJUSTED VALUE--A Guarantee Period Value adjusted by the market
value adjustment formula on any date prior to the end of a Guarantee
Period.
MARKET VALUE ADJUSTMENT--An adjustment of values under a Guarantee Period
in accordance with the market value adjustment formula prior to the end of
that Guarantee Period. The adjustment reflects the change in the value of
the Guarantee Period Value due to changes in interest rates since the date
the Guarantee Period commenced. The adjustment is computed using the market
value adjustment formula stated in the Contract.
1
<PAGE> 6
NON-QUALIFIED PLAN CONTRACT--A Contract issued in connection with a
retirement plan which does not receive favorable tax treatment under
Section 408 or 408A 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.
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 408 or 408A 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-nine subdivisions of the Separate Account available
under the Contract, 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 Contract Value in the first seven Contribution Years
after a Purchase Payment is made or against certain annuitizations of
Contract Value in the first seven Contribution Years after a Purchase
Payment is made.
WITHDRAWAL VALUE--Contract Value less 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 available underlying allocation options, including
twenty-nine variable Subaccounts, a Fixed Account Option and ten durations of
Guarantee Periods, for the Contract Owner to pursue his or her investment
objectives.
The minimum initial Purchase Payment is $1,000 and, subject to certain
exceptions, the minimum subsequent payment is $500. An allocation to a
Subaccount, Fixed Account or Guarantee Period must be at least $500. The maximum
Purchase Payments without KILICO's prior approval is $1,000,000. (See "The
Contracts," page 12.)
KILICO provides for variable accumulations and benefits under the Contracts by
crediting Purchase Payments to one or more Subaccounts of the Separate Account
as selected by the Contract Owner. Each Subaccount invests in one of the
following corresponding Portfolios: Kemper Money Market, Kemper Government
Securities, Kemper Investment Grade Bond, Kemper Global Income, Kemper Horizon
5, Kemper High Yield, Kemper Horizon 10+, Kemper Total Return, Kemper Horizon
20+, Kemper Value+Growth, Kemper Blue Chip, Kemper International, Kemper
Contrarian Value, Kemper Small Cap Value, Kemper Small Cap Growth, Kemper
Growth, Kemper Global Blue Chip, Kemper International Growth and Income,
Kemper-Dreman High Return Equity and Kemper-Dreman Financial Services; Scudder
VLIF Global Discovery, Scudder VLIF Growth and Income, Scudder VLIF
International and Scudder VLIF Capital Growth; Janus Growth and Janus Growth and
Income; Warburg Emerging Markets and Warburg Post-Venture Capital. (See "The
Funds" page 7.) The Contract Values allocated to the Separate Account will vary
with the investment performance of the Portfolios and Funds selected by the
Contract Owner.
KILICO provides for fixed accumulations and benefits under the Contracts in the
Fixed Account. Any portion of the Purchase Payment allocated to the Fixed
Account is credited with interest daily at a rate periodically declared by
KILICO at its sole discretion, but not less than 3%. (See "Fixed Account
Option," page 12.)
2
<PAGE> 7
KILICO also provides for fixed accumulations under the Contracts in the MVA
Option. The MVA Option is only available during the Accumulation Period. An
Owner may allocate amounts to one or more Guarantee Periods available under the
MVA Option with durations of from one to ten years. KILICO may, at its
discretion, offer additional Guarantee Periods or limit, for new Contracts the
number of Guarantee Period options available to no less than three (3). KILICO
will credit interest daily at a rate declared by KILICO at its sole discretion
to amounts allocated to the MVA Option and guarantees these amounts at various
interest rates ("Guaranteed Interest Rates") for the duration of the Guarantee
Period selected by the Owner, subject to any applicable Withdrawal Charge,
Market Value Adjustment or Records Maintenance Charge. KILICO may not change a
Guaranteed Interest Rate for the duration of the Guarantee Period; however,
Guaranteed Interest Rates for subsequent Guarantee Periods will be determined at
the sole discretion of KILICO. At the end of any Owner's Guarantee Period, a
subsequent Guarantee Period automatically renews for the same duration as the
terminating Guarantee Period unless the Owner elects another Guarantee Period
during the designated period after the end of the Guarantee Period. The
interests under the Contract relating to the MVA Option are registered under the
Securities Act of 1933 but are not registered under the Investment Company Act
of 1940. (See "The MVA Option," page 6.)
The investment risk under the Contracts is borne by the Contract Owner, except
to the extent that Contract Values are allocated to the MVA Option and are
guaranteed to receive the Guaranteed Interest Rate or to the Fixed Option and
are guaranteed to earn at least 3% interest.
Transfers between Subaccounts are permitted before and after annuitization,
subject to certain limitations. A transfer from a Guarantee Period is subject to
a Market Value Adjustment unless effected within 30 days after the existing
Guarantee Period ends. Restrictions apply to transfers out of the Fixed Account.
(See "Transfer During Accumulation Period" and "Transfer During Annuity Period,"
pages 15 and 23, respectively.)
A Contract Owner may withdraw all or a portion of the Contract Value subject to
Withdrawal Charges, any applicable Market Value Adjustment and other specified
conditions. (See "Withdrawal During Accumulation Period," page 16.)
No sales charge is deducted from any Purchase Payment. Each Contract Year, a
Contract Owner may withdraw the greater of (i) the excess of Contract Value over
total Purchase Payments subject to Withdrawal Charges less prior withdrawals
that were previously assessed a Withdrawal Charge, and (ii) 10% of the Contract
Value, without assessment of any withdrawal charge. If the Contract Owner
withdraws an amount in excess of the above amount in any Contract Year, the
Purchase Payments withdrawn in excess of the above amount are subject to a
contingent deferred sales charge ("Withdrawal Charge"). The Withdrawal Charge is
7% in the first Contribution Year, 6% in the second Contribution Year, 5% in the
third and fourth Contribution Years, 4% in the fifth Contribution Year, 3% in
the sixth Contribution Year, 2% in the seventh Contribution Year and 0%
thereafter. (See "Withdrawal Charge," page 20.) The Withdrawal Charge also
applies at the annuitization of Accumulation Units in their seventh Contribution
Year or earlier, except as set forth under "Withdrawal Charge." 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," page 25.)
KILICO assesses charges under the Contract for assuming the mortality and
expense risk and administrative expenses under the Contract, for records
maintenance, for any applicable premium taxes and for the Guaranteed Retirement
Income Benefit. (See "Charges Against the Separate Account," page 19.) In
addition, the investment advisers to the Funds deduct varying charges against
the assets of the Funds for which they provide investment advisory services.
(See the Funds' prospectuses for such information.)
The Contracts may be purchased in connection with retirement plans which qualify
as individual retirement annuities established under Section 408 of the Code,
including Roth IRAs established under Section 408A of the Code, and are also
offered under other retirement plans which may not qualify for similar tax
advantages. (See "Taxation of Annuities in General," page 25 and "Qualified
Plans," page 28.)
A Contract Owner has the right within the "free look" period (generally ten
days, subject to state variation) after receiving the Contract to cancel the
Contract by delivering or mailing it to KILICO. Upon receipt by KILICO, the
Contract will be cancelled and a refund will be made. The amount of the refund
will depend on the state in which the Contract is issued; however, it generally
will be an amount at least equal to the Separate Account Contract Value plus
amounts allocated to the Fixed Account or to the Guarantee Periods which will
not be subject to a Market Value Adjustment. (See "The Contracts," page 12.) 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> 8
- --------------------------------------------------------------------------------
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........................... 7%
Second year.......................... 6%
Third year........................... 5%
Fourth year.......................... 5%
Fifth year........................... 4%
Sixth year........................... 3%
Seventh year......................... 2%
Eighth year and following............ 0%
Surrender Fees...................................................................................... None
Exchange Fee(2)..................................................................................... $25
ANNUAL CONTRACT FEE (Records Maintenance Charge)(3)................................................. $30
</TABLE>
FUND ANNUAL EXPENSES(After Fee Waivers and Expense
Reductions)
(as percentage of each Portfolio's average net assets
for the period ended December 31, 1997)
<TABLE>
<CAPTION>
SEPARATE ACCOUNT ANNUAL EXPENSES
(as a percentage of average daily account value)
<S> <C>
Mortality and Expense
Risk.................................. 1.25%
Administration.......................... .15%
Account Fees and
Expenses.............................. 0%
---------
Total Separate Account
Annual Expenses....................... 1.40%
=========
GUARANTEED RETIREMENT INCOME BENEFIT
CHARGE
Annual Expense (as a percentage of
Contract Value)....................... .25%
</TABLE>
<TABLE>
<CAPTION>
MANAGEMENT OTHER TOTAL PORTFOLIO
FEES EXPENSES ANNUAL EXPENSES
---------- -------- ---------------
<S> <C> <C> <C>
Kemper Money Market..................... .50% .05% .55%
Kemper Government Securities............ .55 .09 .64
Kemper Investment Grade Bond............ .60 .20 .80
Kemper Global Income(8)................. .75 .30 1.05
Kemper Horizon 5........................ .60 .37 .97
Kemper High Yield....................... .60 .05 .65
Kemper Horizon 10+...................... .60 .23 .83
Kemper Total Return..................... .55 .05 .60
Kemper Horizon 20+...................... .60 .33 .93
Kemper Value+Growth..................... .75 .09 .84
Kemper Blue Chip(8)..................... .65 .30 .95
Kemper International.................... .75 .16 .91
Kemper Contrarian Value................. .75 .05 .80
Kemper Small Cap Value.................. .75 .09 .84
Kemper Small Cap Growth................. .65 .06 .71
Kemper Growth........................... .60 .05 .65
Kemper Global Blue Chip(6)(7)........... .85 .71 1.56
Kemper International Growth and
Income(6)(7)........................... .70 .42 1.12
Kemper-Dreman High Return Equity(7)..... .75 .12 .87
Kemper-Dreman Financial Services(7)..... .75 .24 .99
Scudder VLIF Global Discovery........... .98 .52 1.50
Scudder VLIF Growth and Income.......... .48 .10 .58
Scudder VLIF International.............. .88 .12 1.00
Scudder VLIF Capital Growth............. .48 .03 .51
Janus Growth(4)......................... .65 .05 .70
Janus Growth and Income(4)(7)........... .67 .30 .97
Warburg Emerging Markets(5)............. .81 .59 1.40
Warburg Post-Venture Capital(5)......... 1.07 .33 1.40
</TABLE>
- --------------------------------------------------------------------------------
(1) A Contract Owner may withdraw up to the greater of (i) the excess of
Contract Value over total Purchase Payments subject to Withdrawal Charges
less prior withdrawals that were previously assessed a Withdrawal Charge,
and (ii) 10% of the Contract Value 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) KILICO reserves the right to charge a fee of $25 for each transfer of
Contract Value in excess of 12 transfers per calendar year.
(3) Applies to Contracts with a Contract Value less than $50,000 on the date of
assessment. Under certain circumstances the annual Records Maintenance
Charge may be reduced or waived by KILICO.
(4) The expense figures shown are net of certain fee waivers or reductions from
Janus Capital Corporation. Without such waivers (estimated for Growth and
Income Portfolio), Management Fees, 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
Portfolio; and .75%, .30% and 1.05%, respectively, for the Growth and Income
Portfolio. See the prospectus and Statement of Additional Information of
Janus Aspen Series for a description of these waivers.
(5) The expense figures shown are net of certain fee waivers or reductions from
Warburg Pincus Asset Management, Inc. Without such waivers, Management Fees,
Other Expenses and Total Portfolio Annual Expenses for the Portfolios for
the fiscal year ended December 31, 1997 would have been 1.25%, .71% and
1.96%, respectively, for the Emerging Markets Portfolio; and 1.25%, .44% and
1.69%, respectively, for the Post-Venture Capital Portfolio.
(6) The expense figures shown are net of certain fee waivers or reductions from
Scudder Kemper Investments, Inc. Without such waivers, Management Fees,
Other Expenses and Total Portfolio Annual Expenses for the Portfolios for
the fiscal year ended December 31, 1997 would have been: 1.00%, .42% and
1.42% for the Kemper International Growth and Income Portfolio; and 1.00%,
.71% and 1.71% for the Kemper Global Blue Chip Portfolio.
(7) Portfolios commenced operations 5/1/98. "Other Expenses" have been
estimated.
(8) Portfolios commenced operations 5/1/97. "Other Expenses" have been
estimated.
4
<PAGE> 9
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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: Kemper Money Market #1(1) $ 93 $119 $156 $237
You would pay the following expenses on a $1,000 Kemper Government Securities 94 121 161 247
investment, assuming 5% annual return on assets: Kemper Investment Grade Bond 95 126 169 263
Kemper Global Income 98 133 181 289
Kemper Horizon 5 97 131 177 281
Kemper High Yield 94 122 161 248
Kemper Horizon 10+ 95 127 170 266
Kemper Total Return 93 120 159 242
Kemper Horizon 20+ 96 130 175 277
Kemper Value+Growth 96 127 171 267
Kemper Blue Chip 97 130 176 278
Kemper International 96 129 174 275
Kemper Contrarian Value 95 126 169 263
Kemper Small Cap Value 96 127 171 267
Kemper Small Cap Growth 94 123 164 254
Kemper Growth 94 122 161 248
Kemper Global Blue Chip 102 148 -- --
Kemper International Growth
and Income 98 135 -- --
Kemper-Dreman High Return
Equity 96 128 -- --
Kemper-Dreman Financial
Services 97 131 -- --
Scudder VLIF Global
Discovery 102 146 -- --
Scudder VLIF Growth and
Income 93 119 -- --
Scudder VLIF International 97 132 -- --
Scudder VLIF Capital Growth 92 117 -- --
Janus Growth 94 123 164 253
Janus Growth and Income 97 131 -- --
Warburg Emerging Markets 101 143 -- --
Warburg Post-Venture Capital 101 143 -- --
If you do not surrender your Contract: Kemper Money Market #1(1) 21 64 110 237
You would pay the following expenses Kemper Government Securities 22 67 115 247
on a $1,000 investment, assuming Kemper Investment Grade Bond 23 72 123 263
5% annual return on assets: Kemper Global Income 26 80 136 289
Kemper Horizon 5 25 77 132 281
Kemper High Yield 22 67 115 248
Kemper Horizon 10+ 24 73 125 266
Kemper Total Return 21 66 113 242
Kemper Horizon 20+ 25 76 130 277
Kemper Value+Growth 24 73 125 267
Kemper Blue Chip 25 76 131 278
Kemper International 24 75 129 275
Kemper Contrarian Value 23 72 123 263
Kemper Small Cap Value 24 73 125 267
Kemper Small Cap Growth 22 69 118 254
Kemper Growth 22 67 115 248
Kemper Global Blue Chip 31 95 -- --
Kemper International Growth
and Income 27 82 -- --
Kemper-Dreman High Return
Equity 24 74 -- --
Kemper-Dreman Financial
Services 25 78 -- --
Scudder VLIF Global
Discovery 30 93 -- --
Scudder VLIF Growth and
Income 21 65 -- --
Scudder VLIF International 25 78 -- --
Scudder VLIF Capital Growth 20 63 -- --
Janus Growth 22 69 118 253
Janus Growth and Income 25 77 -- --
Warburg Emerging Markets 29 90 -- --
Warburg Post-Venture Capital 29 90 -- --
</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 Portfolios have been provided by Scudder Kemper Investments,
Inc., Janus Capital Corporation and Warburg Pincus Asset Management, Inc., as
applicable, 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.
(1)Money Market Subaccount #2 is not shown because it is available only for
dollar cost averaging that will deplete an Owner's subaccount value entirely
at least by the end of the first Contribution Year.
5
<PAGE> 10
KILICO, THE MVA OPTION, THE SEPARATE ACCOUNT AND THE FUNDS
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 MVA OPTION
An Owner may allocate amounts in the MVA Option to one or more Guarantee Periods
with durations of one to ten years during the Accumulation Period. KILICO may,
at its discretion, offer additional Guarantee Periods or limit, for new
Contracts, the number of durations of Guarantee Periods available to no less
than three (3).
The amounts allocated to the MVA Option under the Contracts are invested in
accordance with the standards applicable to KILICO's General Account. Assets
supporting the amounts allocated to Guarantee Periods under the Contracts are
held in a "non-unitized" separate account of KILICO. However, all of KILICO's
General Account assets are available to fund benefits under the Contracts. A
non-unitized separate account is a separate account in which the Owner does not
participate in the performance of the assets through unit values. There are no
discrete units for this separate account. The assets of the non-unitized
separate account are held as reserves for the guaranteed obligations of KILICO.
The assets of the separate account are not chargeable with liabilities arising
out of the business conducted by any other separate account or out of any other
business KILICO may conduct.
State insurance laws concerning the nature and quality of investments regulate
KILICO's investments for its General Account and any non-unitized separate
account. Within specified limits and subject to certain standards, these laws
generally permit investment in federal, state and municipal obligations,
preferred and common stocks, corporate bonds, real estate mortgages, real estate
and certain other investments. (See "Management's Discussion and
Analysis--INVESTMENTS" and "FINANCIAL STATEMENTS" for information on KILICO's
investments.) Assets of KILICO's General Account are managed by Scudder Kemper
Investments, Inc. ("SKI") an affiliate of KILICO.
KILICO intends to consider the return available on the instruments in which it
intends to invest the proceeds from the Contracts when it establishes Guaranteed
Interest Rates. Such return is only one of many factors considered in
establishing the Guaranteed Interest Rates. (See "The Accumulation Period--4.
Establishment of Guaranteed Interest Rates.")
KILICO's investment strategy for this non-unitized separate account is generally
to invest in debt instruments that it uses to match its liabilities with regard
to a Guarantee Period. This is done, in KILICO's sole discretion, by investing
in any type of instrument that is authorized under applicable state law. KILICO
expects to invest a substantial portion of the Purchase Payments received in
debt instruments as follows: (1) securities issued by the United States
Government or its agencies or instrumentalities, which issues may or may not be
guaranteed by the United States Government; (2) debt securities which have an
investment grade, at the time of purchase, within the four (4) highest grades
assigned by Moody's Investors Services, Inc. ("Moody's") (Aaa, Aa, A or Baa),
Standard & Poor's Corporation ("Standard & Poor's") (AAA, AA, A or BBB), or any
other nationally recognized rating service; and (3) other debt instruments
including, but not limited to, issues of or guaranteed by banks or bank holding
companies and corporations, which obligations, although not rated by Moody's or
Standard & Poor's, are deemed by KILICO's management to have an investment
quality comparable to securities which may be purchased as stated above. In
addition, KILICO may engage in options and futures transactions on fixed income
securities.
KILICO's invested assets portfolio at December 31, 1997 included approximately
87.4 percent in U.S. Treasuries, investment grade corporate, foreign and
municipal bonds, and commercial paper, .3 percent in below investment grade
(high risk) bonds, 4.9 percent in mortgage loans and other real estate-related
investments and 7.4 percent in all other investments. (See "Management's
Discussion and Analysis--INVESTMENTS.")
KILICO is not obligated to invest the amounts allocated to the MVA Option
according to any particular strategy, except as may be required by applicable
state insurance laws. (See "Management's Discussion and Analysis--INVESTMENTS.")
6
<PAGE> 11
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.
Twenty-nine Subaccounts of the Separate Account are currently available under
this Contract. Each Subaccount invests exclusively in shares of one of the
corresponding Portfolios of the Funds. Additional Subaccounts may be added in
the future.
The Separate Account will purchase and redeem shares from the Funds at net asset
value. KILICO will redeem shares of the Funds as necessary to provide benefits,
to deduct charges under the Contracts and to transfer assets from one Subaccount
to another as requested by Contract Owners. All dividends and capital gains
distributions received by the Separate Account from a Portfolio of a Fund will
be reinvested in such Portfolio at net asset value and retained as assets of the
corresponding Subaccount.
The Separate Account's financial statements appear in the Statement of
Additional Information.
THE FUNDS
The Separate Account invests in shares of the Investors Fund Series, the Scudder
Variable Life Investment Fund, the Janus Aspen Series and the Warburg Pincus
Trust, 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 and the Warburg
Pincus Trust, certain qualified retirement plans. Shares of the Funds are sold
only to insurance company separate accounts and qualified retirement plans. In
addition to selling shares to separate accounts of KILICO and its affiliates,
shares of the Funds may be sold to separate accounts of insurance companies not
affiliated with KILICO. It is conceivable that in the future it may be
disadvantageous for variable life insurance separate accounts and variable
annuity separate accounts of companies unaffiliated with KILICO, or for variable
life insurance separate accounts, variable annuity separate accounts and
qualified retirement plans to invest simultaneously in the Funds. Currently,
neither KILICO nor the Funds foresee any such disadvantages to variable life
insurance owners, variable annuity owners or qualified retirement plans.
Management of the Funds has an obligation to monitor events to identify material
conflicts between such owners and determine what action, if any, should be
taken. In addition, if KILICO believes that a Fund's response to any of those
events or conflicts insufficiently protects 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.
7
<PAGE> 12
The twenty-eight Portfolios are summarized below:
INVESTORS FUND SERIES
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 GOVERNMENT SECURITIES PORTFOLIO seeks high current return consistent with
preservation of capital from a portfolio composed primarily of U.S. Government
securities.
KEMPER INVESTMENT GRADE BOND PORTFOLIO seeks high current income by investing
primarily in a diversified portfolio of investment grade debt securities.
KEMPER GLOBAL INCOME PORTFOLIO seeks to provide high current income consistent
with prudent total return asset management.
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.
KEMPER HIGH YIELD PORTFOLIO seeks to provide a high level of current income by
investing in fixed-income securities.
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 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 HORIZON 20+ PORTFOLIO, designed for investors with approximately a 20+
year investment horizon, seeks growth of capital, with income as a secondary
objective.
KEMPER VALUE+GROWTH PORTFOLIO seeks growth of capital through professional
management of a portfolio of growth and value stocks.
KEMPER BLUE CHIP PORTFOLIO seeks growth of capital and of income.
KEMPER INTERNATIONAL PORTFOLIO seeks total return, a combination of capital
growth and income, principally through an internationally diversified portfolio
of equity 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 SMALL CAP GROWTH PORTFOLIO seeks maximum appreciation of investors'
capital from a portfolio primarily of growth stocks of smaller companies.
KEMPER GROWTH PORTFOLIO seeks maximum appreciation of capital through
diversification of investment securities having potential for capital
appreciation.
KEMPER GLOBAL BLUE CHIP PORTFOLIO seeks long-term growth of capital through a
diversified worldwide portfolio of marketable securities, primarily equity
securities, including common stocks, preferred stocks and debt securities
convertible into common stocks.
KEMPER INTERNATIONAL GROWTH AND INCOME PORTFOLIO seeks a long-term growth of
capital and current income, primarily from foreign equity securities.
KEMPER-DREMAN HIGH RETURN EQUITY PORTFOLIO seeks to achieve a high rate of total
return.
KEMPER-DREMAN FINANCIAL SERVICES PORTFOLIO seeks long-term capital appreciation
by investing primarily in common stocks and other equity securities of companies
in the financial services industry believed by the Portfolio's investment
manager to be undervalued.
SCUDDER VARIABLE LIFE INVESTMENT FUND
SCUDDER VLIF GLOBAL DISCOVERY PORTFOLIO seeks above-average capital appreciation
over the long term by investing primarily in the equity securities of small
companies located throughout the world.
8
<PAGE> 13
SCUDDER VLIF GROWTH AND INCOME PORTFOLIO seeks long-term growth of capital,
current income and growth of income from a portfolio consisting primarily of
common stocks and securities convertible into common stocks.
SCUDDER VLIF INTERNATIONAL PORTFOLIO seeks long-term growth of capital
principally from a diversified portfolio of foreign equity securities.
SCUDDER VLIF CAPITAL GROWTH PORTFOLIO seeks to maximize long-term capital growth
from a portfolio consisting primarily of equity securities.
JANUS ASPEN SERIES
JANUS 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.
JANUS GROWTH AND INCOME PORTFOLIO seeks long-term capital growth and current
income.
WARBURG PINCUS TRUST
WARBURG EMERGING MARKETS PORTFOLIO seeks long-term growth of capital.
WARBURG POST-VENTURE CAPITAL PORTFOLIO seeks long-term growth of capital by
investing primarily in equity securities of issuers in their
post-venture-capital stage of development and pursues an aggressive investment
strategy.
------------------
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, attached hereto, and the Funds' Statements of Additional Information
available upon request from KILICO. Read the prospectuses carefully before
investing.
Scudder Kemper Investments, Inc. ("SKI"), an affiliate of KILICO, is the
investment manager for the twenty available Portfolios of the Investors Fund
Series and the four available Portfolios of the Scudder Variable Life Investment
Fund. Zurich Investment Management Limited ("ZIML"), an affiliate of SKI, is the
sub-adviser for the Kemper International Portfolio. Under the terms of the
Sub-Advisory Agreement with SKI, ZIML renders investment advisory and management
services with regard to that portion of this Portfolio's assets as may be
allocated by SKI to ZIML from time to time for management, including services
related to foreign securities, foreign currency transactions and related
investments. Dreman Value Management L.L.C. ("DVM") serves as sub-adviser for
the Kemper-Dreman High Return Equity and Kemper-Dreman Financial Services
Portfolios. Under the terms of the sub-advisory agreement between SKI and DVM
for each Portfolio, DVM manages the investment and reinvestment of each
Portfolio's assets in accordance with the investment objectives, policies and
limitations and subject to the supervision of SKI and the Board of Trustees.
Janus Capital Corporation is the investment adviser for the two available
Portfolios of the Janus Aspen Series. Warburg Pincus Asset Management, Inc. is
the investment adviser for the two available Portfolios of the Warburg Pincus
Trust. The investment advisers are paid fees for their services by the Funds
they manage. KILICO may receive compensation from the Funds or the investment
advisers of the Funds for services related to the Funds. Such compensation will
be consistent with the services rendered or the cost savings resulting from the
arrangement.
For their services to the Portfolios, the managers receive compensation at the
following rates:
INVESTORS FUND SERIES
For its services, SKI is paid a management fee based upon the average daily net
assets of each Portfolio, as follows: Kemper Money Market (.50 of 1%), Kemper
Government Securities (.55 of 1%), Kemper Investment Grade Bond (.60 of 1%),
Kemper Global Income (.75 of 1%), Kemper Horizon 5 (.60 of 1%), Kemper High
Yield (.60 of 1%), Kemper Horizon 10+ (.60 of 1%), Kemper Total Return (.55 of
1%), Kemper Horizon 20+ (.60 of 1%), Kemper Value+Growth (.75 of 1%), Kemper
Blue Chip (.65 of 1%), Kemper International (.75 of 1%), Kemper Contrarian Value
(.75 of 1%), Kemper Small Cap Value (.75 of 1%), Kemper Small Cap Growth (.65 of
1%), Kemper Growth (.60 of 1%), Kemper Global Blue Chip (1.00% for the first
$250 million, .95% for the next $750 million and .90% over $1 billion), Kemper
International Growth and Income (.70 of 1%), Kemper-Dreman High Return Equity
and Kemper-Dreman Financial Services (.75% for the first $250 million, .72% for
the next $750 million, .70% for the next $1.5 billion, .68% for the next $2.5
billion, .65% for the next $2.5 billion, .64%
9
<PAGE> 14
for the next $2.5 billion, .63% for the next $2.5 billion and .62% over $12.5
billion). SKI pays ZIML for its services as sub-adviser for the Kemper
International Portfolio and the Kemper Global Income Portfolio a sub-advisory
fee, payable monthly, at an annual rate of .35 of 1% and .30 of 1%,
respectively, of the average daily net assets of such Portfolios. SKI pays DVM
for its services as sub-adviser for the Kemper-Dreman High Return Equity and
Kemper-Dreman Financial Services Portfolios a sub-advisory fee, payable monthly,
at the annual rate of .24% of the first $250 million of each Portfolio's average
daily net assets, .23% of the average daily net assets between $250 million and
$1 billion, .224% of average daily net assets between $1 billion and $2.5
billion, .218% of average daily net assets between $2.5 billion and $5 billion,
.208% of average daily net assets between $5 billion and $7.5 billion, .205% of
average daily net assets between $7.5 billion and $10 billion, .202% of average
daily net assets between $10 billion and $12.5 billion and .198% of each
Portfolio's average daily net assets over $12 billion.
SCUDDER VARIABLE LIFE INVESTMENT FUND
For its advisory services to the Portfolios, SKI receives compensation monthly
at the following annual rate for each Portfolio:
<TABLE>
<CAPTION>
PERCENT OF THE AVERAGE
DAILY NET ASSET VALUES
PORTFOLIO OF EACH PORTFOLIO
--------- ----------------------
<S> <C>
Scudder VLIF Global Discovery.................... .975%
Scudder VLIF Growth and Income................... .475%
Scudder VLIF International....................... .875%
Scudder VLIF Capital Growth...................... .475%
</TABLE>
JANUS ASPEN SERIES
Janus Capital Corporation receives a monthly advisory fee for the Janus Growth
Portfolio and Janus Growth and Income Portfolio based on the following schedule
(expressed as an annual rate):
<TABLE>
<CAPTION>
AVERAGE DAILY NET
ASSETS OF PORTFOLIO ANNUAL RATE
------------------- -----------
<S> <C>
First $300,000,000....................................... .75%
Next $200,000,000........................................ .70%
Over $500,000,000........................................ .65%
</TABLE>
However, Janus Capital Corporation has agreed to reduce each of the above
Portfolios' advisory fees to the extent that such fee exceeds the effective rate
of a fund managed by Janus Capital Corporation with similar investment objective
and policies.
WARBURG PINCUS TRUST
Warburg Pincus Asset Management, Inc. receives a monthly advisory fee based upon
the average daily net assets of each Warburg Portfolio, as follows: Emerging
Markets .81% and Post-Venture Capital 1.07% (after waivers and/or
reimbursements).
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
10
<PAGE> 15
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 and
Kemper Investment Grade 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 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 seven years after purchase may
be subject to a Withdrawal Charge that ranges from 7% the first year to 0% after
seven 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.
11
<PAGE> 16
FIXED ACCOUNT OPTION
CONTRIBUTIONS UNDER THE FIXED ACCOUNT OF THE CONTRACT AND TRANSFERS TO THE FIXED
ACCOUNT 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 Account Option under which KILICO 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 Fixed 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.
The minimum initial Purchase Payment is $1,000 and the minimum subsequent
payment is $500. A Contract Owner may make Purchase Payments by authorizing
KILICO to draw on an account of the Contract Owner via check or electronic
debit, in which case the minimum subsequent payment is $100. Purchase Payments
in excess of $1,000,000 require the prior approval of KILICO. The maximum annual
amount of Purchase Payments may also be limited by the provisions of the
retirement plan pursuant to which the Contract has been purchased. An allocation
to a Subaccount, the Fixed Account or a Guarantee Period must be at least $500.
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.
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 Separate Account Contract Value plus
amounts allocated to the General Account and the Guarantee Periods 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 "Tax Treatment of Withdrawals, Loans and Assignments.")
Amounts payable during the Annuity Period may not be assigned or encumbered and,
to the extent permitted by law, are not subject to levy, attachment or other
judicial process for the payment of the payee's debts or obligations.
The Beneficiary is designated by the Owner. If a Beneficiary is not named, or if
no named Beneficiary survives, the Beneficiary shall be the deceased Annuitant's
or deceased Owner's estate.
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<PAGE> 17
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), Guarantee Periods, or
Fixed 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 a Guarantee Period or to the Fixed Account will begin
earning interest one day after receipt in proper form. However, with respect to
initial Purchase Payments, the amount will be credited only after an affirmative
determination by KILICO to issue the Contract, but no later than the second day
following receipt of the Purchase Payment. After the initial purchase, the
number of Accumulation Units credited is determined by dividing the Purchase
Payment amount allocated to a Subaccount by the Accumulation Unit value which is
next computed following receipt by KILICO of any Purchase Payment in good funds.
Purchase Payments will not be received except on those days when the New York
Stock Exchange is open for trading.
The number of Accumulation Units will not change because of a subsequent change
in value. The dollar value of an Accumulation Unit will vary to reflect the
investment experience of the Subaccount and the assessment of charges against
the Subaccount other than the Records Maintenance Charge and Guaranteed
Retirement Income Benefit Charge. The number of Accumulation Units will be
reduced upon assessment of the Records Maintenance Charge and Guaranteed
Retirement Income Benefit 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.
KILICO will issue a Contract without having previously received a signed
application from the applicant in the following circumstances. A dealer may
inform KILICO of an applicant's answers to the questions necessary to issue a
Contract by transmitting to KILICO the applicable data in writing or by
electronic means. The dealer will also cause the initial Purchase Payment to be
paid to KILICO. If the information is in good order, KILICO will issue the
Contract. The Contract will be delivered to the owner with a letter requesting
the Owner to sign and return to KILICO a confirmation of the correctness of the
information in the Contract.
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
13
<PAGE> 18
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. GUARANTEE PERIODS OF THE MVA OPTION.
An Owner may select, on the application form or with the initial order to
purchase, one or more Guarantee Periods with durations of one to ten years. Any
subsequent Purchase Payments are allocated to Guarantee Periods as selected by
the Owner. The Guarantee Period, for each Purchase Payment or portion thereof,
selected by the Owner determines the Guaranteed Interest Rate. KILICO pays
interest at the Guaranteed Interest Rates in effect at the time the Purchase
Payment is received. The Guaranteed Interest Rate applies for the entire
duration of the Guarantee Period for that Purchase Payment remaining in the
Guarantee Period. Interest is credited daily at a rate equivalent to the
effective annual rate.
Set forth below is an illustration of how KILICO will credit interest during a
Guarantee Period. For the purpose of this example, certain assumptions were made
as indicated.
EXAMPLE OF GUARANTEED INTEREST RATE ACCUMULATION
<TABLE>
<S> <C>
Purchase Payment: $40,000
Guarantee Period: 5 Years
Guaranteed Interest Rate: 4.0% Effective Annual Rate
</TABLE>
<TABLE>
<CAPTION>
INTEREST CREDITED CUMULATIVE
YEAR DURING YEAR INTEREST CREDITED
- ---- ----------------- -----------------
<S> <C> <C>
1........................................................... $1,600.00 $1,600.00
2........................................................... 1,664.00 3,264.00
3........................................................... 1,730.56 4,994.56
4........................................................... 1,799.78 6,794.34
5........................................................... 1,871.77 8,666.11
</TABLE>
Accumulated Value at the end of 5 years is:
$40,000 + $8,666.11 = $48,666.11
NOTE: THIS EXAMPLE ASSUMES NO WITHDRAWALS OF ANY AMOUNT DURING THE ENTIRE
FIVE-YEAR PERIOD. A MARKET VALUE ADJUSTMENT AND A WITHDRAWAL CHARGE APPLY TO ANY
INTERIM WITHDRAWAL OR TRANSFER (SEE, "WITHDRAWAL DURING ACCUMULATION PERIOD" AND
"TRANSFER DURING ACCUMULATION PERIOD.") THE HYPOTHETICAL INTEREST RATES ARE
ILLUSTRATIVE ONLY AND ARE NOT INTENDED TO PREDICT FUTURE INTEREST RATES TO BE
GUARANTEED UNDER THE CONTRACT. ACTUAL INTEREST RATES GUARANTEED FOR ANY GIVEN
TIME MAY BE MORE OR LESS THAN THOSE SHOWN.
At the end of any Guarantee Period, a subsequent Guarantee Period begins. KILICO
provides written notification of the beginning of a subsequent Guarantee Period.
The subsequent Guarantee Period automatically renews for the same duration as
the terminating Guarantee Period unless the Owner elects another Guarantee
Period within thirty days after the end of the terminating Guarantee Period. The
Owner may choose a different Guarantee Period by preauthorized telephone
instructions or written notification to KILICO within thirty days after the
beginning of the subsequent Guarantee Period (or such longer period as stated in
KILICO's notification). An Owner should not select a subsequent Guarantee Period
that would extend beyond the Annuity Date then in effect for that Contract as
the Guarantee Period Amount available for annuitization in such Guarantee Period
would be subject to a Market Value Adjustment and any applicable Withdrawal
Charge. (See "Market Value Adjustment" below.)
14
<PAGE> 19
The amount reinvested at the beginning of any subsequent Guarantee Period is
equal to the Guarantee Period Value in the Guarantee Period just ended. The
Guaranteed Interest Rate in effect when the subsequent Guarantee Period begins
applies for the entire duration of the subsequent Guarantee Period.
An Owner may call 1-800-621-5001 or write to KILICO, 1 Kemper Drive, Long Grove,
Illinois 60049 for the subsequent Guaranteed Interest Rates.
4. ESTABLISHMENT OF GUARANTEED INTEREST RATES.
KILICO declares the Guaranteed Interest Rates for each of the ten durations of
Guarantee Periods from time to time as market conditions dictate, but once
established, rates will be guaranteed for the duration of the respective
Guarantee Periods. KILICO advises an Owner of the Guaranteed Interest Rate for a
chosen Guarantee Period at the time a Purchase Payment is received, a transfer
is effectuated or a Guarantee Period renews. Any portion of an Owner's
Accumulated Guarantee Period Value withdrawn from the MVA Option will be subject
to any applicable Withdrawal Charge and Records Maintenance Charge and may be
subject to a Market Value Adjustment. (See "Market Value Adjustment" below.)
KILICO has no specific formula for establishing the Guaranteed Interest Rates
for the Guarantee Periods. The determination may be influenced by, but not
necessarily correspond to, interest rates generally available on the types of
investments acquired with the Purchase Payments received under the Contracts.
(See "The MVA Option".) KILICO, in determining Guaranteed Interest Rates, may
also consider, among other factors, the duration of a Guarantee Period,
regulatory and tax requirements, sales commissions and administrative expenses
borne by KILICO, and general economic trends.
KILICO'S MANAGEMENT MAKES THE FINAL DETERMINATION OF THE GUARANTEED INTEREST
RATES TO BE DECLARED. KILICO CANNOT PREDICT OR GUARANTEE THE LEVEL OF FUTURE
GUARANTEED INTEREST RATES.
5. 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 Accumulated Guarantee Period Value in the MVA Option and the Owner's
Contract interest in the Fixed Account, equals the Contract Value.
6. TRANSFER DURING ACCUMULATION PERIOD.
During the Accumulation Period, a Contract Owner may transfer the Contract Value
among the Subaccounts, the Guarantee Periods and the Fixed Account subject to
the following provisions: (i) the amount transferred must be at least $100
unless the total Contract Value attributable to a Subaccount, Guarantee Period
or Fixed Account is being transferred; (ii) the Contract Value remaining in a
Subaccount, Guarantee Period or Fixed Account must be at least $500 unless the
total value was transferred; (iii) transfers may not be made from any Subaccount
to the Fixed Account for a period of six months following any transfer from the
Fixed Account into one or more Subaccounts; and (iv) transfers from the Fixed
Account may be made one time during the Contract year in the thirty day period
following an anniversary of a Contract year. KILICO reserves the right to charge
a fee of $25 for each transfer in excess of 12 transfers per calendar year. In
addition, transfers of all or a portion of Guarantee Period Value will be
subject to the Market Value Adjustment described below unless the transfer is
effective within thirty days after the end of the applicable Guarantee Period.
Because a transfer before the end of a Guarantee Period is subject to a Market
Value Adjustment, the amount actually transferred from the Guarantee Period may
be more or less than the requested specific dollar amount.
KILICO will make transfers pursuant to proper written or telephone instructions
which specify in detail the requested changes. 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.
15
<PAGE> 20
If a Contract Owner authorizes a third party to transact transfers on the
Contract Owner's behalf, KILICO will reallocate the Contract Value pursuant to
the instructions from such third party. However, KILICO does not offer or
participate in any asset allocation program and takes no responsibility for any
third party asset allocation program. KILICO may suspend or cancel acceptance of
a third party's instructions at any time and may restrict the investment options
that will be available for transfer under third party authorizations.
A Contract Owner may elect to have transfers made automatically among the
Subaccounts of the Separate Account on an annual, semiannual or quarterly basis
so that Contract Value is reallocated to match the percentage allocations in the
Contract Owner's predefined allocation elections. Transfers under this program
will not be subject to the $100 minimum transfer amounts described above. An
election to participate in the automatic asset reallocation program must be in
writing in the form prescribed by KILICO and returned to KILICO at its home
office.
7. WITHDRAWAL DURING ACCUMULATION PERIOD.
The Contract Owner may redeem all or a portion of the Contract Value and
previous withdrawals, plus or minus any applicable Market Value Adjustment and
less any Withdrawal Charge. 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 the greater of (i) the excess of Contract
Value over total Purchase Payments subject to Withdrawal Charges, less prior
withdrawals that were previously assessed a Withdrawal Charge, and (ii) 10% of
the Contract Value in any Contract Year, without assessment of any Withdrawal
Charge. If the Contract Owner withdraws an amount in excess of the above amount
in any Contract Year, the excess amount of Purchase Payments withdrawn are
subject to a Withdrawal Charge. The Withdrawal Charge is 7% in the first
Contribution Year, 6% in the second Contribution Year, 5% in the third and
fourth Contribution Years, 4% in the fifth Contribution Year, 3% in the sixth
Contribution Year, 2% in the seventh Contribution Year and 0% in the eighth and
later Contribution Years.
In the case of a Contract invested other than solely in one Subaccount or
Guarantee Period or the Fixed Account, 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, Guarantee Periods and the Fixed Account in which the Contract
Owner has an interest. The number of Accumulation Units redeemed from each
Subaccount and the amount redeemed from the Guarantee Periods and the Fixed
Account will be in approximately the same proportion which the Owner's Contract
interest in each Subaccount, Guarantee Period and in the Fixed 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) Partial withdrawals are not permitted from the Fixed Account in the
first Contract Year.
(2) The amount requested must be at least $100 (before application of the
Market Value Adjustment), or the Owner's entire interest in the Subaccount,
Guarantee Period or the Fixed Account from which withdrawal is requested.
(3) The Owner's Contract interest in the Subaccount, Guarantee Period or
the Fixed Account from which the withdrawal is requested must be at least
$500 after the withdrawal is completed unless the total value was
withdrawn.
Election to withdraw shall be made in writing to KILICO at Suite 102, 1290 Silas
Deane Highway, Wethersfield, CT 06109 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 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
16
<PAGE> 21
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. For withdrawal requests from the MVA Option and
the Fixed Account, KILICO may defer any payment for the period permitted by the
appropriate state of jurisdiction, but in no event for more than six months
after the written request is received by KILICO. During the period of deferral,
interest at the current Guaranteed Interest Rate for the same Guarantee Period
as declared by KILICO, will continue to be credited.
8. MARKET VALUE ADJUSTMENT.
Any withdrawal (except payments of death benefits), transfer or any
annuitization of Guarantee Period Value other than if effected during the "free
look" period or within 30 days after a Guarantee Period terminates, may be
adjusted up or down by the application of a Market Value Adjustment. The Market
Value Adjustment is applied to the amount being withdrawn before deduction of
any applicable Withdrawal Charge.
The Market Value Adjustment reflects the relationship between (a) the currently
established interest rate ("Current Interest Rate") for a Guarantee Period equal
to the remaining length of the Guarantee Period, rounded to the next higher
number of complete years, and (b) the Guaranteed Interest Rate applicable to the
amount being withdrawn. Generally, if the Guaranteed Interest Rate is the same
or lower than the applicable Current Interest Rate, then the application of the
Market Value Adjustment results in a reduced Market Adjusted Value and hence a
lower payment upon withdrawal. Thus, it is possible that the amount available on
withdrawal could be less than the original Purchase Payment or the original
amount allocated to a Guarantee Period if interest rates increase. Conversely,
if the Guaranteed Interest Rate is higher than the applicable Current Interest
Rate, the application of the Market Value Adjustment results in an increased
Market Adjusted Value and, hence, a higher payment upon withdrawal.
The Market Value Adjustment (MVA) is determined by the application of the
following formula:
(1 + I) (t/365)
MVA = MPV X [ [ ------- ] -1 ]
(1 + J)
Where I is the Guaranteed Interest Rate being credited to the Guarantee
Period Value (MPV) subject to the Market Value Adjustment,
J is the Current Interest Rate declared by KILICO, as of the effective date
of the application of the Market Value Adjustment, for current allocations
to a Guarantee Period the length of which is equal to the balance of the
Guarantee Period for the Guarantee Period Value subject to the Market Value
Adjustment, rounded to the next higher number of complete years, and
t is the number of days remaining in the Guarantee Period.
For an illustration showing an upward and a downward adjustment, see Appendix A.
9. GUARANTEED DEATH BENEFIT.
A death benefit will be paid to the designated Beneficiary upon any of the
following events during the Accumulation Period:
1. the death of the Owner, or a joint owner,
2. the death of the Annuitant if no contingent annuitant is named or if
the contingent annuitant does not survive the Annuitant, or
3. if a contingent annuitant is named and survives the Annuitant, the
death of the contingent annuitant.
The amount of the death benefit will depend on the age of the deceased Owner or
Annuitant at the time the death benefit becomes payable. If the deceased Owner
or Annuitant had not attained age 91 prior to the date of death, the greatest of
the following amounts will be paid to the designated Beneficiary: (a) the total
amount of Purchase Payments, less the aggregate dollar amount of all previous
partial withdrawals; (b) the Contract Value; (c) Purchase Payments less previous
partial withdrawals accumulated at 5.00% interest per year to the earlier of the
deceased's age 80 or the date of death plus the total amount of Purchase
Payments less the aggregate dollar amount of all partial withdrawals from age 80
to the date of death; and (d) the greatest anniversary value immediately
preceding the date of death determined as follows. The highest of the Contract
Values on each
17
<PAGE> 22
Contract anniversary prior to the deceased's attainment of age 81 is determined.
The greatest anniversary value is equal to this amount, increased by the dollar
amount of any purchase payments made since that anniversary and reduced by any
withdrawals since that anniversary. If the deceased had attained age 91 prior to
the date of death, the Contract Value will be paid to the designated
Beneficiary. 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, 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.
10. GUARANTEED RETIREMENT INCOME BENEFIT.
Guaranteed Retirement Income Benefit is an optional benefit available under the
Contract which provides a minimum amount of fixed annuity guaranteed lifetime
income to the Annuitant subject to the conditions described below. The
Guaranteed Retirement Income Benefit option must be elected on the initial
application or order to purchase. The Owner may elect to discontinue this
benefit any time after the seventh Contract anniversary by sending a written
notice to KILICO. Once the benefit has been discontinued, it may not be elected
again.
If the Guaranteed Retirement Income Benefit has been elected by the Contract
Owner on the initial application or order to purchase and has not been
discontinued by the Owner, it may be exercised only within thirty days following
the seventh or later Contract anniversary. In addition, it may not be exercised
prior to the Annuitant's attainment of age 60, nor later than attainment of age
91, except that if the age of the Annuitant on the Date of Issue of the Contract
is below age 44, it may be exercised following the 15th or later Contract
anniversary.
If the Guaranteed Retirement Income Benefit is exercised by an eligible Contract
Owner, the amount of the annuity payments will be based on the greater of:
1. the income provided by applying the Guaranteed Retirement Income
Benefit base to the guaranteed annuity factors; and
2. the income provided by applying the Contract Value to the current
annuity factors.
For the above purposes, the Guaranteed Retirement Income Benefit base is equal
to the amount of the Guaranteed Death Benefit that would have been paid under
the Contract. This amount is equal to the greatest of the following amounts: (a)
the total amount of Purchase Payments, less the aggregate dollar amount of all
previous partial withdrawals; (b) the Contract Value; (c) Purchase Payments less
previous partial withdrawals accumulated at 5.00% interest per year to the
earlier of the Annuitant's age 80 or the date of exercise of the benefit plus
the total amount of Purchase Payments less the aggregate dollar amount of all
partial withdrawals from age 80 to the date of exercise; and (d) the greatest
anniversary value immediately preceding the date of exercise of the benefit
determined as follows. The highest of the Contract Values on each Contract
anniversary prior to the Annuitant's attainment of age 81 is determined. The
greatest anniversary value is equal to this amount, increased by the dollar
amount of any purchase payments made since that anniversary and reduced by any
withdrawals since that anniversary. The guaranteed annuity factors are based on
the 1983a table projected using projection scale G, with interest at 2.5% (the
"Annuity 2000" table), except that if the Guaranteed Retirement Income Benefit
is exercised on the 10th year anniversary or later, its interest rate assumption
will be 3.50%.
Because the Guaranteed Retirement Income Benefit is based on conservative
actuarial factors, the level of income that it guarantees may often be less than
the level that would be provided by applying the Contract Value to current
annuity factors.
18
<PAGE> 23
The Guaranteed Retirement Income Benefit will be paid in the amount determined
above and will be paid for the life of the Annuitant with a period certain based
on the Annuitant's age at the time the benefit is exercised and the type of
Contract, as follows:
<TABLE>
<CAPTION>
PERIOD CERTAIN YEARS
--------------------------
INDIVIDUAL
ANNUITANT'S AGE RETIREMENT
AT ELECTION ANNUITY NON-QUALIFIED
- --------------- ---------- -------------
<S> <C> <C>
15 to 75 10 10
76 9 10
77 8 10
78 7 10
79 7 10
80 7 10
81 7 9
82 7 8
83 7 7
84 6 6
85 to 90 5 5
</TABLE>
CONTRACT CHARGES AND EXPENSES
Charges and deductions under the Contracts are made for KILICO's assumption of
mortality and expense risk and administrative expenses, and for an annual
Records Maintenance Charge. Subject to certain expense limitations, investment
management fees and other expenses of the Funds are indirectly borne by the
Contract Owner. KILICO will deduct state premium taxes from Contract Value when
paid by KILICO. Where applicable, the dollar amount of state premium taxes
previously paid or paid upon annuitization by KILICO will be charged back
against the Contract Value when and if the Contract is annuitized. Additionally,
where applicable, a Withdrawal Charge may be assessed by KILICO in the event of
early withdrawal or early annuitization. A Guaranteed Retirement Income Benefit
charge also applies if the Guaranteed Retirement Income Benefit is elected.
A. CHARGES AGAINST THE SEPARATE ACCOUNT.
During the Accumulation Period and the Annuity Period, KILICO assesses that
portion of each Subaccount with a daily asset charge for mortality and expense
risks and administrative costs, which amounts to an aggregate of 1.40% per annum
(consisting of 1.25% for mortality and expense risks and .15% 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 account. Additionally, KILICO
deducts an annual Records Maintenance Charge of $30 for each Contract as
described below. The Records Maintenance Charge is not assessed during the
Annuity Period.
These charges may be decreased by KILICO without notice but may not exceed the
rate or amount shown above. If the daily asset charge is insufficient to cover
the risks and costs, any loss or deficiency will fall on KILICO. Conversely, if
the charges prove more than sufficient, the gain will accrue to KILICO, creating
a profit which would be available for any proper corporate purpose including,
among other things, payment of distribution expenses.
1. RECORDS MAINTENANCE CHARGE.
KILICO will assess an annual Records Maintenance Charge of $30 during the
Accumulation Period against each Contract which has a Contract Value of less
than $50,000 on the date of assessment whether or not any Purchase Payments have
been made during the year. The charge is assessed at the end of each Contract
Year, on surrender of a Contract and on surrender upon annuitization. This
charge is to reimburse KILICO for expenses incurred in establishing and
maintaining the records relating to the Contract. The imposition of the Records
Maintenance Charge will constitute a reduction in the net assets of each
Subaccount, Guarantee Period and the Fixed Account.
At any time the Records Maintenance Charge is assessed, an equal portion of the
applicable charge will be assessed against each Subaccount, Guarantee Period and
the Fixed Account in which the Contract is participating
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<PAGE> 24
and a number of Accumulation Units sufficient to equal the proper portion of the
charge will be redeemed from each Subaccount, and an amount deducted from the
Fixed Account Contract Value and Guarantee Period Value to meet the assessment.
2. MORTALITY RISK.
Variable Annuity payments reflect the investment experience of each Subaccount
but are not affected by changes in actual mortality experience or by actual
expenses incurred by KILICO.
The mortality risk assumed by KILICO arises from two contractual obligations.
First, in case of the death of the Contract Owner or of the Annuitant prior to
the deceased's 91st birthday, and prior to the Annuity Date, KILICO may, in some
cases, pay an amount greater than the Contract Value. (See "Guaranteed Death
Benefit", page 17) The second contractual obligation assumed by KILICO is to
continue to make annuity payments to each Annuitant for the entire life of the
Annuitant under Annuity Options involving life contingencies.
The latter assures each Annuitant that neither the Annuitant's own longevity nor
an improvement in life expectancy generally will have an adverse effect on the
annuity payments received under a Contract and relieves the Annuitant from the
risk of outliving the amounts accumulated for retirement.
3. EXPENSE RISK.
KILICO also assumes the risk that all actual expenses involved in administering
the Contracts including Contract maintenance costs, administrative costs, data
processing costs and costs of other services may exceed the amount recovered
from the Records Maintenance Charge or the amount recovered from the
administrative cost portion of the daily asset charge.
4. ADMINISTRATIVE COSTS.
The daily asset charge for administrative costs is imposed to reimburse KILICO
for the expenses it incurs for administering the Contracts, which include, among
other things, responding to Contract Owner inquiries, processing changes in
Purchase Payment allocations and providing reports to Contract Owners.
5. EXCEPTIONS.
KILICO may offer, at its discretion, reduced fees and charges, including but not
limited to, Records Maintenance Charge and mortality and expense risk and
administrative charges, for certain sales that may result in savings of certain
costs and expenses. Reductions in these fees and charges will not be unfairly
discriminatory against any Contract Owner.
B. WITHDRAWAL CHARGE.
No sales charge is deducted from any Purchase Payment. However, a contingent
deferred sales charge ("Withdrawal Charge") will be used to cover expenses
relating to the sale of the Contracts, including commissions paid to sales
personnel, and other promotion and acquisition expenses. Also, withdrawals 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.")
Each Contract Year, a Contract Owner may withdraw up to the greater of (i) the
excess of Contract Value over total Purchase Payments subject to Withdrawal
Charges less prior withdrawals that were previously assessed a Withdrawal
Charge, and (ii) 10% of the Contract Value determined at the time the withdrawal
is requested, without assessment of any charge. If the Contract Owner withdraws
an amount in excess of the above amount, the Purchase Payments withdrawn in
excess of the above amount will be subject to a Withdrawal Charge. The
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<PAGE> 25
Withdrawal Charge applies in the first seven Contribution Years following each
Purchase Payment as shown below:
<TABLE>
<CAPTION>
YEAR OF
WITHDRAWAL WITHDRAWAL
AFTER PURCHASE CHARGE
-------------- ----------
<S> <C>
First.................................. 7%
Second................................. 6%
Third.................................. 5%
Fourth................................. 5%
Fifth.................................. 4%
Sixth.................................. 3%
Seventh................................ 2%
Eighth and following................... 0%
</TABLE>
Purchase Payments will be deemed to be surrendered in the order in which they
were received.
When a withdrawal is requested, the recipient will receive a check in the amount
requested. To the extent that any Withdrawal Charge is applicable, the Contract
Value will be reduced by the amount of the Withdrawal Charge in addition to the
actual dollar amount sent to the Owner.
Because the Contribution Years are based on the date each Purchase Payment is
made, Contract Owners may be subject to a Withdrawal Charge as indicated above,
even though the Contract may have been issued many years earlier. (For
additional details, see "Withdrawal During Accumulation Period.")
Subject to certain exceptions and State approvals, withdrawal charges will not
be assessed on withdrawals:
1. after an Owner has been confined in a hospital or skilled health care
facility for at least thirty days and the Owner remains confined at the
time of the request;
2. within thirty days following an Owner's discharge from a hospital or
skilled health care facility after a confinement of at least thirty
days; or
3. if the Owner or Annuitant becomes disabled after the Contract is
issued and before attaining age 65.
Restrictions and provisions related to the nursing care or hospitalization
disability waivers are more fully described in endorsements issued with the
Contract.
The Withdrawal Charges are intended to compensate KILICO for expenses in
connection with distribution of the Contracts. Under current assumptions, KILICO
anticipates Withdrawal Charges will not fully cover distribution expenses. To
the extent that distribution expenses are not recovered from Withdrawal Charges,
those expenses may be recovered from KILICO's general assets. Those assets may
include proceeds from the mortality and expense charge described above.
The Withdrawal Charge also applies at the time of annuitization to amounts
attributable to Accumulation Units in their seventh Contribution Year or
earlier. The amount annuitized is subject to the Withdrawal Charge, as
applicable. There shall be no Withdrawal Charge assessed upon annuitization so
long as annuity payments provide for payment under Annuity Options 2, 3 or 4, or
payments under Annuity Option 1 are scheduled to continue for at least five
years.
The Withdrawal Charge may be reduced or eliminated, but only to the extent
KILICO anticipates that it will incur lower sales expenses or perform fewer
services because of economies arising from the size of the particular group, the
average contribution per participant, or the use of mass enrollment procedures.
Units of a Subaccount sold to officers, directors and employees of KILICO and
Investors Fund Series (IFS), IFS investment advisers and principal underwriter
or certain affiliated companies, or to any trust, pension, profit-sharing or
other benefit plan for such persons may be withdrawn without any Withdrawal
Charge.
C. GUARANTEED RETIREMENT INCOME BENEFIT CHARGE
If the Guaranteed Retirement Income Benefit option is selected on the initial
application or order to purchase, KILICO will deduct on each Contract Quarter
anniversary a pro rata portion of an annual charge equal to 0.25% of the
Contract Value. The quarterly charge will be deducted on a pro rata basis from
the Subaccounts, the Fixed Account and Guarantee Periods. The charge for the
Guaranteed Retirement Income Benefit will cease after the Annuitant attains age
91.
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<PAGE> 26
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
are described on pages 9 and 10. 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. See "Appendix--State Premium Tax Chart" in the Statement
of Additional Information.
THE ANNUITY PERIOD
In addition to exercising the Guaranteed Retirement Income Benefit, Contracts
may be annuitized under one of several other Annuity Options. Annuity payments
will begin on the Annuity Date and under the Annuity Option selected by the
Owner. The Annuity Date must be at least one year after the Date of Issue and
may not be deferred beyond the Annuitant's 91st birthday (100th birthday if the
Contract is part of a Charitable Remainder Trust) subject to state variation.
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) if
variable annuitization is elected, 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 seventh 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 and state variations) to commence annuity payments prior to the
Annuitant's 91st birthday (100th birthday if the Contract is part of a
Charitable Remainder Trust). A change of Annuity Option is permitted if made
before the date annuity payments are to commence. 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. 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) for options involving life contingency, the age and sex 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. The sex of the payee will influence the
amount of periodic payments because females have longer life expectancies than
males and therefore the payments will be smaller. 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.
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<PAGE> 27
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
the discounted value of the remaining payments in the specified period based on
the discount rates stated in the supplemental contract. Variable Annuity
payments under Option 1 reflect the payment of the mortality and expense risk
charge, even though there is no life contingency risk associated with Option 1.
OPTION 2--LIFE INCOME.
An annuity payable monthly during the lifetime of the payee, terminating with
the last monthly payment due prior to the death of the payee. If this Option is
elected, annuity payments terminate automatically and immediately on the death
of the payee without regard to the number or total amount of payments made.
Thus, it is possible for an individual to receive only one payment if death
occurred prior to the date the second payment was due.
OPTION 3--LIFE INCOME WITH INSTALLMENTS GUARANTEED.
An annuity payable monthly during the lifetime of the payee with the provision
that if, at the death of the payee, payments have been made for less than five,
ten, fifteen or twenty years as elected, and the Beneficiary is a natural
person, KILICO will automatically continue payments for the remainder of the
elected period to the Beneficiary. If the Beneficiary is either an estate or
trust, KILICO will pay the discounted value of the remaining payments in the
specified period based on the discount rates stated in the supplemental
contract.
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 Fixed Account
Contract Value or Guarantee Period 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.
The MVA Option is not available during the Annuity Period.
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 Fixed
Account by written request to KILICO subject to the following limitations:
a. No transfer to a Subaccount may be made during the first year of the
Annuity Period; subsequent transfers are limited to one per year during the
Annuity Period.
b. A Contract's entire interest in a Subaccount must be transferred.
c. A transfer to a Subaccount, if notice to KILICO is received more than
seven (7) days prior to any annuity payment date, shall be effective during
the Valuation Period next succeeding the date such notice is received. If
received fewer than seven (7) days before any annuity payment date, the
transfer shall be effective during the Valuation Period next succeeding
that annuity payment date.
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<PAGE> 28
d. A transfer to the Fixed Account may be made effective only on an
anniversary of the first Annuity Date and upon not less than thirty (30)
days prior written notice to KILICO.
The Annuity Unit value of a Subaccount shall be determined as of the end of the
Valuation Period next preceding the effective date of the transfer. The transfer
privilege may be suspended, modified or terminated at any time (subject to state
requirements). Payees should consider the appropriateness of each Subaccount's
investment objectives and risks as an investment during the Annuity Period.
5. ANNUITY UNIT VALUE.
The value of an Annuity Unit is determined independently for each of the
Subaccounts.
For each Subaccount, the Annuity Unit value for any Valuation Period is
determined by multiplying the Annuity Unit value for the immediately preceding
Valuation Period by the net investment factor for the Valuation Period for which
the Annuity Unit value is being calculated, and multiplying the result by an
interest factor which offsets the effect of the assumed investment earnings rate
of 2.5% per annum which is assumed in the annuity tables contained in the
Contract.
The net investment factor for each Subaccount for any Valuation Period is
determined by dividing (a) by (b) where:
(a) Is the value of an Accumulation Unit for the applicable Subaccount as
of the end of the current Valuation Period, plus or minus the per share
charge or credit for taxes reserved.
(b) Is the value of an Accumulation Unit for the applicable Subaccount as
of the end of the immediately preceding Valuation Period, plus or minus the
per share charge or credit for taxes reserved.
6. FIRST PERIODIC PAYMENT UNDER VARIABLE ANNUITY.
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 falling on the 20th day of a month or 7th day of a month
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 UNDER VARIABLE ANNUITY.
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. Payment will be based on
the Contract Value as of the date immediately preceding the date the annuity
payment is due. Fixed Annuity payments will not change regardless of investment,
mortality or expense experience.
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<PAGE> 29
9. DEATH BENEFIT.
If the payee dies after the Annuity Date while the Contract is in force, the
death proceeds, if any, will depend upon the form of annuity payment in effect
at the time of death. (See "Annuity Options.")
FEDERAL INCOME TAXES
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.
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 Certificate. KILICO does not anticipate that it will
incur any federal income tax liability attributable to such income and gains of
the Separate Account, and therefore KILICO does not intend to make provision for
any such taxes. If KILICO is taxed on investment income or capital gains of the
Separate Account, then KILICO may impose a charge against the Separate Account
in order to make provision for such taxes.
C. TAXATION OF ANNUITIES IN GENERAL
1. TAX DEFERRAL DURING ACCUMULATION PERIOD
Under existing provisions of the Code, except as described below, any increase
in the Contract Value of a Non-Qualified Plan Contract is generally not taxable
to the 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 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 Contracts is taxed as ordinary
income that is received or accrued by the Owner during the taxable year. There
are several exceptions to this general rule for non-natural Owners. First,
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 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
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<PAGE> 30
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 Certificate.
Although KILICO does not control the investments of the Fund, it expects that
the Fund will comply with such regulations so that the Separate Account will be
considered "adequately diversified."
OWNERSHIP TREATMENT. In certain circumstances, a variable annuity contract owner
may be considered the owner, for federal income tax purposes, of the assets of
the separate account used to support his or her contract. In those
circumstances, income and gains from such separate account assets would be
includible in the contract owner's gross income. The Internal Revenue Service
(the "Service") has stated in published rulings that a variable contract owner
will be considered the owner of separate account assets if the owner possesses
incidents of ownership in those assets, such as the ability to exercise
investment control over the assets. In addition, the Treasury Department
announced, in connection with the issuance of regulations concerning investment
diversification, that those regulations "do not provide guidance concerning the
circumstances in which investor control of the investments of a segregated asset
account may cause the investor, rather than the insurance company, to be treated
as the owner of the assets in the account." This announcement also stated that
guidance would be issued by way of regulations or rulings on the "extent to
which policyholders may direct their investments to particular sub-accounts [of
a separate account] without being treated as owners of the underlying assets."
As of the date of this Prospectus, no such guidance has been issued.
The ownership rights under this 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 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 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 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 assignment or
pledge (or agreement to assign or pledge) any portion of the Certificate Value,
is treated as a withdrawal of such amount or portion. (Assignments and pledges
are permitted only in limited circumstances under Qualified Plan 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
26
<PAGE> 31
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.
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
Owner reaches age 59 1/2; (b) attributable to the Owner's becoming disabled (as
defined in the tax law); (c) made to a Beneficiary on or after the death of the
Owner or, if the Owner is not an individual, on or after the death of the
primary Annuitant (as defined in the tax law); (d) made as a series of
substantially equal periodic payments (not less frequently than annually) for
the life (or life expectancy) of the Annuitant or for the joint lives (or joint
life expectancies) of the Annuitant and designated Beneficiary (as defined in
the tax law); (e) made under a 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.)
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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.
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 section 408 or 408A 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. 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. There are exceptions to this penalty tax which
vary depending on the type of Qualified Plan. In the case of an IRA, exceptions
provide that the penalty tax does not apply to a payment (a) received on or
after the Owner reaches age 59 1/2, (b) received on or after the Owner's death
or because of the Owner's disability (as defined in the tax law), or (c) made as
a series of substantially equal periodic payments (not less frequently than
annually) for the life (or life expectancy) of the Owner or for the joint lives
(or joint life expectancies) of the Owner and designated beneficiary (as defined
in the tax law). These exceptions, as well as certain others not described
herein, generally apply to taxable distributions from other Qualified Plan
Contracts. 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
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exceptions 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, 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 and 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 Certificate
Value. The Certificate provides a death benefit that in certain circumstances
may exceed the greater of the Purchase Payments and the Certificate Value. It is
possible that the Certificate's death benefit could be viewed as violating the
prohibition on investment in life insurance contracts with the result that the
Certificate would not be viewed as satisfying the requirements of an IRA.
SIMPLIFIED EMPLOYEE PENSIONS (SEP-IRAS). Section 408(k) of the Code allows
employers to establish simplified employee pension plans for their employees,
using the employees' IRAs for such purposes, if certain criteria are met. Under
these plans the employer may, within specified limits, make deductible
contributions on behalf of the employees to IRAs. As discussed above (see
Individual Retirement Annuities), there is some uncertainty regarding the
treatment of the Certificate's death benefit for purposes of the tax rules
governing IRAs (which would include SEP-IRAs). Employers and employees intending
to use the Certificate in connection with such plans should seek competent
advice.
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 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.
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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.
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. KILICO pays commissions to the
seller which may vary but are not anticipated to exceed in the aggregate an
amount equal to six and one-quarter percent of Purchase Payments. 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"), 1 Kemper Drive, Long Grove, Illinois, 60010, 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 the
investment options specified in this Prospectus. Other distributors may sell and
service contracts with different investment options.
VOTING RIGHTS
Proxy materials in connection with any shareholder meeting of a Fund will be
delivered to each Contract Owner with Subaccount interests invested in such Fund
as of the record date for voting at such meeting. Such proxy materials will
include an appropriate form which may be used to give voting instructions.
KILICO will vote such Fund shares held in each Subaccount in accordance with
instructions received from persons having a Subaccount interest in such Fund
shares. Fund shares as to which no timely voting instructions are received will
be voted by KILICO in proportion to the voting instructions received from all
persons in a timely manner. KILICO will also vote any Fund shares attributed to
amounts it has accumulated in the Subaccounts in the same proportion that
Contract Owners vote. A Fund is not required to hold annual shareholders'
meetings. They will, however, hold special meetings as required or deemed
desirable for such purposes as electing trustees, changing fundamental policies
or approving an investment advisory agreement.
Contract Owners of all Contracts participating in each Subaccount shall have
voting rights with respect to the Portfolio invested in by that Subaccount,
based upon each Contract Owner's proportionate interest in that Subaccount as
measured by units. The person having such voting rights will be the Contract
Owner before surrender, the Annuity Date or the death of the Annuitant, and
thereafter, the payee entitled to receive Variable Annuity payments under the
Contract. During the Annuity Period, voting rights attributable to a Contract
will generally decrease as Annuity Units attributable to an Annuitant decrease.
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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 Account 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. In addition, KILICO will calculate for a
Contract Owner the portion of a total amount that must be invested in a selected
Guarantee Period so that the portion grows to equal the original total amount at
the expiration of the Guarantee Period.
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 a Subaccount to be automatically transferred on a
monthly, quarterly, semiannual or annual basis for a specified duration to one
or more of the other Subaccounts, Guarantee Periods and the Fixed Account during
the Accumulation Period. A Contract Owner may also elect such transfers from the
Fixed Account on a monthly or quarterly basis for a minimum duration of one
year. 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").
A Contract Owner may also for purposes of Dollar Cost Averaging allocate all or
a portion of the initial Purchase Payment to the Kemper Money Market Subaccount
#2 which is the only Subaccount with no deduction for the 1.40% charge for
mortality and expense risks and administrative costs. The Contract Owner must
transfer all of the Subaccount Value out of Kemper Money Market Subaccount #2
within one year from the initial Purchase Payment. If an Owner terminates Dollar
Cost Averaging or does not deplete all Contract Value in Kemper Money Market
Subaccount #2 within one year, KILICO will automatically transfer any remaining
Subaccount Value in Kemper Money Market Subaccount #2 to Kemper Money Market
Subaccount #1.
Transfers will be made in the amounts designated by the Contract Owner and must
be at least $100 per Subaccount, Guarantee Period or Fixed Account. The total
Contract Value in an account 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
transferring account 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 Fixed Account has a balance of at least $10,000, a Contract Owner may
elect automatic calendar quarter transfers of interest accrued in the Fixed
Account to one or more of the Subaccounts or Guarantee Periods. 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 Fixed Account
transfers) prior to the next Transfer Date such transfer is to be made.
Election of Dollar Cost Averaging is not available during the Annuity Period.
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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 Fixed Account, or from any of the Subaccounts
or Guarantee Periods on a monthly, quarterly, semi-annual or annual basis.
Currently the SWP is available to Contract Owners who request a minimum $100
periodic payment. A market value adjustment will apply to any withdrawals under
the SWP from a Guarantee Period unless effected within 30 days after the
Guarantee Period ends. SWP withdrawals from the Fixed Account are not available
in the first Contract Year and are limited to the amount that is free of
Withdrawal Charges. If the amounts distributed under the SWP from the
Subaccounts or Guarantee Periods exceed the amount free of Withdrawal Charge
then the Withdrawal Charge will be applied on any amounts exceeding the 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.
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.
LEGAL MATTERS
Legal matters with respect to the organization of KILICO, its authority to issue
annuity contracts and the validity of the Contract, have been passed upon by
Frank Julian, Associate General Counsel for KILICO. Jorden Burt Boros Cicchetti
Berenson & Johnson, Washington, D.C., has advised KILICO on certain legal
matters concerning federal securities laws applicable to the issue and sale of
the Contracts.
SPECIAL CONSIDERATIONS
KILICO reserves the right to amend the Contract and Certificates to meet the
requirements of any applicable federal or state laws or regulations. KILICO will
notify the Owner in writing of any such amendments.
An Owner's rights under a Contract may be assigned as provided by applicable
law. An assignment will not be binding upon KILICO until it receives a written
copy of the assignment. The Owner is solely responsible for the validity or
effect of any assignment. The Owner, therefore, should consult a qualified tax
advisor regarding the tax consequences, as an assignment may be a taxable event.
AVAILABLE INFORMATION
KILICO is subject to the informational requirements of the Securities Exchange
Act of 1934 and in accordance therewith files reports and other information with
the Securities and Exchange Commission (the "Commission"). Such reports and
other information can be inspected and copied at the public reference facilities
of the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. and 500
West Madison, Suite 1400, Northwestern Atrium Center, Chicago, Illinois. Copies
of such materials also can be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates.
KILICO has filed registration statements (the "Registration Statements") with
the Commission under the Securities Act of 1933 relating to the Contracts
offered by this Prospectus. This Prospectus has been filed as part of the
Registration Statements and does not contain all of the information set forth in
the Registration Statements, and reference is hereby made to such Registration
Statements for further information relating to KILICO and the Contracts. The
Registration Statements may be inspected and copied, and copies can be obtained
at prescribed rates in the manner set forth in the preceding paragraph.
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BUSINESS
CORPORATE STRUCTURE
KEMPER INVESTORS LIFE INSURANCE COMPANY ("KILICO"), founded in 1947, is
incorporated under the insurance laws of the State of Illinois. KILICO is
licensed in the District of Columbia and all states except New York. KILICO is a
wholly-owned subsidiary of Kemper Corporation ("Kemper"), a nonoperating holding
company.
CORPORATE CONTROL EVENTS
On January 4, 1996, 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 KILICO. On February 27, 1998, Zurich
acquired Insurance Partner's remaining 20 percent interest for cash. As a result
of this transaction, Kemper and KILICO became wholly-owned subsidiaries of
Zurich.
The acquisition of KILICO was accounted for using the purchase method of
accounting. The consolidated financial statements of KILICO prior to January 4,
1996, were prepared on a historical cost basis and have been labeled as
"preacquisition" throughout this Prospectus.
Under purchase accounting, KILICO's assets and liabilities have been marked to
their relative fair values as of the acquisition date. The difference between
the allocated cost of $745.6 million of acquiring KILICO and the net fair values
of KILICO's assets and liabilities as of the acquisition date resulted in $254.9
million of goodwill. KILICO originally began to amortize goodwill on a
straight-line basis over twenty-five years, however, in the fourth quarter of
1997, KILICO changed its amortization period to twenty years. The change in
amortization periods was made to conform to Zurich's accounting practices and
policies and resulted in an increase in goodwill amortization of $5.1 million in
1997. KILICO has presented January 4, 1996 (the acquisition date) as the opening
purchase accounting balance sheet for comparative purposes, where appropriate,
throughout this Prospectus.
Purchase accounting adjustments primarily affected the recorded historical
values of fixed maturities, mortgage loans, other invested assets, deferred
insurance acquisition costs, future policy benefits and deferred income taxes.
(See note captioned "Summary of Significant Accounting Policies" in the notes to
the consolidated financial statements below.)
STRATEGIC INITIATIVES
Since the early 1990's, KILICO has intensified the management of its real
estate-related investments due to adverse market conditions. KILICO also
successfully implemented strategies over the last several years to reduce both
its joint venture operating losses and the level of its real estate-related
investments. These strategies included individual property sales, refinancings
and restructurings, as well as bulk sale transactions completed in December 1995
in anticipation of the 1996 change in control. As a result of these strategies,
KILICO reduced its holdings of real estate-related investments from 36.2 percent
of its total invested assets and cash at year-end 1991 to 4.9 percent at
year-end 1997.
The management, operations and strategic directions of KILICO were also
integrated by the end of 1993 with those of another Kemper subsidiary, Federal
Kemper Life Assurance Company ("FKLA"). The integration streamlined management,
controlled costs, improved profitability, increased operating efficiencies and
productivity, and helped to expand both companies' distribution capabilities.
Headquartered in Long Grove, Illinois, FKLA markets term and interest-sensitive
life insurance, as well as certain annuity products through brokerage general
agents and other independent distributors.
Beginning in 1995, KILICO also began to introduce and expand new and existing
product lines. In late 1995, KILICO began to sell term life insurance products
in order to balance its product mix and asset-liability structure. Over the last
three years, KILICO increased the competitiveness of its variable annuity
products by adding multiple variable subaccount investment options and
investment managers to existing variable annuity products. In 1996, KILICO
introduced a registered flexible individual variable life insurance product and
in 1997 KILICO introduced a non-registered individual and group variable
bank-owned life insurance contract ("BOLI") and a series of individual variable
life insurance contracts.
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NARRATIVE DESCRIPTION OF BUSINESS
KILICO offers both individual fixed-rate (general account) and individual and
group variable (separate account) annuity contracts, as well as individual term
life, universal life and individual and group variable life insurance products
through various distribution channels. KILICO offers investment-oriented
products, guaranteed returns or a combination of both, to help policyholders
meet multiple insurance and financial objectives. Financial institutions,
securities brokerage firms, insurance agents and financial planners are
important distribution channels for KILICO's products. KILICO's sales mainly
consist of deposits received on certain long duration annuity and variable life
insurance contracts as well as reinsurance premiums assumed from FKLA beginning
in 1996. (See note captioned "Reinsurance" in the notes to the consolidated
financial statements and see the table captioned "Sales" below.)
KILICO's fixed and variable annuities generally have surrender charges that are
a specified percentage of policy values and decline as the policy ages. General
account annuity and interest-sensitive life policies are guaranteed to
accumulate at specified interest rates but allow for periodic crediting rate
changes.
Over the last several years, in part reflecting the current interest rate
environment, KILICO has increased its emphasis on marketing its existing and new
separate account products. Unlike the fixed-rate annuity business where KILICO
manages spread revenue, variable annuities pose minimal investment risk for
KILICO, as policyholders invest in one or more of several underlying investment
funds. KILICO, in turn, receives administrative fee revenue as well as cost of
insurance charges which compensate KILICO for providing life insurance coverage
to the contractholder potentially in excess of their cash surrender values.
As a result of this strategy, KILICO's separate account assets and related sales
of its variable annuity and life products have increased as follows (in
millions):
<TABLE>
<CAPTION>
DECEMBER 31 JANUARY 4
------------------- ----------
1997 1996 1996
---- ---- ----
<S> <C> <C> <C>
Separate account assets..................................... $5,122.0 $2,127.2 $1,761.1
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------
PREACQUISITION
--------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Variable annuity sales...................................... $ 259.8 $254.6 $ 151.1
Variable life sales......................................... 2,708.6 .2 --
-------- ------ --------
Total separate account sales.............................. $2,968.4 $254.8 $ 151.1
======== ====== ========
</TABLE>
Rating improvements in 1996 (see "Rankings and ratings" below) and the 1996
change in control also helped to increase KILICO's sales in 1997 and 1996,
compared with 1995.
In order to increase variable annuity sales, KILICO introduced Kemper PASSPORT
in 1992. Kemper PASSPORT is a variable and market value adjusted annuity
featuring a choice of investment portfolios, an increasing estate benefit,
tax-free transfers and guaranteed rates for a variety of terms. In 1994, KILICO
changed Kemper PASSPORT from a single premium annuity to one with a flexible
premium structure and also added a small capitalization equity subaccount as
another investment portfolio option. In 1995 and 1996, KILICO also added several
new subaccounts and new investment managers as investment portfolio choices for
certain purchasers of the Kemper Advantage III variable annuity product. During
late 1996, KILICO introduced POWER V, a registered flexible premium variable
life insurance product. During mid-1997, KILICO also introduced variable BOLI
which is primarily marketed to banks and other large corporate entities and a
series of non-registered variable individual universal life insurance contracts
which are marketed primarily to high net worth individuals. These products are
being distributed by Investors Brokerage Services, Inc., ("IBS") a wholly-owned
subsidiary of KILICO. Excluding these contracts distributed by IBS which
accounted for $2,705.8 million of KILICO's first year sales, INVEST Financial
Corporation, ("INVEST") an affiliated company until June 28, 1996, and certain
other unrelated companies of INVEST's new parent First American National Bank,
and EVEREN Securities, Inc., an affiliated company until September 13, 1995,
accounted for approximately 23.0 percent and 5.0 percent, respectively, in 1997
of KILICO's first-year sales, compared with 24 percent and 12 percent,
respectively, in 1996.
34
<PAGE> 39
Current crediting rates, a conservative investment strategy and the interest
rate environment have impacted general account annuity sales for KILICO over the
last several years. KILICO's general account fixed annuity sales were as follows
(in millions):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
PREACQUISITION
--------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
General account fixed annuity sales......................... $145.7 $140.6 $247.6
====== ====== ======
</TABLE>
Beginning in early 1995, KILICO began raising crediting rates on certain of its
existing and new general account products, reflecting both competitive
conditions and a rising interest rate environment. As a result of these actions,
sales of general account annuities increased. During late 1995, as interest
rates fell, KILICO began reducing crediting rates on certain of its existing and
new general account products reflecting both competitive conditions and the
falling interest rate environment. As a result of these events, as well as a
strong stock and bond market during 1996 and most of 1997, which influenced
potential buyers of fixed annuity products to purchase variable annuity
products, sales of general account annuities have increased only slightly in
1997, compared with 1996.
Beginning in 1995, KILICO began to sell term life insurance products in order to
balance its product mix and asset-liability structure. During 1997 and 1996,
KILICO also assumed $21.1 million and $7.3 million, respectively, of term life
insurance premiums from FKLA. Excluding the amounts assumed from FKLA, KILICO's
total term life sales, including new and renewal premiums, net of reinsurance
ceded, amounted to $1.1 million in 1997, compared with $565 thousand in 1996 and
$236 thousand in 1995.
FEDERAL INCOME TAX DEVELOPMENTS
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. 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 KILICO's non-qualified
fixed and variable annuities and certain of its variable life insurance
products, including BOLI and the nonregistered individual variable universal
life insurance contract 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 be determined.
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 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.
35
<PAGE> 40
NAIC RATIOS
The National Association of Insurance Commissioners (the "NAIC") annually
calculates certain statutory financial ratios for most insurance companies in
the United States. These calculations are known as the Insurance Regulatory
Information System ("IRIS") ratios. There presently are twelve IRIS ratios. The
primary purpose of the ratios is to provide an "early warning" of any negative
developments. The NAIC reports the ratios to state regulators who may then
contact the companies if three or more ratios fall outside the NAIC's "usual
ranges".
Based on statutory financial data as of December 31, 1997, KILICO had three
ratios outside the usual ranges, the change in reserving ratio, the change in
premium ratio and the change in product mix ratio. KILICO's change in reserving
ratio reflected the level of interest-sensitive life surrenders and withdrawals
during 1997, as well as the 1997 reinsurance agreement with FKLA. KILICO's
change in premium ratio and change in product mix ratio reflected the $2.7
billion increase in BOLI premiums received during 1997. Other than certain
states requesting quarterly financial reporting and/or explanations of the
underlying causes for certain ratios, no state regulators have taken any action
due to KILICO's IRIS ratios for 1997 or earlier years.
GUARANTY ASSOCIATION ASSESSMENTS
From time to time, mandatory assessments are levied on KILICO by life and health
guaranty associations of most states in which KILICO is licensed, to cover
losses to policyholders of insolvent or rehabilitated insurance companies. These
associations levy assessments (up to prescribed limits) on all member insurers
in a particular state, in order to pay claims on the basis of the proportionate
share of premiums written by member insurers in the lines of business in which
the insolvent or rehabilitated insurer engaged. These assessments may be
deferred or forgiven in certain states if they would threaten an insurer's
financial strength, and, in some states, these assessments can be partially
recovered through a reduction in future premium taxes.
In the early 1990s, there were a number of failures of life insurance companies.
KILICO's financial statements include provisions for all known assessments that
will be levied against KILICO by various state guaranty associations as well as
an estimate of amounts (net of estimated future premium tax recoveries) that
KILICO believes will be assessed in the future for failures which have occurred
to date and for which the life insurance industry has estimated the cost to
cover losses to policyholders. Assessments levied against KILICO and charged to
expense in 1997, 1996 and 1995 amounted to $1.2 million, $601 thousand and $5.8
million, respectively. Such amounts relate to accrued guaranty fund assessments
of $4.8 million, $5.8 million and $5.0 million at December 31, 1997, 1996 and
1995, respectively. Additional assessments charged to expense reflect accruals
for the life insurance industry's new or revised loss estimates for certain
insolvent insurance companies.
RISK-BASED CAPITAL
Since the early 1990s, reflecting a recessionary environment and the
insolvencies of a few large life insurance companies, both state and federal
legislators have increased scrutiny of the existing insurance regulatory
framework. While various initiatives, such as the codification of statutory
accounting principles, are being considered for future implementation by the
NAIC, it is not presently possible to predict the future impact of potential
regulatory changes on KILICO.
Under asset adequacy and risk-based capital rules in Illinois, state regulators
may mandate remedial action for inadequately reserved or inadequately
capitalized companies. The asset adequacy rules are designed to assure that
reserves and assets are adequate to cover liabilities under a variety of
economic scenarios. The focus of the capital rules is a risk-based formula that
applies prescribed factors to various risk elements in an insurer's business and
investments to develop a minimum capital requirement designed to be proportional
to the amount of risk assumed by the insurer. KILICO has capital levels
substantially exceeding any which would mandate action under the risk-based
capital rules and is in compliance with applicable asset adequacy rules.
36
<PAGE> 41
RESERVES AND REINSURANCE
The following table provides a breakdown of KILICO's reserves for future policy
benefits by product type (in millions):
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31
1997 1996
----------- -----------
<S> <C> <C>
General account annuities................................... $3,137 $3,507
Interest-sensitive life insurance and other................. 709 743
Term life reserves.......................................... 10 7
Ceded future policy benefits................................ 383 427
------ ------
Total............................................. $4,239 $4,684
====== ======
</TABLE>
Ceded future policy benefits shown above reflect coinsurance (indemnity
reinsurance) transactions in which KILICO insured liabilities of approximately
$516 million in 1992 and $416 million in 1991 with Fidelity Life Association, A
Mutual Legal Reserve Company ("FLA"), an affiliated mutual insurance company.
FLA shares directors, management, operations and employees with FKLA pursuant to
an administrative and management services agreement. FLA produces policies not
produced by FKLA or KILICO as well as other policies similar to certain FKLA
policies. At December 31, 1997 and 1996, KILICO's reinsurance recoverable from
FLA related to these coinsurance transactions totaled approximately $382.6
million and $427.2 million, respectively. Utilizing FKLA's employees, KILICO is
the servicing company for this coinsured business and is reimbursed by FLA for
the related servicing expenses.
During December 1997, KILICO entered into a funds held reinsurance agreement
with another Zurich affiliated company, EPICENTRE Reinsurance (Bermuda) Limited
("EPICENTRE"). Under the terms of this agreement, KILICO 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 variable BOLI, which is held in KILICO's separate accounts. During
1997, KILICO ceded to EPICENTRE approximately $24.3 million of separate account
fees (cost of insurance charges) paid to KILICO by these policyholders for the
life insurance coverage provided under the terms of each separate account
contract. KILICO 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 in
this Prospectus. KILICO remains primarily liable to its policyholders for these
amounts.
During 1996, KILICO assumed on a yearly renewable term basis approximately $14.4
billion (face amount) of term life insurance from FKLA. As a result of this
transaction, KILICO also recorded reserves in 1997 and 1996 of approximately
$7.9 million and $7.3 million, respectively. (See the note captioned
"Reinsurance" in the notes to the consolidated financial statements below.)
COMPETITION
KILICO is in a highly competitive business and competes with a large number of
other stock and mutual life insurance companies, many of which are larger
financially, although none is truly dominant in the industry. KILICO, with its
emphasis on annuity products, also competes for savings dollars with securities
brokerage and investment advisory firms as well as other institutions that
manage assets, produce financial products or market other types of investment
products.
KILICO's principal methods of competition continue to be innovative products,
often designed for selected distribution channels and economic conditions, as
well as appropriate product pricing, careful underwriting, expense control and
the quality of services provided to policyholders and agents. Certain of
KILICO's financial strength ratings and claims-paying/performance ratings,
however, were lower in 1995 than in earlier years, and were under review in
1995, due to uncertainty with respect to Kemper's and KILICO's ownership. These
ratings impacted sales efforts in certain markets; however, increases in
KILICO's financial strength ratings and claims-paying/performance ratings in
January 1996 favorably impacted variable annuity sales during 1997 and 1996 and
should continue to favorably impact future sales.
To address its competition, KILICO has adopted certain business strategies.
These include systematic reductions of investment risk and strengthening of its
capital position; continued focus on existing and new variable annuity and
variable life insurance products; distribution through diversified channels; and
ongoing efforts to continue as a low-cost provider of insurance products and
high-quality services to agents and policyholders through the use of technology.
37
<PAGE> 42
EMPLOYEES
At December 31, 1997, KILICO utilized the services of approximately 620
employees of FKLA, which are also shared with FLA and Zurich Life Insurance
Company of America ("ZLICA"). On January 5, 1996, KILICO, FKLA, FLA and ZLICA
began to operate under the trade name Zurich Kemper Life. On July 1, 1996,
Kemper acquired 100 percent of the issued and outstanding common stock of ZLICA
from Zurich.
REGULATION
KILICO is generally subject to regulation and supervision by the insurance
departments of Illinois and other jurisdictions in which KILICO is licensed to
do business. These departments enforce laws and regulations designed to assure
that insurance companies maintain adequate capital and surplus, manage
investments according to prescribed character, standards and limitations and
comply with a variety of operational standards. The departments also make
periodic examinations of individual companies and review annual and other
reports on the financial condition of each company operating within their
respective jurisdictions. Regulations, which often vary from state to state,
cover most aspects of the life insurance business, including market practices,
forms of policies and accounting and financial reporting procedures.
Insurance holding company laws enacted in many states grant additional powers to
state insurance commissioners to regulate acquisition of and by domestic
insurance companies, to require periodic disclosure of relevant information and
to regulate certain transactions with related companies. These laws also impose
prior approval requirements for certain transactions with affiliates and
generally regulate dividend distributions by an insurance subsidiary to its
holding company parent.
In addition, certain of KILICO's variable life insurance and annuity products,
and the related separate accounts, are subject to regulation by the Securities
and Exchange Commission (the "SEC").
KILICO believes it is in compliance in all material respects with all applicable
regulations.
INVESTMENTS
A changing marketplace has affected the life insurance industry and to
accommodate customers' increased preference for safety over higher yields,
KILICO has systematically reduced its investment risk and strengthened its
capital position.
KILICO's cash flow is carefully monitored and its investment program is
regularly and systematically planned to provide funds to meet all obligations
and to optimize investment return. For securities, portfolio management is
handled by an affiliated company, Scudder Kemper Investments, Inc. ("SKI"),
formerly Zurich Kemper Investments, Inc. ("ZKI"), and its subsidiaries and
affiliates, with KILICO's real estate-related investments being handled by a
majority-owned Kemper real estate subsidiary. Investment policy is directed by
KILICO's board of directors. KILICO's investment strategies take into account
the nature of each annuity and life insurance product, the respective crediting
rates and the estimated future policy benefit maturities. See "INVESTMENTS"
below.
FORWARD-LOOKING STATEMENTS
All statements, trend analyses and other information contained in this report
and elsewhere (such as in other filings by KILICO with the Securities and
Exchange Commission, press releases, presentations by KILICO or its management
or oral statements) relative to markets for KILICO's products and trends in
KILICO's operations or financial results, as well as other statements including
words such as "anticipate," "believe," "plan," "estimate," "expect," "intend,"
and other similar expressions, constitute forward-looking statements under the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements are subject to known and unknown risks, uncertainties and other
factors which may cause actual results to be materially different from those
contemplated by the forward-looking statements. Such factors include, among
other things: (i) general economic conditions and other factors, including
prevailing interest rate levels and stock market performance, which may affect
the ability of KILICO to sell its products, the market value of KILICO's
investments and the lapse rate and profitability of KILICO's contracts; (ii)
KILICO's ability to achieve anticipated levels of operational efficiencies
through certain cost-saving initiatives; (iii) customer response to new
products, distribution channels and marketing initiatives; (iv) mortality,
morbidity, and other factors which may affect the profitability of KILICO's
insurance products; (v) changes in the Federal income tax laws and regulations
which may affect the relative tax advantages of some of KILICO's products; (vi)
increasing competition which could affect the sale of KILICO's products; (vii)
regulatory changes or actions, including those relating to regulation of
financial services affecting
38
<PAGE> 43
(among other things) bank sales and underwriting of insurance products,
regulations of the sale and underwriting and pricing of insurance products; and
(viii) the risk factors or uncertainties listed from time to time in KILICO's
other filings with the Securities and Exchange Commission.
PROPERTIES
KILICO shares 99,000 sq. ft. of office space leased by FKLA from Lumbermens
Mutual Casualty Company, a former affiliate, ("Lumbermens"), located in Long
Grove, Illinois.
LEGAL PROCEEDINGS
KILICO has been named as defendant in certain lawsuits incidental to its
insurance business. Based upon the advice of legal counsel, KILICO's management
believes that the resolution of these various lawsuits will not result in any
material adverse effect on KILICO's consolidated financial position.
39
<PAGE> 44
SELECTED FINANCIAL DATA
The following table sets forth selected financial information for KILICO for the
five years ended December 31, 1997 and for the opening balance sheet as of the
acquisition date, January 4, 1996. Such information should be read in
conjunction with KILICO's consolidated financial statements and notes thereto
included in this Prospectus. All amounts are shown in millions.
<TABLE>
<CAPTION>
PREACQUISITION
----------------------------------
DECEMBER 31
DECEMBER 31 DECEMBER 31 JANUARY 4 ----------------------------------
1997 1996 1996 1995 1994 1993
----------- ----------- --------- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
TOTAL REVENUE.................. $ 425.5 $ 356.2 $ -- $ 68.1(1) $ 330.5 $ 337.4
========= ======== ======== ======== ======== ========
NET INCOME EXCLUDING REALIZED
INVESTMENT RESULTS........... $ 31.9 $ 25.6 $ -- $ 74.2 $ 61.9 $ 33.7
========= ======== ======== ======== ======== ========
NET INCOME (LOSS).............. $ 38.7 $ 34.4 $ -- $ (133.0)(1) $ 26.4 $ 14.0
========= ======== ======== ======== ======== ========
FINANCIAL SUMMARY
Total separate account
assets....................... $ 5,122.0 $2,127.2 $1,761.1 $1,761.1 $1,508.0 $1,499.5
========= ======== ======== ======== ======== ========
Total assets................... $10,589.7 $7,717.9 $7,682.7 $7,581.7 $7,537.1 $8,113.7
========= ======== ======== ======== ======== ========
Future policy benefits......... $ 3,856.9 $4,256.5 $4,585.1 $4,573.2 $4,843.7 $5,040.0
========= ======== ======== ======== ======== ========
Stockholder's equity........... $ 865.6 $ 751.0 $ 745.6 $ 605.9 $ 434.0 $ 654.6
========= ======== ======== ======== ======== ========
</TABLE>
- ---------------
(1) Total revenue and net income (loss) for 1995 were adversely impacted by real
estate-related investment losses. Such losses reflect a change in KILICO's
strategy with respect to its real estate-related investments in connection
with the January 4, 1996 acquisition of Kemper by the Zurich-led investor
group. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations".
40
<PAGE> 45
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
As discussed in the note captioned "Summary of Significant Accounting Policies"
in the notes to the consolidated financial statements, Kemper, and therefore
KILICO, were acquired on January 4, 1996, by an investor group led by Zurich. In
connection with the acquisition, KILICO's assets and liabilities were marked to
their respective fair values as of the acquisition date in conformity with the
purchase accounting method required under generally accepted accounting
principles.
KILICO's financial statements as of January 4, 1996, and as of and for the year
ended December 31, 1996, have been adjusted to reflect the effects of such
purchase accounting adjustments. KILICO's financial statements for the year
ended December 31, 1995 has been prepared on an historical cost basis and do not
reflect such purchase accounting adjustments.
RESULTS OF OPERATIONS
KILICO recorded net income of $38.7 million in 1997, compared with net income of
$34.4 million in 1996 and with a net loss of $133.0 million in 1995. The
increase in net income in 1997, compared with 1996, was due to a significant
increase in operating earnings before the amortization of goodwill, offset by an
increase in goodwill amortization and a slight decline in net realized capital
gains. The increase in net income in 1996, compared with 1995, was primarily due
to a decrease in the level of real estate-related realized investment losses.
KILICO's strategy with respect to its real estate-related investments changed
dramatically as of year-end 1995 in connection with the Zurich-led investor
group's acquisition of Kemper. This change, as further discussed below, resulted
in significant reductions in real estate-related investments and significant
realized capital losses in the second half of 1995.
The following table reflects the components of net income (loss):
NET INCOME (LOSS)
(in millions)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------
PREACQUISITION
--------------
1997 1996 1995
------ ------ --------------
<S> <C> <C> <C>
Operating earnings before
amortization of goodwill.... $ 47.2 $ 35.8 $ 74.2
Amortization of goodwill...... (15.3) (10.2) --
Net realized investment gains
(losses).................... 6.8 8.8 (207.2)
------ ------ -------
Net income (loss)... $ 38.7 $ 34.4 $(133.0)
====== ====== =======
</TABLE>
The following table reflects the major components of realized investment results
included in net income (loss) above. (See "INVESTMENTS" below, and the note
captioned "Invested Assets and Related Income" in the notes to the consolidated
financial statements.)
REALIZED INVESTMENT RESULTS, AFTER TAX
(in millions)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------
PREACQUISITION
--------------
1997 1996 1995
------ ------ --------------
<S> <C> <C> <C>
Real estate-related gains
(losses).................... $ 12.8 $ 11.4 $(211.6)
Fixed maturity write-downs.... (2.8) (.9) (4.7)
Other gains (losses), net..... (3.2) (1.7) 9.1
------ ------ -------
Total............... $ 6.8 $ 8.8 $(207.2)
====== ====== =======
</TABLE>
The higher level of real estate-related losses in 1995, compared with both 1997
and 1996, reflected realized capital losses predominately from real
estate-related bulk sale transactions in December 1995, as well as a higher
level of write-downs on real estate-related investments. These sales and
write-downs in 1995, reflect Zurich's and Insurance Partners' strategies,
adopted by KILICO, with respect to the disposition of real estate-related
41
<PAGE> 46
investments. Other realized investment gains and losses for 1997, 1996 and 1995
relate primarily to the sale of fixed maturity investments. The fixed maturity
losses generated in 1997 and 1996 arose primarily from the sale of fixed
maturity investments, consisting of lower yielding U.S. Treasury bonds,
collateralized mortgage obligations and corporate bonds, related to ongoing
repositionings of KILICO's fixed maturity investment portfolio. The proceeds
from the repositionings, together with cash and short-term investments, were
reinvested into higher yielding corporate bonds and asset-backed securities in
1997 and 1996. Real estate-related gains in both 1997 and 1996, continue to
reflect KILICO's strategy to reduce its exposure to real estate-related
investments, as well as improving real estate market conditions in most areas of
the country. Fixed maturity write-downs in 1997 primarily reflect
other-than-temporary declines in value of certain U.S. dollar denominated fixed
maturity investments which have significant exposure to countries in Southeast
Asia. (See "INVESTMENTS" below.)
Operating earnings before the amortization of goodwill increased to $47.2
million in 1997, compared with $35.8 million in 1996. Operating earnings
increased in 1997 before the amortization of goodwill, compared with 1996,
primarily due to an increase in spread revenue (investment income earned less
interest credited), an increase in separate account fees and charges, an
increase in premium income and an increase in the deferral of insurance
acquisition costs, offset by an increase in claims incurred and other
policyholder benefits, taxes, licenses and fees, commissions, operating expenses
and an increase in the amortization of the value of business acquired.
Operating earnings before the amortization of goodwill decreased to $35.8
million in 1996, compared with $74.2 million in 1995, primarily due to purchase
accounting adjustments which reduced investment income and increased expenses.
Investment income was lower in 1996, compared with 1995, primarily reflecting
purchase accounting adjustments related to the amortization of premiums on fixed
maturity investments. Under purchase accounting, the fair value of KILICO's
fixed maturity investments as of January 4, 1996 became KILICO's new cost basis
in such investments. The difference between the new cost basis and original par
is then amortized against investment income over the remaining effective lives
of the fixed maturity investments. As a result of the interest rate environment
as of January 4, 1996, the market value of KILICO's fixed maturity investments
was approximately $133.9 million greater than original par. The amortization of
such premiums reduced investment income by approximately $14.1 million in 1997
and $22.7 million in 1996, compared with 1995.
Investment income and interest credited also declined in 1997, compared with
1996 and 1995, as a result of a decrease in both total invested assets and
liabilities for future policy benefits to policyholders. Such decreases were the
result of surrender and withdrawal activity over the last three years.
Investment income was also negatively impacted during 1996, compared with 1995,
by a higher level of cash and short-term investments held in the first quarter
of 1996. The increase in cash and short-term investments in the first quarter of
1996 was caused in part by the cash proceeds received from bulk sales of real
estate-related investments in late December 1995.
Investment income was positively impacted in 1997 and 1996 from the benefits of
capital contributions to KILICO and from the above-mentioned repositionings of
KILICO's investment portfolio.
42
<PAGE> 47
The following table reflects KILICO's sales.
SALES
(in millions)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------
PREACQUISITION
--------------
1997 1996 1995
-------- ------ --------------
<S> <C> <C> <C>
Annuities:
General account................ $ 145.7 $140.6 $247.6
Separate account............... 259.8 254.6 151.1
-------- ------ ------
Total annuities............. 405.5 395.2 398.7
-------- ------ ------
Life Insurance:
Separate account bank-owned
variable universal life
("BOLI").................... 2,700.0 -- --
Separate account variable
universal life.............. 8.6 .2 --
Term life...................... 22.2 7.8 .2
Interest-sensitive life........ -- .6 .2
-------- ------ ------
Total life.................. 2,730.8 8.6 .4
-------- ------ ------
Total sales....... $3,136.3 $403.8 $399.1
======== ====== ======
</TABLE>
Sales of annuity products consist of total deposits received. General account
annuity sales increased only slightly in 1997, compared with 1996, due to the
current low interest rate environment. The decrease in 1996 general account
(fixed annuity) sales, compared with 1995, is reflective of the declining
interest rate environments and the stock and bond markets during 1996 and 1995,
respectively, which made variable annuities more attractive to consumers in
1996, and fixed annuities more attractive to consumers during 1995.
The increase in separate account (variable sales) in 1997, compared with 1996
and 1995, was in part due to improvements in KILICO's financial strength and
performance ratings in January 1996, the addition of new separate account
investment fund options, the addition of new investment fund managers and a
strong overall underlying stock and bond market. Sales of variable annuities not
only increase administrative fees earned but they also pose minimal investment
risk for KILICO, as policyholders invest in one or more of several underlying
investment funds which invest in stocks and bonds. KILICO believes that the
increase in its financial strength and performance ratings in January 1996
together with KILICO's association with Zurich, will continue to assist in
KILICO's future sales efforts.
Beginning in late 1995, KILICO introduced a registered flexible individual
variable life insurance product and in 1997 KILICO introduced several
non-registered variable universal life insurance contracts, BOLI and a series of
individual universal life insurance contracts. Sales of these separate account
variable products, like variable annuities, pose minimal investment risk for
KILICO as policyholders also invest in one or more underlying investment funds
which invest in stocks and bonds. KILICO receives premium tax and DAC tax
expense loads from certain contract holders, as well as administrative fees and
cost of insurance charges which compensate KILICO for providing life insurance
coverage to the contractholders in excess of their cash surrender values. Face
amount of new variable universal life insurance business issued amounted to
$59.6 billion in 1997, compared with $4.0 million in 1996.
Beginning in 1995, KILICO began to sell low-cost term life insurance products
offering initial level premiums for 5, 10, 15 and 20 years in order to balance
its product mix and asset-liability structure. In 1997 and 1996, KILICO also
assumed $21.1 million and $7.3 million, respectively, of term life insurance
premiums from FKLA. (See the note captioned "Reinsurance" in the notes to the
consolidated financial statements.) Excluding the amounts assumed from FKLA,
KILICO's total term life sales, including new and renewal premiums, amounted to
$1.1 million in 1997, compared with $565 thousand in 1996 and $236 thousand in
1995. Face amount of new term business issued during 1997, 1996 and 1995
amounted to approximately $278 million, $187 million and $120 million,
respectively.
Included in separate account fees and charges are administrative fees received
from KILICO's separate account products of $31.0 million in 1997, compared with
$25.3 million and $21.9 million in 1996 and 1995, respectively.
43
<PAGE> 48
Administrative fee revenue increased in each of the last three years due to
growth in average separate account assets.
Also included in separate account fees and charges in 1997 are cost of insurance
charges related to variable universal life insurance, primarily BOLI, of $27.6
million, of which $24.3 million of such fees were ceded to EPICENTRE. (See the
note captioned "Reinsurance" in the notes to the consolidated financial
statements.) Separate account fees and charges in 1997 also include premium tax
expense loads of $51.1 million related to BOLI.
Other income includes surrender charge revenue of $5.2 million in 1997, compared
with $5.4 million and $7.7 million in 1996 and 1995, respectively, as total
general account and separate account policyholder surrenders and withdrawals
decreased in 1997 and 1996, compared with 1995. The decrease in surrender charge
revenue in 1997, compared with 1996 and 1995 also reflects that 49 percent of
KILICO's fixed and variable annuity liabilities, excluding BOLI, at December 31,
1997 are subject to minimal (5 percent or less) or no surrender charges,
compared with 57 percent in 1996 and 56 percent in 1995. Also included in other
income in 1995 is a ceding commission experience adjustment which resulted in
income of $4.4 million related to certain reinsurance transactions entered into
by KILICO during 1992. (See the note captioned "Reinsurance" in the notes to the
consolidated financial statements.)
POLICYHOLDER SURRENDERS, WITHDRAWALS AND DEATH BENEFITS
(in millions)
<TABLE>
<CAPTION>
PREACQUISITION
--------------
1997 1996 1995
------ ------ --------------
<S> <C> <C> <C>
General account................. $703.1 $652.0 $755.9
Separate account................ 236.2 196.7 205.6
------ ------ ------
Total...................... $939.3 $848.7 $961.5
====== ====== ======
</TABLE>
Reflecting the current interest rate environment and other competitive market
factors, KILICO adjusts its crediting rates on interest-sensitive products over
time in order to manage spread revenue and policyholder surrender and withdrawal
activity. KILICO can also improve spread revenue over time by increasing
investment income. Beginning in late 1994, as a result of rising interest rates
and other competitive market factors, KILICO began to increase crediting rates
on certain interest-sensitive products which adversely impacted spread income.
The declines in interest rates during the last three quarters of 1995, however,
and the current interest rate environment during 1996 and 1997, have mitigated
at present, competitive pressures to increase existing renewal crediting rates
further.
General account surrenders, withdrawals and death benefits increased $51.1
million in 1997, compared with 1996, reflecting an increase of $18.2 million in
claims incurred as a result of the aforementioned term life insurance business
assumed from FKLA as well as an increase in overall surrenders and withdrawals
in 1997, compared with 1996. KILICO expects that the level of surrender and
withdrawal activity experienced in 1997 should remain at a similar level in 1998
given current projections for relatively stable interest rates.
Taxes licenses and fees increased in 1997 to $52.6 million of which $51.1
million of this increase was related to premium taxes on BOLI. Excluding the
taxes due on BOLI, of which KILICO received a corresponding expense load in
separate account fees and other charges, taxes licenses and fees amounted to
$1.5 million, compared with $2.2 million in 1996 and $6.9 million in 1995.
Taxes, licenses and fees were lower in 1997 and 1996, compared with 1995,
primarily reflecting the level of guaranty fund assessments in each of those
years. Expenses for such assessments totaled $1.2 million, $601 thousand, and
$5.8 million in 1997, 1996 and 1995, respectively. (See "Guaranty association
assessments" above.)
Commissions expense was higher in 1997, compared with both 1996 and 1995, due to
an increase in total sales, excluding BOLI.
Operating expenses declined in 1995, primarily as a result of a decrease in
headcount resulting from the uncertainty concerning KILICO's ownership.
Operating expenses increased in 1997 and 1996, compared with 1995, as a result
of restaffing after the completion of the merger, an increase in evidence costs
related to new term life sales and an increase in data processing expenses. Data
processing expenses increased to $10.8 million in 1997, compared with $4.1
million in 1996 and $3.7 million in 1995, primarily due to infrastructure
improvements related to new product development, a new general ledger and
accounts payable system, development of a data
44
<PAGE> 49
warehouse and costs related to bringing KILICO's systems in compliance with the
year 2000. Data processing expenses related to bringing KILICO's systems in
compliance with the year 2000 amounted to $88 thousand in 1997. KILICO currently
anticipates that it will cost an additional $895 thousand to bring all remaining
systems in compliance. (See "Year 2000 Compliance" above.)
Operating earnings were positively impacted by the deferral of insurance
acquisition costs in 1997, compared with 1996 and 1995. The deferral of
insurance acquisition costs increased in 1997, compared with both 1996 and 1995
reflecting an increase in commissions expense and operating expenses related
directly to the increase in production of new business.
Operating earnings were negatively impacted by the amortization of insurance
acquisition costs and the amortization of the value of business acquired in 1997
and 1996, compared with the amortization of insurance acquisition costs in 1995.
Deferred insurance acquisition costs, and the related amortization thereof, for
policies sold prior to January 4, 1996 have been replaced under purchase
accounting by the value of business acquired. The value of business acquired
reflects the present value of the right to receive future cash flows from
insurance contracts existing at the date of acquisition. The amortization of the
value of business acquired is calculated assuming an interest rate equal to the
liability or contract rate on the value of the business acquired. (See note
captioned "Summary of Significant Accounting Policies" in the notes to the
consolidated financial statements.) Deferred insurance acquisition costs are
established on all new policies sold after January 4, 1996.
The amortization of the value of business acquired increased in 1997, compared
with 1996, as a result of an increase in net operating earnings related to the
business previously acquired. The amortization of the value of business acquired
in 1997 and 1996 was also adversely affected by net realized capital gains in
1997 and 1996, while the net amortization of insurance acquisition costs in
1995, was positively affected by realized capital losses. Net realized capital
gains tend to accelerate the amortization of both the value of business acquired
and deferred insurance acquisition costs as they tend to decrease KILICO's
projected future estimated gross profits. Net realized capital losses tend to
defer such amortization into future periods as they tend to increase KILICO's
projected future estimated gross profits.
The difference between the cost of acquiring KILICO and the net fair value of
KILICO's assets and liabilities as of January 4, 1996 was recorded as goodwill.
During 1996, KILICO began to amortize goodwill on a straight-line basis over
twenty-five years. In December of 1997, KILICO 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, KILICO recorded an
increase in amortization expense of $5.1 million during 1997. The amortization
of goodwill increased expenses by $10.2 million in 1996, compared with 1995.
45
<PAGE> 50
INVESTMENTS
KILICO's principal investment strategy is to maintain a balanced,
well-diversified portfolio supporting the insurance contracts written. KILICO
makes shifts in its investment portfolio depending on, among other factors, its
evaluation of risk and return in various markets, consistency with KILICO's
business strategy and investment guidelines approved by the board of directors,
the interest rate environment, liability durations and changes in market and
business conditions.
INVESTED ASSETS AND CASH
(in millions)
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31
1997 1996
----------- -----------
<S> <C> <C> <C> <C>
Cash and short-term investments............................. $ 260 5.8% $ 74 1.6%
Fixed maturities:
Investment-grade:
NAIC(1) Class 1........................................ 3,004 67.1 3,231 71.5
NAIC(1) Class 2........................................ 651 14.5 621 13.7
Below investment grade:
Performing............................................. 14 .3 13 .3
Nonperforming.......................................... -- -- 1 --
Joint venture mortgage loans................................ 73 1.6 111 2.4
Third-party mortgage loans.................................. 103 2.3 107 2.4
Other real estate-related investments....................... 44 1.0 50 1.1
Policy loans................................................ 282 6.3 288 6.4
Equity securities........................................... 25 .6 10 .2
Other....................................................... 21 .5 14 .4
------ ----- ------ -----
Total(2).......................................... $4,477 100.0% $4,520 100.0%
====== ===== ====== =====
</TABLE>
- ---------------
(1) National Association of Insurance Commissioners ("NAIC").
-- Class 1 = A- and above
-- Class 2 = BBB- through BBB+
(2) See the note captioned "Financial Instruments--Off-Balance-Sheet Risk" in
the notes to the consolidated financial statements.
FIXED MATURITIES
KILICO is carrying its fixed maturity investment portfolio, which it considers
available for sale, at estimated fair value, with the aggregate unrealized
appreciation or depreciation being recorded as a separate component of
stockholder's equity, net of any applicable income tax expense. The aggregate
unrealized appreciation (depreciation) on fixed maturities at December 31, 1997
and 1996 was $24.6 million and $(63.2) million, respectively, compared with no
unrealized appreciation or depreciation, at January 4, 1996 as a result of
purchase accounting adjustments. KILICO does not record a net deferred tax
benefit for the aggregate unrealized depreciation on investments. Fair values
are sensitive to movements in interest rates and other economic developments and
can be expected to fluctuate, at times significantly, from period to period.
At December 31, 1997, investment-grade fixed maturities and cash and short-term
investments accounted for 87.4 percent of KILICO's invested assets and cash,
compared with 86.8 percent at December 31, 1996. Approximately 54.0 percent of
KILICO's NAIC Class 1 bonds were rated AAA or equivalent at year-end 1997,
compared with 58.4 percent at December 31, 1996.
Approximately 35.1 percent of KILICO'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. KILICO has not made any investments in interest-only
or other similarly volatile tranches of mortgage-backed securities. KILICO's
mortgage-backed investments are generally of AAA credit quality, and the markets
for these investments have been and are expected to remain liquid. KILICO plans
to continue to reduce its holding of such investments over time.
46
<PAGE> 51
As a result of the previously discussed repositionings of KILICO's fixed
maturity portfolio, approximately 10.8 percent and 8.8 percent of KILICO's
investment-grade fixed maturities at December 31, 1997 and 1996, respectively,
consisted of corporate asset-backed securities. The majority of KILICO'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 ("CMBs") (10.7%).
Future investment income from mortgage-backed securities and other asset-backed
securities may be affected by the timing of principal payments and the yields on
reinvestment alternatives available at the time of such payments. As a result of
purchase accounting adjustments to fixed maturities, most of KILICO's
mortgage-backed securities are carried at a premium over par. Prepayment
activity resulting from a decline in interest rates on such securities purchased
at a premium would accelerate the amortization of the premiums which would
result in reductions of investment income related to such securities.
At December 31, 1997 and 1996 KILICO had unamortized premiums and discounts
related to mortgage-backed and asset-backed securities as follows (in millions):
<TABLE>
<CAPTION>
DECEMBER 31
-------------
1997 1996
---- ----
<S> <C> <C>
Unamortized premiums........................................ $19.6 $24.7
===== =====
Unamortized discounts....................................... $ 5.2 $ 5.7
===== =====
</TABLE>
KILICO believes that as a result of the purchase accounting adjustments and the
current interest rate environment, anticipated prepayment activity in 1998 is
expected to result in reductions to future investment income similar to or
greater than those reductions experienced by KILICO in 1997.
Amortization of the discount or premium from mortgage-backed and asset-backed
securities is recognized using a level effective yield method which considers
the estimated timing and amount of prepayments of the underlying loans and is
adjusted to reflect differences which arise between the prepayments originally
anticipated and the actual prepayments received and currently anticipated. To
the extent that the estimated lives of such securities change as a result of
changes in prepayment rates, the adjustment is also included in net investment
income.
The table below provides information about KILICO's mortgage-backed and
asset-backed securities that are sensitive to changes in interest rates. The
expected maturity dates have been calculated on a security by security basis
using prepayment assumptions obtained from a survey conducted by a securities
information service. These assumptions are consistent with the current interest
rate and economic environment.
<TABLE>
<CAPTION>
CARRYING FAIR VALUE
VALUE AT EXPECTED MATURITY DATE AT
DECEMBER 31, --------------------------------------------------------- DECEMBER 31,
(IN MILLIONS) 1997 1998 1999 2000 2001 2002 THEREAFTER TOTAL 1997
------------- ------------ ---- ---- ---- ---- ---- ---------- ----- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed Maturities:
Mortgage-backed bonds... $1,283.6 $219.1 $232.5 $145.1 $92.2 $64.5 $530.2 $1,283.6 $1,283.6
Average yield......... 6.58% 6.60% 6.61% 6.64% 6.64% 6.63% 6.67% 6.58% 6.58%
Asset-backed bonds...... $ 353.0 $ 18.9 $ 16.9 $ 30.8 $35.5 $47.2 $203.7 $ 353.0 $ 353.0
Average yield......... 6.81% 6.85% 7.04% 7.05% 7.15% 7.13% 7.20% 6.81% 6.81%
CMBs.................... $ 42.2 $ 0.3 $ 0.4 $ 0.4 $ 0.4 $ 8.0 $ 32.7 $ 42.2 $ 42.2
Average yield......... 6.64% 6.64% 6.64% 6.64% 6.64% 6.63% 6.63% 6.64% 6.64%
-------- -------- --------
$1,678.8 $1,678.8 $1,678.8
======== ======== ========
</TABLE>
47
<PAGE> 52
<TABLE>
<CAPTION>
CARRYING FAIR VALUE
VALUE AT EXPECTED MATURITY DATE AT
DECEMBER 31, ------------------------------------------------------- DECEMBER 31,
(IN MILLIONS) 1996 1997 1998 1999 2000 2001 THEREAFTER TOTAL 1996
------------- ------------ ---- ---- ---- ---- ---- ---------- ----- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed Maturities:
Mortgage-backed bonds... $1,402.0 $161.4 $239.0 $261.4 $166.1 $ 61.8 $512.3 $1,402.0 $1,402.0
Average yield......... 6.83% 6.83% 6.83% 6.83% 6.83% 6.83% 6.83% 6.83% 6.83%
Asset-backed
bonds................. $ 339.3 $ 31.4 $ 38.1 $ 36.6 $ 44.4 $ 51.0 $137.8 $ 339.3 $ 339.3
Average yield......... 6.82% 6.82% 6.82% 6.82% 6.82% 6.82% 6.82% 6.82% 6.82%
-------- -------- --------
$1,741.3 $1,741.3 $1,741.3
======== ======== ========
</TABLE>
The current weighted average maturity of the mortgage-backed and asset-backed
securities at December 31, 1997, is 3.8 years. A 200 basis point increase in
interest rates would extend the weighted average maturity by approximately 1.0
year, while a 200 basis point decrease in interest rates would decrease the
weighted average maturity by approximately 1.3 years.
The weighted average maturity of the mortgage-backed and asset-backed securities
at December 31, 1996, was 4.6 years. A 200 basis point increase in interest
rates would have extended the weighted average maturity by approximately 1.7
years, while a 200 basis point decrease in interest rates would have decreased
the weighted average maturity by approximately 1.3 years.
As of December 31, 1997, KILICO had $54.7 million of U.S. dollar denominated
fixed maturity investments, after write-downs for other-than-temporary declines
in value, which have significant exposure to countries in Southeast Asia.
Approximately $5.6 million of such securities were from Korea, $21.9 million
were from Hong Kong, China, $20.4 million were from Malaysia and the remainder
of such bonds were from a United Kingdom bank with most of its loans issued to
countries in Southeast Asia. Write-downs on such securities, which were
considered to be other-than-temporary, as of December 31, 1997 amounted to $3.1
million. There can be no assurance that the current estimate for
other-than-temporary declines in value for such securities will prove accurate
over time due to changing economic conditions in Southeast Asia.
Below investment-grade securities holdings (NAIC classes 3 through 6),
representing securities of 9 issuers at December 31, 1997, totaled 0.3 percent
of cash and invested assets at both December 31, 1997 and December 31, 1996.
(See note captioned "Invested Assets and Related Income" in the notes to the
consolidated financial statements.) Below investment-grade securities are
generally unsecured and often subordinated to other creditors of the issuers.
These issuers may have relatively higher levels of indebtedness and be more
sensitive to adverse economic conditions than investment-grade issuers. KILICO
has significantly reduced its exposure to below investment-grade securities
since 1991. This strategy takes into account the more conservative nature of
today's consumer and the resulting demand for higher-quality investments in the
life insurance and annuity marketplace. KILICO expects to increase its holdings
in this category selectively during 1998.
REAL ESTATE-RELATED INVESTMENTS
The $220.0 million real estate-related portfolio held by KILICO, consisting of
joint venture and third-party mortgage loans and other real estate-related
investments, constituted 4.9 percent of cash and invested assets at December 31,
1997, compared with $267.7 million, or 5.9 percent, at December 31, 1996. The
decrease in real estate-related investments during 1997 was primarily due to
asset sales.
As reflected in the "Real estate portfolio" table below, KILICO has continued to
fund both existing projects and legal commitments. The future legal commitments
were $75.3 million at December 31, 1997. This amount represented a net decrease
of $122.1 million since December 31, 1996, primarily due to sales in 1997. As of
December 31, 1997, KILICO expects to fund approximately $21.2 million of these
legal commitments, along with providing capital to existing projects. The
disparity between total legal commitments and the amount expected to be funded
relates principally to standby financing arrangements that provide credit
enhancements to certain tax-exempt bonds, which KILICO does not presently expect
to fund. The total legal commitments, along with estimated working capital
requirements, are considered in KILICO's evaluation of reserves and write-downs.
(See note captioned "Financial Instruments -- Off-Balance-Sheet Risk" in the
notes to the consolidated financial statements.)
48
<PAGE> 53
Excluding the $4.0 million of real estate owned and $19.2 million of net equity
investments in joint ventures, KILICO's real estate loans totaled $196.8 million
at December 31, 1997, after reserves and write-downs. Of this amount, $155.0
million are on accrual status with a weighted average interest rate of
approximately 8.82 percent. Of these accrual loans, 9.7 percent have terms
requiring current periodic payments of their full contractual interest, 53.4
percent require only partial payments or payments to the extent of cash flow of
the borrowers, and 36.9 percent defer all interest to maturity.
The equity investments in real estate at December 31, 1997 consisted of KILICO's
other equity investments in joint ventures. These equity investments include
KILICO's share of periodic operating results. KILICO, as an equity owner or
affiliate thereof, has the ability to fund, and historically has elected to
fund, operating requirements of certain joint ventures.
REAL ESTATE PORTFOLIO
(in millions)
<TABLE>
<CAPTION>
MORTGAGE LOANS OTHER REAL ESTATE-RELATED INVESTMENTS
---------------- ---------------------------------------
JOINT THIRD- OTHER REAL ESTATE EQUITY
VENTURE PARTY LOANS(2) OWNED INVESTMENTS TOTAL
------- ------ --------- ------------ ------------ ------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996.............. $111.0 $106.6 $ 30.9 $ 7.5 $11.7 $267.7(1)
Additions (deductions):
Fundings.................................. 11.8 -- -- -- -- 11.8
Interest added to principal............... 5.6 .7 -- -- -- 6.3
Sales/paydowns/distributions.............. (47.9) (13.8) (10.4) (4.1) (3.0) (79.2)
Operating gain............................ -- -- -- -- .8 .8
Transfers................................. (9.1) 9.1 -- -- -- --
Realized investments gains................ 7.6 .4 2.2 .7 8.8 19.7
Other transactions, net................... (6.3) -- (1.6) (.1) .9 (7.1)
------ ------ ------ ----- ----- ------
Balance at December 31, 1997.............. $ 72.7 $103.0 $ 21.1 $ 4.0 $19.2 $220.0(3)
====== ====== ====== ===== ===== ======
</TABLE>
- ---------------
(1) Net of $11.8 million reserve and write-downs. Excludes $9.7 million of real
estate-related accrued interest.
(2) The other real estate loans were notes receivable evidencing financing,
primarily to joint ventures. These loans were issued by KILICO generally to
provide financing for Kemper's or KILICO's joint ventures for various
purposes.
(3) Net of $9.2 million reserve and write-downs. Excludes $9.5 million of real
estate-related accrued interest.
REAL ESTATE CONCENTRATIONS AND OUTLOOK
KILICO's real estate portfolio is distributed by geographic location and
property type. However, KILICO has concentration exposures in certain states and
in certain types of properties. In addition to these exposures, KILICO also has
exposures to certain real estate developers and partnerships. (See notes
captioned "Unconsolidated Investees" and "Concentration of Credit Risk" in the
notes to the consolidated financial statements.)
As a result of KILICO's ongoing strategy to reduce its exposure to real
estate-related investments, as of December 31, 1997, KILICO had three remaining
properties which account for approximately 83.2 percent of KILICO's $220.0
million real estate-related portfolio.
The largest of these investments at December 31, 1997 amounted to $88.2 million
and consisted of second mortgages on nine hotel properties and two office
buildings in which Patrick M. Nesbitt or his affiliates, a third-party real
estate developer, have ownership interests. These hotels and office buildings
are geographically dispersed and the current market values of the underlying
properties substantially exceed the balances due on KILICO's mortgages. These
loans are on accrual status.
KILICO's loans to a master limited partnership (the "MLP") between subsidiaries
of Kemper and subsidiaries of Lumbermens, amounted to $60.5 million at December
31, 1997. The MLP's underlying investment primarily consists of a water
development project located in California's Sacramento River Valley. This
project is currently in the final stages of a permit process with various
Federal and California State agencies which will determine the long-term
economic viability of the project. KILICO currently anticipates that the permit
process will be successfully completed in 1998. Loans to the MLP are on accrual
status.
The remaining significant real estate-related investment amounted to $34.4
million at December 31, 1997 and consisted of various zoned and unzoned
residential commercial lots located in Hawaii, as well as a sewer
49
<PAGE> 54
treatment plant which is located in the same geographical area as the
residential lots. The sewer treatment plant is currently under a sales contract
and is expected to close in early 1998. Due to certain negative zoning
restriction developments in January 1997 and a continuing economic slump in
Hawaii, KILICO has placed these real estate-related investments on nonaccrual
status as of December 31, 1996. KILICO is currently pursuing the zoning of all
remaining unzoned properties, as well as pursuing steps to sell all remaining
zoned properties. However, due to the state of Hawaii's economy, which has
lagged behind the economic expansion of most of the rest of the United States,
KILICO anticipates that it could be several additional years until all of
KILICO's investments in Hawaii are completely disposed of.
KILICO evaluates its real estate-related investments (including accrued
interest) using an estimate of the investments observable market price, net of
estimated costs to sell. (See note captioned "Summary of Significant Accounting
Policies" in the notes to the consolidated financial statements.) Because
KILICO's real estate review process includes estimates, there can be no
assurance that current estimates will prove accurate over time due to changing
economic conditions and other factors. KILICO's real estate-related investments
are expected to continue to decline further through future sales. KILICO's net
income could be materially reduced in future periods if real estate market
conditions worsen in areas where KILICO's portfolio is located, if Kemper's and
KILICO's plans with respect to certain projects change or if necessary
construction or zoning permits are not obtained.
The following table is a summary of KILICO's troubled real estate-related
investments:
TROUBLED REAL ESTATE-RELATED INVESTMENTS
(BEFORE RESERVES AND WRITE-DOWNS, EXCEPT FOR REAL ESTATE OWNED)
(in millions)
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31
1997 1996
----------- -----------
<S> <C> <C>
Potential problem loans(1)...................... $ -- $ 3.2
Past due loans(2)............................... -- --
Nonaccrual loans (primarily Hawaiian
properties)(3)................................ 47.4 43.5
Real estate owned............................... 4.0 7.5
----- -----
Total................................. $51.4 $54.2
===== =====
</TABLE>
- ---------------
(1) These are real estate-related investments where KILICO, based on known
information, has serious doubts about the borrowers' abilities to comply
with present repayment terms and which KILICO anticipates may go into
nonaccrual, past due or restructured status.
(2) Interest more than 90 days past due but not on nonaccrual status.
(3) KILICO does not accrue interest on real estate-related investments when it
judges that the likelihood of collection of interest is doubtful. Loans on
nonaccrual status after reserves and write-downs amounted to $41.8 million
and $38.2 million at December 31, 1997 and December 31, 1996, respectively.
NET INVESTMENT INCOME
KILICO's pre-tax net investment income totaled $296.2 million in 1997, compared
with $299.7 million in 1996 and $348.4 million in 1995. Included in pre-tax net
investment income is KILICO's share of the operating losses from equity
investments in real estate consisting of other income less depreciation,
interest and other expenses. Such operating results exclude interest expense on
loans by KILICO which are on nonaccrual status. As previously discussed,
KILICO's net investment income in 1997 and 1996, compared with 1995, has been
negatively impacted by purchase accounting adjustments.
50
<PAGE> 55
KILICO's total foregone investment income before tax on both nonperforming fixed
maturity investments and nonaccrual real estate-related investments was as
follows:
FOREGONE INVESTMENT INCOME
(dollars in millions)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------
PREACQUISITION
--------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Fixed maturities......................... $ .5 $ .7 $ .4
Real estate-related investments.......... 3.9 .5 20.5
---- ---- -----
Total............................. $4.4 $1.2 $20.9
==== ==== =====
Basis points............................. 10 3 43
==== ==== =====
</TABLE>
Foregone investment income from the nonaccrual of real estate-related
investments is net of KILICO's share of interest expense on these loans excluded
from KILICO's share of joint venture operating results. Based on the level of
nonaccrual real estate-related investments at December 31, 1997, KILICO
estimates foregone investment income in 1998 will be similar to the 1997 level.
Any increase in nonperforming securities, and either worsening or stagnant real
estate conditions, would increase the expected adverse effect on KILICO's future
investment income and realized investment results.
REALIZED INVESTMENT RESULTS
Reflected in net income (loss) are after-tax realized investment gains of $6.8
million and $8.8 million in 1997 and 1996, respectively, compared with after-tax
realized investment losses of $207.2 million in 1995. (See note captioned
"Invested Assets and Related Income" in the notes to the consolidated financial
statements.)
Unrealized gains and losses on fixed maturity investments are not reflected in
KILICO's net income (loss). These changes in unrealized value are included
within a separate component of stockholder's equity, net of any applicable
income taxes. If and to the extent a fixed maturity investment suffers an
other-than-temporary decline in value, however, such security is written down to
net realizable value, and the write-down adversely impacts net income.
KILICO regularly monitors its investment portfolio and as part of this process
reviews its assets for possible impairments of carrying value. Because the
review process includes estimates, there can be no assurance that current
estimates will prove accurate over time due to changing economic conditions and
other factors.
A valuation allowance has been established, and is evaluated as of each reported
period end, to reduce the deferred tax asset for investment losses to the amount
that, based upon available evidence, is in management's judgment more likely
than not to be realized. (See note captioned "Income Taxes" in the notes to the
consolidated financial statements.)
INTEREST RATES
In 1994, rapidly rising short-term interest rates resulted in a much flatter
yield curve as the Federal Reserve Board raised rates five times during the year
and once during first-quarter 1995. Interest rates subsequently declined through
the remainder of 1995. In 1996, however, interest rates again began to rise,
before declining again in 1997.
When maturing or sold investments are reinvested at lower yields in a low
interest rate environment, KILICO can adjust its crediting rates on fixed
annuities and other interest-bearing liabilities. However, competitive
conditions and contractual commitments do not always permit the reduction in
crediting rates to fully or immediately reflect reductions in investment yield,
which can result in narrower spreads.
A rising interest rate environment can increase net investment income as well as
contribute to both realized and unrealized fixed maturity investment losses,
while a declining interest rate environment can decrease net investment income
as well as contribute to both realized and unrealized fixed maturity investment
gains. Also, lower renewal crediting rates on annuities, compared with
competitors' higher new money crediting rates, have influenced certain annuity
holders to seek alternative products. KILICO mitigates this risk somewhat by
charging surrender fees, which decrease over time, when annuity holders withdraw
funds prior to maturity on certain annuity products. Approximately 49 percent of
KILICO's fixed and variable annuity liabilities as of December 31, 1997,
however, were no longer subject to significant surrender fees.
51
<PAGE> 56
LIQUIDITY AND CAPITAL RESOURCES
KILICO carefully monitors cash and short-term investments to maintain adequate
balances for timely payment of policyholder benefits, expenses, taxes and
policyholder's account balances. In addition, regulatory authorities establish
minimum liquidity and capital standards. The major ongoing sources of KILICO's
liquidity are deposits for fixed annuities, premium income, investment income,
separate account fees, other operating revenue and cash provided from maturing
or sold investments. (See the Policyholder surrenders and withdrawals table and
related discussion and "INVESTMENTS" above.)
RATINGS
Ratings are an important factor in establishing the competitive position of life
insurance companies. Rating organizations continue to review the financial
performance and condition of life insurers and their investment portfolios,
including those of KILICO. Any reductions in KILICO's claims-paying ability or
financial strength ratings could result in its products being less attractive to
consumers. Any reductions in KILICO's parent's ratings could also adversely
impact KILICO's financial flexibility.
Ratings reductions for Kemper or its subsidiaries and other financial events can
also trigger obligations to fund certain real estate-related commitments to take
out other lenders. In such events, those lenders can be expected to renegotiate
their loan terms, although they are not contractually obligated to do so.
Each rating is subject to revision or withdrawal at any time by the assigning
organization and should be evaluated independently of any other rating. (See
"Ranking and ratings" above.)
STOCKHOLDER'S EQUITY
Stockholder's equity totaled $865.6 million at December 31, 1997, compared with
$751.0 million at December 31, 1996, and $745.6 million at January 4, 1996. The
1997 increase in stockholder's equity was primarily due to net income of $38.7
million, a $45.0 million capital contribution and an increase in stockholder's
equity related to the change in unrealized appreciation of $60.1 million related
to KILICO's fixed maturity investment portfolio due to falling interest rates
during 1997, offset by a dividend of $29.2 million to Kemper. The 1996 increase
in stockholder's equity was primarily due to net income of $34.4 million and an
$18.4 million capital contribution, offset by a $47.4 million decrease in
stockholder's equity related to the change in the unrealized loss position of
KILICO's fixed maturity investment portfolio due to rising interest rates during
1996.
EMERGING ISSUES
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 130, REPORTING COMPREHENSIVE
INCOME. SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses).
This statement requires that all items required to be reported be displayed with
the same prominence as other financial statements. This statement is effective
for fiscal years beginning after December 31, 1997. The impact of implementation
is not expected to be material to KILICO's reported net income before reporting
comprehensive income. Comprehensive income, however, by design, could be
materially different from reported net income, as changes in unrealized
appreciation and depreciation of investments for example will now be included as
a component of reported comprehensive income. Full implementation of SFAS No.
130 is expected in the first quarter of 1998.
In June 1997, the FASB also issued SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF
AN ENTERPRISE AND RELATED INFORMATION. SFAS No. 131 establishes standards for
how to report information about operating segments. It also establishes
standards for related disclosures about products and services, geographic areas
and major customers. This statement is effective for fiscal years beginning
after December 31, 1997. Full implementation of SFAS No. 131 is expected in
December 1998 and the impact of implementation is not expected to be material to
KILICO.
In February 1998, the FASB issued SFAS No. 132, EMPLOYERS' DISCLOSURES ABOUT
PENSIONS AND OTHER POSTRETIREMENT BENEFITS. SFAS No. 132 revises standards for
disclosures related to pension and other postretirement benefit plans. This
statement is effective for fiscal years beginning after December 31, 1997. Full
implementation of SFAS No. 132 is expected in December 1998 and the impact of
implementation is not expected to be material to KILICO.
52
<PAGE> 57
DIRECTORS AND EXECUTIVE OFFICERS OF KILICO
<TABLE>
<CAPTION>
NAME AND AGE
POSITION WITH KILICO
YEAR OF ELECTION OTHER BUSINESS EXPERIENCE DURING PAST 5 YEARS OR MORE
-------------------- -----------------------------------------------------
<S> <C>
John B. Scott (53) Chief Executive Officer, President and Director of Federal
Chief Executive Officer since Kemper Life Assurance Company (FKLA) and Fidelity Life
February 1992. President since Association (FLA) since 1988. Chief Executive Officer,
November 1993. Director since 1992. President and Director of Zurich Life Insurance Company of
America (ZLICA) and Zurich Direct, Inc. (ZD) since March
1996. Chairman of the Board and Director of Investors
Brokerage Services, Inc. (IBS) and Investors Brokerage
Services Insurance Agency, Inc. (IBSIA) since 1993. Chairman
of the Board of FKLA and FLA from April 1988 to January
1996. Chairman of the Board of KILICO from February 1992 to
January 1996. Executive Vice President and Director of
Kemper Corporation (Kemper) from January 1994 and March
1996, respectively. Executive Vice President of Kemper
Financial Companies, Inc. from January 1994 to January 1996
and Director from 1992 to January 1996.
Eliane C. Frye (50) Executive Vice President of FKLA and FLA since 1995.
Executive Vice President since 1995. Executive Vice President of ZLICA and ZD since March 1996.
Director of FLA since December 1997. Director of ZD from
March 1996 to March 1997. Director of IBS and IBSIA since
1995. Senior Vice President of KILICO, FKLA and FLA from
1993 to 1995. Vice President of FKLA and FLA from 1988 to
1993.
Frederick L. Blackmon (46) Senior Vice President and Chief Financial Officer of FKLA
Senior Vice President and Chief since December 1995. Senior Vice President and Chief
Financial Officer since December Financial Officer of FLA since January 1996. Senior Vice
1995. President and Chief Financial Officer of ZLICA since March
1996. Senior Vice President and Chief Financial Officer of
ZD since March 1996. Director of ZD from March 1996 to March
1997. Treasurer and Chief Financial Officer of Kemper since
January 1996. Chief Financial Officer of Alexander Hamilton
Life Insurance Company from April 1989 to November 1995.
James C. Harkensee (39) Senior Vice President of FKLA and FLA since January 1996.
Senior Vice President since January Senior Vice President of ZLICA since 1995. Senior Vice
1996. President of ZD since 1995. Director of ZD from April 1993
to March 1997. Vice President of ZLICA from 1992 to 1995.
Chief Actuary of ZLICA from 1991 to 1994. Assistant Vice
President of ZLICA from 1990 to 1992. Vice President of ZD
from 1994 to 1995.
James E. Hohmann (42) Senior Vice President and Chief Actuary of FKLA since
Senior Vice President and Chief December 1995. Senior Vice President and Chief Actuary of
Actuary since December 1995. FLA since January 1996. Senior Vice President and Chief
Actuary of ZLICA since March 1996. Senior Vice President and
Chief Actuary of ZD since March 1996. Director of FLA since
June 1997. Director of ZD from March 1996 to March 1997.
Managing Principal (Partner) of Tillinghast-Towers Perrin
from January 1991 to December 1995. Consultant/Principal
(Partner) of Tillinghast-Towers Perrin from November 1986 to
January 1991.
Edward K. Loughridge (43) Senior Vice President and Corporate Development Officer of
Senior Vice President and Corporate FKLA and FLA since January 1996. Senior Vice President and
Development Officer since January Corporate Development Officer for ZLICA and ZD since March
1996. 1996. Senior Vice President of Human Resources of
Zurich-American Insurance Group from February 1992 to March
1996.
Phillip D. Meserve (47) Senior Vice President of FKLA, FLA, ZLICA and ZD since March
Senior Vice President since March 1997. Director of IBSIA and IBS since March and May, 1997,
1997 respectively. Managing Director of Equitable Distributors
from May 1996 to March 1997. Senior Vice President of
Banker's Trust from April 1995 to April 1996. Senior Vice
President of Fidelity Investments Insurance Services from
February 1992 to March 1995.
</TABLE>
53
<PAGE> 58
<TABLE>
<CAPTION>
NAME AND AGE
POSITION WITH KILICO
YEAR OF ELECTION OTHER BUSINESS EXPERIENCE DURING PAST 5 YEARS OR MORE
-------------------- -----------------------------------------------------
<S> <C>
Debra P. Rezabek (42) Senior Vice President of FKLA and FLA since March 1996.
Senior Vice President since 1996. Corporate Secretary of FKLA and FLA since January 1996. Vice
General Counsel since 1992. Corporate President of KILICO, FKLA and FLA since 1995. General
Secretary since January 1996. Counsel and Director of Government Affairs of FKLA and FLA
since 1992 and of KILICO since 1993. Senior Vice President,
General Counsel and Corporate Secretary of ZLICA since March
1996. Senior Vice President, General Counsel and Corporate
Secretary of ZD since March 1996. Director of ZD from March
1996 to March 1997. Secretary of IBS and IBSIA since 1993.
Director of IBS and IBSIA from 1993 to 1996. Assistant
General Counsel of FKLA and FLA from 1988 to 1992. General
Counsel and Assistant Secretary of KILICO, FKLA and FLA from
1992 to 1996. Assistant Secretary of Kemper since January
1996.
Kenneth M. Sapp (52) Senior Vice President of FKLA, FLA and ZLICA since January
Senior Vice President since January 1998. Vice President--Aetna Life Brokerage of Aetna Life &
1998. Annuity Company from February 1992 to January 1998.
George Vlaisavljevich (55) Senior Vice President of FKLA, FLA and ZLICA since October
Senior Vice President since October 1996. Senior Vice President of ZD since March 1997. Director
1996. of IBS and IBSIA since October 1996. Executive Vice
President of The Copeland Companies from April 1983 to
September 1996.
Loren J. Alter (59) Director of FKLA, FLA and Scudder Kemper Investments, Inc.
Director since January 1996. (SKI) since January 1996. Director of ZLICA since May 1979.
Executive Vice President of Zurich Insurance Company since
1979. President, Chief Executive Officer and Director of
Kemper since January 1996.
William H. Bolinder (54) Chairman of the Board and Director of FKLA and FLA since
Chairman of the Board and Director January 1996. Chairman of the Board of ZLICA and ZD since
since January 1996. March 1995. Chairman of the Board and Director of Kemper
since January 1996. Vice Chairman and Director of SKI since
January 1996. Member of the Corporate Executive Board of
Zurich Insurance Group since October 1994. Chairman of the
Board of American Guarantee and Liability Insurance Company,
Zurich American Insurance Company of Illinois, American
Zurich Insurance Company and Steadfast Insurance Company
since 1995. Chief Executive Officer of American Guarantee
and Liability Insurance Company, Zurich American Insurance
Company of Illinois, American Zurich Insurance Company and
Steadfast Insurance Company from 1986 to June 1995.
President of Zurich Holding Company of America since 1986.
Manager of Zurich Insurance Company, U.S. Branch since 1986.
Underwriter for Zurich American Lloyds since 1986.
David A. Bowers (51) Director of FKLA and ZLICA since May 1997. Director of FLA
Director since May 1997. since June 1997. Executive Vice President, Corporate
Secretary and General Counsel of Zurich-American Insurance
Group since August 1985. Vice President, General Council and
Secretary of Kemper since January 1996.
Markus Rohrbasser (43) Director of FKLA, FLA and ZLICA since May 1997. Chief
Director since May 1997. Financial Officer and Member of the Corporate Executive
Board of Zurich Insurance Company since January 1997. Member
of Enlarged Corporate Executive Board and Chief Executive
Officer of Union Bank of Switzerland (North America) from
1992 to 1997.
</TABLE>
54
<PAGE> 59
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------------------------ --------------------------
OTHER LONG TERM
ANNUAL INCENTIVE PLAN OPTIONS/ ALL OTHER
NAME AND COMPENSATION PAYOUTS SARS COMPENSATION
PRINCIPAL POSITION YEAR SALARY ($) BONUS ($)(2) ($)(3) ($)(2) (#)(4) ($)(5)(6)(7)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
John B. Scott.............. 1997 $171,000 $ -- $ -- $-- $ -- $ 63,362
Chief Executive Officer(1) 1996 212,500 94,000 -- 212,500 -- 142,498
1995 172,800 129,600 20,035 -- 15,360 260,106
Eliane C. Frye............. 1997 98,040 47,515 -- 91,590 -- 29,909
Executive Vice President(1) 1996 105,000 41,750 -- 69,750 -- 58,520
1995 91,200 67,200 9,261 -- 10,560 41,546
Frederick L. Blackmon...... 1997 96,300 54,225 -- 112,500 -- 19,699
Senior Vice President and 1996 100,583 47,000 27,924 71,250 -- 11,226
Chief Financial
Officer(1)
George Vlaisavljevich...... 1997 252,500 146,000 39,922 243,000 -- 9,491
Senior Vice President(1)
Phillip D. Meserve......... 1997 231,818 150,500 172,526 280,500 -- --
Senior Vice President(1)
</TABLE>
- ---------------
(1) Also served in same positions for FKLA, ZLICA and FLA. An allocation of the
time devoted to duties as executive officer of KILICO has been made. All
compensation items reported in the Summary Compensation Table reflect this
allocation.
(2) Annual bonuses are paid pursuant to annual incentive plans. The amounts of
the bonuses earned in 1997 for Mr. Scott were not available as of the date
of this filing.
(3) The amounts disclosed in this column include:
(a) Amounts paid as non-preferential dividend equivalents on shares of
restricted stock and phantom stock units.
(b) The cash value of shares of Kemper common stock when awarded under the
Kemper Anniversary Award Plan. Employees were awarded shares on an
increasing scale beginning with their 10th year of employment and every 5
years thereafter, with a pro rata award at retirement.
(c) The taxable benefit from personal use of an employer-provided automobile
and certain estate planning services facilitated for executives.
(d) Relocation expense reimbursements of $21,437 in 1996 for Mr. Blackmon
and $24,498 and $52,526, respectively, for Messrs. Vlaisavljevich and
Meserve in 1997.
(e) Sign-on payment of $120,000 for Mr. Meserve in 1997.
(4) Options were granted under Kemper stock option plans maintained for selected
officers and employees of Kemper and its subsidiaries.
(5) The amounts in this column include:
(a) The amounts of employer contributions allocated to the accounts of the
named persons under defined contribution plans or under supplemental plans
maintained to provide benefits in excess of applicable ERISA limitations.
(b) Distributions from the Kemper and FKLA supplemental plans.
(6) Pursuant to the Conseco Merger Agreement, which was an agreement that was
subsequently terminated as the result of a failed merger attempt by Conseco,
the restricted stock awards for 1993 and 1994 were cancelled. To replace
these awards, on June 30, 1994, the Committee, under the Kemper Bonus
Restoration Plan and in its sole discretion, granted cash awards to the
named executive officers and other affected executives entitling each of
them to receive an amount in cash immediately prior to the effective time of
the then-planned Conseco merger equal to the product of the number of shares
of restricted stock previously
55
<PAGE> 60
granted to such individual under the 1993 Senior Executive Long-Term
Incentive Plan multiplied by the consideration payable in the merger. As a
result of the termination of the Conseco Merger Agreement, no cash awards
were paid pursuant to the Kemper Bonus Restoration Plan.
In January 1995, the board of directors, upon the advice of the Committee,
approved the adoption of the Kemper 1995 Executive Incentive Plan under
which active employee holders of the previously cancelled shares of
restricted stock were granted phantom stock units by the Committee equal to
the number of shares cancelled plus an added amount representing 20 percent
of the aggregate cancelled shares. The 20 percent supplement was awarded in
recognition of the imposition of new vesting periods on the phantom awards
(to the extent the restricted stock held prior to cancellation would
otherwise have vested in June 1994 had stockholder approval of the affected
restricted stock plan been obtained as earlier anticipated).
By their terms, the phantom stock units associated with cancelled shares of
restricted stock originally awarded in 1993, as supplemented, would have
vested on December 31, 1995 and entitle the holders to a cash payment (net
of any required tax withholding) determined by the value of Kemper's common
stock based on an average trading range to December 31, 1995, and those
phantom stock units associated with the cancelled restricted stock
originally awarded in 1994 could similarly have vested and been paid on
December 31, 1996, subject to ongoing employment to the respective vesting
dates. Notwithstanding these vesting provisions, the phantom stock units
earlier vested and entitled payment upon the consummation of a "change of
control" of Kemper. Dividend equivalents were payable to holders of the
phantom stock units as compensation income when and as dividends were paid
on Kemper's outstanding common stock, and the Executive Incentive Plan
provided for standard anti-dilution adjustments.
Phantom stock units awarded to the named executive officers subject to
vesting on December 31, 1995 and December 31, 1996, were Mr. Scott 5,400 and
12,600 phantom units, respectively, and Ms. Frye 1,680 and 1,680 phantom
units, respectively. All phantom stock units vested and were paid
immediately prior to the effectiveness of the January 4, 1996 acquisition of
Kemper by Zurich and Insurance Partners. Mr. Scott and Ms. Frye received
allocated cash out payments of $430,272, and $80,317, respectively, in 1996.
(7) Pursuant to the terms of a Termination Protection Agreement with Kemper
dated March 17, 1994, Mr. Scott received payments in 1995 and 1996. These
payments were made by Kemper and no portion of the payments were allocated
to KILICO.
TABLE OF CONTENTS--STATEMENT OF ADDITIONAL INFORMATION
The Statement of Additional Information, Table of Contents is: Services to the
Separate Account; Performance Information of Subaccounts; State Regulation;
Experts; Financial Statements; Independent Auditors' Report, Financial
Statements of the Separate Account. The Statement of Additional Information
should be read in conjunction with this Prospectus.
FINANCIAL STATEMENTS
The financial statements of KILICO that are included in this Prospectus should
be considered primarily as bearing on the ability of KILICO to meet its
obligations under the Contracts. The Contracts are not entitled to participate
in earnings, dividends or surplus of KILICO.
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.
There were no disagreements with Coopers & Lybrand L.L.P. on accounting or
financial disclosures for the year ended December 31, 1997.
56
<PAGE> 61
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. In connection with our audit of the consolidated financial
statements, we also have audited the financial statement schedules as listed in
the accompanying index. These consolidated financial statements and the
financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and financial statement schedules 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. In addition, in our
opinion, the financial statement schedules referred to above, when considered in
relation to the basic financial statements taken as a whole, present fairly, in
all material respects, the information required to be included therein.
Coopers & Lybrand L.L.P.
Chicago, Illinois
March 18, 1998
57
<PAGE> 62
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 also have 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
58
<PAGE> 63
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.
59
<PAGE> 64
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.
60
<PAGE> 65
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.
61
<PAGE> 66
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.
62
<PAGE> 67
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.
63
<PAGE> 68
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".)
64
<PAGE> 69
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
65
<PAGE> 70
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.
66
<PAGE> 71
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>
67
<PAGE> 72
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>
68
<PAGE> 73
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.
69
<PAGE> 74
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:
GEOGRAPHIC DISTRIBUTION AS OF DECEMBER 31, 1997
<TABLE>
<S> <C>
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%
=====
</TABLE>
DISTRIBUTION BY PROPERTY TYPE AS OF DECEMBER 31, 1997
<TABLE>
<S> <C>
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.
70
<PAGE> 75
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) CONCENTRATION OF CREDIT RISK (CONTINUED)
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.
71
<PAGE> 76
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) INCOME TAXES (CONTINUED)
The Company has established a valuation allowance to reduce the deferred Federal
tax asset related to real estate and other investments to the amount that, based
upon available evidence, is, in management's judgment, more likely than not to
be realized. Any reversals of the valuation allowance are contingent upon the
recognition of future capital gains in the Company's Federal income tax return
or a change in circumstances which causes the recognition of the benefits to
become more likely than not. The change in the valuation allowance is related
solely to the change in the net deferred Federal tax asset or liability from
unrealized gains or losses on investments.
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 contract 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.
72
<PAGE> 77
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
73
<PAGE> 78
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.
74
<PAGE> 79
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 financial
75
<PAGE> 80
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(12) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
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.
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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>
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<PAGE> 82
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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>
- ---------------
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.
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<PAGE> 83
APPENDIX A
ILLUSTRATION OF A MARKET VALUE ADJUSTMENT
Purchase Payment: $40,000
Guarantee Period: 5 Years
Guaranteed Interest Rate: 5% Annual Effective Rate
The following examples illustrate how the Market Value Adjustment and the
Withdrawal Charge may affect the values of a Certificate upon a withdrawal. The
5% assumed Guaranteed Interest Rate is the rate required to be used in the
"Summary of Expenses." In these examples, the withdrawal occurs one year after
the Date of Issue. The Market Value Adjustment operates in a similar manner for
transfers. No Withdrawal Charge applies to transfers.
The Guarantee Period Value for this $40,000 Purchase Payment is $51,051.26 at
the end of the five-year Guarantee Period. After one year, when the withdrawals
occur in these examples, the Guarantee Period Value is $42,000.00. It is also
assumed, for the purposes of these examples, that no prior partial withdrawals
or transfers have occurred.
The Market Value Adjustment will be based on the rate KILICO is then crediting
(at the time of the withdrawal) on new Certificates with the same Guarantee
Period as the time remaining in your Guarantee Period rounded to the next higher
number of complete years. One year after the Purchase Payment there would have
been four years remaining in your Guarantee Period. These examples also show the
Withdrawal Charge (if any) which would be calculated separately after the Market
Value Adjustment.
EXAMPLE OF A DOWNWARD MARKET VALUE ADJUSTMENT
A downward Market Value Adjustment results from a full or partial withdrawal
that occurs when interest rates have increased. Assume interest rates have
increased one year after the Purchase Payment and KILICO is then crediting 6.5%
for a four-year Guarantee Period. Upon a full withdrawal, the market value
adjustment factor would be:
(4)
[ (1 + .05) ]
-.0551589* = [ --------- ] -1
[ (1 + .065) ]
The Market Value Adjustment is a reduction of $2,316.67 from the Guarantee
Period Value:
- 2,316.67 = -.0551589 X 42,000.00
The Market Adjusted Value would be:
$39,683.33 = $42,000.00 - $2,316.67
A Withdrawal Charge of 6% would be assessed against the Market Adjusted Value in
excess of the amount available as a free withdrawal. In this case, there are no
prior withdrawals, so 10% of the Market Adjusted Value is not subject to a
Withdrawal Charge. The Withdrawal Charge is thus:
$2,142.90 = $39,683.33 X .90 X .06
Thus, the amount payable on a full withdrawal would be:
$37,540.43 = $39,683.33 - $2,142.90
If instead of a full withdrawal, 50% of the Guarantee Period Value was withdrawn
(partial withdrawal of 50%), the Market Value Adjustment would be 50% of that of
the full withdrawal:
-$1,158.34 = -.0551589 X $21,000.00
The Market Adjusted Value would be:
$19,841.66 = $21,000.00 - $1,158.34
- ---------------
* Actual calculation utilizes 10 decimal places.
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<PAGE> 84
The Withdrawal Charge of 6% would apply to the Market Adjusted Value being
withdrawn, less 10% of the full Market Adjusted Value as there are no prior
withdrawals:
$952.39 = ($19,841.46 - .10 X $39,683.33) X .06
Thus, the amount payable on this partial withdrawal would be:
$18.889.07 = $19,841.46 -$952.39
EXAMPLE OF AN UPWARD MARKET VALUE ADJUSTMENT
An upward Market Value Adjustment results from a withdrawal that occurs when
interest rates have decreased. Assume interest rates have decreased one year
later and KILICO is then crediting 4% for a four-year Guarantee Period. Upon a
full withdrawal, the market value adjustment factor would be:
(4)
[ (1 + .05) ]
+.0390198 = [ --------- ] -1
[ (1 + .04) ]
The Market Value Adjustment is an increase of $1638.83 to the Guarantee Period
Value:
$1,638.83 = $42,000.00 X .0390198
The Market Adjusted Value would be:
$43,638.33 = $42,000.00 +$1,638.83
A Withdrawal Charge of 6% would apply to the Market Adjusted Value being
withdrawn, less 10% of the full Market Adjusted Value, as there were no prior
withdrawals:
$2,356.47 = $43,638.33 X .90 X .06
Thus, the amount payable on withdrawal would be:
$41,281.85 = $43,638.33 - $2,356.47
If instead of a full withdrawal, 50% of the Guarantee Period Value was withdrawn
(partial withdrawal of 50%), the Market Value Adjustment would be:
$819.42 = $21,000.00 X .0390198
The Market Adjusted Value of $21,000.00 would be:
$21,819.42 = $21,000.00 + $819.42
The Withdrawal Charge of 6% would apply to the Market Adjusted Value being
withdrawn, less 10% of the full Market Adjusted Value as there are no prior
withdrawals:
$1,047.34 = ($21,819.42 - .1 X $43,638.33) X .06
Thus, the amount payable on this partial withdrawal would be:
$20,772.08 = $21,819.42 - $1,047.34
Actual Market Value Adjustment may have a greater or lesser impact than that
shown in the Examples, depending on the actual change in interest crediting
rates and the timing of the withdrawal or transfer in relation to the time
remaining in the Guarantee Period.
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APPENDIX B
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> 86
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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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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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 an
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<PAGE> 89
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 should consult
85
<PAGE> 90
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.
86
<PAGE> 91
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> <C> <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 to
87
<PAGE> 92
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 1.40% per annum. If you elected the Guaranteed Retirement Income
Benefit option, an additional charge of .25% of the Contract Value will be
assessed against the Separate Account, Fixed Account and Guarantee Periods on a
pro-rata basis.
2. An annual records maintenance charge of $30.00 will be assessed ratably each
quarter against the Separate Account, Fixed Account and Guarantee Periods.
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, 7%; over 1 to 2 years, 6%; over 2 to 3 years, 5%; over 3
to 4 years, 5%; over 4 to 5 years, 4%; over 5 to 6 years, 3%; over 6 to 7 years,
2%; over 7 years 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.
88
<PAGE> 93
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 $ 937.00 14 $16,798.32 27 $40,421.63 40 $ 75,113.26
2 1,913.00 15 18,310.91 28 42,642.92 41 78,375.30
3 2,928.90 16 19,868.88 29 44,930.85 42 81,735.20
4 3,976.63 17 21,473.59 30 47,287.42 43 85,195.89
5 5,066.14 18 23,126.44 31 49,714.68 44 88,760.41
6 6,198.41 19 24,828.87 32 52,214.76 45 92,431.86
7 7,374.46 20 26,582.37 33 54,789.84 46 96,213.46
8 8,604.34 21 28,388.49 34 57,442.18 47 100,108.50
9 9,871.11 22 30,248.78 35 60,174.08 48 104,120.40
10 11,175.88 23 32,164.88 36 62,987.94 49 108,252.65
11 12,519.80 24 34,138.47 37 65,886.22 50 112,508.87
12 13,904.03 25 36,171.26 38 68,871.45
13 15,329.79 26 38,265.04 39 71,946.23
</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 $ 937 14 $1,000 27 $1,000 40 $1,000
2 946 15 1,000 28 1,000 41 1,000
3 955 16 1,000 29 1,000 42 1,000
4 955 17 1,000 30 1,000 43 1,000
5 964 18 1,000 31 1,000 44 1,000
6 973 19 1,000 32 1,000 45 1,000
7 982 20 1,000 33 1,000 46 1,000
8 1,000 21 1,000 34 1,000 47 1,000
9 1,000 22 1,000 35 1,000 48 1,000
10 1,000 23 1,000 36 1,000 49 1,000
11 1,000 24 1,000 37 1,000 50 1,000
12 1,000 25 1,000 38 1,000
13 1,000 26 1,000 39 1,000
</TABLE>
* Includes applicable withdrawal charges.
89
<PAGE> 94
STATEMENT OF ADDITIONAL INFORMATION
------------------------, 1998
- --------------------------------------------------------------------------------
INDIVIDUAL AND GROUP VARIABLE, FIXED AND MARKET VALUE
ADJUSTED DEFERRED ANNUITY CONTRACTS
- --------------------------------------------------------------------------------
ISSUED BY
KEMPER INVESTORS LIFE INSURANCE COMPANY
IN CONNECTION WITH
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
HOME OFFICE: 1 KEMPER DRIVE, LONG GROVE, ILLINOIS 60049 (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 . 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-18
Experts..................................................... B-18
Financial Statements........................................ B-18
</TABLE>
<PAGE> 95
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. The firm 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 and one-quarter percent (6 1/4%)
of Purchase Payments.
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, the Kemper Investment Grade Bond Subaccount and the Kemper
Government Securities 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. Standardized 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 $40,000 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 return percentage is
then determined by subtracting the initial investment from the ending value and
dividing the remainder by the initial investment and expressing the result as a
percentage. An assumed investment of $40,000 was chosen because that
approximates the 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
B-1
<PAGE> 96
(cumulative) nonstandardized total return figures may be provided. Annualized
nonstandardized total return figures represent the average annual percentage
charge 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 may 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 and the Kemper Government Securities 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
Investment Grade Bond Subaccount and the Kemper Government Securities
Subaccount, based upon the one month period ended December 31, 1997, were 6.12%,
3.44% and 4.06%, respectively. The yield quotation is computed by dividing the
net investment income per unit earned during the specified one month or 30-day
period by the Accumulation unit values on the last day of the period, according
to the following formula that assumes a semi-annual reinvestment of income:
a - b 6
YIELD = 2[( ------- +1) - 1]
cd
a = net dividends and interest earned during the period by the Fund attributable
to the Subaccount
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of Accumulation Units outstanding during the period
d = the Accumulation Unit value per unit on the last day of the period
The yield of each Subaccount reflects the deduction of all recurring fees and
charges applicable to each Subaccount, but does not reflect the deduction of
Withdrawal Charges or premium taxes.
The 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 Separate Account's portfolio are not included in the
calculation. The Kemper Money Market Subaccount's yield for the seven-day period
ended December 31, 1997 was 3.90% and average portfolio maturity was 27 days.
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 December 31, 1997 was 3.98%.
B-2
<PAGE> 97
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 seven years after purchase may be subject
to a Withdrawal Charge that ranges from 7% the first year to 0% after seven
years. Yield, effective yield and total return do not reflect the effect of the
Withdrawal Charge or premium taxes that may be imposed upon the redemption of
units. 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> 98
PERFORMANCE FIGURES
(AS OF DECEMBER 31, 1997)
(STANDARDIZED AND NON-STANDARDIZED)
<TABLE>
<CAPTION>
AVERAGE
ANNUAL
TOTAL RETURN(1) TOTAL
(NON-STANDARDIZED) RETURN(2)
----------------------- (STANDARDIZED)
YEAR TO DATE CUMULATIVE --------------
(%) ENDING (%) ANNUALIZED ANNUALIZED
RETURN(3) VALUE(4) RETURN (%) RETURN (%) RETURN
------------ -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
KEMPER CONTRARIAN VALUE SUBACCOUNT...................... 28.61%
Life of Subaccount (from 05/01/96).................... $59,838 49.52% 27.26% 23.14%
Life of Portfolio (from 05/01/96)..................... 59,838 49.52% 27.26% 23.14%
One Year.............................................. 51,446 28.54% 28.54% 20.89%
KEMPER VALUE+GROWTH SUBACCOUNT.......................... 23.76%
Life of Subaccount (from 05/01/96).................... 56,224 40.49% 22.60% 18.39%
Life of Portfolio (from 05/01/96)..................... 56,224 40.49% 22.60% 18.39%
One Year.............................................. 49,504 23.68% 23.68% 16.05%
KEMPER HORIZON 20+ SUBACCOUNT........................... 18.83%
Life of Subaccount (from 05/01/96).................... 54,346 35.79% 20.13% 15.87%
Life of Portfolio (from 05/01/96)..................... 54,346 35.79% 20.13% 15.87%
One Year.............................................. 47,532 18.75% 18.75% 11.13%
JANUS GROWTH SUBACCOUNT................................. 19.89%
Life of Subaccount (from 09/15/95).................... 57,865 44.66% 17.40% 14.73%
Life of Portfolio (from 09/13/93)..................... 75,123 87.73% 15.78% N/A
Three Year............................................ 71,914 79.71% 21.58% N/A
One Year.............................................. 47,957 19.82% 19.82% 12.19%
</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> 99
PERFORMANCE FIGURES
(AS OF DECEMBER 31, 1997)
(STANDARDIZED AND NON-STANDARDIZED)
(CONTINUED)
<TABLE>
<CAPTION>
COMPARED TO
----------------------------------------------------------------------------------------------
STANDARD & CONSUMER
DOW JONES DOW JONES POOR'S STANDARD & PRICE CONSUMER
INDUSTRIAL(5) INDUSTRIAL(5) 500(6) POOR'S 500(6) 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 CONTRARIAN 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 19.83 110.62 18.85 11.66 2.60
Three Years.................... 106.24 27.29 113.30 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> 100
PERFORMANCE FIGURES
(AS OF DECEMBER 31, 1997)
(STANDARDIZED AND NON-STANDARDIZED)
(CONTINUED)
<TABLE>
<CAPTION>
AVERAGE
ANNUAL
TOTAL
TOTAL RETURN(1) RETURN(2)
(NON-STANDARDIZED) (STANDARDIZED)
------------------------------- --------------
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)......... 3.81%
Life of Subaccount (from 04/06/82)....... $91,778 126.87% 5.34% 5.07%
Life of Portfolio (from 04/06/82)........ 91,778 126.87% 5.34% 5.07%
Ten Years................................ 60,635 51.51% 4.24% 3.97%
Five Years............................... 46,660 16.58% 3.11% 2.09%
Three Years.............................. 44,822 11.98% 3.84% 1.98%
One Year................................. 41,524 3.73% 3.73% -3.11%
KEMPER MONEY MARKET SUBACCOUNT #2(20)...... 5.21%
Life of Subaccount (from 04/06/82)....... 100,417 150.97% 6.02% 5.75%
Life of Portfolio (from 04/06/82)........ 100,417 150.97% 6.02% 5.75%
Ten Years................................ 66,548 66.29% 5.22% 4.94%
Five Years............................... 49,527 23.74% 4.35% 3.32%
Three Years.............................. 46,522 16.23% 5.14% 3.26%
One Year................................. 42,083 5.13% 5.13% -1.80%
KEMPER HIGH YIELD SUBACCOUNT(19)........... 10.08%
Life of Subaccount (from 04/06/82)....... 241,465 503.59% 12.11% 11.82%
Life of Portfolio (from 04/06/82)........ 241,465 503.59% 12.11% 11.82%
Ten Years................................ 106,143 165.28% 10.25% 9.96%
Five Years............................... 65,537 63.77% 10.37% 9.27%
Three Years.............................. 57,336 43.26% 12.73% 10.71%
One Year................................. 44,032 10.01% 10.01% 2.75%
KEMPER GOVERNMENT SECURITIES SUBACCOUNT.... 7.46%
Life of Subaccount (from 11/03/89)....... 67,043 67.61% 6.54% 6.26%
Life of Portfolio (from 09/03/87)........ 76,290 90.65% 6.44% N/A
Ten Years................................ 76,075 90.11% 6.64% N/A
Five Years............................... 51,435 28.51% 5.15% 4.10%
Three Years.............................. 51,126 27.74% 8.50% 6.56%
One Year................................. 43,984 7.38% 7.38% .29%
KEMPER INVESTMENT GRADE BOND SUBACCOUNT.... 7.54%
Life of Subaccount (from 05/01/96)....... 44,143 10.28% 6.04% 2.26%
Life of Portfolio (from 05/01/96)........ 44,143 10.28% 6.04% 2.26%
One Year................................. 43,014 7.46% 7.46% .37%
</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> 101
PERFORMANCE FIGURES
(AS OF DECEMBER 31, 1997)
(STANDARDIZED AND NON-STANDARDIZED)
(CONTINUED)
<TABLE>
<CAPTION>
COMPARED TO
------------------------------------------------------------------------------------------------------
SALOMON BROS SALOMON BROS LEHMAN BROS.
CONSUMER CONSUMER CDA CERT CDA CERT HIGH GRADE HIGH GRADE GOVT/CORP
PRICE PRICE OF DEPOSIT OF DEPOSIT CORP BOND CORP BOND BOND
INDEX(7) 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 MONEY MARKET
SUBACCOUNT #2(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
Ten Years............. 39.93 3.42 180.09 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
<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 MONEY MARKET
SUBACCOUNT #2(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
Ten 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
</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> 102
PERFORMANCE FIGURES
(AS OF DECEMBER 31, 1997)
(STANDARDIZED AND NON-STANDARDIZED)
(CONTINUED)
<TABLE>
<CAPTION>
COMPARED TO
--------------------------------------------------------------------------------------
LEHMAN BROS LEHMAN BROS LEHMAN BROS
MERRILL LYNCH MERRILL LYNCH LONG LONG GOVT/CORP
GOVT/CORP GOVT/CORP GOVT/CORP 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 MONEY MARKET SUBACCOUNT
#2(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 9.17 139.88 9.14
Five Years....................... 44.49 7.64 44.29 7.61 N/A
Three Years...................... 36.50 10.39 34.68 10.43 N/A
One Year......................... 9.78 9.78 9.76 9.76 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
<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 MONEY MARKET SUBACCOUNT
#2(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........................
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
</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> 103
PERFORMANCE FIGURES
(AS OF DECEMBER 31, 1997)
(STANDARDIZED AND NON-STANDARDIZED)
(CONTINUED)
<TABLE>
<CAPTION>
AVERAGE
ANNUAL
TOTAL RETURN(1) TOTAL
(NON-STANDARDIZED) RETURN(2)
------------------------ (STANDARDIZED)
CUMULATIVE ANNUALIZED --------------
YEAR TO DATE(%) (%) (%) ANNUALIZED
RETURN(3) ENDING VALUE(4) RETURN RETURN (%) RETURN
--------------- --------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
KEMPER GROWTH SUBACCOUNT.................. 19.69%
Life of Subaccount (from 12/09/83)...... $243,929 509.75% 13.72% 13.42%
Life of Portfolio (from 12/09/83)....... 243,929 509.75% 13.72% 13.42%
Ten Years............................... 161,985 304.89% 15.01% 14.71%
Five Years.............................. 80,764 101.83% 15.08% 13.94%
Three Years............................. 76,176 90.37% 23.94% 22.00%
One Year................................ 47,874 19.61% 19.61% 11.99%
KEMPER BLUE CHIP SUBACCOUNT............... N/A
Life of Subaccount (from 05/01/97)...... 44,209 10.45% N/A N/A
Life of Portfolio (from 05/01/97)....... 44,209 10.45% N/A N/A
SCUDDER VLIF CAPITAL GROWTH SUBACCOUNT.... 33.88%
Life of Subaccount (from 05/01/98)...... N/A N/A N/A N/A
Life of Portfolio (from 07/16/85)....... 210,213 425.46% 14.23% N/A
Ten Years............................... 164,262 310.58% 15.17% N/A
Five Years.............................. 85,484 113.63% 16.39% N/A
Three Years............................. 80,491 101.15% 26.23% N/A
One Year................................ 53,554 33.81% 33.81% N/A
WARBURG POST-VENTURE CAPITAL SUBACCOUNT... 11.77%
Life of Subaccount (from 05/01/98)...... N/A N/A N/A N/A
Life of Portfolio (from 09/30/96)....... 43,483 8.63% 6.84% N/A
One Year................................ 44,709 11.70% 11.70% N/A
</TABLE>
<TABLE>
<CAPTION>
COMPARED TO
------------------------------------------------------------------------------------------
STANDARD & STANDARD &
STANDARD & STANDARD & CONSUMER POOR'S POOR'S
POOR'S 500 POOR'S 500 CONSUMER PRICE INDEX MIDCAP MIDCAP
(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................. 31.01 31.01 1.70 1.70 30.44 30.44
KEMPER BLUE CHIP
SUBACCOUNT
Life of Portfolio (from
05/01/97).............. 22.55 22.55 0.69 0.69 30.85 30.85
SCUDDER VLIF CAPITAL
GROWTH SUBACCOUNT........
Life of Portfolio (from
07/16/85).............. N/A N/A N/A N/A 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................. 31.01 31.01 1.70 1.70 30.44 30.44
WARBURG POST-VENTURE
CAPITAL SUBACCOUNT.......
Life of Portfolio (from
09/30/96).............. N/A N/A N/A N/A N/A N/A
One Year................. 31.01 31.01 1.70 1.70 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
KEMPER BLUE CHIP
SUBACCOUNT
Life of Portfolio (from
05/01/97).............. N/A N/A
SCUDDER VLIF CAPITAL
GROWTH SUBACCOUNT........
Life of Portfolio (from
07/16/85).............. N/A N/A
Ten Years................ 375.19 16.86
Five Years............... 131.97 18.33
Three Years.............. 108.83 27.83
One Year................. 21.64 21.64
WARBURG POST-VENTURE
CAPITAL SUBACCOUNT.......
Life of Portfolio (from
09/30/96).............. N/A N/A
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> 104
PERFORMANCE FIGURES
(AS OF DECEMBER 31, 1997)
(STANDARDIZED AND NON-STANDARDIZED)
(CONTINUED)
<TABLE>
<CAPTION>
AVERAGE
ANNUAL
TOTAL RETURN(1) TOTAL
(NON-STANDARDIZED) RETURN(2)
----------------------- (STANDARDIZED)
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...................... 32.39%
Life of Subaccount (from 05/02/94).................... $88,491 121.15% 24.15% 22.57%
Life of Portfolio (from 05/02/94)..................... 88,491 121.15% 24.15% 22.57%
Three Years........................................... 85,886 114.64% 28.99% 27.14%
One Year.............................................. 52,954 32.31% 32.31% 24.64%
KEMPER SMALL CAP VALUE SUBACCOUNT....................... 20.08%
Life of Subaccount (from 05/01/96).................... 48,477 21.12% 12.17% 8.17%
Life of Portfolio (from 05/01/96)..................... 48,477 21.12% 12.17% 8.17%
One Year.............................................. 48,031 20.00% 20.00% 12.38%
</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
05/02/94)....................... 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
</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> 105
PERFORMANCE FIGURES
(AS OF DECEMBER 31, 1997)
(STANDARDIZED AND NON-STANDARDIZED)
(CONTINUED)
<TABLE>
<CAPTION>
AVERAGE
ANNUAL
TOTAL
TOTAL RETURN(1) RETURN(2)
(NON-STANDARDIZED) (STANDARDIZED)
------------------------------- --------------
YEAR TO DATE(%) CUMULATIVE (%) ANNUALIZED (%) ANNUALIZED
RETURN(3) ENDING VALUE(4) RETURN RETURN (%) RETURN
--------------- --------------- -------------- -------------- ----------
<S> <C> <C> <C> <C> <C>
KEMPER INTERNATIONAL SUBACCOUNT(18)... 7.96%
Life of Subaccount (from
01/06/92)......................... $67,606 68.94% 9.15% 8.34%
Life of Portfolio (from 01/06/92)... 67,606 68.94% 9.15% 8.34%
Five Years.......................... 68,891 72.15% 11.48% 10.36%
Three Years......................... 55,264 38.08% 11.36% 9.36%
One Year............................ 43,184 7.88% 7.88% .83%
KEMPER GLOBAL INCOME SUBACCOUNT....... N/A
Life of Subaccount
(from 05/01/97)................... 40,769 1.85% N/A N/A
Life of Portfolio (from 05/01/97)... 40,769 1.85% N/A N/A
SCUDDER VLIF GLOBAL DISCOVERY
SUBACCOUNT.......................... 10.83%
Life of Subaccount
(from 05/01/98)................... N/A N/A N/A N/A
Life of Portfolio (from 05/01/98)... 46,339 15.77% 9.17% N/A
One Year............................ 44,333 10.76% 10.76% N/A
SCUDDER VLIF INTERNATIONAL
SUBACCOUNT.......................... 7.56%
Life of Subaccount (from
05/01/96)......................... N/A N/A N/A N/A
Life of Portfolio (from 05/01/87)... 93,997 134.92% 8.33% N/A
Ten Years........................... 106,185 165.39% 10.25% N/A
Five Years.......................... 70,925 77.24% 12.13% N/A
Three Years......................... 53,364 33.34% 10.06% N/A
One Year............................ 43,024 7.49% 7.49% N/A
</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............................................... 31.01 31.01 1.70 1.70
KEMPER GLOBAL INCOME SUBACCOUNT
Life of Portfolio (from 05/01/97)...................... 22.55 22.55 0.69 0.69
SCUDDER VLIF GLOBAL DISCOVERY SUBACCOUNT
Life of Portfolio (from 05/01/96)...................... 48.25 26.62 3.72 2.21
One Year............................................... 31.01 31.01 1.70 1.70
SCUDDER VLIF INTERNATIONAL SUBACCOUNT
Life of Portfolio (from 05/01/87)...................... N/A N/A N/A N/A
Ten Years.............................................. 292.76 14.66 39.93 3.42
Five Years............................................. 122.72 17.37 13.69 2.60
Three Years............................................ 111.30 28.32 7.72 2.51
One Year............................................... 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. 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> 106
PERFORMANCE FIGURES
(AS OF DECEMBER 31, 1997)
(STANDARDIZED AND NON-STANDARDIZED)
(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
KEMPER GLOBAL INCOME SUBACCOUNT
Life of Portfolio (from 05/01/97)......... 2.42 1.44 20.83 12.01
SCUDDER VLIF GLOBAL DISCOVERY SUBACCOUNT
Life of Portfolio (from 05/01/96)......... N/A N/A N/A N/A
One Year.................................. 2.06 2.06 14.17 14.17
SCUDDER VLIF INTERNATIONAL SUBACCOUNT
Life of Portfolio (from 05/01/87)......... N/A N/A N/A N/A
Ten Years................................. 88.77 6.56 N/A N/A
Five Years................................ 73.96 11.71 88.40 13.51
Three Years............................... 21.04 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> 107
PERFORMANCE FIGURES
(AS OF DECEMBER 31, 1997)
(STANDARDIZED AND NON-STANDARDIZED)
(CONTINUED)
<TABLE>
<CAPTION>
AVERAGE
ANNUAL
TOTAL
TOTAL RETURN(1) RETURN(2)
(NON-STANDARDIZED) (STANDARDIZED)
---------------------------------- --------------
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)......... 18.32%
Life of Subaccount (from 04/06/82)....... $247,567 518.84% 12.29% 12.00%
Life of Portfolio (from 04/06/82)........ 247,567 518.84% 12.29% 12.00%
Ten Years................................ 128,367 220.84% 12.36% 12.07%
Five Years............................... 66,944 67.29% 10.84% 9.74%
Three Years.............................. 68,093 70.16% 19.39% 17.33%
One Year................................. 47,329 18.25% 18.25% 10.63%
KEMPER HORIZON 10+ SUBACCOUNT.............. 15.17%
Life of Subaccount (from 05/01/96)....... 50,846 27.04% 15.42% 11.31%
Life of Portfolio (from 05/01/96)........ 50,846 27.04% 15.42% 11.31%
One Year................................. 46,070 15.10% 15.10% 7.51%
KEMPER HORIZON 5 SUBACCOUNT................ 11.16%
Life of Subaccount (from 05/01/96)....... 48,284 20.63% 11.90% 7.91%
Life of Portfolio (from 05/01/96)........ 48,284 20.63% 11.90% 7.91%
One Year................................. 44,462 11.08% 11.08% 3.75%
SCUDDER VLIF GROWTH & INCOME SUBACCOUNT.... 28.67%
Life of Subaccount (from 05/01/98)....... N/A N/A N/A N/A
Life of Portfolio (from 05/02/94)........ 83,736 109.27% 22.30% N/A
Three Years.............................. 80,557 101.32% 26.27% N/A
One Year................................. 51,469 28.60% 28.60% N/A
</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................... 122.76 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 1.70 1.70 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 1.70 1.70 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 1.70 1.70 6.66 6.66
SCUDDER VLIF GROWTH & INCOME
SUBACCOUNT
Life of Portfolio (from
05/02/94).................. N/A N/A N/A N/A N/A N/A
Three Years.................. 111.30 28.32 7.72 2.51 24.45 7.56
One Year..................... 31.01 31.01 1.70 1.70 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> 108
PERFORMANCE FIGURES
(AS OF DECEMBER 31, 1997)
(STANDARDIZED AND NON-STANDARDIZED)
(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 16.48 16.45 9.57
One Year............................... 9.78 9.78 9.76 9.76
SCUDDER VLIF GROWTH & INCOME SUBACCOUNT
Life of Portfolio (from 05/02/94)...... N/A N/A N/A N/A
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> 109
PERFORMANCE FIGURES--NOTES
* N/A Not Applicable
(1) The Non standardized Total Return figures quoted are based on a
hypothetical $40,000 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. (23) From May 1, 1996 to December 31, 1996.
(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> 110
The following tables illustrate an assumed $40,000 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 the inception date of each Fund to December 31, 1997.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
KEMPER MONEY MARKET SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<C> <S> <C>
1982 ............................... $43,058
1983 ............................... 46,405
1984 ............................... 50,670
1985 ............................... 54,094
1986 ............................... 56,926
1987 ............................... 59,885
1988 ............................... 63,514
1989 ............................... 68,402
1990 ............................... 72,994
1991 ............................... 76,270
1992 ............................... 77,820
1993 ............................... 78,968
1994 ............................... 81,012
1995 ............................... 84,434
1996 ............................... 87,447
1997 ............................... 90,778
</TABLE>
<TABLE>
<CAPTION>
KEMPER GOVERNMENT SECURITIES
SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<C> <S> <C>
1987 ............................... $40,113
1988 ............................... 40,801
1989 ............................... 46,074
1990 ............................... 49,929
1991 ............................... 56,785
1992 ............................... 59,330
1993 ............................... 62,326
1994 ............................... 59,688
1995 ............................... 70,150
1996 ............................... 70,995
1997 ............................... 76,290
</TABLE>
<TABLE>
<CAPTION>
KEMPER INVESTMENT GRADE BOND
SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<C> <S> <C>
1996 ............................... $41,050
1997 ............................... 44,143
</TABLE>
<TABLE>
<CAPTION>
KEMPER GLOBAL INCOME SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<C> <S> <C>
1997 ............................... $40,769
</TABLE>
<TABLE>
<CAPTION>
KEMPER HORIZON 5 SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<C> <S> <C>
1996 ............................... $43,438
1997 ............................... 48,284
</TABLE>
<TABLE>
<CAPTION>
KEMPER HIGH YIELD SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<C> <S> <C>
1982 .............................. $ 49,485
1983 .............................. 56,063
1984 .............................. 62,318
1985 .............................. 74,895
1986 .............................. 87,061
1987 .............................. 90,996
1988 .............................. 104,077
1989 .............................. 101,381
1990 .............................. 84,537
1991 .............................. 126,794
1992 .............................. 147,376
1993 .............................. 174,554
1994 .............................. 168,457
1995 .............................. 195,187
1996 .............................. 219,553
1997 .............................. 241,465
</TABLE>
<TABLE>
<CAPTION>
KEMPER HORIZON 10+ SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<C> <S> <C>
1996 ............................... $44,147
1997 ............................... 50,846
</TABLE>
<TABLE>
<CAPTION>
KEMPER TOTAL RETURN SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<C> <S> <C>
1982 .............................. $ 49,393
1983 .............................. 57,379
1984 .............................. 53,853
1985 .............................. 68,340
1986 .............................. 77,673
1987 .............................. 77,143
1988 .............................. 85,302
1989 .............................. 104,435
1990 .............................. 108,255
1991 .............................. 147,444
1992 .............................. 147,925
1993 .............................. 163,685
1994 .............................. 145,429
1995 .............................. 182,252
1996 .............................. 209,232
1997 .............................. 247,567
</TABLE>
<TABLE>
<CAPTION>
KEMPER HORIZON 20+ SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<C> <S> <C>
1996 ............................... $45,734
1997 ............................... 54,346
</TABLE>
<TABLE>
<CAPTION>
KEMPER VALUE+GROWTH SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<C> <S> <C>
1996 ............................... $45,430
1997 ............................... 56,224
</TABLE>
B-16
<PAGE> 111
<TABLE>
<CAPTION>
KEMPER BLUE CHIP SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<C> <S> <C>
1997 ............................... $44,209
</TABLE>
<TABLE>
<CAPTION>
KEMPER INTERNATIONAL SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<C> <S> <C>
1992 ............................... $39,254
1993 ............................... 51,478
1994 ............................... 48,933
1995 ............................... 54,820
1996 ............................... 62,622
1997 ............................... 67,606
</TABLE>
<TABLE>
<CAPTION>
KEMPER CONTRARIAN VALUE SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<C> <S> <C>
1996 ............................... $46,525
1997 ............................... 59,838
</TABLE>
<TABLE>
<CAPTION>
KEMPER SMALL CAP VALUE SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<C> <S> <C>
1996 ............................... $40,371
1997 ............................... 48,477
</TABLE>
<TABLE>
<CAPTION>
KEMPER SMALL CAP GROWTH SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<C> <S> <C>
1994 ............................... $41,213
1995 ............................... 52,892
1996 ............................... 66,844
1997 ............................... 88,491
</TABLE>
<TABLE>
<CAPTION>
KEMPER GROWTH SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<C> <S> <C>
1983 .............................. $ 41,162
1984 .............................. 45,032
1985 .............................. 55,642
1986 .............................. 60,009
1987 .............................. 60,235
1988 .............................. 59,688
1989 .............................. 75,584
1990 .............................. 75,035
1991 .............................. 118,212
1992 .............................. 120,811
1993 .............................. 136,674
1994 .............................. 128,086
1995 .............................. 170,516
1996 .............................. 203,807
1997 .............................. 243,929
</TABLE>
<TABLE>
<CAPTION>
SCUDDER VLIF GLOBAL
DISCOVERY SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<C> <S> <C>
1996 ............................... $41,810
1997 ............................... 46,339
</TABLE>
<TABLE>
<CAPTION>
SCUDDER VLIF GROWTH AND INCOME
SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<C> <S> <C>
1994 ............................... $41,578
1995 ............................... 54,351
1996 ............................... 65,077
1997 ............................... 83,736
</TABLE>
<TABLE>
<CAPTION>
SCUDDER VLIF INTERNATIONAL SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<C> <S> <C>
1987 ............................... $35,409
1988 ............................... 40,769
1989 ............................... 55,419
1990 ............................... 50,462
1991 ............................... 55,468
1992 ............................... 53,012
1993 ............................... 72,052
1994 ............................... 70,457
1995 ............................... 77,786
1996 ............................... 87,390
1997 ............................... 943,997
</TABLE>
<TABLE>
<CAPTION>
SCUDDER VLIF CAPITAL GROWTH
SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<C> <S> <C>
1985 .............................. $ 43,878
1986 .............................. 52,927
1987 .............................. 51,190
1988 .............................. 61,634
1989 .............................. 74,624
1990 .............................. 68,087
1991 .............................. 93,734
1992 .............................. 98,364
1993 .............................. 117,263
1994 .............................. 103,424
1995 .............................. 133,489
1996 .............................. 157,011
1997 .............................. 210,213
</TABLE>
<TABLE>
<CAPTION>
JANUS GROWTH SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<C> <S> <C>
1993 ............................... $41,230
1994 ............................... 41,700
1995 ............................... 53,835
1996 ............................... 62,659
1997 ............................... 75,123
</TABLE>
<TABLE>
<CAPTION>
WARBURG PINCUS POST-VENTURE CAPITAL
SUBACCOUNT
YEAR
ENDED TOTAL
12/31 VALUE
- ----- -----
<C> <S> <C>
1996 ............................... $38,903
1997 ............................... 43,483
</TABLE>
B-17
<PAGE> 112
TAX-DEFERRED ACCUMULATION
<TABLE>
<CAPTION>
NON-QUALIFIED
ANNUITY CONVENTIONAL
AFTER-TAX CONTRIBUTIONS SAVINGS PLAN
AND TAX-DEFERRED EARNINGS. AFTER-TAX
-------------------------------- CONTRIBUTIONS
TAXABLE LUMP AND TAXABLE
NO WITHDRAWALS SUM WITHDRAWAL EARNINGS.
-------------- -------------- -------------
<S> <C> <C> <C>
10 Years.......................................... $107,946 $ 86,448 $ 81,693
20 Years.......................................... 233,048 165,137 133,476
30 Years.......................................... 503,133 335,021 218,082
</TABLE>
This chart compares the accumulation of a $50,000 initial investment into a
Non-Qualified Annuity and a Conventional Savings Plan. Contributions to the
Non-Qualified Annuity and the Conventional Savings Plan are made after-tax. Only
the gain in the Non-Qualified Annuity will be subject to income tax in a taxable
lump sum withdrawal. The chart assumes a 37.1% federal marginal tax rate and an
8% annual return. The 37.1% federal marginal tax is based on a marginal tax rate
of 36%, representative of the target market, adjusted to reflect a decrease of
$3 of itemized deductions for each $100 of income over $117,950. Tax rates are
subject to change as is the tax-deferred treatment of the Contracts. Income on
Non-Qualified Annuities is taxed as ordinary income upon withdrawal. A 10% tax
penalty may apply to early withdrawals. See "Federal Income Taxes" in the
prospectus. The chart does not reflect the following annuity charges and
expenses: 1.25% mortality and expense risk; .10% administration charges; 7%
maximum deferred withdrawal charge; and $30 annual records maintenance charge.
The tax-deferred accumulation would be reduced if these charges were reflected.
No implication is intended by the use of these assumptions that the return shown
is guaranteed in any way or that the return shown represents an average or
expected rate of return over the period of the Contracts. [IMPORTANT--THIS IS
NOT AN ILLUSTRATION OF YIELD OR RETURN].
Unlike savings plans, contributions to Non-Qualified Annuities provide
tax-deferred treatment on earnings. In addition, contributions to tax-deferred
retirement annuities are not subject to current tax in the year of contribution.
When monies are received from a Non-Qualified Annuity (and you have many
different options on how you receive your funds), they are subject to income
tax. At the time of receipt, if the person receiving the monies is retired, not
working or has additional tax exemptions, these monies may be taxed at a lesser
rate.
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 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.
FINANCIAL STATEMENTS
This Statement of Additional Information contains financial statements for the
Separate Account which reflect assets attributable to other variable annuity
contracts offered by KILICO through the Separate Account. As of the date of this
Statement of Additional Information, no assets attributable to the Contracts are
reflected as the Contracts were not offered prior to such date. In addition, the
financial statements for the Separate Account reflect Subaccounts that are not
available under the Contracts.
B-18
<PAGE> 113
[THIS PAGE INTENTIONALLY LEFT BLANK]
B-19
<PAGE> 114
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, Kemper Horizon 5 Subaccount, Kemper
Global Income Subaccount and Kemper Blue Chip Subaccount (investment options
within the Investors Fund Series), and the Growth Subaccount (investment option
within Janus Aspen Series), 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, except for Kemper
Global Income Subaccount and Kemper Blue Chip Subaccount as to which the period
is May 1, 1997 (commencement of operations) to December 31, 1997. 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
the transfer agent. An audit also includes assessing the accounting principles
used and significant estimates made by management as well as evaluating the
overall financial statement presentation. We believe that our 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, except for Kemper Global Income Subaccount and Kemper Blue
Chip Subaccount as to which the period is May 1, 1997 (commencement of
operations) to December 31, 1997, in conformity with generally accepted
accounting principles.
Coopers & Lybrand L.L.P.
Chicago, Illinois
February 20, 1998
B-20
<PAGE> 115
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 Account, 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), and the Growth Subaccount (investment option within
Janus Aspen Series) 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 the 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-21
<PAGE> 116
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
MARKET MARKET RETURN YIELD GROWTH SECURITIES
SUBACCOUNT SUBACCOUNT #2 SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Investments in underlying
portfolio funds, at current
values..................... $73,754 6,379 743,633 306,171 527,701 72,906
Dividends and other
receivables................ 200 17 142 40 69 5
------- ----- ------- ------- ------- ------
Total assets.......... 73,954 6,396 743,775 306,211 527,770 72,911
------- ----- ------- ------- ------- ------
LIABILITIES AND CONTRACT
OWNERS' EQUITY
Liabilities:
Mortality and expense risk
and administrative
charges.................. 82 -- 796 327 564 78
Other payables............. 118 2 195 63 106 12
------- ----- ------- ------- ------- ------
Total liabilities..... 200 2 991 390 670 90
------- ----- ------- ------- ------- ------
Contract owners' equity...... $73,754 6,394 742,784 305,821 527,100 72,821
======= ===== ======= ======= ======= ======
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
Accumulated net investment
income (loss).............. 69,873 1,176 301,262 181,924 202,725 30,968
Accumulated net realized gain
on sales of investments.... -- -- 88,300 6,525 61,033 1,024
Unrealized appreciation of
investments................ -- -- 149,742 20,584 75,374 1,270
------- ----- ------- ------- ------- ------
Contract owners' equity...... $73,754 6,394 742,784 305,821 527,100 72,821
======= ===== ======= ======= ======= ======
<CAPTION>
INVESTORS FUND SERIES
--------------------------
KEMPER
KEMPER SMALL CAP
INTERNATIONAL GROWTH
SUBACCOUNT SUBACCOUNT
------------- ----------
<S> <C> <C>
ASSETS
Investments in underlying
portfolio funds, at current
values..................... 160,865 112,970
Dividends and other
receivables................ 28 25
------- -------
Total assets.......... 160,893 112,995
------- -------
LIABILITIES AND CONTRACT
OWNERS' EQUITY
Liabilities:
Mortality and expense risk
and administrative
charges.................. 172 115
Other payables............. 125 17
------- -------
Total liabilities..... 297 132
------- -------
Contract owners' equity...... 160,596 112,863
======= =======
ANALYSIS OF CONTRACT OWNERS'
EQUITY
Excess of proceeds from units
sold over payments for
units redeemed............. 107,157 72,054
Accumulated net investment
income (loss).............. 7,987 7,311
Accumulated net realized gain
on sales of investments.... 18,107 11,120
Unrealized appreciation of
investments................ 27,345 22,378
------- -------
Contract owners' equity...... 160,596 112,863
======= =======
</TABLE>
See accompanying notes to financial statements.
B-22
<PAGE> 117
<TABLE>
<CAPTION>
INVESTORS FUND SERIES
---------------------------------------------------------------------------------------------------------------------
KEMPER KEMPER KEMPER KEMPER KEMPER KEMPER
INVESTMENT CONTRARIAN SMALL CAP VALUE+ HORIZON HORIZON KEMPER KEMPER KEMPER
GRADE BOND VALUE VALUE GROWTH 20+ 10+ HORIZON 5 GLOBAL INCOME BLUE CHIP
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ---------- ---------- ---------- ---------- ---------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
5,463 78,165 33,296 27,952 6,474 9,169 4,902 326 2,080
1 20 14 21 5 4 3 -- 3
----- ------ ------ ------ ----- ----- ----- --- -----
5,464 78,185 33,310 27,973 6,479 9,173 4,905 326 2,083
----- ------ ------ ------ ----- ----- ----- --- -----
5 68 35 29 7 10 5 -- 2
1 35 25 23 4 3 2 -- 3
----- ------ ------ ------ ----- ----- ----- --- -----
6 103 60 52 11 13 7 -- 5
----- ------ ------ ------ ----- ----- ----- --- -----
5,458 78,082 33,250 27,921 6,468 9,160 4,898 326 2,078
===== ====== ====== ====== ===== ===== ===== === =====
5,144 64,882 28,513 23,759 5,342 7,793 4,402 307 2,017
(37) (395) (220) (224) (86) (83) (47) (7) (20)
73 2,762 1,143 618 177 138 98 21 27
278 10,833 3,814 3,768 1,035 1,312 445 5 54
----- ------ ------ ------ ----- ----- ----- --- -----
5,458 78,082 33,250 27,921 6,468 9,160 4,898 326 2,078
===== ====== ====== ====== ===== ===== ===== === =====
<CAPTION>
JANUS ASPEN SERIES
------------------
GROWTH
SUBACCOUNT
----------
<S> <C>
29,665
13
------
29,678
------
31
--
------
31
------
29,647
======
23,713
668
916
4,350
------
29,647
======
</TABLE>
B-23
<PAGE> 118
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
MARKET MARKET RETURN HIGH YIELD GROWTH SECURITIES
SUBACCOUNT SUBACCOUNT #2 SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Dividends and capital gains
distributions.................... $3,938 374 107,616 23,900 112,090 6,229
Expenses:
Mortality and expense risk and
administrative charges......... 999 1 9,756 3,824 6,893 1,011
------ --- ------- ------ ------- -----
Net investment income (loss)....... 2,939 373 97,860 20,076 105,197 5,218
------ --- ------- ------ ------- -----
Net realized and unrealized gain
(loss) on investments:
Net realized gain (loss) on sales
of investments................. -- -- 21,466 5,634 13,791 (133)
Change in unrealized appreciation
(depreciation) of
investments.................... -- -- 1,837 2,376 (29,191) 284
------ --- ------- ------ ------- -----
Net realized and unrealized gain
(loss) on investments............ -- -- 23,303 8,010 (15,400) 151
------ --- ------- ------ ------- -----
Net increase in contract owners'
equity resulting from
operations....................... $2,939 373 121,163 28,086 89,797 5,369
====== === ======= ====== ======= =====
<CAPTION>
INVESTORS FUND SERIES
--------------------------
KEMPER
KEMPER SMALL CAP
INTERNATIONAL GROWTH
SUBACCOUNT SUBACCOUNT
------------- ----------
<S> <C> <C>
Dividends and capital gains
distributions.................... 9,141 8,510
Expenses:
Mortality and expense risk and
administrative charges......... 2,301 1,226
------ ------
Net investment income (loss)....... 6,840 7,284
------ ------
Net realized and unrealized gain
(loss) on investments:
Net realized gain (loss) on sales
of investments................. 9,738 8,226
Change in unrealized appreciation
(depreciation) of
investments.................... (2,788) 8,507
------ ------
Net realized and unrealized gain
(loss) on investments............ 6,950 16,733
------ ------
Net increase in contract owners'
equity resulting from
operations....................... 13,790 24,017
====== ======
</TABLE>
- ---------------
(a) For the period from May 1, 1997 (commencement of operations) to December 31,
1997.
See accompanying notes to financial statements.
B-24
<PAGE> 119
<TABLE>
<CAPTION>
INVESTORS FUND SERIES
- --------------------------------------------------------------------------------------------------------------------------------
KEMPER KEMPER KEMPER KEMPER KEMPER KEMPER KEMPER
INVESTMENT CONTRARIAN SMALL CAP VALUE+ HORIZON HORIZON KEMPER GLOBAL KEMPER
GRADE BOND VALUE VALUE GROWTH 20+ 10+ HORIZON 5 INCOME BLUE CHIP
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT(A) SUBACCOUNT(A)
---------- ---------- ---------- ------------ ----------- ----------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
303 181 121 40 60 29 -- --
28
621 357 282 98 113 62 7 20
54
--- ------ ----- ----- --- ----- --- -- ---
(26) (318) (176) (161) (58) (53) (33) (7) (20)
--- ------ ----- ----- --- ----- --- -- ---
2,750 1,194 619 161 129 97 21 27
71
9,122 3,077 3,038 777 945 320 5 54
248
--- ------ ----- ----- --- ----- --- -- ---
319 11,872 4,271 3,657 938 1,074 417 26 81
--- ------ ----- ----- --- ----- --- -- ---
293 11,554 4,095 3,496 880 1,021 384 19 61
=== ====== ===== ===== === ===== === == ===
<CAPTION>
JANUS ASPEN SERIES
------------------
GROWTH
SUBACCOUNT
------------------
<S> <C>
741
312
-----
429
-----
842
3,150
-----
3,992
-----
4,421
=====
</TABLE>
B-25
<PAGE> 120
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
MARKET MARKET RETURN YIELD GROWTH SECURITIES
SUBACCOUNT SUBACCOUNT #2 SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Operations:
Net investment income
(loss)..................... $ 2,939 373 97,860 20,076 105,197 5,218
Net realized gain (loss) on
sales of investments....... -- -- 21,466 5,634 13,791 (133)
Change in unrealized
appreciation (depreciation)
of investments............. -- -- 1,837 2,376 (29,191) 284
-------- ------- ------- ------- ------- -------
Net increase in contract
owners' equity resulting
from operations.......... 2,939 373 121,163 28,086 89,797 5,369
-------- ------- ------- ------- ------- -------
Account unit transactions:
Proceeds from units sold..... 21,938 7,884 36,774 26,456 32,804 6,125
Net transfers (to) from
affiliated divisions and
subaccounts................ 7,054 (10,145) (30,823) (473) (35,916) (6,847)
Payments for units
redeemed................... (17,525) (213) (75,741) (34,745) (43,779) (11,513)
-------- ------- ------- ------- ------- -------
Net increase (decrease) in
contract owners' equity
from account unit
transactions............. 11,467 (2,474) (69,790) (8,762) (46,891) (12,235)
-------- ------- ------- ------- ------- -------
Total increase (decrease) in
contract owners' equity...... 14,406 (2,101) 51,373 19,324 42,906 (6,866)
Beginning of period............ 59,348 8,495 691,411 286,497 484,194 79,687
-------- ------- ------- ------- ------- -------
End of period.................. $ 73,754 6,394 742,784 305,821 527,100 72,821
======== ======= ======= ======= ======= =======
<CAPTION>
INVESTORS FUND SERIES
--------------------------
KEMPER
KEMPER SMALL CAP
INTERNATIONAL GROWTH
SUBACCOUNT SUBACCOUNT
------------- ----------
<S> <C> <C>
Operations:
Net investment income
(loss)..................... 6,840 7,284
Net realized gain (loss) on
sales of investments....... 9,738 8,226
Change in unrealized
appreciation (depreciation)
of investments............. (2,788) 8,507
------- -------
Net increase in contract
owners' equity resulting
from operations.......... 13,790 24,017
------- -------
Account unit transactions:
Proceeds from units sold..... 14,396 14,943
Net transfers (to) from
affiliated divisions and
subaccounts................ (14,865) 11,461
Payments for units
redeemed................... (15,633) (6,408)
------- -------
Net increase (decrease) in
contract owners' equity
from account unit
transactions............. (16,102) 19,996
------- -------
Total increase (decrease) in
contract owners' equity...... (2,312) 44,013
Beginning of period............ 162,908 68,850
------- -------
End of period.................. 160,596 112,863
======= =======
</TABLE>
- ---------------
(a) For the period from May 1, 1997 (commencement of operations) to December 31,
1997.
See accompanying notes to financial statements.
B-26
<PAGE> 121
<TABLE>
<CAPTION>
INVESTORS FUND SERIES
------------------------------------------------------------------------------------------------------------------------
KEMPER KEMPER KEMPER KEMPER KEMPER KEMPER
INVESTMENT CONTRARIAN SMALL CAP VALUE+ HORIZON HORIZON KEMPER KEMPER KEMPER
GRADE BOND VALUE VALUE GROWTH 20+ 10+ HORIZON 5 GLOBAL INCOME BLUE CHIP
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT(A) SUBACCOUNT(A)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(26) (318) (176) (161) (58) (53) (33) (7) (20)
71 2,750 1,194 619 161 129 97 21 27
248 9,122 3,077 3,038 777 945 320 5 54
----- ------ ------ ------ ----- ----- ----- --- -----
293 11,554 4,095 3,496 880 1,021 384 19 61
----- ------ ------ ------ ----- ----- ----- --- -----
1,403 16,729 8,235 8,265 1,223 1,730 1,182 44 1,073
2,113 31,875 9,674 7,531 1,114 1,220 1,152 263 1,027
(224) (2,935) (1,625) (1,266) (179) (395) (200) -- (83)
----- ------ ------ ------ ----- ----- ----- --- -----
3,292 45,669 16,284 14,530 2,158 2,555 2,134 307 2,017
----- ------ ------ ------ ----- ----- ----- --- -----
3,585 57,223 20,379 18,026 3,038 3,576 2,518 326 2,078
1,873 20,859 12,871 9,895 3,430 5,584 2,380 -- --
----- ------ ------ ------ ----- ----- ----- --- -----
5,458 78,082 33,250 27,921 6,468 9,160 4,898 326 2,078
===== ====== ====== ====== ===== ===== ===== === =====
<CAPTION>
JANUS ASPEN SERIES
------------------
GROWTH
SUBACCOUNT
----------
<S> <C>
429
842
3,150
------
4,421
------
5,841
2,785
(1,058)
------
7,568
------
11,989
17,658
------
29,647
======
</TABLE>
B-27
<PAGE> 122
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 KEMPER
MONEY MONEY TOTAL HIGH KEMPER GOVERNMENT
MARKET MARKET RETURN YIELD GROWTH SECURITIES
SUBACCOUNT SUBACCOUNT #2 SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Operations:
Net investment income (loss)....... $ 2,493 243 33,796 21,101 57,547 4,982
Net realized gain (loss) on sales
of investments................... -- -- 17,341 4,321 11,516 117
Change in unrealized appreciation
(depreciation) of investments.... -- -- 42,597 5,924 10,026 (4,343)
-------- ------ ------- ------- ------- -------
Net increase in contract owners'
equity resulting from
operations..................... 2,493 243 93,734 31,346 79,089 756
-------- ------ ------- ------- ------- -------
Account unit transactions:
Proceeds from units sold........... 22,801 12,928 47,161 36,482 43,192 7,926
Net transfers (to) from affiliated
divisions and subaccounts........ (7,498) (6,807) (27,829) (7,862) (9,293) (9,264)
Payments for units redeemed........ (16,282) (184) (78,322) (28,503) (41,011) (10,724)
-------- ------ ------- ------- ------- -------
Net increase (decrease) in
contract owners' equity from
account unit transactions...... (979) 5,937 (58,990) 117 (7,112) (12,062)
-------- ------ ------- ------- ------- -------
Total increase (decrease) in contract
owners' equity..................... 1,514 6,180 34,744 31,463 71,977 (11,306)
Beginning of period.................. 57,834 2,315 656,667 255,034 412,217 90,993
-------- ------ ------- ------- ------- -------
End of period........................ $ 59,348 8,495 691,411 286,497 484,194 79,687
======== ====== ======= ======= ======= =======
<CAPTION>
INVESTORS FUND SERIES
--------------------------
KEMPER
KEMPER SMALL CAP
INTERNATIONAL GROWTH
SUBACCOUNT SUBACCOUNT
------------- ----------
<S> <C> <C>
Operations:
Net investment income (loss)....... 942 478
Net realized gain (loss) on sales
of investments................... 5,409 2,710
Change in unrealized appreciation
(depreciation) of investments.... 14,729 8,276
------- ------
Net increase in contract owners'
equity resulting from
operations..................... 21,080 11,464
------- ------
Account unit transactions:
Proceeds from units sold........... 20,272 13,879
Net transfers (to) from affiliated
divisions and subaccounts........ 819 11,423
Payments for units redeemed........ (13,606) (3,253)
------- ------
Net increase (decrease) in
contract owners' equity from
account unit transactions...... 7,485 22,049
------- ------
Total increase (decrease) in contract
owners' equity..................... 28,565 33,513
Beginning of period.................. 134,343 35,337
------- ------
End of period........................ 162,908 68,850
======= ======
</TABLE>
- ---------------
(a) For the period from May 1, 1996 (commencement of operations) to December 31,
1996.
See accompanying notes to financial statements.
B-28
<PAGE> 123
<TABLE>
<CAPTION>
INVESTORS FUND SERIES
- -----------------------------------------------------------------------------------------------------------------
KEMPER KEMPER KEMPER KEMPER
INVESTMENT CONTRARIAN SMALL CAP VALUE+ KEMPER KEMPER KEMPER
GRADE BOND VALUE VALUE GROWTH HORIZON 20+ HORIZON 10+ HORIZON 5
SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A)
------------- ------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
(11) (77) (44) (63) (28) (30) (14)
2 12 (51) (1) 16 9 1
30 1,711 737 730 258 367 125
----- ------ ------ ----- ----- ----- -----
21 1,646 642 666 246 346 112
----- ------ ------ ----- ----- ----- -----
1,262 9,908 6,111 6,223 2,580 4,108 1,453
632 9,522 6,244 3,214 620 1,206 887
(42) (217) (126) (208) (16) (76) (72)
----- ------ ------ ----- ----- ----- -----
1,852 19,213 12,229 9,229 3,184 5,238 2,268
----- ------ ------ ----- ----- ----- -----
1,873 20,859 12,871 9,895 3,430 5,584 2,380
-- -- -- -- -- -- --
----- ------ ------ ----- ----- ----- -----
1,873 20,859 12,871 9,895 3,430 5,584 2,380
===== ====== ====== ===== ===== ===== =====
<CAPTION>
JANUS ASPEN SERIES
------------------
GROWTH
SUBACCOUNT
----------
<S> <C>
200
74
1,182
------
1,456
------
3,853
10,206
(445)
------
13,614
------
15,070
2,588
------
17,658
======
</TABLE>
B-29
<PAGE> 124
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
seventeen subaccount options are presented in the accompanying financial
statements, (the Kemper Money Market Subaccounts represent only one subaccount),
as available subaccount options to Contract Owners. Each subaccount invests
exclusively in the shares of a corresponding portfolio of one of the underlying
investment funds; the Investors Fund Series or the Janus Aspen Series (the
"Fund"), both of which are open-end diversified management investment companies.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
could affect the reported amounts of assets and liabilities as well as the
disclosure of contingent amounts at the date of the financial statements. As a
result, actual results reported as income and expenses could differ from the
estimates reported in the accompanying financial statements.
SECURITY VALUATION
The investments are stated at current value which is based on the closing bid
price, net asset value, at December 31, 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.
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.
B-30
<PAGE> 125
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(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
Kemper Global Income Subaccount............................. 316 321
Kemper Blue Chip Subaccount................................. 1,864 2,026
JANUS ASPEN SERIES FUND:
Growth Subaccount........................................... 1,605 25,315
----------
TOTAL INVESTMENTS................................. $1,879,284
==========
</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 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).
B-31
<PAGE> 126
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(2) SUMMARY OF INVESTMENTS (CONTINUED)
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. 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.
KEMPER GLOBAL INCOME SUBACCOUNT: This subaccount seeks to provide high current
income consistent with prudent total return asset management. The subaccount
will invest in common stocks of well capitalized, established companies that are
believed to have the potential for growth of capital, earnings and dividends. At
least 65% of the subaccounts total assets in common stocks will be in companies
with a market capitalization of at least $1.0 billion at the time of initial
investment. The subaccount will also engage in options and financial futures
transactions.
KEMPER BLUE CHIP SUBACCOUNT: This subaccount seeks growth of capital and of
income. The subaccount will invest in investment grade foreign and U.S. fixed
income securities, with at least 65% of the subaccounts total assets invested in
securities of issuers located in at least three countries. The subaccount will
also engage in options and financial futures transactions.
B-32
<PAGE> 127
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(2) SUMMARY OF INVESTMENTS (CONTINUED)
JANUS ASPEN SERIES
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.
(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 Growth Subaccounts whose direct and indirect operating
expenses exceed eighty hundredths of one percent (.80%) of average daily net
assets. In determining reimbursement of direct and indirect operating expenses,
for each subaccount, charges for mortality and expense risks and administrative
expenses, and records maintenance charges are excluded and, for each subaccount,
charges for taxes, extraordinary expenses, and brokerage and transaction costs
are excluded. During the year 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, an unaffiliated company, is the investment manager of
the Janus Aspen Series Fund Portfolio.
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-33
<PAGE> 128
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-34
<PAGE> 129
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
----------
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
----------
</TABLE>
B-35
<PAGE> 130
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
CONTRACT
NUMBER UNIT OWNERS'
OF UNITS VALUE EQUITY
-------- ----- --------
<S> <C> <C> <C>
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............................... -- 1.215 --
Flexible Payment, Nonqualified............................ 42 1.215 50
Periodic Payment, Qualified............................... 917 1.209 1,108
Periodic Payment, Nonqualified............................ 192 1.209 232
----------
1,390
----------
JANUS ASPEN SERIES FUND
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
----------
TOTAL ADVANTAGE III CONTRACT OWNERS' EQUITY........................................ $1,638,556
==========
</TABLE>
B-36
<PAGE> 131
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
----------
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
----------
</TABLE>
B-37
<PAGE> 132
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
CONTRACT
NUMBER UNIT OWNERS'
OF UNITS VALUE EQUITY
-------- ----- --------
<S> <C> <C> <C>
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
----------
KEMPER GLOBAL INCOME SUBACCOUNT
Qualified................................................. 30 1.020 30
Nonqualified.............................................. 290 1.020 296
----------
326
----------
KEMPER BLUE CHIP SUBACCOUNT
Qualified................................................. 220 1.106 243
Nonqualified.............................................. 1,659 1.106 1,835
----------
2,078
----------
TOTAL PASSPORT CONTRACT OWNERS' EQUITY............. $ 560,865
==========
</TABLE>
B-38
<PAGE> 133
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-39
<PAGE> 134
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(A) FINANCIAL STATEMENTS:
(1) Financial Statements included in Part A of the Registration
Statement:
Kemper Investors Life Insurance Company and Subsidiaries
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 Statements of Operations, years ended December 31,
1997, 1996 and 1995
Kemper Investors Life Insurance Company and Subsidiaries
Consolidated Statements of Stockholder's Equity, years ended
December 31, 1997, 1996 and January 4, 1996, and 1995
Kemper Investors Life Insurance Company and Subsidiaries
Consolidated Statements of Cash Flows, years ended December 31,
1997, 1996 and 1995
Notes to Consolidated Financial Statements
Schedule V: Valuation and qualifying accounts
(2) Financial Statements included in Part B of the Registration
Statement:
KILICO Variable Annuity Separate Account
Reports of Independent Accountants
Statement of Assets and Liabilities and Contract Owners' Equity as
of December 31, 1997
Statement 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 Financial Statements
(B) EXHIBITS:
<TABLE>
<C> <S>
(4)1.1 A copy of resolution of the Board of Directors of Kemper
Investors Life Insurance Company dated September 13, 1977.
(4)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.
(2)3.3 Selling Group Agreement of Investors Brokerage Services,
Inc.
(7)4.1 Form of Group Variable, Fixed and Market Value Adjusted
Annuity Contract.
(7)4.2 Form of Certificate to Group Variable, Fixed and Market
Value Adjusted Annuity Contract.
(7)4.3 Form of Individual Variable, Fixed and Market Value Adjusted
Annuity Contract.
(7)5. Form of Application.
(3)6. Kemper Investors Life Insurance Company articles of
incorporation and by-laws.
7. Inapplicable.
(2)8.1(a) Fund Participation Agreement among KILICO, Janus Aspen
Series and Janus Capital Corporation.
(5)8.1(b) Service Agreement between KILICO and Janus Capital
Corporation.
(8)8.2(a) Participation Agreement By and Among Kemper Investors Life
Insurance Company and Warburg, Pincus Trust and Warburg
Pincus Asset Management Inc. (f/k/a Warburg, Pincus
Counsellors, Inc.) and Counsellors Securities, Inc.
</TABLE>
C-1
<PAGE> 135
<TABLE>
<C> <S>
(6)8.2(b) Service Agreement between Warburg Pincus Asset Management
Inc. (f/k/a Warburg Pincus Counsellors, Inc.) and Federal
Kemper Life Assurance Company and Kemper Investors Life
Insurance Company.
(8)8.3 Fund Participation Agreement among KILICO, Investors Fund
Series (formerly known as Kemper Investors Fund), Zurich
Kemper Investments, Inc. and Kemper Distributors, Inc.
8.4(a) Form of Participation Agreement between Kemper Investors
Life Insurance Company and Scudder Variable Life Investment
Fund.
8.4(b) Form of Participating Contract and Policy Agreement between
Kemper Investors Life Insurance Company and Scudder Kemper
Investments, Inc.
8.4(c) Form of Indemnification Agreement between Kemper Investors
Life Insurance Company and Scudder Kemper Investments, Inc.
(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.
(4)13. Schedules for Computation of Performance Calculations.
(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).
(10)17.3 Schedule V: Valuation and qualifying accounts (year ended
December 31, 1996).
(11)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) Filed with the Registration Statement on Form N-4 for the Registrant (File
No. 333-22375) filed on or about February 26, 1997.
(5) Filed with Post-Effective Amendment No. 25 to the Registration Statement on
Form N-4 (File No. 2-72671) filed on or about April 28, 1997.
(6) Incorporated by reference to Post-Effective Amendment No. 4 to the
Registration Statement on Form S-6 (File No. 33-79808) filed on or about
April 30, 1997.
(7) Filed with the Pre-Effective Amendment No. 1 to the Registration Statement
on Form N-4 (File No. 333-22375) filed on or about November 3, 1997.
(8) Filed with Amendment No. 3 to the Registration Statement on Form S-1 (File
No. 333-22389) filed on or about April 8, 1998.
(9) Filed with Post-Effective Amendment No. 11 to the Registration Statement on
Form N-4 (File No. 33-43501) filed on or about April 16, 1998.
(10) Filed with Amendment No. 2 to the Registration Statement on Form S-1 for
KILICO (File No. 333-02491) filed on or about April 23, 1997.
(11) Filed with Amendment No. 1 to the Registration Statement on Form S-1 for
KILICO (File No. 333-02491) filed on or about April 25, 1996.
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<PAGE> 136
ITEM 25. DIRECTORS AND OFFICERS OF KEMPER INVESTORS LIFE INSURANCE COMPANY
The directors and principal officers of KILICO are listed below
together with their current positions. The address of each officer and
director is 1 Kemper Drive, Long Grove, Illinois 60049.
<TABLE>
<CAPTION>
NAME OFFICE WITH KILICO
---- ------------------
<S> <C>
John B. Scott........................ 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 & 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
Not applicable because as of the date of this initial registration, no
Contracts have been sold.
ITEM 28. INDEMNIFICATION
To the extent permitted by law of the State of Illinois and subject to
all applicable requirements thereof, Article VI of the By-Laws of Kemper
Investors Life Insurance Company ("KILICO") provides for the
indemnification of any person against all expenses (including attorneys
fees), judgments, fines, amounts paid in settlement and other costs
actually and reasonably incurred by him in connection with any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative in which he is a party or is threatened to
be made a party by reason of his being or having been a director, officer,
employee or agent of KILICO, or serving or having served, at the request of
KILICO, as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, or by reason of his
holding a fiduciary position in connection with the management or
administration of retirement, pension, profit sharing or other benefit
plans including, but not limited to, any fiduciary liability under the
Employee Retirement Income Security Act of 1974 and any amendment thereof,
if he acted in good faith and in a manner he reasonably believed to be in
and not opposed to the best interests of KILICO, and with respect to any
criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction, or upon a plea of NOLO CONTENDERE
or its equivalent, shall not, of itself, create a presumption that he did
not act in good faith and in a manner which he reasonably believed to be in
or not opposed to the best interests of KILICO, and, with respect to any
criminal action or proceeding, had reasonable cause to believe that his
conduct was unlawful. No indemnification shall be made in respect of any
claim, issue or matter as to which a director or officer shall have been
adjudged to be liable for negligence or misconduct in the performance of
his duty to the company, unless and only to the extent that the court in
which such action or suit was brought or other court of competent
jurisdiction shall determine upon application that, despite the
adjudication of liability but in view of all the circumstances of the case,
he is fairly and reasonably entitled to indemnity for such expenses as the
court shall deem proper.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers, employees
or agents of KILICO pursuant to the foregoing provisions, or otherwise,
KILICO has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in
that Act and is, therefore, unenforceable. In the event that a claim
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<PAGE> 137
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
Michael A. Kelly.................................... Vice President
Robert A. Daniel.................................... Vice President & Treasurer
Debra P. Rezabek.................................... Secretary
Frank J. Julian..................................... Assistant Secretary
Phillip D. Meserve.................................. Director
Eliane C. Frye...................................... Director
George Vlaisavljevich............................... Director
</TABLE>
ITEM 29.(C)
Inapplicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
Accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the Rules
promulgated thereunder are maintained by Kemper Investors Life Insurance
Company at its home office at 1 Kemper Drive, Long Grove, Illinois 60049.
ITEM 31. MANAGEMENT SERVICES
Inapplicable.
ITEM 32. UNDERTAKINGS AND REPRESENTATION
a. Registrant hereby undertakes to file a post-effective amendment to
this registration statement as frequently as is necessary to ensure that
the audited financial statements in the registration statement are never
more than sixteen (16) months old for so long as payment under the variable
annuity contracts may be accepted.
b. Registrant hereby undertakes to include either (1) as part of any
application to purchase a contract offered by the Prospectus, a space that
an applicant can check to request a Statement of Additional Information, or
(2) a postcard or similar written communication affixed to or included in
the Prospectus that the applicant can remove to send for a Statement of
Additional Information.
c. Registrant hereby undertakes to deliver any Statement of Additional
Information and any financial statement required to be made available under
this Form promptly upon written or oral request.
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 Policy, 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> 138
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act of
1940, the Registrant, KILICO Variable Annuity Separate Account, has caused this
Amendment to the Registration Statement to be signed on its behalf by the
undersigned, 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
--------- -----
<S> <C>
/s/ JOHN B. SCOTT Chief Executive Officer, President and Director
- ----------------------------------------------------- (Principal Executive Officer)
John B. Scott
/s/ W. H. BOLINDER Chairman of the Board and Director
- -----------------------------------------------------
William H. Bolinder
/s/ FREDERICK L. BLACKMON Senior Vice President 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> 139
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER TITLE NUMBER*
- ------- ----- ----------
<S> <C> <C>
8.4(a) Form of Participation Agreement between Kemper Investors
Life Insurance Company and Scudder Variable Life Investment
Fund........................................................
8.4(b) Form of Participating Contract and Policy Agreement between
Kemper Investors Life Insurance Company and Scudder Kemper
Investments, Inc. ..........................................
8.4(c) Form of Indemnification Agreement between Kemper Investors
Life Insurance Company and Scudder Kemper Investments,
Inc. .......................................................
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(A)
FORM OF
PARTICIPATION AGREEMENT
PARTICIPATION AGREEMENT (the "Agreement") made by and between SCUDDER
VARIABLE LIFE INVESTMENT FUND (the "Fund"), a Massachusetts business trust
created under a Declaration of Trust dated March 15, 1985, as amended, with a
principal place of business in Boston, Massachusetts and KEMPER INVESTORS LIFE
INSURANCE COMPANY, an Illinois corporation (the "Company"), with a principal
place of business One Kemper Drive, Long Grove, Illinois, on behalf of one or
more separate accounts of the Company, as set forth on Schedule A hereto, as it
may be amended from time to time upon written notice to the Fund in accordance
with Paragraph 10 herein (each, an "Account").
WHEREAS, the Fund acts as the investment vehicle for the separate
accounts established for variable life insurance policies and variable annuity
contracts (collectively referred to herein as "Variable Insurance Products") to
be offered by insurance companies which have entered into participation
agreements substantially identical to this Agreement ("Participating Insurance
Companies") and their affiliated insurance companies; and
WHEREAS, the beneficial interest in the Fund is divided into several
series of shares of beneficial interest without par value ("Shares"), and
additional series of Shares may be established, each designated a "Portfolio"
and representing the interest in a particular managed portfolio of securities;
and
WHEREAS, each Portfolio of the Fund, except the Money Market Portfolio,
is divided into two classes of Shares, and additional classes of Shares may be
established; and
WHEREAS, the Parties desire to evidence their agreement as to certain
other matters,
NOW THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements hereinafter contained, the parties hereto agree as
follows:
1. Duty of Fund to Sell.
The Fund shall make its Shares available for purchase at the applicable
net asset value per Share by Participating Insurance Companies and their
affiliates and separate accounts on those days on which the Fund calculates its
net asset value pursuant to rules of the Securities and Exchange Commission (the
"SEC"); provided, however, that the Trustees of the Fund may refuse to sell
Shares of any Portfolio to any person, or suspend or terminate the offering of
Shares of
<PAGE> 2
any Portfolio, if such action is required by law or by regulatory
authorities having jurisdiction or is, in the sole discretion of the Trustees,
acting in good faith and in light of their duties under federal and any
applicable state laws, necessary in the best interest of the shareholders of any
Portfolio.
The Company's orders for such Shares of the Portfolios and one or more
classes thereof which are available for purchase under this Agreement, as set
forth on Schedule B hereto, as it may be amended from time to time, shall be
executed on a daily basis at the net asset value per Share next computed after
receipt by the Fund of the order for the Shares. The Company's order may net the
purchase orders and redemption requests for each Portfolio or class thereof. For
purposes of this Paragraph 1, the Company shall be the designee of the Fund for
receipt of such orders from the Account(s), and receipt by such designee shall
constitute receipt by the Fund; provided that the Fund receives notice of such
order by [10:00] a.m., [New York] time on the next following Business Day.
"Business Day" shall mean any day on which the New York Stock Exchange is open
for trading and on which the Fund calculates its net asset value per Share
pursuant to the rules of the SEC.
The Company shall pay for Shares on the next Business Day after an
order to purchase Shares is made in accordance with the provisions hereof.
Payment shall be made by wiring federal funds to the Fund or to its designated
custodial account by [2:00] p.m., [New York] time. For purposes of Paragraph 1,
upon receipt by the Fund of the federal funds so wired, such funds shall cease
to be the responsibility of the Company and shall become the responsibility of
the Fund. If payment in federal funds for any purchase is not received by the
Fund or its designated custodian or is received after [2:00] p.m., [New York]
time, the Company shall promptly upon the Fund's written request, reimburse the
Fund for any charges, costs, fees, interest, or other expenses incurred by the
Fund in connection with any advances to, or borrowings or overdrafts by, the
Fund, or any similar expenses incurred by the Fund as a result of transactions
effected by the Fund based upon such purchase order.
The Fund agrees to redeem for cash, at the Company's request, any full
or fractional Shares held by the Company, executing such requests on a daily
basis at the net asset value per Share next computed after receipt by the Fund
of the request for redemption. The
2
<PAGE> 3
Company's request may net any purchase orders and redemption requests for each
Portfolio or class thereof. For purposes of this Paragraph 1, the Company shall
be the designee of the Fund for receipt of requests for redemption from the
Account(s), and receipt by such designee shall constitute receipt by the Fund;
provided that the Fund receives notice of such request for redemption by [10:00]
a.m., [New York] time on the next following Business Day.
Payment for Shares redeemed shall be made by wiring federal funds to
the Company by [2:00] p.m., [New York] time, on the next Business Day after the
Fund receives the request for redemption. If payment in federal funds for any
redemption request is received by the Company after [2:00] p.m., [New York]
time, the Fund shall promptly upon the Company's written request, reimburse the
Company for any charges, costs, fees, interest, or other expenses incurred by
the Company as a result of such failure to provide redemption proceeds within
the specified time. Notwithstanding the foregoing, the Trustees of the Fund may
suspend the right of redemption or postpone the date of payment or satisfaction
upon redemption: (a) for any period during which the New York Stock Exchange is
closed, other than customary week-end and holiday closings, and during which
trading on the New York Stock Exchange is restricted; (b) for any period during
which an emergency, as determined by the SEC, exists as a result of which
disposal by the Fund of securities owned by it is not reasonably practicable or
it is not reasonably practicable for the Fund fairly to determine the value of
its net assets; and (c) for such other periods as the SEC may by order permit
for the protection of holders of the Shares.
Issuance and transfer of the Shares will be by book entry only. Stock
certificates will not be issued to the Company or any Account. Shares ordered
from the Fund will be recorded in an appropriate title for each Account or the
appropriate subaccount thereof.
The Fund shall furnish same day notice (by wire or telephone, followed
by written confirmation) to the Company of any income dividends or capital gain
distributions payable on the Shares. The Company hereby elects to receive all
such income dividends and capital gain distributions as are payable on the
Shares of the Portfolios and classes thereof in additional Shares of that
Portfolio or class thereof. The Company reserves the right to revoke this
election and to receive all such income dividends and capital gain distributions
in
3
<PAGE> 4
cash. The Fund shall notify the Company of the number of Shares so issued as
payment of such dividends and distributions. The Fund shall to the extent
practicable provide advance notice to Company of any date on which the Fund
reasonably expects to make a dividend distribution.
4
<PAGE> 5
2. Fund Materials.
The Fund, at its expense, shall provide the Company or its designee
with camera-ready copy or, at the Company's request, computer diskette versions
of all prospectuses, statements of additional information, annual and
semi-annual reports and proxy materials (collectively, "Fund Materials") to be
printed and distributed by the Company or its broker/dealer to the Company's
existing or prospective contract owners, as appropriate. The Company agrees to
bear the cost of printing and distributing such Fund Materials.
The Fund shall provide such other assistance as is reasonably necessary
in order for the Company once each year (or more frequently if the prospectus
and/or statement of additional information ("SAI") for the Fund is amended
during the year) to have the prospectus for the Account(s), with respect to the
Variable Insurance Products, and the Fund's prospectus printed together in one
document, and to have the SAI for the Fund and the SAI for the Account(s), with
respect to the Variable Insurance Products, printed together in one document.
Alternatively, the Company may print the Fund's prospectus and/or its SAI in
combination with other investment companies' prospectuses and statements of
additional information. The Fund will cooperate with the Company in preparing
and filing with the SEC, pursuant to Rule 497 under the 1933 Act, appropriate
versions of the Fund's prospectus and/or SAI.
3. Requirement to Execute Participation Agreement; Requests.
Each Participating Insurance Company shall, prior to purchasing Shares
in the Fund, execute and deliver a participation agreement in a form
substantially identical to this Agreement.
The Fund shall make available, upon written request from the
Participating Insurance Company given in accordance with Paragraph 9, to each
Participating Insurance Company which has executed an Agreement and which
Agreement has not been terminated pursuant to Paragraph 8 (i) a list of all
other Participating Insurance Companies, and (ii) a copy of the Agreement as
executed by any other Participating Insurance Company.
The Fund shall also make available upon request to each Participating
Insurance Company which has executed an Agreement and Agreement has not been
terminated pursuant to Paragraph 8, the net asset value of any Portfolio of the
Fund as of any date upon which the Fund
5
<PAGE> 6
calculates the net asset value of its Portfolios for the purpose of purchase and
redemption of Shares.
The Fund shall make the net asset value per Share for each Portfolio
and class thereof available to the Company on a daily basis as soon as
reasonably practical after the net asset value per Share is calculated (normally
by [6:00] p.m., [New York] time) and shall use its best efforts to make such net
asset value per Share available by [6:30] p.m., [New York] time.
Each party to this Agreement shall have the right to rely on
information or confirmations provided by any other party (or by any affiliate of
any other party), and shall not be liable in the event that an error results
from any incorrect information or confirmations supplied by any other party. If
an error is made in reliance upon incorrect information or confirmations, any
amount required to make an account of a Variable Insurance Product owner whole
shall be borne by the party who provided the incorrect information or
confirmation.
4. Indemnification.
(a) The Company agrees to indemnify and hold harmless the Fund and each
of its Trustees and officers and each person, if any, who controls the Fund
within the meaning of Section 15 of the Securities Act of 1933 (the "Act")
against any and all losses, claims, damages, liabilities or litigation
(including legal and other expenses), arising out of the acquisition of any
Shares by any person, to which the Fund or such Trustees, officers or
controlling person may become subject under the Act, under any other statute, at
common law or otherwise, which (i) may be based upon any wrongful act by the
Company, any of its employees or representatives, any affiliate of or any person
acting on behalf of the Company or a principal underwriter of its insurance
products, or (ii) may be based upon any untrue statement or alleged untrue
statement of a material fact contained in a registration statement or prospectus
covering Shares or any amendment thereof or supplement thereto or the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading if such a
statement or omission was made in reliance upon information furnished to the
Fund by the Company, or (iii) may be based on any untrue statement or alleged
untrue statement of a material fact contained in a registration statement or
prospectus covering insurance products sold by the Company or any insurance
company which is an affiliate thereof,
6
<PAGE> 7
or any amendments or supplement thereto, or the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statement or statements therein not misleading, unless such statement or
omission was made in reliance upon information furnished to the Company or such
affiliate by or on behalf of the Fund; provided, however, that in no case (i) is
the Company's indemnity in favor of a Trustee or officer or any other person
deemed to protect such Trustee or officer or other person against any liability
to which any such person would otherwise be subject by reason of willful
misfeasance, bad faith, or gross negligence in the performance of his duties or
by reason of his reckless disregard of obligations and duties under this
Agreement or (ii) is the Company to be liable under its indemnity agreement
contained in this Paragraph 4 with respect to any claim made against the Fund or
any person indemnified unless the Fund or such person, as the case may be, shall
have notified the Company in writing pursuant to Paragraph 10 within a
reasonable time after the summons or other first legal process giving
information of the nature of the claims shall have been served upon the Fund or
upon such person (or after the Fund or such person shall have received notice of
such service on any designated agent), but failure to notify the Company of any
such claim shall not relieve the Company from any liability which it may have to
the Fund or any person against whom such action is brought otherwise than on
account of its indemnity agreement contained in this Paragraph 4. The Company
shall be entitled to participate, at its own expense, in the defense, or, if it
so elects, to assume the defense of any suit brought to enforce any such
liability, but, if it elects to assume the defense, such defense shall be
conducted by counsel chosen by it and satisfactory to the Fund, to its officers
and Trustees, or to any controlling person or persons, defendant or defendants
in the suit. In the event that the Company elects to assume the defense of any
such suit and retain such counsel, the Fund, such officers and Trustees or
controlling person or persons, defendant or defendants in the suit, shall bear
the fees and expenses of any additional counsel retained by them, but, in case
the Company does not elect to assume the defense of any such suit, the Company
will reimburse the Fund, such officers and Trustees or controlling person or
persons, defendant or defendants in such suit, for the reasonable fees and
expenses of any counsel retained by them. The Company agrees promptly to notify
the Fund pursuant to Paragraph 10 of the commencement of any litigation or
proceedings against it or any of its directors or officers in connection with
the issue and sale of any Shares.
7
<PAGE> 8
(b) The Fund agrees to indemnify and hold harmless the Company and each
of its directors and officers and each person, if any, who controls the Company
within the meaning of Section 15 of the Act against any and all losses, claims,
damages, liabilities or litigation (including legal and other expenses), to
which it or such directors, officers or controlling person may become subject
under the Act, under any other statute, at common law or otherwise, arising out
of the acquisition of any Shares by any person which (i) may be based upon any
wrongful act by the Fund, any of its employees or representatives, any affiliate
of or any person acting on behalf of the Fund or a principal underwriter of the
Fund, or (ii) may be based upon any untrue statement or alleged untrue statement
of a material fact contained in a registration statement or prospectus covering
Shares or any amendment thereof or supplement thereto or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading unless such statement or
omission was made in reliance upon information furnished to the Fund by the
Company or (iii) may be based on any untrue statement or alleged untrue
statement of a material fact contained in a registration statement or prospectus
covering insurance products sold by the Company or any insurance company which
is an affiliate thereof, or any amendment or supplement thereto, or the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statement or statements therein not misleading,
if such statement or omission was made in reliance upon information furnished to
the Company or such affiliate by or on behalf of the Fund; provided, however,
that in no case (i) is the Fund's indemnity in favor of a director or officer or
any other person deemed to protect such director or officer or other person
against any liability to which any such person would otherwise be subject by
reason of willful misfeasance, bad faith, or gross negligence in the performance
of his duties or by reason of his reckless disregard of obligations and duties
under this Agreement or (ii) is the Fund to be liable under its indemnity
agreement contained in this Paragraph 4 with respect to any claims made against
the Company or any such director, officer or controlling person unless it or
such director, officer or controlling person, as the case may be, shall have
notified the Fund in writing pursuant to Paragraph 10 within a reasonable time
after the summons or other first legal process giving information of the nature
of the claim shall have been served upon it or upon such director, officer or
controlling person (or after the Company or such director, officer or
controlling person
8
<PAGE> 9
shall have received notice of such service on any designated agent), but
failure to notify the Fund of any claim shall not relieve it from any liability
which it may have to the Company or any person against whom such action is
brought otherwise than on account of its indemnity agreement contained in this
Paragraph. The Fund will be entitled to participate at its own expense, in the
defense, or, if it so elects, to assume the defense of any suit brought to
enforce any such liability, but if the Fund elects to assume the defense, such
defense shall be conducted by counsel chosen by it and satisfactory to the
Company, its directors, officers or controlling person or persons, defendant or
defendants, in the suit. In the event the Fund elects to assume the defense of
any such suit and retain such counsel, the Company, its directors, officers or
controlling person or persons, defendant or defendants in the suit, shall bear
the fees and expenses of any additional counsel retained by them, but, in case
the Fund does not elect to assume the defense of any such suit, it will
reimburse the Company or such directors, officers or controlling person or
persons, defendant or defendants in the suit, for the reasonable fees and
expenses of any counsel retained by them. The Fund agrees promptly to notify
the Company pursuant to Paragraph 10 of the commencement of any litigation or
proceedings against it or any of its officers or Trustees in connection with
the issuance or sale of any Shares.
The provisions of this Section 4 shall survive the termination of the
Agreement.
5. Procedure for Resolving Irreconcilable Conflicts.
(a) The Trustees of the Fund will monitor the operations of the Fund
for the existence of any material irreconcilable conflict among the interests of
all the contract holders and policy owners of variable Insurance Products (the
"Participants") of all separate accounts investing in the Fund. An
irreconcilable material conflict may arise, among other things, from: (a) an
action by any state insurance regulatory authority; (b) a change in applicable
insurance laws or regulations; (c) a tax ruling or provision of the Internal
Revenue Code or the regulations thereunder; (d) any other development relating
to the tax treatment of insurers, contract holders or policy owners or
beneficiaries of Variable Insurance Products; (e) the manner in which the
investments of any Portfolio are being managed; (f) a difference in voting
instructions given by variable annuity contract holders, on the one hand, and
variable life insurance policy owners, on the other hand, or by the contract
holders or policy owners of different participating insurance companies; or (g)
a decision by an insurer to override the voting instructions of Participants.
9
<PAGE> 10
(b) The Company will be responsible for reporting any potential or
existing conflicts to the Trustees of the Fund. The Company will be responsible
for assisting the Trustees in carrying out their responsibilities under this
Paragraph 5(b) and Paragraph 5(a), by providing the Trustees with all
information reasonably necessary for the Trustees to consider the issues raised.
The Fund will also request its investment adviser to report to the Trustees any
such conflict which comes to the attention of the adviser.
(c) If it is determined by a majority of the Trustees of the Fund, or a
majority of its disinterested Trustees, that a material irreconcilable conflict
exists involving the Company, the Company shall, at its expense, and to the
extent reasonably practicable (as determined by a majority of the disinterested
Trustees), take whatever steps are necessary to eliminate the irreconcilable
material conflict, including withdrawing the assets allocable to some or all of
the separate accounts from the Fund or any Portfolio or class thereof and
reinvesting such assets in a different investment medium, including another
Portfolio of the Fund or class thereof, offering to the affected Participants
the option of making such a change or establishing a new funding medium
including a registered investment company.
For purposes of this Paragraph 5(c), the Trustees, or the disinterested
Trustees, shall determine whether or not any proposed action adequately remedies
any irreconcilable material conflict. In the event of a determination of the
existence of an irreconcilable material conflict, the Trustees shall cause the
Fund to take such action, such as the establishment of one or more additional
Portfolios or classes, as they in their sole discretion determine to be in the
interest of all shareholders and Participants in view of all applicable factors,
such as cost, feasibility, tax, regulatory and other considerations. In no event
will the Fund be required by this Paragraph 5(c) to establish a new funding
medium for any variable contract or policy.
The Company shall not be required by this Paragraph 5(c) to establish a
new funding medium for any variable contract or policy if an offer to do so has
been declined by a vote of a majority of the Participants materially adversely
affected by the material irreconcilable conflict. The Company will recommend to
its Participants that they decline an offer to establish a new funding medium
only if the Company believes it is in the best interest of the Participants.
10
<PAGE> 11
(d) The Trustees' determination of the existence of an
irreconcilable material conflict and its implications promptly shall be
communicated to all Participating Insurance Companies by written notice thereof
delivered or mailed, first class postage prepaid.
6. Unregistered Separate Accounts.
For its unregistered Account(s) which are exempt from registration in
reliance upon Sections 3(c)(1) or 3(c)(7) under the Investment Company Act of
1940, as amended (the "1940 Act"), the Company represents and warrants that:
(a) Investors Brokerage Services, Inc. is the principal
underwriter for each such unregistered Account and any
subaccount thereof and is registered as a broker-dealer under
the Securities Exchange Act of 1934, as amended;
(b) Shares are and will continue to be the only investment
securities held by the corresponding Account subaccounts; and
(c) with regard to each Portfolio, the Company, on behalf of the
corresponding Account subaccount, will:
(1) seek instructions from all owners of Variable Insurance
Products with regard to the
voting of all proxies with respect to Shares and vote
such proxies only in accordance with such instructions;and
(2) refrain from substituting shares of another security
for such Shares unless the SEC has approved such
substitution in the manner provided in Section 26 of
the 1940 Act.
11
<PAGE> 12
7. Voting Privileges.
The Company shall be responsible for assuring that its separate account
or accounts participating in the Fund shall use a calculation method of voting
procedures substantially the same as the following: those Participants permitted
to give instructions and the number of Shares for which instructions may be
given will be determined as of the record date for the Fund shareholders'
meeting, which shall not be more than 60 days before the date of the meeting.
Whether or not voting instructions are actually given by a particular
Participant, all Fund shares held in any separate account or sub-account thereof
and attributable to policies or contracts will be voted for, against, or
withheld from voting on any proposition in the same proportion as (i) the
aggregate record date cash value held in such sub-account for policies or
contracts giving instructions, respectively, to vote for, against, or withhold
votes on such proposition, bears to (ii) the aggregate record date cash value
held in the sub-account for all policies or contracts for which voting
instructions are received. Owners of policies or contracts continued in effect
under lapse options will not be permitted to give voting instructions. Shares
held in any other insurance company general or separate account or sub-account
thereof will be voted in the proportion specified in the second preceding
sentence for shares attributable to policies or contracts.
The Company will provide pass-through voting privileges as required by
Paragraph 6 of this Agreement and to all owners of Variable Insurance Products
which are registered under the Act and/or the 1940 Act so long as the SEC
continues to interpret the 1940 Act as requiring pass-through voting privileges.
The owners of Variable Insurance Products to whom the Company will provide
pass-through voting privileges pursuant to this Agreement are hereinafter
referred to as "Pass-through Voters". Accordingly, the Company, when applicable,
will distribute to Pass-through Voters all proxy material furnished and will
vote Shares of the Portfolios held in its Account(s) in a manner consistent with
voting instructions timely received from Pass-through Voters. The Company will
vote Shares for which it has not received timely voting instructions, as well as
Shares it owns, in the same proportion as it votes those Shares for which it has
received voting instructions. The Company reserves the right to disregard the
voting instructions of Pass-through Voters to the extent such action is
permitted by Rules 6e-2 or 6e-3(T) under the 1940 Act and is permitted under
applicable state insurance laws affecting Fund.
12
<PAGE> 13
8. Duration and Termination.
This Agreement shall continue in force until terminated in
accordance with the provisions herein.
This Agreement shall terminate in accordance with the following
provisions:
(a) At the option of the Company or the Fund at any time
upon 180 days' notice, unless a shorter time is
agreed to by the parties;
(b) At the option of the Company, if Shares are not
reasonably available to meet the requirements of the
Variable Insurance Products as determined by the
Company. Prompt notice of election to terminate shall
be furnished by the Company, said termination to be
effective ten (10) days after receipt of notice
unless the Fund makes available a sufficient number
of Shares to reasonably meet the requirements of the
Variable Insurance Products within said ten-day
period;
(c) At the option of the Company, upon the institution of
formal proceedings against the Fund or the principal
underwriter for the Shares by the SEC, the National
Association of Securities Dealers, Inc. (the "NASD"),
or any other regulatory body, the expected or
anticipated ruling, judgment or outcome of which
would, in the Company's reasonable judgment,
materially impair Fund's ability to meet and perform
Fund's obligations and duties hereunder. Prompt
notice of election to terminate shall be furnished by
the Company with said termination to be effective
upon receipt of notice;
(d) At the option of the Fund, upon the institution of
formal proceedings against the Company or the
principal underwriter for the Variable Insurance
Products by the SEC, the NASD, or any other
regulatory body, the expected or anticipated ruling,
judgment or outcome of which would, in the Fund's
reasonable judgment, materially impair the Company's
ability to meet and perform its obligations and
duties hereunder. Prompt notice of election to
terminate shall be furnished by the Fund with said
termination to be effective upon receipt of notice;
13
<PAGE> 14
(e) In the event Shares are not registered, issued or
sold in accordance with applicable federal and/or
state law and any applicable rules and regulations
thereunder, or such law precludes the use of such
Shares as the underlying investment media for
Variable Insurance Products issued or to be issued by
the Company. Termination shall be effective upon such
occurrence without notice;
(f) Upon the receipt of any necessary regulatory
approvals, or requisite vote of Pass-through Voters
having an interest in the Portfolios, to substitute
for Shares of the Portfolios the shares of another
investment company in accordance with the terms of
the applicable Variable Insurance Products. The
Company shall give sixty (60) days' written notice to
the Fund of any proposed request for regulatory
approvals or vote to replace the Portfolios' Shares;
(g) At the option of the Company, upon the Fund's breach
of any material provision of this Agreement, which
breach has not been cured to the Company's
satisfaction within thirty (30) days after written
notice of such breach is delivered to the Fund;
(h) At the option of the Fund, upon the Company's breach
of any material provision of this Agreement, which
breach has not been cured to the Fund's satisfaction
within thirty (30) days after written notice of such
breach is delivered to the Company;
(i) In the event this Agreement is assigned without the
prior written consent of the Company and the Fund.
Termination shall be effective immediately upon such
occurrence without notice.
In addition, this Agreement may be terminated at any time, at the
option of either of the Company or the Fund, when neither the Company, any
insurance company nor the separate account or accounts of such insurance company
which is an affiliate thereof which is not a Participating Insurance Company own
any Shares of the Fund or may be terminated by either party to the Agreement
upon a determination by a majority of the Trustees of the Fund, or a
14
<PAGE> 15
majority of its disinterested Trustees, following certification thereof by a
Participating Insurance Company given in accordance with Paragraph 10 that an
irreconcilable conflict exists among the interests of (i) all contract holders
and policy holders of Variable Insurance Products of all separate accounts or
(ii) the interests of the Participating Insurance Companies investing in the
Fund.
Notwithstanding any termination of this Agreement and unless the
further sale of Shares of the Portfolios is proscribed by applicable law or the
SEC or other regulatory body, the Fund shall, at the Company's option, continue
to make available additional Shares, as provided below, pursuant to the terms
and conditions of this Agreement, for all Variable Insurance Products in effect
on the effective date of termination of this Agreement (hereinafter referred to
as "Existing Contracts"). Specifically, without limitation, the owners of the
Existing Contracts shall be permitted to reallocate investments in the Fund,
redeem investments in the Fund and/or invest in the Fund upon the payment of
additional premiums under the Existing Contracts.
9. Compliance.
The Fund will comply with the provisions of Section 4240(a) of the New
York Insurance Law.
Each Portfolio of the Fund will comply with the provisions of Section
817(h) of the Internal Revenue Code of 1986, as amended (the "Code"), relating
to diversification requirements for variable annuity, endowment and life
insurance contracts. Specifically, each Portfolio will comply with either (i)
the requirement of Section 817(h)(1) of the Code that its assets be adequately
diversified, or (ii) the "Safe Harbor for Diversification" specified in Section
817(h)(2) of the Code, or (iii) in the case of variable life insurance contracts
only, the diversification requirement of Section 817(h)(1) of the Code by having
all or part of its assets invested in U. S. Treasury securities which qualify
for the "Special Rule for Investments in United States Obligations" specified in
Section 817(h)(3) of the Code. The Fund will notify the Company immediately upon
having a reasonable basis for believing that a Portfolio has ceased to comply
with the requirements of Section 817(h) of the Code or that the Portfolio might
not so comply in the future and will immediately take all steps necessary to
adequately diversify the Portfolio to achieve compliance.
15
<PAGE> 16
The provisions of Paragraphs 5 and 7 of this Agreement shall be
interpreted in a manner consistent with any Rule or order of the Securities and
Exchange Commission under the Investment Company Act of 1940, as amended,
applicable to the parties hereto.
No Shares of any Portfolio of the Fund may be sold to the general
public.
10. Notices.
Any notice shall be sufficiently given when sent by registered or
certified mail to the other party at the address of such party set forth below
or at such other address as such party may from time to time specify in writing
to the other party.
If to the Fund:
Scudder Variable Life Investment Fund
Two International Place
Boston, Massachusetts 02110
(617) 295-2275
Attn: David B. Watts
If to the Company:
Kemper Investors Life Insurance Company
One Kemper Drive
Long Grove, Illinois 60049
Attn: General Counsel
11. Massachusetts Law to Apply.
This Agreement shall be construed and the provisions hereof interpreted
under and in accordance with the laws of The Commonwealth of Massachusetts.
12. Miscellaneous.
The name "Scudder Variable Life Investment Fund" is the designation of
the Trustees for the time being under a Declaration of Trust dated March 15,
1985, as amended, and all persons dealing with the Fund must look solely to the
property of the Fund for the enforcement of any claims against the Fund as
neither the Trustees, officers, agents or shareholders assume any personal
liability for obligations entered into on behalf of the Fund. No Portfolio shall
be liable for any obligations properly attributable to any other Portfolio.
16
<PAGE> 17
The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect. This Agreement may be executed
simultaneously in two or more counterparts, each of which taken together shall
constitute one and the same instrument.
13. Entire Agreement.
This Agreement incorporates the entire understanding and agreement
among the parties hereto, and supersedes any and all prior understandings and
agreements between the parties hereto with respect to the subject matter hereof.
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed in its name and behalf by its duly authorized
representative and its seal to be hereunder affixed hereto as of the _________
day of _______________, 1998.
SEAL SCUDDER VARIABLE LIFE
INVESTMENT FUND
By:__________________
David B. Watts
President
SEAL KEMPER INVESTORS LIFE
INSURANCE COMPANY
By:__________________
Its:_________________
17
<PAGE> 18
SCHEDULE A
TO PARTICIPATION AGREEMENT
Separate Account(s) of the Company
KILICO Variable Separate Account - 2
18
<PAGE> 19
SCHEDULE B
TO PARTICIPATION AGREEMENT
Portfolios and Classes Available for Purchase
Portfolios of Scudder Variable Life Investment Fund
Portfolio:
Class:
Class:
19
<PAGE> 1
EXHIBIT 8.4(B)
Scudder Investor Services, Inc.
Two International Place
Boston, Massachusetts 02110
FORM OF
PARTICIPATING CONTRACT AND POLICY AGREEMENT
Ladies and Gentlemen:
We (sometimes hereinafter referred to as "Investor Services") are the
Principal Underwriter of shares of Scudder Variable Life Investment Fund (the
"Fund"), a no-load, open-end, diversified registered management investment
company established in 1985 as a Massachusetts business trust. The Fund is a
series fund consisting of the Balanced Portfolio, Bond Portfolio, Capital Growth
Portfolio, Global Discovery Portfolio, International Portfolio, Money Market
Portfolio, and Growth and Income Portfolio (individually or collectively
hereinafter referred to as the "Portfolio" or the "Portfolios"). In addition,
each Portfolio, except the Money Market Portfolio, is divided into two classes
of shares of beneficial interest("Shares"). Additional Portfolios and classes
may be created from time to time. The Fund is the funding vehicle for variable
annuity contracts and variable life insurance policies ("Participating Contracts
and Policies") to be offered to the separate accounts (the "Accounts") of
certain life insurance companies ("Participating Insurance Companies"). Owners
of Participating Contracts and Policies will designate a portion of their
premium to be invested in insurance company separate accounts or sub-accounts
which invest in, or represent an investment in, directly or indirectly, Shares
of the Portfolios of the Fund. All Shares of the Portfolios will be sold only to
Participating Insurance Companies which have agreed to participate in the Fund
to fund their separate accounts and/or to qualified plans, all in accordance
with the requirements of Section 817(h) of the Internal Revenue Code of 1986, as
amended ("Code") and Treasury Regulation 1.817-5. Shares of the Portfolios will
not be sold directly to the general public.
You are a registered broker-dealer which intends to offer and sell
Participating Contracts and Policies. In connection with such offer and sale you
will be obligated to deliver the prospectuses of such Participating Contracts
and Policies and, contemporaneously therewith, the prospectus of the Fund. Sales
of Shares to Participating Insurance Companies or their affiliates or the
separate accounts of either shall be effected solely by us as principal
underwriter of the Fund, and not by you. The relationship between us shall be
further governed by the following terms and conditions:
<PAGE> 2
1. To the extent, if any, that your activities or the
activities of the Participating Insurance Companies in
connection with the sale of Participating Contracts and
Policies may constitute the sale of Shares, you and we agree
that (i) we are the sole "principal underwriter" of the Fund
and the sole "underwriter" of the Shares as those terms are
defined in the Investment Company Act of 1940 (the "1940 Act")
and the Securities Act of 1933 (the "1933 Act"), respectively,
and (ii) neither you nor the Participating Insurance Companies
or the Accounts shall be deemed to be "principal underwriters"
of the Fund or "underwriters" of the Fund within the meaning
of the 1940 Act and the 1933 Act, respectively.
2. You hereby represent and warrant to us as follows:
(a) You are a corporation duly organized and validly
existing in good standing under the laws of the State
of Delaware and have full power and authority to
enter into this Agreement.
(b) This Agreement has been duly authorized, executed and
delivered by you and is a valid and binding
obligation enforceable against you in accordance with
its terms.
(c) Your compliance with the provisions of this Agreement
will not conflict with or result in a violation of
the provisions of your charter or by-laws, or any
statute or any judgment, decree, order, rule or
regulation of any court or governmental agency or
body having jurisdiction.
3. We hereby represent and warrant to you as follows:
(a) A registration statement (File No. 2-96461) on
Form N- IA with respect to the Shares (w) has been
prepared by the Fund in conformity with the
requirements of the 1940 Act and the 1933 Act and
all applicable published instructions, rules and
regulations (the "Rules and Regulations") of the
Securities and Exchange Commission (the
"Commission"), (x) has been filed with the
Commission, (y) is currently effective, and (z) will
be amended under the 1933 Act and the 1940 Act from
time to time as required in order to effect the
continuous offering of the Shares. The registration
statement, including financial statements and
exhibits, and the final prospectus, including the
statement of additional information, as subsequently
amended and supplemented, are herein respectively
referred to as the "Registration Statement" and the
"Prospectus".
(b) The Registration Statement and the Prospectus
and any amendment or supplement thereto will contain
all statements required to be stated therein and
will comply in all material respects with the
requirements of the 1940 Act, the 1933 Act and the
Rules and Regulations, and the Registration
Statement and any post-effective amendment thereto
will not contain or incorporate by reference any
untrue statement of a material fact or omit to
2
<PAGE> 3
state any material fact required to be stated
therein or necessary to make the statements therein,
in light of the circumstances under which they were
made, not misleading, and the Prospectus and any
amendment or supplement thereto will not contain or
incorporate by reference any untrue statement of a
material fact or omit to state a material fact
required to be stated therein or necessary in order
to make the statements therein, in light of the
circumstances under which they were made, not
misleading.
(c) We are a corporation duly organized and validly
existing in good standing under the laws of The
Commonwealth of Massachusetts and have full power and
authority to enter into this Agreement.
(d) This Agreement has been duly authorized, executed and
delivered by us and is a valid and binding obligation
enforceable against us in accordance with its terms.
(e) Our compliance with all of the provisions of this
Agreement will not conflict with or result in a
violation of the provisions of our charter or
by-laws, or any statute or any judgment, decree,
order, rule or regulation of any court or
governmental agency or body having jurisdiction over
us.
4. You hereby covenant and agree with us as follows:
(a) You shall be an independent contractor and neither
you nor any of your directors, partners, officers or
employees as such, is or shall be an employee of us
or of the Fund. You are responsible for your own
conduct and the employment, control and conduct of
your agents and employees and for injury to such
agents or employees or to others through your agents
or employees.
(b) You or one or more Participating Insurance Companies
will be responsible for insuring compliance with all
applicable laws and regulations of any regulatory
body having jurisdiction over you or Participating
Contracts and Policies.
(c) No person is authorized to make any representations
concerning Shares except those contained in the
Registration Statement or Prospectus relating thereto
and in such printed information as issued by us for
use as information supplemental to the Prospectus. In
offering Participating Contracts and Policies you
shall, with respect to the Fund and the Shares, rely
solely on the representations contained in the
Registration Statement, Prospectus and in the
above-mentioned supplemental information.
(d) You are not entitled to any compensation whatsoever
from us or the Fund with respect to offers of
Participating Contracts and Policies.
3
<PAGE> 4
(e) With respect to payments to be made to us pursuant
to a Rule 12b-1 Plan for the Fund, you will not seek
reimbursement for administrative and recordkeeping
services under the Fund's Rule 12b-1 Plan that have
been or will be paid for by any fees or charges
imposed on owners of Participating Contracts and
Policies by a Participating Insurance Company for
such services. This provision does not restrict you
from receiving sales charges on purchases and
redemptions, consistent with applicable law, made
under or redemption proceeds from a Participating
Contract or Policy at the same time that you are
seeking reimbursement for expenses under the Fund's
Rule 12b-1 Plan.
5. We hereby covenant and agree with you as follows:
(a) If, at any time when a Prospectus relating to the
Shares is required to be delivered under the 1940
Act, the 1933 Act or the Rules and Regulations, we
become aware of the occurrence of any event as a
result of which the Prospectus as then amended or
supplemented would include any untrue statement of a
material fact, or omit to state a material fact
necessary to make the statements therein, in light
of the circumstances under which made, not
misleading, or if we become aware that it has become
necessary at any time to amend or supplement the
Prospectus to comply with the 1940 Act, the 1933 Act
or the Rules and Regulations, we will promptly
notify you and promptly request the Fund to prepare
and to file with the Commission an amendment to the
Registration Statement or supplement to the
Prospectus which will correct such statement or
omission or an amendment or supplement which will
effect such compliance, and deliver to you copies of
any such amendment or supplement.
(b) We will cooperate with you in taking such action as
may be necessary to qualify the Shares for offering
and sale under the securities or Blue Sky laws of any
state or jurisdiction as you may request and will
continue such qualification in effect so long as is
required by applicable law in connection with the
distribution of Shares.
(c) We shall reimburse you, subject to the minimum
amounts set forth in the attached schedule, for
those distribution and shareholder servicing-related
expenses that are permitted to be paid for by the
Fund under the Fund's Rule 12b-1 Plan and for which
(i) you submit documentation, as may be requested by
us or by the Fund's Board of Trustees, and (ii) we
receive payment for such expenses from the Fund
under the Fund's Rule 12b-1 Plan. We shall remit to
you as promptly as reasonably practicable all
payments received by us from the Fund for remittance
to you pursuant to the Fund's Rule 12b-1 Plan.
6. Sales of Shares may be suspended or the offering of Shares
withdrawn without notice (i) if the continued offering or sale
of Shares would violate any applicable
4
<PAGE> 5
statute or regulation, order or decree of any court,
governmental agency or self-regulatory organization having
jurisdiction, or (ii) if in the sole discretion of the
Trustees of the Fund, including a majority of those Trustees
who are not "interested persons" (as defined in the 1940 Act)
of the Fund acting in good faith and in light of their duties
under federal and any applicable state laws, such action is
determined to be necessary in the best interests of the
Shareholders of any Portfolio.
7. If we elect to provide to you for the purpose of your offering
Participating Contracts and Policies copies of any Prospectus
relating to the Shares and printed information supplemental
thereto, we shall furnish you with such copies as you
reasonably request upon the payment of reasonable charges
therefor by you or one or more Participating Insurance
Companies. If we elect not to provide such copies of such
documents, you or one or more Participating Insurance
Companies shall bear the entire cost of printing copies for
your use. You shall not use such copies of such documents
printed by you or one or more Participating Insurance
Companies until you shall have furnished us with a copy
thereof and we either have given you written approval for use
or twenty days shall have elapsed following our receipt
thereof and we have not objected thereto in writing.
8. (a) You will indemnify and hold harmless Investor Services
and each of its directors and officers and each person,
if any, who controls Investor Services within the
meaning of Section 15 of the 1933 Act, against any loss,
liability, damages, claim or expense (including the
reasonable cost of investigating or defending any
alleged loss, liability, damages, claim or expense and
reasonable counsel fees incurred in connection
therewith), arising by reason of any person's acquiring
any Shares, which may be based upon the 1933 Act or any
other statute or common law, and which (i) may be based
upon any wrongful act by you, any of your employees or
representatives, any affiliate of or any person acting
on behalf of you, or (ii) may be based upon any untrue
statement or alleged untrue statement of a material fact
contained in a Registration Statement or Prospectus
covering Shares or any amendment thereof or supplement
thereto or the omission or alleged omission to state
therein a material fact required to be stated therein or
necessary to make the statements therein not misleading
if such a statement or omission was made in reliance
upon information furnished to us or the Fund by you, or
(iii) may be based on any untrue statement or alleged
untrue statement of a material fact contained in a
registration statement or prospectus covering insurance
products sold by you, or any amendments or supplement
thereto, or the omission or alleged omission to state
therein a material fact required to be stated therein or
necessary to make the statement or statements therein
not misleading, unless such statement or omission was
made in reliance upon information furnished to you or a
Participating Insurance Company by or on behalf of
Investor Services or the Fund; provided, however, that
in no case (i) is the indemnity by you in favor of any
person indemnified to be deemed to
5
<PAGE> 6
protect Investor Services or any such person against
any liability to which Investor Services or any such
person would otherwise be subject by reason of willful
misfeasance, bad faith or gross negligence in the
performance of its or his duties or by reason of its or
his reckless disregard of its obligations and duties
under this Agreement, or (ii) are you to be liable under
your indemnity agreement contained in this paragraph
with respect to any claim made against Investor Services
or any person indemnified unless Investor Services or
such person, as the case may be, shall have notified you
in writing within a reasonable time after the summons or
other first legal process giving information of the
nature of the claim shall have been served upon Investor
Services or upon such person (or after Investor Services
or such person shall have received notice of such
service on any designated agent), but failure to notify
you of any such claim shall not relieve you from any
liability which you may have to Investor Services or any
person against whom such action is brought otherwise
than on account of your indemnity agreement contained in
this paragraph. You shall be entitled to participate, at
your own expense, in the defense, or, if you so elect,
to assume the defense of any suit brought to enforce any
such liability, but, if you elect to assume the defense,
such defense shall be conducted by counsel chosen by you
and satisfactory to Investor Services, or to its
officers or directors, or to any controlling person or
persons, defendant or defendants in the suit. In the
event that you assume the defense of any such suit and
retain such counsel, Investor Services or such officers
or directors or controlling person or persons, defendant
or defendants in the suit, shall bear the fees and
expenses of any additional counsel retained by them,
but, in case you do not elect to assume the defense of
any such suit, you shall reimburse Investor Services and
such officers, directors or controlling person or
persons, defendant or defendants in such suit, for the
reasonable fees and expenses of any counsel retained by
them. You agree promptly to notify Investor Services of
the commencement of any litigation or proceedings
against it in connection with the offer, issue and sale
of any Shares.
(b) Investor Services will indemnify and hold harmless
you and each of your directors and officers and each
person, if any, who controls you within the meaning of
Section 15 of the 1933 Act, against any loss, liability,
damages, claim or expense (including the reasonable cost
of investigating or defending any alleged loss,
liability, damages, claim or expense and reasonable
counsel fees incurred in connection therewith), arising
by reason of any person's acquiring any Shares, which
may be based upon the 1933 Act or any other statute or
common law, and which (i) may be based upon any wrongful
act by Investor Services, any of its employees or
representatives, any affiliate of or any person acting
on its behalf, or (ii) may be based upon any untrue
statement or alleged untrue statement of a material fact
contained in a Registration Statement or Prospectus
covering Shares or any amendment thereof or supplement
thereto or the omission or
6
<PAGE> 7
alleged omission to state therein a material fact
required to be stated therein or necessary to make the
statements therein not misleading unless such statement
or omission was made in reliance upon information
furnished to Investor Services or the Fund by you or
(iii) may be based on any untrue statement or alleged
untrue statement of a material fact contained in a
registration statement or prospectus covering insurance
products sold by you, or any amendment or supplement
thereto, or the omission or alleged omission to state
therein a material fact required to be stated therein or
necessary to make the statement or statements therein
not misleading, if such statement or omission was made
in reliance upon information furnished to you by or on
behalf of Investor Services or the Fund; provided,
however, that in no case (i) is the indemnity by
Investor Services in favor of any person indemnified to
be deemed to protect you or any such person against any
liability to which you or any such person would
otherwise be subject by reason of willful misfeasance,
bad faith or gross negligence in the performance of your
or his duties or by reason of your or his reckless
disregard of your or his obligations and duties under
this Agreement, or (ii) is Investor Services to be
liable under its indemnity agreement contained in this
paragraph with respect to any claim made against you or
any person indemnified unless you or such person, as the
case may be, shall have notified Investor Services in
writing within a reasonable time after the summons or
other first legal process giving information of the
nature of the claim shall have been served upon you or
upon such person (or after you or such person shall have
received notice of such service on any designated
agent), but failure to notify Investor Services of any
such claim shall not relieve Investor Services from any
liability which Investor Services may have to you or any
person against whom such action is brought otherwise
than on account of its indemnity agreement contained in
this paragraph. Investor Services shall be entitled to
participate, at its own expense, in the defense, or, if
it so elects, to assume the defense of any suit brought
to enforce any such liability, but, if it elects to
assume the defense, such defense shall be conducted by
counsel chosen by Investor Services and satisfactory to
you, or to your officers or directors, or to any
controlling person or persons, defendant or defendants
in the suit. In the event that Investor Services assumes
the defense of any such suit and retains such counsel,
you or such officers or directors or controlling person
or persons, defendant or defendants in the suit, shall
bear the fees and expenses of any additional counsel
retained by you, but, in case Investor Services does not
elect to assume the defense of any such suit, Investor
Services shall reimburse you and such officers,
directors or controlling person or persons, defendant or
defendants in such suit, for the reasonable fees and
expenses of any counsel retained by you. Investor
Services agrees promptly to notify you of the
commencement of any litigation or proceedings against it
in connection with the offer, issue and sale of any
Shares.
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<PAGE> 8
9. The indemnities, representations, warranties, covenants and
agreements of each party to this Agreement as set forth in
this Agreement will remain in full force and effect regardless
of any investigation made by or on behalf of either of such
parties or any of their respective officers, directors,
partners or any controlling person, and will survive delivery
of and payment for the Shares.
10. Any provision of this Agreement which may be determined by
competent authority to be prohibited or unenforceable in any
jurisdiction shall, as to such jurisdiction, be ineffective to
the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such
prohibition or unenforceability in any jurisdiction shall not
invalidate or render unenforceable such provision in any other
jurisdiction. To the extent permitted by applicable law, each
party hereto waives any provision of law which renders any
provision hereof prohibited or unenforceable in any respect.
11. This Agreement constitutes the entire agreement among the
parties concerning the subject matter hereof, and supersedes
any and all prior understandings.
12. This Agreement shall automatically terminate in the event of
its assignment. This Agreement may be terminated at any time
by either party by 30 days' written notice given to the other
party, except that the Agreement may be terminated by Investor
Services without notice (i) if the continued offering or sale
of Shares would violate any applicable statute or regulation,
order or decree of any court, governmental agency or
self-regulatory organization having jurisdiction, or (ii) if
in the sole discretion of the Trustees of the Fund, including
a majority of those Trustees who are not "interested persons"
(as defined in the 1940 Act) of the Fund, acting in good faith
and in light of their duties under federal and any applicable
state laws, such action is determined to be necessary in the
best interests of the Shareholders of any Portfolio. The
obligation of each party to indemnify the other party pursuant
to paragraph 8 hereof shall apply with respect to any Shares
sold before or after such termination. To the extent we
receive payments under any provision of this Agreement
pursuant to a Rule 12b-1 Plan for the Fund, both you and we
understand and agree that this Agreement will be subject to
the applicable approval, reporting and termination
requirements as set forth in Rule 12b-1.
13. Any notice hereunder shall be duly given if mailed or
telegraphed to the other party hereto at the address specified
below or at such other address as such party may from time to
time specify in writing to the other party. This Agreement
shall be governed by and construed in accordance with the laws
of The Commonwealth of Massachusetts.
14. This Agreement may be executed in any number of counterparts
which, taken together shall constitute one and the same
instrument. This Agreement shall become effective upon receipt
by us of your acceptance hereof.
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<PAGE> 9
15. This Agreement may not be modified or amended except by a
written instrument duly executed by the parties hereto.
SCUDDER INVESTOR SERVICES, INC.
By:_______________________________
David S. Lee
President
Two International Place
Boston, Massachusetts 02110
The undersigned hereby
accepts the offer set forth
in the above letter.
INVESTORS BROKERAGE SERVICES, INC.
Dated:___________________ By:_______________________________
Otis R. Heldman, Jr.
President
One Kemper Drive
Long Grove, Illinois 60049
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<PAGE> 1
EXHIBIT 8.4(C)
FORM OF
INDEMNIFICATION AGREEMENT
INDEMNIFICATION AGREEMENT (the "Agreement") made by and between SCUDDER
KEMPER INVESTMENTS, INC., a Delaware corporation ("SKI"), with a principal place
of business in Boston, Massachusetts and KEMPER INVESTORS LIFE INSURANCE
COMPANY, an Illinois corporation (the "Company"), with a principal place of
business in One Kemper Drive, Long Grove, Illinois, on behalf of one or more
separate accounts of the Company, as set forth on Schedule A hereto, as it may
be amended from time to time upon written notice to the Fund in accordance with
Paragraph 9 herein (the "Account").
WHEREAS, SKI has caused to be organized Scudder Variable Life
Investment Fund (the "Fund"), a Massachusetts business trust created under a
Declaration of Trust dated March 15, 1985, as amended, the beneficial interest
in which is divided into several series, each designated a "Portfolio" and
representing the interest in a particular managed portfolio of securities, each
of which series (except Money Market Portfolio) is divided into two classes of
shares of beneficial interest; and
WHEREAS, the purpose of the Fund is to act as the investment vehicle
for the separate accounts established for variable life insurance policies and
variable annuity contracts to be offered by insurance companies which have
entered into indemnification agreements substantially identical to this
Agreement; and
WHEREAS, the parties desire to express their agreement as to certain
other matters;
NOW THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements hereinafter contained, the parties hereto agree as
follows:
1. Additional Definitions.
For purposes of this Agreement, the following definitions shall apply:
(a) "Shares" means shares of beneficial interest, without par
value, of any class of any Portfolio, now or hereafter
created, of the Fund.
2. Access to Other Products.
SKI shall permit an Account to participate in any registered investment
company other than the Fund which is intended as the funding vehicle for
insurance products and for which SKI or an affiliate of SKI acts as investment
adviser, on the same basis as other insurance companies are permitted to
participate in such a registered investment company. This provision shall not
<PAGE> 2
require SKI to make available to the Company shares of any investment company
which is organized solely as the funding vehicle for insurance products offered
by a single insurance company or a group of affiliated insurance companies.
3. Right to Review and Approve Sales Materials.
The Company shall furnish, or shall cause to be furnished, to SKI or
its designee, at least 10 days prior to its intended use, each piece of
promotional material in which SKI or the Fund is named. No such material shall
be used unless SKI or its designee shall have approved such use in writing, or
10 days shall have elapsed without approval, rejection or objection since
receipt by SKI or its designee of such material.
SKI shall furnish, or shall cause to be furnished, to the Company or
its designee, at least 10 days prior to its intended use, each piece of
promotional material in which the Company or its separate account(s) is named.
No such material shall be used unless the Company or its designee shall have
approved such use in writing, or 10 days shall have elapsed without approval,
rejection or objection since receipt by the Company or its designee of such
material.
4. Sales Organization Meetings.
Representatives of SKI or its designee shall meet with the sales
organizations of the Company at such reasonable times and places as may be
agreed upon by the Company and SKI or its designee for the purpose of educating
sales personnel about the Fund.
5. Administration of Separate Accounts
(a) Administrative services to owners of variable life insurance
policies and/or variable annuity contracts issued by the Company shall be the
responsibility of the Company and shall not be the responsibility of SKI. SKI
recognizes the Company as the sole shareholder of Fund Shares issued under the
Participation Agreement, dated as of the _____ day of _______, 1998, by and
between the Company on behalf of its separate accounts and the Fund (the
"Participation Agreement"). From time to time, SKI may pay amounts from its past
profits to the Company for providing certain administrative services for the
Fund or its Portfolios, or for providing owners of variable life insurance
policies and/or variable annuity contracts with other services that relate to
the Fund. These services may include, among other things, aggregating
allocation, transfer, and liquidation orders of the Accounts, printing and
mailing to owners of variable life insurance policies and/or variable annuity
contracts copies of the Portfolios'
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<PAGE> 3
prospectuses and other materials that the Fund is required by law or otherwise
to provide to its shareholders, but that the Company is not otherwise required
to provide to owners of variable life insurance policies and/or variable annuity
contracts, providing financial consultants with advice with respect to inquiries
related to the Portfolios (not including information about performance or
related to sales), and such other related services as the Fund and the Company
may from time to time agree. In consideration of the savings resulting from such
arrangement, and to compensate the Company for its costs, SKI agrees to pay the
Company an amount equal to ____ basis points (___%) per annum of the average
aggregate amount invested by the Company in the Portfolios under the
Participation Agreement. Payment of such amounts by SKI will not increase the
fees paid by the Fund, the Portfolios or their shareholders.
(b) The parties agree that SKI's payments to the Company are for
administrative services only and do not constitute payment in any manner for
investment advisory services or for costs of distribution.
(c) For the purposes of computing the administrative fee reimbursement
contemplated hereby, the average aggregate amount invested by the Company over a
one-month period shall be computed by totaling the Company's aggregate
investment (Share net asset value multiplied by total number of Shares held by
the Company) on each business day during the month and dividing by the total
number of business days during each month.
(d) SKI will calculate the reimbursement of administrative expenses at
the end of each calendar quarter and will make such reimbursement to the Company
within thirty (30) days thereafter. The reimbursement check will be accompanied
by a statement showing the calculation of the monthly amounts payable to SKI and
such other supporting data as may be reasonably requested by the Company.
6. Duration.
This Agreement shall continue in force until terminated in
accordance with the following provisions:
(a) At the option of the Company or SKI at any time upon 180 days'
notice, unless a shorter time is agreed to by the parties;
(b) Contemporaneously with the termination of the Participation
Agreement;
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<PAGE> 4
(c) In the event this Agreement is assigned without the prior
written consent of the Company and SKI. Termination shall be
effective immediately upon such occurrence without notice.
Provided, however, the obligation of each party hereto to
indemnify the other party hereto shall continue with respect to all losses,
claims, damages, liabilities or litigation based upon the acquisition of Shares
purchased as the funding vehicle for any variable life insurance policy or
variable annuity contract issued by the Company or any affiliated insurance
company.
7. Indemnification.
(a) The Company agrees to indemnity and hold harmless SKI and each of
its directors and officers and each person, if any, who control SKI within the
meaning of Section 15 of the Securities Act of 1933 (the "Act") or any person
controlled by or under common control with SKI ("affiliate") against any and all
losses, claims, damages, liabilities or litigation (including legal and other
expenses) to which SKI or such directors, officers or affiliate may become
subject under the Act, under any other statute, at common law or otherwise,
arising out of the acquisition of any Shares by any person which (i) may be
based upon any wrongful act by the Company, any of its employees or
representatives, any affiliate of or any person acting on behalf of the Company
or a principal underwriter of its insurance products, or (ii) may be based upon
any untrue statement or alleged untrue statement of a material fact contained in
a registration statement or prospectus covering Shares or any amendment thereof
or supplement thereto or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading if such statement or omission was made in reliance upon
information furnished to SKI or the Fund by the Company; provided, however, that
in no case (i) is the Company's indemnity in favor of a director or officer or
any other person deemed to protect such director or officer or other person
against any liability to which any such person would otherwise be subject by
reason of willful misfeasance, bad faith, or gross negligence in the performance
of his duties or by reason of his reckless disregard of obligations and duties
under this Agreement or (ii) is the Company to be liable under its indemnity
agreement contained in this Paragraph 7 with respect to any claim made against
SKI
4
<PAGE> 5
or any person indemnified unless SKI or such person, as the case may be,
shall have notified the Company in writing pursuant to Paragraph 9 within a
reasonable time after the summons or other first legal process giving
information of the nature of the claims shall have been served upon SKI or upon
such person (or after SKI or such person shall have received notice of such
service on any designated agent), but failure to notify the Company of any such
claim shall not relieve the Company from any liability which it may have to SKI
or any person against whom such action is brought otherwise than on account of
the indemnity agreement contained in this Paragraph 7. The Company shall be
entitled to participate, at its own expense, in the defense, or, if it so
elects, to assume the defense of any suit brought to enforce any such liability,
but, if it elects to assume the defense, such defense shall be conducted by
counsel chosen by it and satisfactory to SKI, its officers and directors, or to
any affiliates, defendant or defendants in the suit. In the event that the
Company elects to assume the defense of any such suit and retain such counsel,
SKI, such officers and directors or affiliates, defendant or defendants in the
suit, shall bear the fees and expenses of any additional counsel retained by
them, but, in case the Company does not elect to assume the defense of any such
suit, the Company will reimburse SKI, such officers and directors or affiliates,
defendant or defendants in such suit, for the reasonable fees and expenses of
any counsel retained by them. The Company agrees promptly to notify SKI pursuant
to Paragraph 9 of the commencement of any litigation or proceedings against it
or any of its directors or officers in connection with the issue and sale of any
Shares.
(b) SKI agrees to indemnify and hold harmless the Company and each of
its directors and officers and each person, if any, who controls the Company
within the meaning of Section 15 of the Act or any person controlled by or under
common control with the Company ("affiliate") against any and all losses,
claims, damages, liabilities or litigation (including legal and other expenses)
to which it or such directors, officers or affiliate may become subject under
the Act, under any other statute, at common law or otherwise, arising out of the
acquisition of any Shares by any person which (i) may be based upon any wrongful
act by SKI, any of its employees or representatives, any affiliate of or any
person acting on behalf of SKI or a principal underwriter of the Fund, or (ii)
may be based upon any untrue statement or alleged untrue statement of a material
fact contained in a registration statement or prospectus covering Shares or any
amendment thereof or supplement thereto or the omission or alleged omission to
state
5
<PAGE> 6
therein a material fact required to be stated therein or necessary to make
the statements therein not misleading if such statement or omission was made in
reliance upon information furnished to the Fund or the Company by SKI; provided,
however, that in no case (i) is SKI's indemnity in favor of a director or
officer or any other person deemed to protect such director or officer or other
person against any liability to which any such person would otherwise be subject
by reason of willful misfeasance, bad faith, or gross negligence in the
performance of his duties or by reason of his reckless disregard of obligations
and duties under this Agreement or (ii) is SKI to be liable under its indemnity
agreement contained in this Paragraph 7 with respect to any claims made against
the Company or any person indemnified unless the Company or such person, as the
case may be, shall have notified SKI in writing pursuant to Paragraph 9 within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon it or upon
such director, officer, or controlling person (or after the Company or such
director, officer or controlling person shall have received notice of such
service on any designated agent), but failure to notify SKI of any claim shall
not relieve it from any liability which it may have to the Company or any person
against whom such action is brought otherwise than on account of its indemnity
agreement contained in this Paragraph 7. SKI will be entitled to participate, at
its own expense, in the defense, or, if it so elects, to assume the defense of
any suit brought to enforce any such liability, but if SKI elects to assume the
defense, such defense shall be conducted by counsel chosen by it and
satisfactory to the Company, its directors, officers or affiliates, defendant or
defendants, in the suit. In the event SKI elects to assume the defense of any
such suit and retain such counsel, the Company, its directors, officers or
affiliates, defendant or defendants in the suit, shall bear the fees and
expenses of any additional counsel retained by them, but, in case SKI does not
elect to assume the defense of any such suit, it will reimburse the Company or
such directors, officers or affiliates, defendant or defendants in the suit, for
the reasonable fees and expenses of any counsel retained by them. SKI agrees
promptly to notify the Company pursuant to Paragraph 8 of the commencement of
any litigation or proceedings against it or any of its officers or directors in
connection with the issuance or sale of any Shares.
(c) SKI agrees to indemnify and hold harmless the Company and each of
its directors and officers against any and all losses, claims, damages,
liabilities or litigation arising from the
6
<PAGE> 7
imposition of additional federal income taxes on the Company or any policyholder
and/or contract holder solely as a result of a Final Determination that any
Portfolio has failed (x) to comply with the diversification requirements of
section 817(h) of the Internal Revenue Code of 1986, as amended (the "Code"),
relating to the diversification requirements for variable annuity, endowment and
life insurance contracts, or (y) to qualify as a regulated investment company
within the meaning of section 851 of the Code; provided, however, that (i) SKI
shall have no liability under this Paragraph 7(c) if such failure is caused by a
third party who is not an employee or agent of SKI (e.g., the Fund's custodian
or another service provider), and (ii) in no case is SKI's indemnity under this
Paragraph 7(c) deemed to protect any person against any liability to which that
person would otherwise be subject by reason of willful misfeasance, bad faith or
gross negligence in the performance of that person's duties or by reason of
reckless disregard by that person of obligations under this Agreement.
The Company agrees that if the Internal Revenue Service asserts in
writing in connection with any governmental audit or review of the Company or,
to the Company's knowledge, of any policyholder and/or contract holder, that any
Portfolio has failed to comply with the diversification requirements of section
817(h) of the Code or the Company otherwise becomes aware of any facts that
could give rise to any claim against SKI as a result of such a failure or
alleged failure, (i) the Company shall promptly notify SKI pursuant to Paragraph
9 of such assertion or potential claim; (ii) the Company shall consult with SKI
as to how to minimize any liability that may arise as a result of such failure
or alleged failure; (iii) the Company shall use its best efforts to minimize any
liability of SKI for indemnification resulting from such failure, including,
without limitation, demonstrating, pursuant to Treasury Regulations Section
1.817-5(a)(2), to the Commissioner of the Internal Revenue Service that such
failure was inadvertent; provided, however, this Paragraph 7(c) shall not be
construed to require the Company to jeopardize its or any policyholder's and/or
contract holder's standing or position with respect any such failure or alleged
failure; (iv) the Company shall permit SKI and its legal and accounting advisors
to participate in any conferences, settlement discussions or other
administrative or judicial proceedings or contests (including judicial appeals
thereof) with the Internal Revenue Service, any policyholder and/or contract
holder or any other claimant regarding any claims that could give rise to
indemnification by SKI as a result of such a failure or alleged failure; (v) any
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<PAGE> 8
written materials to be submitted by the Company to the Internal Revenue
Service, any policyholder and/or contract holder or any other claimant in
connection with any of the foregoing proceedings or contests (including, without
limitation, any such materials to be submitted to the Internal Revenue Service
pursuant to Treasury Regulations Section 1.817-5(a)(2)), shall be provided by
the Company to SKI (together with any supporting information or analysis, but
excluding any privileged materials) at least 10 business days prior to the day
on which such proposed materials are to be submitted; (vi) the Company shall
provide SKI and its advisors with such cooperation as SKI shall reasonably
request (including, without limitation, by permitting SKI and its accounting and
legal advisors to review the relevant books and records of the Company) in order
to facilitate SKI's review of any written submissions provided to it pursuant to
the preceding clause or its assessment of the validity or amount of any claim
against it arising from such a failure or alleged failure; (vii) the Company
shall not with respect to any claim of the IRS or any policyholder and/or
contract holder that would give rise to a claim for indemnification against SKI
(a) compromise or settle any claim, (b) accept any adjustment on audit, or (c)
forego any allowable judicial appeals, without the express written consent of
SKI, which shall not be unreasonably withheld, provided that the Company shall
not be required to appeal any adverse judicial decision unless SKI shall have
provided an opinion of independent counsel to the effect that a reasonable basis
(consistent with Formal Opinion 85-352 of the American Bar Association) exists
for taking such appeal; and (viii) SKI shall have no liability as a result of
such failure or alleged failure if the Company fails to comply with any of the
foregoing clauses (i) through (vii). Should SKI refuse to give its written
consent to any compromise or settlement of any claim or liability hereunder, the
Company may, in its discretion, authorize SKI to act in the name of the Company
in, and to control the conduct of, such conferences, discussions, proceedings,
contests or appeals and all administrative or judicial appeals thereof, and in
that event SKI shall bear the fees and expenses associated with the conduct of
the proceedings that it is so authorized to control.
For purposes of this Paragraph 7(c), "Final Determination" shall mean,
with respect to any claim, a settlement of such claim (including the acceptance
of an adjustment proposed by the Internal Revenue Service) or a decision of a
court of competent jurisdiction with respect to such
8
<PAGE> 9
claim that has become final after either the (i) exhaustion of allowable
appeals or (2) expiration of the time to take any such appeal with respect to
the claim.
8. Massachusetts Law to Apply.
This Agreement shall be construed and the provisions hereof interpreted
under and in accordance with the laws of The Commonwealth of Massachusetts.
9. Notices.
Any notice shall be sufficiently given when sent by registered or
certified mail to the other party at the address of such party set forth below
or at such other address as such party may from time to time specify in writing
to the other party.
If to SKI:
Scudder Kemper Investments, Inc.
Two International Place
Boston, Massachusetts 02110
(617) 295-2275
Attn: David B. Watts
If to the Company:
Kemper Investors Life Insurance Company
One Kemper Drive
Long Grove, Illinois 60049
Attn: General Counsel
10. Miscellaneous.
The captions in the Agreement are included for convenience of reference
only and in no way define or delineate any of the provisions hereof or otherwise
affect their construction or effect. This Agreement may be executed
simultaneously in two or more counterparts, each of which taken together shall
constitute one and the same instrument.
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<PAGE> 10
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed in its name and behalf by its duly authorized
representative and its seal to be hereunder affixed hereto as of the __________
day of __________, 1998.
SEAL SCUDDER KEMPER INVESTMENTS, INC.
By:_____________________________
David S. Lee
Authorized Officer
SEAL KEMPER INVESTORS LIFE
INSURANCE COMPANY
By:____________________________
Name:
Title:
10
<PAGE> 11
SCHEDULE A
TO INDEMNIFICATION AGREEMENT
Separate Account(s) of the Company
KILICO Variable Separate Account - 2
11
<PAGE> 1
Exhibit 10.1
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors of
Kemper Investors Life Insurance Company and
Contract Owners of KILICO Individual and Group Variable, Fixed and Market Value
Adjusted Deferred Annuity Contracts
We consent to the inclusion in this registration statement on Form N-4 (File
No. 333-22375) 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 Individual and Group Variable, Fixed and Market Value
Adjusted Deferred Annuity Contracts
We consent to the inclusion in this registration statement on Form N-4 (File
No. 333-22375) 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
