<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 20, 2000
COMMISSION FILE NOS. 333-
811-3199
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-4
<TABLE>
<S> <C>
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. _ [ ]
Post-Effective Amendment No. _ [ ]
and
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940 [ ]
Amendment No. 51 [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 J. JULIAN, ESQ.
KEMPER INVESTORS LIFE INSURANCE COMPANY
1 KEMPER DRIVE
LONG GROVE, ILLINOIS 60049
JOAN E. BOROS, ESQ.
JORDEN BURT BOROS CICCHETTI BERENSEN & 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.
Calculation of Registration Fee under the Securities Act of 1933:
Registrant is registering an indefinite number of securities under the
Securities Act of 1933 pursuant to Investment Company Act Rule 24f-2.
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.
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<PAGE> 2
PROSPECTUS FOR
KEMPER INVESTORS LIFE INSURANCE COMPANY
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INDIVIDUAL AND GROUP VARIABLE AND MARKET VALUE
ADJUSTED DEFERRED ANNUITY CONTRACTS
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ZURICH PREFERRED
ISSUED BY
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
AND
KEMPER INVESTORS LIFE INSURANCE COMPANY
This prospectus describes Variable and Market Value Adjusted Deferred Annuity
Contracts of Kemper Investors Life Insurance Company that are designed to
provide benefits under retirement plans which may qualify for certain federal
tax advantages or as nonqualified annuities. Depending on particular state
requirements, the Contracts may be issued on a group or individual basis.
Contracts issued on an individual basis are represented by a Certificate. All
discussion of "Contracts" includes those issued on an individual or group basis.
Unless otherwise noted, or the context requires, all references to
"Certificates" includes "Contracts".
You may allocate purchase payments to one or more of the variable options, or
the fixed option subject to a market value adjustment. The Contract currently
offers twenty-seven investment options, each of which is a Subaccount of KILICO
Variable Annuity Separate Account. Currently, you may choose among the following
Portfolios:
KEMPER VARIABLE SERIES
- Kemper Money Market
- Kemper Technology Growth
- Kemper Total Return
- Kemper High Yield
- Kemper Growth
- Kemper Government Securities
- Kemper Small Cap Growth
- Kemper Investment Grade Bond
SCUDDER VARIABLE LIFE INVESTMENT FUND ("VLIF") (CLASS A SHARES)
- Scudder VLIF Capital Growth
- Scudder VLIF International
- Scudder VLIF Bond
THE ALGER AMERICAN FUND
- Alger American Growth
- Alger American Small Capitalization
- Alger American MidCap Growth
JANUS ASPEN SERIES
- Janus Aspen Growth
- Janus Aspen Aggressive Growth
- Janus Aspen Worldwide Growth
- Janus Aspen Balanced
FIDELITY VARIABLE INSURANCE PRODUCTS FUND ("VIP")
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II ("VIP II")
- Fidelity VIP Equity-Income
- Fidelity VIP Growth
- Fidelity VIP II Index 500
- Fidelity VIP II Contrafund
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC. ("VP")
- American Century VP Income & Growth
- American Century VP Value
J.P. MORGAN SERIES TRUST II
- J.P. Morgan Small Company
WARBURG PINCUS TRUST
- Warburg Pincus Emerging Markets
THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC.
The Contracts are not insured by the FDIC. They are obligations of the issuing
insurance company and not a deposit of, or guaranteed by, any bank or savings
institution and are subject to risks, including possible loss of principal.
This prospectus contains important information about the Contracts that you
should know before investing. You should read it before investing and keep it
for future reference. We have filed a Statement of Additional Information
("SAI") with the Securities and Exchange Commission. The current SAI has the
same date as this prospectus and is incorporated by reference in this
prospectus. You may obtain a free copy by writing us or calling (888) 477-9700.
A table of contents for the SAI appears on page 67. You may also find this
prospectus and other information about the separate account required to be filed
with the Securities and Exchange Commission ("SEC") at the SEC's web site at
http://www.sec.gov.
The date of this prospectus is March 16, 2000.
The Securities and Exchange Commission has not approved or disapproved these
securities or determined if this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
<PAGE> 3
TABLE OF CONTENTS
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<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DEFINITIONS................................................. 1
SUMMARY..................................................... 3
SUMMARY OF EXPENSES......................................... 5
CONDENSED FINANCIAL INFORMATION............................. 8
KILICO, THE MVA OPTION, THE SEPARATE ACCOUNT AND THE
FUNDS..................................................... 9
THE CONTRACTS AND CERTIFICATES.............................. 15
THE ACCUMULATION PERIOD..................................... 16
CONTRACT AND CERTIFICATE CHARGES AND EXPENSES............... 22
THE ANNUITY PERIOD.......................................... 24
FEDERAL INCOME TAXES........................................ 28
DISTRIBUTION OF CONTRACTS AND CERTIFICATES.................. 35
VOTING RIGHTS............................................... 35
REPORTS TO CONTRACT OWNERS AND INQUIRIES.................... 35
DOLLAR COST AVERAGING....................................... 36
SYSTEMATIC WITHDRAWAL PLAN.................................. 36
EXPERTS..................................................... 36
LEGAL MATTERS............................................... 37
SPECIAL CONSIDERATIONS...................................... 37
AVAILABLE INFORMATION....................................... 37
BUSINESS.................................................... 38
PROPERTIES.................................................. 44
LEGAL PROCEEDINGS........................................... 44
SELECTED FINANCIAL DATA..................................... 45
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 46
KILICO'S DIRECTORS AND EXECUTIVE OFFICERS................... 61
EXECUTIVE COMPENSATION...................................... 64
TABLE OF CONTENTS--STATEMENT OF ADDITIONAL INFORMATION...... 66
FINANCIAL STATEMENTS........................................ 66
CHANGE OF ACCOUNTANTS....................................... 66
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS....................
FINANCIAL STATEMENTS OF KEMPER INVESTORS LIFE INSURANCE
COMPANY AND SUBSIDIARIES.................................. 67
APPENDIX A ILLUSTRATION OF A MARKET VALUE ADJUSTMENT........ 68
APPENDIX B KEMPER INVESTORS LIFE INSURANCE COMPANY DEFERRED
FIXED AND VARIABLE ANNUITY IRA, ROTH IRA AND SIMPLE IRA
DISCLOSURE STATEMENT...................................... 71
</TABLE>
<PAGE> 4
DEFINITIONS
The following terms as used in this Prospectus have the indicated meanings:
ACCUMULATED GUARANTEE PERIOD VALUE--The sum of your Guarantee Period
Values.
ACCUMULATION PERIOD--The period between the Date of Issue of a Contract and
the Annuity Date when you make premium payments to us.
ACCUMULATION UNIT--A unit of measurement used to determine the value of
each Subaccount during the Accumulation Period.
ALLOCATION OPTION--The twenty-seven (27) Subaccounts and the MVA Option
available under the Certificate for allocation of Purchase Payments, or
transfers of Certificate Value during the Accumulation Period.
ANNUITANT--The person designated to receive or who is actually receiving
annuity payments. Life annuity payments involving life contingencies depend
upon the annuitant.
ANNUITY DATE--The date on which annuity payments from us to the annuitant
start.
ANNUITY OPTION--One of several forms in which annuity payments can be made.
ANNUITY PERIOD--The period starting on the Annuity Date when we make
annuity payments to the annuitant.
ANNUITY UNIT--A unit of measurement used to determine the amount of
Variable Annuity payments.
BENEFICIARY--The person you designate to receive any benefits under a
Contract upon your death or upon the Annuitant's death prior to the Annuity
Period.
CERTIFICATE--An individual certificate of participation we issue to each
Owner in a group as evidence of his or her rights and benefits under the
Contract or an individual contract we issue to an Owner.
CODE--The Internal Revenue Code of 1986, as amended.
COMPANY ("WE", "US", "OUR", "KILICO")--Kemper Investors Life Insurance
Company. Our home office is located at 1 Kemper Drive, Long Grove, Illinois
60049.
CONTRACT--A Variable and Market Value Adjusted Deferred Annuity Contract
offered on an individual or group basis. Contracts issued on a group basis
are represented by a Certificate.
CONTRACT VALUE--The sum of the values of the your Accumulated Guarantee
Period Value and Separate Account Value during the Accumulation Period.
CONTRACT YEAR--Period between anniversaries of the Date of Issue of a
Contract.
DATE OF ISSUE--The date on which the first Contract Year commences.
DEBT--The principal of any outstanding loan plus any accrued interest.
Requests for loans must be made in writing to us.
FIXED ANNUITY--An annuity where we guarantee the amount of each annuity
payment.
FUND--Kemper Variable Series, Scudder Variable Life Investment Fund, The
Alger American Fund, Janus Aspen Series, Fidelity Variable Insurance
Products Fund, Fidelity Variable Insurance Products Fund II, American
Century Variable Portfolios, Inc., J.P. Morgan Series Trust II, Warburg
Pincus Trust and The Dreyfus Socially Responsible Growth Fund, Inc.,
including any Portfolios thereunder.
GENERAL ACCOUNT--All our assets other than those allocated to any legally
segregated separate account.
GUARANTEED INTEREST RATE--The rate of interest we set for a given Guarantee
Period.
GUARANTEE PERIOD--The period of time for which a Guaranteed Interest Rate
of an MVA Option is guaranteed. You may elect MVA Options having Guarantee
Periods of from one to ten years.
1
<PAGE> 5
GUARANTEE PERIOD VALUE--The sum of:
- your Purchase Payments allocated to an MVA Option or amounts you transfer
to an MVA Option; plus
- interest credited; minus
- your withdrawals and transfers; plus or minus
- any applicable Market Value Adjustment previously made.
IBS--Investors Brokerage Services, Inc., whose corporate headquarters is at
1 Kemper Drive, Long Grove, Illinois 60049.
MARKET ADJUSTED VALUE--A Guarantee Period Value adjusted by the market
value adjustment formula.
MARKET VALUE ADJUSTMENT--An adjustment of values under a Guarantee Period
in accordance with the market value adjustment formula. 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.
MVA OPTION--A fixed account accumulation option to which payments may be
allocated or contract value transferred.
NON-QUALIFIED CONTRACT--A Contract issued in connection with a retirement
plan which does not receive favorable tax treatment under Section 401, 403,
408, 408A or 457 of the Internal Revenue Code.
OWNER ("YOU, YOUR, YOURS")--The person designated in the Contract or
Certificate as having the privileges of ownership defined in the Contract.
PURCHASE PAYMENTS--Amounts paid to us by you or on your behalf.
QUALIFIED CONTRACT--A Contract issued in connection with a retirement plan
which receives favorable tax treatment under Section 401, 403, 408, 408A or
457 of the Internal Revenue Code.
SEPARATE ACCOUNT--The KILICO Variable Annuity Separate Account.
SEPARATE ACCOUNT VALUE--The sum of your Subaccount Values.
SKI--Scudder Kemper Investments, Inc., whose Corporate Headquarters is at
345 Park Avenue, New York, New York 10154-0010.
SUBACCOUNTS--The twenty-seven subdivisions of the Separate Account, the
assets of which consist solely of shares of the corresponding portfolios of
the Funds.
SUBACCOUNT VALUE--The value of your allocations to a Subaccount.
VALUATION DATE--Each day when a Subaccount is valued. Subaccounts are
normally valued every day the New York Stock Exchange is open for trading.
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) you specify.
2
<PAGE> 6
SUMMARY
The Contracts provide for investment on a tax-deferred basis and annuity
benefits. Both Non-Qualified and Qualified Contracts are described in this
Prospectus.
The minimum initial Purchase Payment is $25,000 and, subject to certain
exceptions, the minimum subsequent payment is $100.
Variable accumulations and benefits are provided by crediting Purchase Payments
to one or more Subaccounts that you select. Each Subaccount invests in a
corresponding Portfolio of one of the Funds. (See "The Funds," page 11.)
Contract Value allocated to the Separate Account varies with the investment
experience of the selected Subaccount(s).
The MVA Options provide fixed-rate accumulations, each for a specified Guarantee
Period. MVA Options are only available during the Accumulation Period. You may
allocate amounts to one or more MVA Options. We may offer additional MVA Options
with different Guarantee Periods at our discretion. For new Contracts, we may
limit to 3 the number of MVA Options available. We credit a Guaranteed Interest
Rate daily to amounts allocated to an MVA Option. Each Guaranteed Interest Rate
is set at our discretion, but once set is guaranteed not to change for the
duration of the Guarantee Period. At the end of a Guarantee Period, your money
will be transferred to the money market subaccount unless you timely elect
another MVA Option.
Transfers between Subaccounts are permitted before and after annuitization,
subject to limitations. A transfer from a Guarantee Period is subject to a
Market Value Adjustment.
The minimum withdrawal amount is $500 for the Subaccounts and $5,000 for the MVA
Options. A minimum $5,000 of unloaned Contract Value must remain after a
withdrawal. If less than $5,000 remains after partial withdrawal, we will
terminate the Contract. If a partial withdrawal is made in connection with a
1035 exchange, direct transfer, or direct rollover, a $5,000 Contract Value must
also remain in the Contract after the transfer. If this withdrawal request would
reduce the Contract Value to less than $5,000, and you have not terminated your
Contract, your partial withdrawal request will be limited so that the Contract
Value remaining will be $5,000. No transfer, rollover, or 1035 exchange is
permitted if there is an outstanding loan on your Contract.
Withdrawals will have tax consequences, including income tax and in some
circumstances an additional 10% penalty tax. Withdrawals are permitted from
Contracts issued with Section 403(b) Qualified Plans only under limited
circumstances. (See "Federal Income Taxes," page 28.)
A Market Value Adjustment also applies to any withdrawal (except during the
"free look" period), transfer, purchase of an annuity option. The Market Value
Adjustment does not apply to the death benefit. The Market Value Adjustment is
applied to the amount being withdrawn. (See "The Contracts," page 15.)
Contract charges include:
- mortality and expense risk charges,
- administrative expenses,
- records maintenance charge, and
- applicable premium taxes.
3
<PAGE> 7
(See "Charges Against the Separate Account," page 22.) In addition, the funds
pay their investment advisers varying fees for investment advise and also incur
other operational expenses. (See the Funds' prospectuses for such information.)
Dollar Cost Averaging (see page 36) and Automatic Asset Rebalancing (see p. 22)
are available to you.
The Contract may be purchased as an Individual Retirement Annuity, Simplified
Employee Pension--IRA, Traditional and Roth Individual Retirement Annuity, tax
sheltered annuity, and as a nonqualified annuity. (See "Taxation of Annuities in
General," page 28 and "Qualified Plans," page 29.)
You may examine a Contract and return it for a refund during the "free look"
period. The length of the free look period will depend on the state in which the
Contract is issued. However, it will be at least ten days from the date you
receive the Contract. (See "The Contracts," page 15.) In addition, a special
free look period applies in some circumstances to Contracts issued as Individual
Retirement Annuities, Simplified Employee Pensions--IRAs or as Roth Individual
Retirement Annuities.
4
<PAGE> 8
SUMMARY OF EXPENSES
CONTRACT OWNER TRANSACTION EXPENSES
<TABLE>
<S> <C> <C>
Sales Load Imposed on Purchases (as a percentage of purchase payments)................................................ None
Contingent Deferred Sales Load (as a percentage of amount surrendered)
Surrender Fees (in addition to Withdrawal Charge)(1).................................................................. None
Exchange Fee.......................................................................................................... None
Records Maintenance Charge (for amounts over $25,000, $15, and over $50,000, 0)(2).................................... $30
</TABLE>
[TO BE UPDATED BY AMENDMENT]
<TABLE>
<CAPTION>
SEPARATE ACCOUNT ANNUAL EXPENSES
(as a percentage of average daily
account value)
<S> <C>
Mortality and Expense Risk.... 1.00%
Administration................ .25%*
Account Fees and Expenses..... 0%
Total Separate Account
Annual Expenses............. 1.25%
</TABLE>
FUND ANNUAL EXPENSES
(as percentage of each Portfolio's average net assets for
the period ended December 31, 1998)
<TABLE>
<CAPTION>
KEMPER KEMPER KEMPER KEMPER KEMPER
MONEY TECHNOLOGY TOTAL KEMPER KEMPER GOVERNMENT SMALL CAP
MARKET(2) GROWTH(3) RETURN HIGH YIELD GROWTH SECURITIES GROWTH
--------- ---------- ------ ---------- ------ ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Management
Fees... .50% .55% .60% .60% .55% .65%
Other
Expenses... .04 .05 .05 .05 .11 .05
--- --- --- --- --- --- ---
Total
Portfolio
Annual
Expenses... .54% .60% .65% .65% .66% .70%
=== === === === === === ===
<CAPTION>
KEMPER SCUDDER
INVESTMENT VLIF SCUDDER SCUDDER
GRADE CAPITAL VLIF VLIF
BOND GROWTH INTERNATIONAL BOND
---------- ------- ------------- -------
<S> <C> <C> <C> <C>
Management
Fees... .60% .47% .87% .47%
Other
Expenses... .07 .04 .18 .09
--- --- ---- ---
Total
Portfolio
Annual
Expenses... .67% .51% 1.05% .56%
=== === ==== ===
</TABLE>
<TABLE>
<CAPTION>
AMERICAN
SCUDDER CENTURY WARBURG DREYFUS
VLIF SCUDDER SCUDDER VP AMERICAN J.P. MORGAN PINCUS SOCIALLY
CAPITAL VLIF VLIF INCOME & CENTURY VP SMALL EMERGING RESPONSIBLE
GROWTH INTERNATIONAL BOND GROWTH VALUE COMPANY(7) MARKETS GROWTH
------- ------------- ------- -------- ---------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Management
Fees... .47% .87% .47% .70% 1.00% .60% .75%
Other
Expenses... .04 .18 .09 .00 .00 .55 .05
--- ---- --- --- ---- ---- --- ---
Total
Portfolio
Annual
Expenses... .51% 1.05% .56% .70% 1.00% 1.15% .80%
=== ==== === === ==== ==== === ===
</TABLE>
<TABLE>
<CAPTION>
JANUS JANUS FIDELITY ALGER
JANUS ASPEN ASPEN JANUS VIP ALGER AMERICAN
ASPEN AGGRESSIVE WORLDWIDE ASPEN EQUITY AMERICAN SMALL
GROWTH(4) GROWTH(4) GROWTH(4) BALANCED(4) INCOME(5) GROWTH CAPITALIZATION
--------- ---------- --------- ----------- --------- -------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Management
Fees... .65% .72% .65% .72% .49% .75% .85%
Other
Expenses... .03 .03 .07 .02 .08 .04 .04
--- --- --- --- --- --- ---
Total
Portfolio
Annual
Expenses.. .68% .75% .72% .74% .57% .79% .89%
=== === === === === === ===
<CAPTION>
ALGER FIDELITY FIDELITY
AMERICAN FIDELITY VIP II VIP II
MIDCAP VIP INDEX CONTRA-
GROWTH GROWTH(5) 500(6) FUND(5)
-------- --------- -------- --------
<S> <C> <C> <C> <C>
Management
Fees... .59% .24% .59%
Other
Expenses... .07 .04 .07
---- ---- ---- ----
Total
Portfolio
Annual
Expenses.. .66% .28% .66%
==== ==== ==== ====
</TABLE>
*We reserve the right to increase the administrative fee up to a maximum of
.45%. You will be provided 3 months notice before any such increase.
5
<PAGE> 9
EXAMPLE
<TABLE>
<CAPTION>
SUBACCOUNT 1 YEAR 3 YEARS 5 YEARS 10 YEARS
---------- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C>
If you surrender your Contract, you
would pay the following expenses on a
$1,000 investment, assuming 5% annual
return on assets:
Kemper Money Market $19 $ 58 $ 99 $215
Kemper Technology Growth
Kemper Total Return 19 60 102 221
Kemper High Yield 20 61 105 227
Kemper Growth 20 61 105 227
Kemper Government Securities 20 61 105 228
Kemper Small Cap Growth 20 63 108 232
Kemper Investment Grade Bond 20 62 106 229
Scudder VLIF Capital Growth
Scudder VLIF International
Scudder VLIF Bond
Alger American Growth
Alger American MidCap Growth
Alger American Small
Capitalization
Janus Aspen Growth
Janus Aspen Aggressive Growth
Janus Aspen Worldwide Growth
Janus Aspen Balanced
Fidelity VIP Equity-Income
Fidelity VIP Growth
Fidelity VIP II Index 500
Fidelity VIP II Contrafund
American Century VP Income &
Growth
American Century VP Value
J.P. Morgan Small Company
Warburg Pincus Energy Markets
Dreyfus Socially Responsible
Growth
</TABLE>
6
<PAGE> 10
The purpose of the preceding table is to assist you in understanding the various
costs and expenses that an Owner in a Subaccount will bear directly or
indirectly. The table reflects expenses of both the Separate Account and the
Fund but not the MVA Option. See "Contract and Certificate Charges and Expenses"
and "The MVA Option" for more information regarding the various costs and
expenses. THE EXAMPLE SHOULD NOT BE CONSIDERED TO BE A REPRESENTATION OF PAST OR
FUTURE EXPENSES AND DOES NOT INCLUDE THE DEDUCTION OF STATE PREMIUM TAXES, WHICH
MAY BE ASSESSED BEFORE OR UPON ANNUITIZATION. ACTUAL EXPENSES MAY BE GREATER OR
LESS THAN THOSE SHOWN. The example assumes a 5% annual rate of return pursuant
to requirements of the Securities and Exchange Commission. This hypothetical
rate of return is not intended to be representative of past or future
performance of any Subaccount. The Records Maintenance Charge is a single
charge, it is not a separate charge for each Subaccount. In addition, the effect
of the Records Maintenance Charge has been reflected by applying the percentage
derived by dividing the total amounts of annual Records Maintenance Charge
collected by the total net assets of all the Subaccounts in the Separate
Account.
(1) Surrenders and other withdrawals from the MVA Option are subject to a Market
Value Adjustment. The Market Value Adjustment may increase or reduce the
Guarantee Period Value.
(2) Under certain circumstances the annual Records Maintenance Charge may be
reduced or waived. The annual Records Maintenance Charge will be waived for
Contracts with a Contract Value exceeding $50,000 on the date of assessment.
(3) Pursuant to their respective agreements with Kemper Variable Series, the
investment manager and the accounting agent have agreed, for the one year
period commencing on the date of this Prospectus, to limit their respective
fees and to reimburse other operating expenses, in a manner communicated to
the Board of the Fund, to the extent necessary to limit total operating
expenses of the Kemper Technology Growth Portfolio of Kemper Variable Series
to the level set forth in the table above. Without taking into effect this
expense cap, for the Technology Growth Portfolio of Kemper Variable Series;
management fees are estimated to be .75%; Other Expenses are estimated to be
.29%; and total operating expenses are estimated to be 1.04%.
(4) The expense figures shown are net of certain fee waivers or reductions from
Janus Capital Corporation. Without such waivers, the Management Fee, Other
Expenses and Total Portfolio Annual Expenses for the Portfolios for the
fiscal year ended December 31, 1998 would have been .72%, .03% and .75%,
respectively, for the Janus Aspen Growth and Janus Aspen Aggressive Growth
Portfolios; .67%, .07% and .74% for the Janus Aspen Worldwide Growth
Portfolio; and .72%, .02% and .74% for the Janus Aspen Balanced Portfolio.
See the prospectus and Statement of Additional Information of Janus Aspen
Series for a description of these waivers.
(5) A portion of the brokerage commissions that certain funds pay was used to
reduce fund expenses. In addition, certain funds, or FMR on behalf of
certain funds, have entered into arrangements with their custodian whereby
credits realized as a result of uninvested cash balances were used to reduce
custodian expenses. Including these reductions, the total operating expenses
presented in the table would have been .57 for the Fidelity VIP Equity
Income Fund, .66 for the Fidelity VIP Growth Fund and the Fidelity VIP II
ContraFund.
(6) FMR agreed to reimburse a portion of the Fidelity VIP II Index 500
Portfolio's expenses during this period. Without this reimbursement, the
Management Fee, Other Expenses and Total Portfolio Annual Expenses for the
Portfolio for the fiscal year ended December 31, 1998 would have been .24%,
.11% and .35%, respectively, on an annualized basis.
(7) Reflects an agreement by Morgan Guaranty Trust Company of New York to
reimburse the Portfolio to the extent expenses exceed 1.15%. Absent fee
waiver and expense reimbursement, total operating expenses would have been
3.43%.
7
<PAGE> 11
[CONDENSED FINANCIAL INFORMATION TO BE FILED BY AMENDMENT]
8
<PAGE> 12
KILICO, THE MVA OPTION, THE SEPARATE ACCOUNT AND THE FUNDS
KEMPER INVESTORS LIFE INSURANCE COMPANY
We were organized under the laws of the State of Illinois in 1947 as a stock
life insurance company. Our offices are located at 1 Kemper Drive, Long Grove,
Illinois 60049. We offer annuity and life insurance products and are admitted to
do business in the District of Columbia and all states except New York. We are a
wholly-owned subsidiary of Kemper Corporation, a nonoperating holding company.
Kemper Corporation is a majority-owned (71.67 percent) subsidiary of Zurich
Holding Company of America ("ZHCA"), which is a wholly-owned subsidiary of
Zurich Insurance Company ("Zurich"). Zurich is a wholly-owned subsidiary of
Zurich Financial Services ("ZFS"). ZFS was formed in the September, 1998 merger
of the Zurich Group with the financial services business of B.A.T. Industries.
ZFS is owned by Zurich Allied A.G. and Allied Zurich p.l.c., fifty-seven percent
and forty-three percent, respectively.
THE MVA OPTION
You may allocate amounts in the Market Value Adjustment ("MVA") Option to one or
more Guarantee Periods with durations of one to ten years during the
Accumulation Period. The MVA Option is not available in all states. At our
discretion, we may offer additional Guarantee Periods.
The amounts allocated to the MVA Option under the Contracts are invested under
the state insurance laws regulating our General Account. Assets supporting the
amounts allocated to Guarantee Periods are held in a "non-unitized" separate
account. However, our General Account assets are available to fund benefits
under the Contracts. A non-unitized separate account is a separate account in
which you do 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 our guaranteed
obligations. 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 we may conduct.
State insurance laws concerning the nature and quality of investments regulate
our General Account investments and any non-unitized separate account
investments. 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.) Our affiliate, Scudder Kemper Investments, Inc.
("SKI"), manages our General Account.
We consider the return available on the instruments in which Contract proceeds
are invested when establishing Guaranteed Interest Rates. This return is only
one of many factors considered in establishing Guaranteed Interest Rates. (See
"The Accumulation Period-- Establishment of Guaranteed Interest Rates.")
Our investment strategy for the non-unitized separate account is generally to
match Guarantee Period liabilities with assets, such as debt instruments. We
expect to invest in debt instruments such as:
- 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;
- 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;
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<PAGE> 13
- other debt instruments including 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 our management to have an
investment quality comparable to securities which may be otherwise
purchased; and
- options and futures transactions on fixed income securities.
Our General Account at December 31, 1999 included approximately percent in
U.S. Treasuries, investment grade corporate, foreign and municipal bonds, and
commercial paper, percent in below investment grade (high risk) bonds,
percent in mortgage loans and other real estate-related investments and
percent in all other investments. (See "Management's Discussion and
Analysis--INVESTMENTS.")
We are not obligated to invest the amounts allocated to the MVA Option according
to any particular strategy, except as state insurance laws may require. (See
"Management's Discussion and Analysis--INVESTMENTS.")
THE SEPARATE ACCOUNT
We established the KILICO Variable Annuity Separate Account on May 29, 1981
pursuant to Illinois law as the KILICO Money Market Separate Account. KILICO
Money Market Separate Account was initially registered with the Securities and
Exchange Commission ("SEC") as an open-end, diversified management investment
company. On November 2, 1989, contract owners approved a Reorganization under
which the Separate Account was restructured as a unit investment trust. The SEC
does not supervise the management, investment practices or policies of the
Separate Account or KILICO.
Benefits provided under the Contracts are our obligations. Although the assets
in the Separate Account are our property, they are held separately from our
other assets and are not chargeable with liabilities arising out of any other
business we may conduct. Income, capital gains and capital losses, whether or
not realized, from the assets allocated to the Separate Account are credited to
or charged against the Separate Account without regard to the income, capital
gains and capital losses arising out of any other business we may conduct.
Twenty-seven Subaccounts of the Separate Account are currently available. Each
Subaccount invests exclusively in shares of one of the corresponding Portfolios.
We may add or delete Subaccounts in the future.
The Separate Account purchases and redeems shares from the Funds at net asset
value. We redeem shares of the Funds as necessary to provide benefits, to deduct
Contract charges and to transfer assets from one Subaccount to another as you
request. All dividends and capital gains distributions received by the Separate
Account from a Portfolio are reinvested in that 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.
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<PAGE> 14
THE FUNDS
The Separate Account invests in shares of the following open-end management
investment companies:
- Kemper Variable Series
- Scudder Variable Life Investment Fund
- The Alger American Fund
- Janus Aspen Series
- Fidelity Variable Insurance Products Fund
- Fidelity Variable Insurance Products Fund II
- American Century Variable Portfolios, Inc.
- J.P. Morgan Series Trust II
- Warburg Pincus Trust
- The Dreyfus Socially Responsible Growth Fund, Inc.
The Funds provide investment vehicles for variable life insurance and variable
annuity contracts. Shares of the Funds are sold only to insurance company
separate accounts and qualified retirement plans. Shares of the Funds may be
sold to separate accounts of other insurance companies, whether or not
affiliated with us. 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 us, or for variable
life insurance separate accounts, variable annuity separate accounts and
qualified retirement plans to invest simultaneously in the Funds. Currently, we
do not foresee disadvantages to variable life insurance owners, variable annuity
owners or qualified retirement plans. The Funds monitor events for material
conflicts between owners and determine what action, if any, should be taken. In
addition, if we believe that the Funds' responses to any of those events
insufficiently protects Owners, we will take appropriate action.
The Funds consist of separate Portfolios. The assets of each Portfolio are held
separate from the assets of the other Portfolios, and each Portfolio has its own
distinct investment objective and policies. Each Portfolio operates as a
separate investment fund, and the investment performance of one Portfolio has no
effect on the investment performance of any other Portfolio.
The twenty-seven Portfolios are summarized below:
KEMPER VARIABLE 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. The Portfolio seeks to maintain a net asset value of $1.00
per share but there is no assurance that the Portfolio will be able to do so.
KEMPER TECHNOLOGY GROWTH PORTFOLIO seeks growth of capital.
KEMPER TOTAL RETURN PORTFOLIO seeks a high total return, a combination of income
and capital appreciation, consistent with reasonable risk.
KEMPER HIGH YIELD PORTFOLIO seeks to provide a high level of current income.
KEMPER GROWTH PORTFOLIO seeks maximum appreciation of capital through
diversification of investment securities having potential for capital
appreciation.
KEMPER GOVERNMENT SECURITIES PORTFOLIO seeks high current return consistent with
preservation of capital.
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<PAGE> 15
KEMPER SMALL CAP GROWTH PORTFOLIO seeks maximum appreciation of investors'
capital.
KEMPER INVESTMENT GRADE BOND PORTFOLIO seeks high current income.
SCUDDER VARIABLE LIFE INVESTMENT FUND (CLASS A SHARES)
SCUDDER VLIF CAPITAL GROWTH PORTFOLIO seeks to maximize long-term capital growth
from a portfolio consisting primarily of equity securities.
SCUDDER VLIF INTERNATIONAL PORTFOLIO seeks long-term growth of capital
principally from a diversified portfolio of foreign equity securities.
SCUDDER VLIF BOND PORTFOLIO seeks high income from a high quality portfolio of
bonds.
THE ALGER AMERICAN FUND
ALGER AMERICAN GROWTH PORTFOLIO seeks long-term capital appreciation.
ALGER AMERICAN SMALL CAPITALIZATION PORTFOLIO seeks long-term capital
appreciation.
ALGER AMERICAN MIDCAP GROWTH PORTFOLIO seeks long-term capital appreciation.
JANUS ASPEN SERIES
JANUS ASPEN GROWTH PORTFOLIO seeks long-term growth of capital in a manner
consistent with the preservation of capital
JANUS ASPEN AGGRESSIVE GROWTH PORTFOLIO seeks long-term growth of capital.
JANUS ASPEN WORLDWIDE GROWTH PORTFOLIO seeks long-term growth of capital in a
manner consistent with the preservation of capital.
JANUS ASPEN BALANCED PORTFOLIO seeks long-term capital growth, consistent with
preservation of capital and balanced by current income.
FIDELITY VARIABLE INSURANCE PRODUCTS FUND
FIDELITY VIP EQUITY-INCOME PORTFOLIO seeks reasonable income. The fund will also
consider the potential for capital appreciation. The fund seeks a yield which
exceeds the composite yield on the securities comprising the S&P 500.
FIDELITY VIP GROWTH PORTFOLIO seeks capital appreciation.
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II
FIDELITY VIP II INDEX 500 PORTFOLIO seeks investment results that correspond to
the total return of common stocks publicly traded in the United States, as
represented by the S&P 500.
FIDELITY VIP II CONTRAFUND PORTFOLIO seeks long-term capital appreciation.
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
AMERICAN CENTURY VP INCOME & GROWTH PORTFOLIO seeks dividend growth, current
income and capital appreciation.
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<PAGE> 16
AMERICAN CENTURY VP VALUE PORTFOLIO seeks long-term capital growth.
J.P. MORGAN SERIES TRUST II
J.P. MORGAN SMALL COMPANY PORTFOLIO seeks to provide a high total return from a
portfolio of small company stocks.
WARBURG PINCUS TRUST
WARBURG PINCUS EMERGING MARKETS PORTFOLIO seeks long-term growth of capital by
investing in equity securities of emerging markets.
THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC.
This Fund's primary goal is to provide capital growth through investment in
common stocks of companies which not only meet traditional investment standards,
but also conduct their business in a manner that contributes to the enhancement
of the quality of life in America.
The Portfolios may not achieve their stated objectives. More detailed
information, including a description of risks involved in investing in the
Portfolios, is found in the Funds' prospectuses accompanying this Prospectus,
and Statements of Additional Information available from us upon request.
Scudder Kemper Investments, Inc. ("SKI"), our affiliate, serves as investment
manager for each of the Kemper Variable Series and the available Scudder
Variable Life Investment Fund Portfolios. Fred Alger Management, Inc. serves as
the investment adviser for the available portfolios of The Alger American Fund.
Janus Capital Corporation is the investment adviser for the four available
Portfolios of the Janus Aspen Series. Fidelity Management & Research Company
("FMR") is the investment adviser for the available Portfolios of the Fidelity
Variable Insurance Products Fund and Fidelity Variable Insurance Products Fund
II. Bankers Trust Company, a wholly-owned subsidiary of Bankers Trust New York
Corporation, serves as the sub-adviser to the Fidelity VIP II Index 500
Portfolio. American Century Investment Management, Inc. is the investment
adviser for the two available portfolios of the American Century Variable
Portfolios, Inc. J.P. Morgan Investment Management, Inc. is the investment
adviser for the J.P. Morgan Small Company Portfolio. Credit Suisse Asset
Management, LLC (successor investment adviser to Warburg Pincus Asset
Management, Inc.) is the investment adviser for the Warburg Pincus Emerging
Markets Portfolio. The Dreyfus Corporation serves as the investment adviser, and
NCM Capital Management Group, Inc. is the sub-adviser, for The Dreyfus Socially
Responsible Growth Fund, Inc. The investment advisers are paid fees for their
services by the Funds they manage. We may receive compensation from the
investment advisers of the Funds for services related to the Funds. Such
compensation will be consistent with the services rendered or the cost savings
resulting from the arrangement.
CHANGE OF INVESTMENTS
We reserve the right to make additions to, deletions from, or substitutions for
the shares held by the Separate Account or that the Separate Account may
purchase. We reserve the right to eliminate the shares of any of the Portfolios
and to substitute shares of another Portfolio or of another investment company,
if the shares of a Portfolio are no longer available for investment, or if in
our judgment further investment in any Portfolio becomes inappropriate in view
of the purposes of the Separate Account. We will not substitute any shares
attributable to any shares held by a Subaccount without prior notice and the
SEC's prior approval, if required. The Separate Account may purchase other
securities for other series or classes of
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<PAGE> 17
policies, or may permit a conversion between series or classes of policies on
the basis of requests made by Owners.
We may 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. New subaccounts may be established when marketing needs or investment
conditions warrant. New subaccounts may be made available to existing Owners as
we determine. We may also eliminate or combine one or more subaccounts, transfer
assets, or substitute one subaccount for another subaccount if marketing, tax,
or investment conditions warrant. We will notify all Owners of these changes.
If we deem it to be in the best interests of persons having voting rights under
the Contract, the Separate Account may be:
- operated as a management company under the Investment Company Act of 1940
("1940 Act");
- deregistered under that Act in the event such registration is no longer
required; or
- combined with our other separate accounts. To the extent permitted by
law, we may transfer the assets of the Separate Account to another separate
account or to the General Account.
PERFORMANCE INFORMATION
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 Subaccount's future
performance.
Standardized average annual total return and nonstandardized total return
calculations measure a Subaccount's net income plus the effect of any realized
or unrealized appreciation or depreciation of the Subaccount's underlying
investments. 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. In addition, we will show standardized average
annual total return and nonstandardized total return for the life of the
Portfolio, meaning the time the underlying Portfolio has been in existence.
Standardized average annual total return will be current to the most recent
calendar quarter. Nonstandardized total return will be current to most recent
calendar month. Standardized average annual total return figures are annualized
and, therefore, represent the average annual percentage change in the value of a
Subaccount investment 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, 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 SEC. The Kemper
Money Market Subaccount's effective yield will be slightly higher than its yield
due to this compounding effect.
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<PAGE> 18
The Subaccounts' performance figures and Accumulation Unit values fluctuate. The
performance figures reflect the deduction of all expenses and fees, including a
prorated portion of the Records Maintenance Charge.
The Subaccounts may be compared to relevant indices and performance data from
independent sources, 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. 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, the comparative information with regard to the indexes will not
reflect the deduction of any Contract charges or portfolio expenses. In
addition, certificates of deposit may offer fixed or variable yields and
principal is guaranteed and may be insured. The Subaccounts are not insured and
the value of their units 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.
Additional information concerning a Subaccount's performance and these indices
and independent sources is provided in the Statement of Additional Information.
THE CONTRACTS AND CERTIFICATES
A. GENERAL INFORMATION.
The minimum initial Purchase Payment is $25,000 and the minimum subsequent
payment is $100. Purchase Payments in excess of $1,000,000 require our prior
approval.
We 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.
You may examine a Contract and return it for a refund during the "free look"
period. The length of the free look period depends upon the state in which the
Contract is issued. However, it will be at least 10 days from the date you
receive the Contract. The amount of the refund depends on the state in which the
Contract is issued. Generally, it will be an amount at least equal to the
Separate Account Contract Value plus the amounts of purchase payments in the
Guarantee Periods on the date we receive the returned Contract, without any
deduction for Records Maintenance Charges. Some states require the return of the
Purchase Payment. In addition, a special free look period applies in some
circumstances to Contracts issued as Individual Retirement Annuities, Simplified
Employee Pensions--IRAs or as Roth Individual Retirement Annuities.
During the Accumulation Period, change a Beneficiary at any time by signing our
form. No Beneficiary change is binding on us until we receive it. We assume no
responsibility for the validity of a Beneficiary change.
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<PAGE> 19
Amounts payable during the Annuity Period may not be assigned. In addition, to
the extent permitted by law, annuity payments are not subject to levy,
attachment or other judicial process for the payment of the payee's debts or
obligations.
You designate the Beneficiary. If you or the Annuitant dies, and no designated
Beneficiary or contingent beneficiary is alive at that time, we will pay you or
the Annuitant's estate.
Under a Qualified Contract, the provisions of the applicable plan may prohibit a
change of Beneficiary. Generally, an interest in a Qualified Contract may not be
assigned.
THE ACCUMULATION PERIOD
A. APPLICATION OF PURCHASE PAYMENTS.
You allocate your Purchase Payments to the Subaccount(s) or MVA Option(s). The
amount of each Purchase Payment allocated to a Subaccount is based on the value
of an Accumulation Unit, as computed after we receive the Purchase Payment.
Generally, we determine the value of an Accumulation Unit by 3:00 p.m. Central
time on each day that the New York Stock Exchange is open for trading. Purchase
Payments allocated to an MVA Option begin earning interest one day after we
receive them. However, with respect to initial Purchase Payments, the amount is
credited only after we determine to issue the Contract. After the initial
purchase, we determine the number of Accumulation Units credited by dividing the
Purchase Payment allocated to a Subaccount by the Subaccount's Accumulation Unit
value, as computed after we receive the Purchase Payment.
The number of Accumulation Units will not change due to investment experience.
Accumulation Unit value varies to reflect the investment experience of the
Subaccount and the assessment of charges against the Subaccount, other than the
Records Maintenance Charge. The number of Accumulation Units and Guarantee
Period Value is reduced when the Records Maintenance Charge is assessed.
If we are not provided with information sufficient to establish a Contract or to
properly credit the initial Purchase Payment, we will promptly request the
necessary information. If the requested information is not furnished within 5
business days after we receive the initial Purchase Payment, or if we determine
that we cannot issue the Contract within the five 5 day period, we will return
the initial Purchase Payment to you, unless you consent to our retaining the
Purchase Payment until the application is completed.
B. ACCUMULATION UNIT VALUE.
Each Subaccount has an Accumulation Unit value. When Purchase Payments or other
amounts are allocated to a Subaccount, the number of units credited is based on
the Subaccount's Accumulation Unit value at the end of the current Valuation
Period. When amounts are transferred out of or deducted from a Subaccount, units
are canceled in a similar manner.
The Accumulation Unit value for each subsequent Valuation Period is the
investment experience factor for that Valuation Period times the Accumulation
Unit value for the preceding Valuation Period. Each Valuation Period has a
single Accumulation Unit value which applies to each day in the Valuation
Period.
Each Subaccount has its own investment experience factor. The investment
experience of the Separate Account is calculated by applying the investment
experience factor to the Accumulation Unit value in each Subaccount during a
Valuation Period.
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The investment experience factor of a Subaccount for any Valuation Period is
determined by the following formula:
(a / b) - c, where:
(a) is the net result of:
- the net asset value per share of the investment held in the
Subaccount determined at the end of the current Valuation Period;
plus
- 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
- a charge or credit for any taxes reserved for the current Valuation
Period which we determine have resulted from the investment
operations of the Subaccount;
(b) is the net asset value per share of the investment held in the
Subaccount determined at the end of the preceding Valuation Period;
(c) is the factor representing the mortality and expense risk and
administration charges.
C. GUARANTEE PERIODS OF THE MVA OPTION.
You may allocate Purchase Payments or transfer Contract Value to one or more
Guarantee Periods with durations of one to ten years. Each MVA Option has a
Guaranteed Interest Rate which will not change during the Guarantee Period.
Interest is credited daily at the effective annual rate. The minimum Purchase
Payment is $5,000 per MVA Option per allocation.
The following example illustrates how we credit Guarantee Period interest.
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 THAT NO WITHDRAWALS ARE MADE DURING THE FIVE-YEAR
PERIOD. IF YOU MAKE WITHDRAWALS OR TRANSFERS DURING THIS PERIOD, MARKET VALUE
ADJUSTMENTS APPLY.
THE HYPOTHETICAL INTEREST RATE IS NOT INTENDED TO PREDICT FUTURE GUARANTEED
INTEREST RATES. ACTUAL GUARANTEED INTEREST RATES FOR ANY GUARANTEE PERIOD MAY BE
MORE OR LESS THAN THOSE SHOWN.
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We send written notice 30 days before the beginning of a new Guarantee Period.
If you do not elect a new Guarantee Period, the MVA assets will be transferred
automatically to the Kemper Money Market Subaccount on the Guarantee Period
maturity date. You may choose a different Guarantee Period by preauthorized
telephone instructions or by giving us written notice. (See "Market Value
Adjustment" below.)
The amount reinvested at the beginning of a new Guarantee Period is the
Guarantee Period Value for the Guarantee Period just ended. The Guaranteed
Interest Rate in effect when the new Guarantee Period begins applies for the
duration of the new Guarantee Period.
You may call us at 1-888-477-9700 or write to Kemper Investors Life Insurance
Company, Customer Service, 1 Kemper Drive, Long Grove, Illinois 60049 for the
new Guaranteed Interest Rates.
D. ESTABLISHMENT OF GUARANTEED INTEREST RATES.
We declare the Guaranteed Interest Rates for each of the ten durations of
Guarantee Periods from time to time as market conditions dictate. Once
established, rates are guaranteed for the respective Guarantee Periods. We
advise you of the Guaranteed Interest Rate for a chosen Guarantee Period when we
receive a Purchase Payment, when a transfer is made or when a Guarantee Period
renews. Withdrawals of Accumulated Guarantee Period Value are subject to a
Market Value Adjustment. (See "Market Value Adjustment" below.)
We have no specific formula for establishing the Guaranteed Interest Rates. The
determination may be influenced by, but not necessarily correspond to, the
current interest rate environment. (See "The MVA Option".) We may also consider,
among other factors, the duration of a Guarantee Period, regulatory and tax
requirements, sales commissions and administrative expenses we bear, and general
economic trends.
WE MAKE THE FINAL DETERMINATION OF THE GUARANTEED INTEREST RATES TO BE DECLARED.
WE CANNOT PREDICT OR GUARANTEE THE LEVEL OF FUTURE GUARANTEED INTEREST RATES.
E. CONTRACT VALUE.
On any Valuation Date, Contract Value equals the total of:
- the number of Accumulation Units credited to each Subaccount, times
- the value of a corresponding Accumulation Unit for each Subaccount, plus
- Accumulated Guarantee Period Value.
F. TRANSFER DURING ACCUMULATION PERIOD.
During the Accumulation Period, you may transfer your Contract Value among the
Subaccounts and the Guarantee Periods, subject to the following provisions:
- the Contract Value transferred into or out of the Guarantee Periods must
be at least $5,000, unless the entire Guarantee Period Value is
transferred;
- we reserve the right to charge $25 for each transfer (that is not part of
the Automatic Asset Rebalancing, see p. 22) when there are more than 12
transfers in a Contract Year.
In addition, transfers of Guarantee Period Value before the Guarantee Period end
date are subject to Market Value Adjustment. Because a transfer before the end
of a Guarantee Period is subject to a Market
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<PAGE> 22
Value Adjustment, the amount transferred from the Guarantee Period may be more
or less than the requested dollar amount.
If you authorize a third party to transact transfers on your behalf as a part of
an advisory service, we will reallocate the Contract Value pursuant to an
authorized program. However, we do not currently offer or participate in any
advisory service program and we take no responsibility for any third party
advisory service program. We may suspend or cancel acceptance of a third party's
instructions at any time and may restrict the investment options available for
transfer under third party authorizations.
We make transfers pursuant to written or telephone instructions specifying in
detail the requested changes. Transfers involving a Subaccount are based upon
the Accumulation Unit values, as calculated after we receive transfer
instructions. We may suspend, modify or terminate the transfer provision. We
disclaim all liability if we follow good faith instructions given in accordance
with our procedures, including requests for personal identifying information,
that are designed to limit unauthorized use of the privilege. Therefore, you
bear the risk of loss in the event of a fraudulent telephone transfer.
G. PARTIAL WITHDRAWALS DURING ACCUMULATION PERIOD.
You may redeem some or all of the Contract Value minus previous withdrawals,
plus or minus any applicable Market Value Adjustment. Withdrawals will have tax
consequences. (See "Federal Tax Matters.") A withdrawal of the entire Contract
Value is called a surrender.
Partial withdrawals are subject to the following:
In any Contract Year, you may make a partial withdrawal, subject to the
following:
- the partial withdrawal from the Subaccounts must be at least $500,
- the minimum withdrawal from the MVA Accounts must be at least $5,000
(before any Market Value Adjustment),
- at least $5,000 of Contract Value less Debt must remain in the Contract
after the withdrawal,
- if there is an outstanding loan the greater of $5,000 or 20% of Contract
Value must be retained in the contract
- transfers, rollovers, and exchanges are not permitted if there is an
outstanding loan.
If Contract Value is allocated to more than one investment option, you must
specify the source of the partial withdrawal. If you do not specify the source,
we cancel Accumulation Units on a pro rata basis from all investment options in
which you have an interest.
Election to withdraw shall be made in writing to Kemper Investors Life Insurance
Company, Customer Service, 1 Kemper Drive, Long Grove, Illinois 60049 and should
be accompanied by the Contract if surrender is requested. Withdrawal requests
are processed only on days when the New York Stock Exchange is open. The
Withdrawal Value attributable to the Subaccounts is determined on the basis on
the Accumulation Unit values, as calculated after we receive the request. The
Withdrawal Value attributable to
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the Subaccounts is paid within 7 days after we receive the request. However, we
may suspend withdrawals or delay payment:
- during any period when the New York Stock Exchange is closed,
- when trading in a Portfolio is restricted or the SEC determines that an
emergency exists, or
- as the SEC by order may permit.
For withdrawal requests from the MVA Option, we may defer any payment for up to
six months, as permitted by state law. During the deferral period, we will
continue to credit interest at the current Guaranteed Interest Rate for the same
Guarantee Period.
H. MARKET VALUE ADJUSTMENT.
Any withdrawal, transfer or annuitization of Guarantee Period Values, unless
effected on the Guarantee Period end date or during the "free look" period, may
be adjusted up or down by a Market Value Adjustment.
The Market Value Adjustment reflects the relationship between
- 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
- 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, the Market Value Adjustment reduces
Market Adjusted Value and results in a lower payment. Thus, if interest
rates increase, the withdrawal could be less than the original Purchase
Payment or the original amount allocated to a Guarantee Period.
Conversely, if the Guaranteed Interest Rate is higher than the applicable
Current Interest Rate, the Market Value Adjustment increases Market
Adjusted Value and results in a higher payment.
The Market Value Adjustment (MVA) uses this formula:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(1 + I)
MVA = GPV X [ [ -------------- ] (t/365) -1 ]
(1 + J + .005)
</TABLE>
Where:
I is the Guaranteed Interest Rate being credited to the Guarantee Period
Value (GPV) subject to the Market Value Adjustment,
J is the Current Interest Rate we declare, 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 Amount subject to the Market
Value Adjustment, rounded to the next higher number of complete years, and
t is the number of days remaining in the Guarantee Period.
The .005 Market Value Adjustment factor can be changed in the future, at our
discretion on newly issued Contracts.
For an illustration showing an upward and a downward adjustment, see Appendix A.
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I. DEATH BENEFIT.
If you (or the Annuitant) die during the Accumulation Period, prior to attaining
age 75, the beneficiary will be paid the greater of:
- the Contract Value less Debt, or
- the total amount of Purchase Payments, minus both Debt and the aggregate
dollar amount of all previous partial withdrawals.
If you (or the Annuitant) die at age 75 or later, the death benefit is the
Contract Value minus Debt.
You or the 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 Contracts, if you are not the Annuitant and you die before the
Annuitant, the death benefit will be paid to your designated Beneficiary. The
available Annuity Options are limited by the Code, as described under "Annuity
Options". The death benefit is determined as stated above, except your age at
death is used in determining the amount payable. If the Beneficiary is your
surviving spouse, the surviving spouse may elect to be treated as the successor
Owner of the Contract and is not required to begin death benefit distribution.
The issue age of the deceased Owner applies in computing the death benefit,
payable at the death of a spouse who has elected to be treated as the successor
Owner.
J. LOANS.
The Owner of a Contract issued as a tax sheltered annuity under Section 403(b)
of the Code or with a qualified plan under Code Section 401 may request a loan
(if permitted by the ERISA Qualified Plan) any time during the accumulation
period. Loans are made from the general account. In general, under the Code
loans may not exceed 50% of the Contract Value. If the Contract Value is at
least $20,000 or the Contract is part of an ERISA qualified plan, the maximum
loan amount is the lesser of:
- 50% of the Contract Value, or
- $50,000 reduced by the highest loan balance over the prior 12 months.
If the Contract Value is less than $20,000 and is not part of an ERISA qualified
plan, the maximum loan amount is the lesser of:
- $10,000, or
- 80% of the Contract Value, less Debt.
The minimum loan is $1,000.
For non-ERISA loans, the loan interest rate is 5.5% per year. For loans issued
under ERISA plans, the loan interest rate will vary based on current rates.
Interest that is not paid when due is added to the loan and will bear interest
at the same rate as the loan. While the loan is outstanding, the portion of the
General Account Contract Value that equals the debt will earn interest at a rate
2.5% less than the loan rate.
Loans must be repaid in substantially equal quarterly payments within 5 years.
Loans used to purchase your principal residence must be repaid within 15 years.
If a loan payment is not made when due, interest will continue to accrue. On
403(b) Contracts, to the extent permitted by law, the amount of the missed
payment will be deducted from your Contract and paid to us. Any loan payment
which is not made when due, plus interest, will be treated as a distribution of
the
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entire remaining loan balance and will be taxable to the borrower, and may be
subject to early withdrawal tax penalty.
If there is an outstanding loan balance when the Contract is surrendered or
annuitized, or when a death benefit is paid, the amount payable will be reduced
by the amount of the loan outstanding plus accrued interest. Any loans made
under a Contract will be subject to Code requirements, our administrative
procedures as reflected under our loan agreements, and, if applicable, ERISA.
K. AUTOMATIC ASSET REBALANCING.
You may elect Automatic Asset Rebalancing on a monthly, quarterly, semi-annual
or annual basis. Funds held under the DCA or MVA options are not eligible for
this option.
CONTRACT AND CERTIFICATE CHARGES AND EXPENSES
We deduct the following charges and expenses:
- mortality and expense risk charge,
- administrative expenses,
- Records Maintenance Charge, and
- applicable premium taxes.
Subject to certain expense limitations, you indirectly bear investment
management fees and other Fund expenses.
A. CHARGES AGAINST THE SEPARATE ACCOUNT.
1. MORTALITY AND EXPENSE RISK CHARGE.
We assess each Subaccount a daily asset charge for mortality and expense risks
at a rate of 1.00% per annum. Variable Annuity payments reflect the investment
experience of each Subaccount but are not affected by changes in actual
mortality experience or by actual expenses we incur.
The mortality risk we assume arises from two contractual obligations. First, if
you or the Annuitant die before you attain age 75, we may, in some cases, pay
more than Contract Value. (See "Death Benefit", page 18) Second, when Annuity
Options involving life contingencies are selected, we assume the risk that
Annuitants will live beyond actuarial life expectancies.
We also assume an expense risk. Actual expenses of administering the Contracts
may exceed the amounts we recover from the Records Maintenance Charge or the
administrative cost portion of the daily asset charge.
2. ADMINISTRATIVE COSTS.
We assess each Subaccount a daily asset charge for administrative costs at a
rate of .25% per annum. We reserve the right to increase this charge to a
maximum of .45 per annum. If we increase this charge we will give you 3 months
advance notice. These charges reimburse us for expenses incurred for
administering the Contracts. These expenses include your inquiries, changes in
allocations, reports to you, Contract maintenance costs, and data processing
costs. The administrative charge covers the average anticipated administrative
expenses incurred while the Contracts are in force. There is not necessarily a
direct relationship between the amount of the charge and the administrative
costs of the particular Contract.
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B. RECORDS MAINTENANCE CHARGE.
We will assess an annual Records Maintenance Charge (assessed ratably each
quarter) during the Accumulation Period against each Contract which has
participated in one or more of the Subaccounts during the calendar year whether
or not any Purchase Payments have been made during the year. The Records
Maintenance Charge is:
- $7.50 quarterly for Contracts with Contract Value under $25,000.
- $3.75 quarterly for Contracts with Contract Value between $25,000 and
$50,000.
- No Records Maintenance Charge for Contracts with Contract Value over
$50,000.
The Record Maintenance Charge is not assessed during the Annuity Period.
The Records Maintenance Charge is to reimburse us for expenses incurred in
establishing and maintaining the records relating to a Contract's participation
in the Separate Account. The Records Maintenance Charge will be assessed at the
end of each calendar quarter and will constitute a reduction in the net assets
of each Subaccount.
At any time the Records Maintenance Charge is assessed, the applicable charge
will be assessed ratably against each Subaccount in which the Contract is
participating and a number of Accumulation Units sufficient to equal the proper
portion of the charge will be redeemed from such Subaccount, or from the
Guarantee Periods if necessary to meet the assessment.
C. WITHDRAWAL CHARGE.
There is no withdrawal charge.
D. INVESTMENT MANAGEMENT FEES AND OTHER EXPENSES.
Each Portfolio's net asset value reflects the deduction of investment management
fees and general operating expenses. Subject to limitations, you indirectly bear
these fees and expenses. Investment management fees appear on page 5. Further
detail is provided in the attached prospectuses for the Portfolios and 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%
of Purchase Payments. If we pay state premium taxes, we may charge the amount
paid against Contract Value upon annuitization, unless the tax was previously
assessed. See "Appendix B--State Premium Tax Chart" in the Statement of
Additional Information. It is our current practice under this Contract to pay
premium tax directly and not charge you. This practice is subject to change
without notice.
F. REDUCTION OR ELIMINATION OF CERTAIN CHARGES.
Contracts may be available for purchase in certain group or sponsored
arrangements that qualify for reductions or eliminations of certain charges, the
time periods in which such charges apply, or both. Group arrangements include
those in which a trustee, an employer or an association purchases Contracts
covering a group of individuals. Sponsored arrangements include those in which
an employer or association allows us to offer Contracts to its employees or
members on an individual basis.
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<PAGE> 27
In certain circumstances, the risk of adverse mortality and expense experience
for Contracts purchased in certain group or sponsored arrangements may be
reduced. Then, the daily asset charge for mortality and expense costs may
likewise be reduced. The daily asset charge for administrative costs and the
Records Maintenance Charge may also be reduced or eliminated if we anticipate
lower administrative expenses. In certain other circumstances, sales expenses in
certain group or sponsored arrangements may be reduced or eliminated.
In determining whether a group or sponsored arrangement qualifies for reduced or
eliminated charges, we will consider:
- the size and type of group to which sales are to be made and
administrative services provided, and the persistency expected from the
group;
- the total amount of Purchase Payments to be received and the method in
which they will be remitted;
- any prior or existing relationship with us;
- the level of commission paid to selling broker-dealers;
- the purpose for which the Contract is being purchased, and whether that
purchase makes it likely that sales costs and administrative expenses
will be reduced; and
- the frequency of projected surrenders or distributions.
We make any reductions or eliminations according to objective guidelines in
effect when an application for a Contract is approved. We may change these
guidelines from time to time. Any variation in the charges will reflect
differences in costs or services and will be offered uniformly to all members of
the group or sponsored arrangement. In no event will a charge reduction or
elimination be permitted if it is unfairly discriminatory to any person or
prohibited by law.
We may also decrease the mortality and expense risk charge, the administration
charge, and the Records Maintenance Charge without notice. However, beyond what
is disclosed above, we guarantee that they will not increase. We bear the risk
that such charges will not cover our costs. On the other hand, should such
charges exceed our costs, we will not refund any charges. Any profit is
available for corporate purposes including, among other things, payment of
distribution expenses.
We may also offer 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 cost savings. Reductions in these
fees and charges will not unfairly discriminate against any Owner.
THE ANNUITY PERIOD
Contracts may be annuitized under one of several Annuity Options, which are
available either on a fixed or variable basis. We make annuity payments
beginning on the Annuity Date under the Annuity Option you select.
1. ANNUITY PAYMENTS.
Annuity payments are based on:
- the annuity table specified in the Contract,
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<PAGE> 28
- the selected Annuity Option, and
- the investment performance of the selected Subaccount(s) (if variable
annuitization is elected).
Under variable annuitization, the Annuitant receives the value of a fixed number
of Annuity Units each month. An Annuity Unit's value reflects the investment
performance of the Subaccount(s) selected. The amount of each annuity payment
varies accordingly.
2. ANNUITY OPTIONS.
You may elect one of the Contract's Annuity Options. You may decide at any time
(subject to the provisions of any applicable retirement plan and state
variations) to begin annuity payments. You may change the Annuity Option before
the Annuity Date. Generally, annuity payments are made in monthly installments.
However, we may make a lump sum payment if the net proceeds available to apply
under an Annuity Option are less than $5,000. In addition, if the first monthly
payment is less than $50 we may change the frequency of payments to quarterly,
semiannual or annual intervals so that the initial payment is at least $50.
The amount of periodic annuity payments may depend upon:
- the Annuity Option you select;
- the age of the payee;
- the investment experience of the selected Subaccount(s); and
- the interest rates at the time of annuitization.
For example:
- if Option 1, income for a specified period, is selected, shorter
periods result in fewer payments with higher values.
- if Option 2, life income, is selected, it is likely that each payment
will be smaller than would result if income for a short period were
specified.
- if Option 3, life income with installments guaranteed, is selected,
each payment will probably be smaller than would result if the life
income option were selected.
- if Option 4, the joint and survivor annuity, is selected, each payment
is smaller than those measured by an individual life income option.
The age of the payee also influences the amount of periodic annuity payments
because an older payee is expected to have a shorter life span, resulting in
larger payments. Finally, if you participate in a Subaccount with higher
investment performance, it is likely you will receive a higher periodic payment.
If the Beneficiary is not an individual, the entire interest must be distributed
within 5 years of your death. The Death Benefit distribution must begin no later
than one year from your death, unless a later date is prescribed by federal
regulation.
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For Non-Qualified Contracts, if you die before the Annuity Date, available
Annuity Options are limited. The Annuity Options available are:
- Option 2 or
- Option 1 or 3 for a period no longer than the life expectancy of the
Beneficiary (but not less than 5 years from your death).
OPTION 1--INCOME FOR SPECIFIED PERIOD.
Option 1 provides an annuity payable monthly for a selected number of years
ranging from five to thirty. Upon the payee's death, if the Beneficiary is an
individual, we automatically continue payments to the Beneficiary for the
remainder of the period specified. If the Beneficiary is not an individual
(e.g., an estate or trust), we pay the discounted value of the remaining
payments in the specified period. Although there is no life contingency risk
associated with Option 1, we continue to deduct the daily asset charges for
mortality and expense risks and administrative costs.
Payees may elect to cancel all or part of the remaining payments due under
Option 1. We will then pay the discounted value of the remaining payments.
OPTION 2--LIFE INCOME.
Option 2 provides for an annuity over the lifetime of the payee. If Option 2 is
elected, annuity payments terminate automatically and immediately on the payee's
death 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.
Option 3 provides an annuity payable monthly during the payee's lifetime.
However, Option 3 also provides for the automatic continuation of payments for
the remainder of the specified period if the Beneficiary is an individual and
payments have been made for less than the specified period. The period specified
may be five, ten, fifteen or twenty years. If the Beneficiary is not an
individual, we pay the discounted value of the remaining payments in the
specified period.
OPTION 4--JOINT AND SURVIVOR ANNUITY.
Option 4 provides an annuity payable monthly while both payees are living. Upon
either payee's death, the monthly income payable continues over the life of the
surviving payee at a percentage specified when Option 4 is elected. Annuity
payments terminate automatically and immediately upon the surviving payee's
death without regard to the number or total amount of payments received.
3. ALLOCATION OF ANNUITY.
You may elect payments on a fixed or variable basis, or a combination. Any
Guarantee Period Value is annuitized on a fixed basis. Any Separate Account
Contract Value is annuitized on a variable basis. The MVA Option is not
available during the Annuity Period. You may exercise the transfer privilege
during the Accumulation Period. Transfers during the Annuity Period are subject
to certain limitations. We reserve the right to restrict the number of options
in the Annuity Period.
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4. TRANSFER DURING ANNUITY PERIOD.
During the Annuity Period, the payee may, by written request, transfer
Subaccount Value from one Subaccount to another Subaccount, subject to the
following limitations:
- Transfers to a Subaccount are prohibited during the first year of the
Annuity Period; subsequent transfers are limited to one per year.
- All interest in a Subaccount must be transferred.
- If we receive notice of transfer to a Subaccount more than 7 days before
an annuity payment date, the transfer is effective during the Valuation
Period after the date we receive the notice.
- If we receive notice of transfer to a Subaccount less than 7 days before
an annuity payment date, the transfer is effective during the Valuation
Period after the annuity payment date.
- Transfers to the General Account are available only on an anniversary of
the first Annuity Date. We must receive notice at least 30 days prior to
the anniversary.
A Subaccount's Annuity Unit value is determined at the end of the Valuation
Period preceding the effective date of the transfer. We may suspend, change or
terminate the transfer privilege at any time.
5. ANNUITY UNIT VALUE.
Annuity Unit value is determined independently for each Subaccount.
Annuity Unit value for any Valuation Period is:
- Annuity Unit value for the preceding Valuation Period, times
- the net investment factor for the current Valuation Period, times
- an interest factor which offsets the 2.5% per annum rate of investment
earnings assumed by the Contract's annuity tables.
The net investment factor for a Subaccount for any Valuation Period is:
- the Subaccount's Accumulation Unit value at the end of the current
Valuation Period, plus or minus the per share charge or credit for taxes
reserved; divided by
- the Subaccount's Accumulation Unit value at the end of the preceding
Valuation Period, plus or minus the per share charge or credit for taxes
reserved.
6. FIRST PERIODIC PAYMENT UNDER VARIABLE ANNUITY.
When annuity payments begin, the value of your Contract interest is:
- Accumulation Unit values at the end of the Valuation Period falling on
the 20th or 7th day of the month before the first annuity payment is due,
times
- the number of Accumulation Units credited at the end of the Valuation
Period, minus
- premium taxes.
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.
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A 2.5% per annum rate of investment earnings is assumed by the Contract's
annuity tables. If the actual net investment earnings rate exceeds 2.5% per
annum, payments increase accordingly. Conversely, if the actual rate is less
than 2.5% per annum, annuity payments decrease.
7. SUBSEQUENT PERIODIC PAYMENTS UNDER VARIABLE ANNUITY.
Subsequent annuity payments are determined by multiplying the number of Annuity
Units by the Annuity Unit value at the Valuation Period before each annuity
payment is due. The first annuity payment is divided by the Annuity Unit value
as of the Annuity Date to establish the number of Annuity Units representing
each annuity payment. This number does not change.
8. FIXED ANNUITY PAYMENTS.
Each Fixed Annuity payment is determined from tables we prepare. These tables
show the monthly payment for each $1,000 of Contract Value allocated to a Fixed
Annuity. Payment is based on the Contract Value at the date before the annuity
payment is due. Fixed Annuity payments do not change regardless of investment,
mortality or expense experience.
9. DEATH PROCEEDS.
If the payee dies after the Annuity Date while the Contract is in force, the
death benefit, if any, depends upon the form of annuity payment in effect at the
time of death. (See "Annuity Options.")
FEDERAL INCOME TAXES
A. INTRODUCTION
This discussion is not exhaustive 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 "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 the courts.
This discussion does not address state or local tax consequences associated with
buying a Contract. In addition, WE MAKE NO GUARANTEE REGARDING ANY TAX
TREATMENT--FEDERAL, STATE, OR LOCAL--OF ANY CONTRACT OR OF ANY TRANSACTION
INVOLVING A CONTRACT.
B. OUR TAX STATUS
We are taxed as a life insurance company and the operations of the Separate
Account are treated as a part of our total operations. The Separate Account is
not separately taxed as a "regulated investment company". Investment income and
capital gains of the Separate Account are not taxed to the extent they are
applied under a Contract. We do not anticipate that we will incur federal income
tax liability attributable to the income and gains of the Separate Account, and
therefore we do not intend to provide for these taxes. If we are taxed on
investment income or capital gains of the Separate Account, then we may impose a
charge against the Separate Account to provide for these taxes.
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<PAGE> 32
C. TAXATION OF ANNUITIES IN GENERAL
1. TAX DEFERRAL DURING ACCUMULATION PERIOD
Under the Code, except as described below, increases in the Contract Value of a
Non-Qualified Contract are generally not taxable to you or the Annuitant until
received as annuity payments or otherwise distributed. However, certain
requirements must be satisfied for this general rule to apply, including:
- the Contract must be owned by an individual,
- Separate Account investments must be "adequately diversified",
- we, rather than you, must be considered the owner of Separate Account
assets for federal tax purposes, and
- annuity payments must appropriately amortize Purchase Payments and
Contract earnings.
NON-NATURAL OWNER. As a general rule, deferred annuity contracts held by
"non-natural persons", such as corporations, trusts or similar entities, are not
annuity contracts for federal income tax purposes. The investment income on
these contracts is taxed as ordinary income received or accrued by the
non-natural owner. There are exceptions to this general rule for non-natural
owners. Contracts are generally treated as held by a natural person if the
nominal owner is a trust or other entity holding the contract as an agent for a
natural person. However, this special exception does not apply to an employer
who is the nominal owner of a contract under a non-qualified deferred
compensation plan for its employees.
Additional exceptions to this rule include:
- contracts acquired by a decedent's estate,
- certain Qualified Contracts,
- contracts purchased by employers at termination of certain qualified
plans,
- contracts used with structured settlement agreements, and
- contracts purchased with a single premium when the annuity starting date
is no later than a year from contract purchase and substantially equal
periodic payments are made at least annually.
DIVERSIFICATION REQUIREMENTS. For a contract to be treated as an annuity for
federal income tax purposes, separate account investments must be "adequately
diversified". The Treasury Secretary issued regulations prescribing standards
for adequately diversifying separate account investments. If the separate
account failed to comply with these diversification standards, the contract
would not be treated as an annuity contract for federal income tax purposes and
the owner would generally be taxed on the difference between contract value and
purchase payments.
Although we do not control Fund investments, we expect the Fund will comply with
these 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 of the assets of the separate account supporting the
contract. In those circumstances, income and gains from separate account assets
are includible in the owner's gross income. The IRS, in published rulings,
stated that a variable contract owner will be considered the owner of separate
account assets if the owner possesses the ability to exercise investment control
over the assets. As of the date of this Prospectus, no investor control guidance
is available.
We may modify the Contract as necessary to attempt to prevent you from being
considered the owner of the Separate Account assets.
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DELAYED ANNUITY DATES. If the Annuity Date occurs (or is scheduled to occur)
when you have reached an advanced age, E.G., past age 95, the Contract might 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 your
income.
The following discussion assumes that the Contract is treated as an annuity
contract for tax purposes and that we are treated as the owner of Separate
Account assets.
2. TAXATION OF PARTIAL AND FULL WITHDRAWALS FROM NONQUALIFIED CONTRACTS
Partial withdrawals from a Non-Qualified Contract are includible in income if
contract value before the withdrawal exceeds the "investment in the contract."
Full withdrawals are also includible in income if they exceed the "investment in
the contract." Investment in the contract equals the total of purchase payments
minus amounts previously received from the contract.
Any assignment or pledge (or agreement to assign or pledge) of contract value,
is treated as a withdrawal. Investment in the contract is increased by the
amount includible in income with respect to such assignment or pledge. If you
transfer a contract interest without adequate consideration to someone other
than the owner's spouse (or to a former spouse incident to divorce), is taxable
on the difference between the Contract Value and the "investment in the
contract." In this case, the transferee's investment in the contract is
increased to reflect the increase in your income.
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
adviser should be consulted in those situations.
3. TAXATION OF ANNUITY PAYMENTS
Normally, the portion of each annuity payment taxable as income equals the
payment minus the exclusion amount. The exclusion amount for variable annuity
payments is the "investment in the contract" allocated to the variable annuity
option and adjusted for any period certain or refund feature, divided by the
number of payments expected to be made. The exclusion amount for fixed annuity
payments is the payment times the ratio of the investment in the contract
allocated to the fixed annuity option and adjusted for any period certain or
refund feature, to expected value of all annuity payments.
Once the total amount of the investment in the contract is excluded using these
ratios, annuity payments will be fully taxable. If annuity payments stop because
the annuitant dies before the total amount of the investment in the contract is
recovered, the unrecovered amount generally is allowed as a deduction to the
annuitant in the last taxable year.
4. TAXATION OF DEATH BENEFITS
Amounts may be distributed upon your or the Annuitant's death. Before the
Annuity Date, death benefits are includible in income and:
- if distributed in a lump sum are taxed like a full withdrawal, or
- if distributed under an Annuity Option are taxed like annuity payments.
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After the Annuity Date, where a guaranteed period exists 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 and:
- if received in a lump sum are includible in income if they exceed the
unrecovered investment, or
- if distributed in accordance with the selected annuity option are fully
excludable from income until the remaining investment in the contract is
deemed to be recovered.
Thereafter, all annuity payments are fully includible in income.
5. PENALTY TAX ON PREMATURE DISTRIBUTIONS
A 10% penalty tax applies to a taxable payment from a Non-Qualified Contract
unless:
- received on or after you reach age 59 1/2,
- attributable to your disability,
- made to a Beneficiary after your death or, for non-natural Owners, after
the primary Annuitant's death,
- made as a series of substantially equal periodic payments (at least
annually) for your life (or life expectancy) or for the joint lives (or
joint life expectancies) of you and your designated Beneficiary,
- made under a Contract purchased with a single premium when the annuity
starting date is no later than a year from Contract purchase and
substantially equal periodic payments are made at least annually, or
- made with annuities used with structured settlement agreements.
6. AGGREGATION OF CONTRACTS
The taxable amount of an annuity payment or withdrawal from a Non-Qualified
Contract is determined by combining some or all of the Non-Qualified Contracts
you own. For example, if you purchase a Contract and also purchase an immediate
annuity at approximately the same time, the IRS may treat the two contracts as
one contract. In addition, if you purchase two or more deferred annuity
contracts from the same company (or its affiliates) during any calendar year,
these contracts are treated as one contract. The effects of this aggregation are
not clear. However, it could affect the taxable amount of an annuity payment or
withdrawal and the amount which might be subject to the 10% penalty tax.
D. QUALIFIED PLANS
Qualified Contracts are used with retirement plans which receive favorable tax
treatment as Individual Retirement Annuities, Simplified Employee
Pensions--IRAs, Roth Individual Retirement Annuities, tax sheltered annuities,
and certain deferred compensation plans ("qualified plans"). Numerous special
tax rules apply to qualified plans and to Qualified Contracts. Therefore, we
make no attempt to provide more than general information about use of Qualified
Contracts.
The tax rules applicable to qualified plans vary according to the type, terms
and conditions of the plan. For example, for both withdrawals and annuity
payments under certain Qualified Contracts, there may be no "investment in the
contract" and the total amount received may be taxable. Both the amount of the
permitted contribution, and the corresponding deduction or exclusion, are
limited under qualified plans. In Qualified Contracts, the Owner and Annuitant
generally are the same individual. Also, if the joint Annuitant is not the
Annuitant's spouse, the annuity options may be limited, depending on the
difference in their ages.
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Furthermore, the length of any Guarantee Period may be limited in some
circumstances to satisfy certain minimum distribution requirements under the
Code.
Under a Qualified Contract, rules specify the form of distribution and
commencement dates. An excise tax is imposed for failure to comply with minimum
distribution requirements. This excise tax generally equals 50% of the amount by
which a minimum required distribution exceeds the actual distribution. In the
case of Individual Retirement Annuities, distributions of minimum amounts must
generally begin by April 1 of the calendar year following the calendar year in
which the owner attains age 70 1/2.
A 10% penalty tax may apply to the taxable amount of payments from Qualified
Contracts. For Individual Retirement Annuities, the penalty tax does not apply
to a payment:
- received after you reach age 59 1/2,
- received after your death or because of your disability, or
- made as a series of substantially equal periodic payments (at least
annually) for your life (or life expectancy) or for the joint lives (or
joint life expectancies) of you and your designated Beneficiary
Qualified Contracts are amended to conform to plan requirements. 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, we are not bound by terms and conditions of qualified
plans if they are inconsistent with the Contract.
1. QUALIFIED PLAN TYPES
We issue Contracts for the following types of qualified plans.
INDIVIDUAL RETIREMENT ANNUITIES. The Code permits eligible individuals to
contribute to an individual retirement annuity known as an "IRA." The Code
limits the amounts contributed, the persons eligible and the time when
distributions start. Also, subject to direct rollover and mandatory withholding
requirements, distributions from other types of qualified plans may be "rolled
over" on a tax-deferred basis into an IRA. The Contract may not fund an
"Education IRA."
SIMPLIFIED EMPLOYEE PENSIONS (SEP-IRAS). The Code allows employers to establish
simplified employee pension plans, using the employees' IRAs. Under these plans
the employer may make limited deductible contributions on behalf of the
employees to IRAs. Employers and employees intending to use the Contract in
connection with these plans should seek competent tax advice.
SIMPLE IRAS. The Code permits certain small employers to establish "SIMPLE
retirement accounts," including SIMPLE IRAs, for their employees. Under SIMPLE
IRAs, certain deductible contributions are made by both employees and employers.
SIMPLE IRAs are subject to various requirements, including limits on the amounts
that may be contributed, the persons who may be eligible, and the time when
distributions may commence. As discussed above (see Individual Retirement
Annuities), there is some uncertainty regarding the proper characterization of
the Contract's death benefit for purposes of the tax rules governing IRAs (which
would include SIMPLE IRAs). Employers and employees intending to use the
Contract with such plans should seek competent advice.
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<PAGE> 36
ROTH IRAS. The Code permits contributions to an IRA known as a "Roth IRA." Roth
IRAs differ from other IRAs in that:
- Roth IRA contributions are never deductible,
- "qualified distributions" from a Roth IRA are excludable from income,
- different eligibility and mandatory distribution requirements apply,
- a rollover to a Roth IRA must be a "qualified rollover contribution,"
under the Code.
For a rollover from a non-Roth IRA to a Roth IRA, amounts which would have been
includible in gross income but for the qualified rollover contribution are
includible in gross income, without application of the 10 percent penalty tax.
An IRA may be converted into a Roth IRA without taking a distribution. You may
convert by notifying the IRA issuer or trustee. The conversion of an IRA to a
Roth IRA is a special type of qualified rollover distribution. Hence, you must
be eligible for a qualified rollover distribution to convert an IRA to a Roth
IRA. A conversion typically results in the inclusion of some or all of the IRA
value in gross income. 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
-- made after you reach age 59 1/2,
-- made after your death,
-- because of your disability, or
-- made to a qualified first-time homebuyer.
- a payment or distribution made in a taxable year that is five years or
more after
-- the first taxable year for which a contribution was made to your Roth
IRA, or
-- the first taxable year for which rollover was made to your Roth IRA. A
non-qualified distribution from a Roth IRA is generally taxed like a
distribution from an IRA. Distributions from a Roth IRA need not start
at age 70 1/2.
TAX-SHELTERED ANNUITIES. Section 403(b) of the Code permits public school
employees and employees of certain types of charitable, educational and
scientific organizations specified in section 501(c)(3) of the Code to have
their employers purchase annuity contracts for them and, subject to certain
limitations, to exclude the amount of purchase payments from gross income for
tax purposes. These annuity contracts are commonly referred to as "tax-sheltered
annuities". If you purchase a Contract for such purposes, you should seek
competent advice as to eligibility, limitations on permissible amounts of
purchase payments and other tax consequences associated with the Contracts.
Tax-sheltered annuity Contracts must contain restrictions on withdrawals of (i)
contributions made pursuant to a salary reduction agreement in years beginning
after December 31, 1988, (ii) earnings on those contributions, and (iii)
earnings after December 31, 1988 on amounts attributable to salary reduction
contributions held as of December 31, 1988. These amounts can be paid only if
the employee has reached age 59 1/2, separated from service, died, or becomes
disabled (within the meaning of the tax law), or in the case of hardship (within
the meaning of the tax law). Amounts permitted to be distributed in the event of
hardship are limited to actual contributions; earnings thereon cannot be
distributed on account of hardship. Amounts subject to the withdrawal
restrictions applicable to section 403(b)(7) custodial accounts may be
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<PAGE> 37
subject to more stringent restrictions. (These limitations on withdrawals do not
apply to the extent we are directed to transfer some or all of the Contract
Value to the issuer of another tax-sheltered annuity or into a section 403(b)(7)
custodial account.) Additional restrictions may be imposed by the plan sponsor.
DEFERRED COMPENSATION PLANS OF STATE AND LOCAL GOVERNMENTS AND TAX-EXEMPT
ORGANIZATIONS. The Code permits employees of state and local governments and
tax-exempt organizations to defer a portion of their compensation without paying
current taxes. The employees must be participants in an eligible deferred
compensation plan. Generally, a Contract purchased by a state or local
government or a tax-exempt organization will not be treated as an annuity
contract for federal income tax purposes. Those who intend to use the Contracts
in connection with such plans should seek competent advice.
2. DIRECT ROLLOVERS
If the Contract is used with a retirement plan that is qualified under sections
401(a), 403(a), or 403(b) of the Code, any "eligible rollover distribution" from
the Contract will be subject to "direct rollover" and mandatory withholding
requirements. An eligible rollover distribution generally is any taxable
distribution from such a qualified retirement plan, excluding certain amounts
such as (i) minimum distributions required under section 401(a)(9) of the Code,
and (ii) certain distributions for life, life expectancy, or for 10 years or
more which are part of a "series of substantially equal periodic payments."
Under these requirements, federal income tax equal to 20% of the eligible
rollover distribution will be withheld from the amount of the distribution.
Unlike withholding on certain other amounts distributed from the Contract,
discussed below, you cannot elect out of withholding with respect to an eligible
rollover distribution. However, this 20% withholding will not apply if, instead
of receiving the eligible rollover distribution, you elect to have it directly
transferred to certain Qualified Plans. Prior to receiving an eligible rollover
distribution, a notice will be provided explaining generally the direct rollover
and mandatory withholding requirements and how to avoid the 20% withholding by
electing a direct rollover.
E. FEDERAL INCOME TAX WITHHOLDING
We withhold and send to the U.S. Government a part of the taxable portion of
each distribution unless the payee notifies us before distribution of an
available election not to have any amounts withheld. In certain circumstances,
we may be required to withhold tax. The withholding rates for the taxable
portion of periodic annuity payments are the same as the withholding rates for
wage payments. In addition, the withholding rate for 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%. The
withholding rate for eligible rollover distributions is 20%.
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<PAGE> 38
DISTRIBUTION OF CONTRACTS AND CERTIFICATES
The Contracts are sold by licensed insurance agents in those states where the
Contract may be lawfully sold. The agents are also registered representatives of
registered broker-dealers who are members of the National Association of
Securities Dealers, Inc. Sales commissions may vary, but are not expected to
exceed 6.25% of Purchase Payments. In addition to commissions, we may pay
additional promotional incentives, in the form of cash or other compensation, to
selling broker-dealers. These incentives may be offered to certain licensed
broker-dealers that sell or are expected to sell certain minimum amounts during
specified time periods. The Contracts are distributed through the principal
underwriter for the Separate Account:
Investors Brokerage Services, Inc. ("IBS")
1 Kemper Drive
Long Grove, Illinois, 60049
IBS is our wholly-owned subsidiary. IBS enters into selling group agreements
with affiliated and unaffiliated broker-dealers. All of the investment options
are not available to all Owners. The investment options are available only under
Contracts that are sold or serviced by broker-dealers having a selling group
agreement with IBS authorizing 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 Fund shareholder meeting are delivered to
each Owner with Subaccount interests invested in the Fund as of the record date.
Proxy materials include a voting instruction form. We vote all Fund shares
proportionately in accordance with instructions received from Owners. We will
also vote any Fund shares attributed to amounts we have accumulated in the
Subaccounts in the same proportion that Owners vote. A Fund is not required to
hold annual shareholders' meetings. Funds hold special meetings as required or
deemed desirable for such purposes as electing trustees, changing fundamental
policies or approving an investment advisory agreement.
Owners have voting rights in a Portfolio based upon the Owner's proportionate
interest in the corresponding Subaccount as measured by units. Owners have
voting rights before surrender, the Annuity Date or the death of the Annuitant.
Thereafter, the payee entitled to receive Variable Annuity payments has voting
rights. During the Annuity Period, Annuitants' voting rights decrease as Annuity
Units decrease.
REPORTS TO CONTRACT OWNERS AND INQUIRIES
Each quarter, we send you a statement showing amounts credited to each
Subaccount and to the Guarantee Period Value. In addition, if you transfer
amounts among the investment options or make additional unscheduled payments,
you will receive written confirmation of these transactions. We will also send a
current statement upon your request. We also send you annual and semi-annual
reports for the Portfolios that correspond to the Subaccounts in which you
invest and a list of the securities held by that Portfolio.
You will have access to Contract information through the Interactive Voice
Response System (IVR) at (888) 477-9700. You will also be able to access your
account information from our website at www.zurichkemper.com.
You may also direct inquiries to the selling agent or may call 1-888-477-9700 or
write to Kemper Investors Life Insurance Company, Customer Service, 1 Kemper
Drive, Long Grove, Illinois 60049.
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<PAGE> 39
DOLLAR COST AVERAGING
DOLLAR COST AVERAGING FOR THE KEMPER MONEY MARKET AND KEMPER GOVERNMENT
SECURITIES SUBACCOUNTS
Under our Dollar Cost Averaging program ("DCA"), you designate a portion of the
Kemper Money Market or Kemper Government Securities Subaccount Value to be
transferred on a monthly or quarterly basis to the other Subaccounts. The DCA
program is available only during the Accumulation Period. DCA to the MVA Options
are not permitted. In the event of a partial annuitization, DCA is only allowed
in the non-annuitized portion of the contract.
The first DCA will occur on the requested beginning date. If the requested
beginning date is a non-business day, the first DCA will occur on the first
business day prior to the requested beginning date. If you do not provide a
requested beginning date, the first DCA will occur on the first business day
following receipt of your request. We will delay the beginning date if
information is missing from your request or if your request is deemed not in
good order. Subsequent DCA transfers will occur, every one or three months, on
the same day of the month as the initial DCA transfer. If a subsequent DCA
transfer is scheduled for a non-business day, the transfer will take place on
the business day prior to the scheduled DCA transfer date.
DOLLAR COST AVERAGING FROM OUR GENERAL ACCOUNT
Deposits and transfers into our general account will be automatically
transferred to the subaccounts on a monthly frequency over a period no greater
than seven (7) months from the date of the initial transfer or deposit to the
General Account. All assets transferred or deposited to the General Account will
be transferred from the General Account by the end of the seven (7) month
period. The first DCA transfer will occur one month following the date of the
initial deposit or transfer to the DCA account. Subsequent DCA transfers will
occur on the same day of the month as the initial DCA transfer. If a subsequent
DCA transfer is scheduled for a non-business day, the transfer will take place
on the business day prior to the scheduled DCA transfer date.
We reserve the right to offer additional DCA periods at any time. All additional
DCA periods will be offered for a limited period of time and may be changed,
revoked or canceled at any time for future deposits or transfers.
SYSTEMATIC WITHDRAWAL PLAN
We offer a Systematic Withdrawal Plan ("SWP") allowing you to pre-authorize
periodic withdrawals during the Accumulation Period. You instruct us to withdraw
selected amounts from the Subaccounts or Guarantee Periods on a monthly,
quarterly, semi-annual or annual basis. SWP is not available from the MVA
accounts or under the DCA Program. WITHDRAWALS TAKEN UNDER THE SWP MAY BE
SUBJECT TO THE 10% TAX PENALTY ON EARLY WITHDRAWALS AND TO INCOME TAXES AND MAY
BE SUBJECT TO 20% WITHHOLDING. If you are interested in SWP, you may obtain an
application and information concerning this program and its restrictions from us
or your agent. We give thirty days' notice if we amend the SWP. The SWP may be
terminated at any time by the you or us.
EXPERTS
[TO BE UPDATED BY AMENDMENT]
The consolidated balance sheets of KILICO as of December 31, 1999, 1998 and 1997
and the related consolidated statements of operations, comprehensive income,
stockholder's equity, and cash flows for the
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<PAGE> 40
years ended December 31, 1999, 1998 and 1997 have been included herein and in
the registration statement in reliance upon the report of PricewaterhouseCoopers
LLP, independent public accountants, appearing elsewhere herein, and upon the
authority of said firm as experts in accounting and auditing.
LEGAL MATTERS
Legal matters with respect to our organization, our authority to issue annuity
contracts and the validity of the Contract, have been passed upon by Debra P.
Rezabek, our Senior Vice President, General Counsel and Corporate Secretary.
Jorden Burt Boros Cicchetti Berenson & Johnson, LLP, Washington, D.C., has
advised us on certain legal matters concerning federal securities laws
applicable to the issue and sale of the Contracts.
SPECIAL CONSIDERATIONS
We reserve the right to amend the Contract to meet the requirements of federal
or state laws or regulations. We will notify you in writing of these amendments.
Your rights under a Contract may be assigned as provided by law. An assignment
will not be binding upon us until we receive a written copy of the assignment.
You are solely responsible for the validity or effect of any assignment. You,
therefore, should consult a qualified tax advisor regarding the tax
consequences, as an assignment may be a taxable event.
AVAILABLE INFORMATION
We are subject to the informational requirements of the Securities Exchange Act
of 1934 and file reports and other information with the SEC. These reports and
other information can be inspected and copied at the SEC's public reference
facilities at Room 1024, 450 Fifth Street, N.W., Washington, D.C. and 500 West
Madison, Suite 1400, Northwestern Atrium Center, Chicago, Illinois. Copies also
can be obtained from the SEC's Public Reference Section at 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates.
We have filed registration statements (the "Registration Statements") relating
to the Contracts with the SEC under the Securities Act of 1933 and the
Investment Company Act of 1940. 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. These Registration Statements contain further
information about us and the Contracts. The Registration Statements may be
inspected and copied, and copies can be obtained at prescribed rates, as
mentioned above.
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<PAGE> 41
BUSINESS
[TO BE UPDATED BY AMENDMENT]
CORPORATE STRUCTURE
KEMPER INVESTORS LIFE INSURANCE COMPANY ("KILICO"), founded in 1947, is
incorporated under the insurance laws of the State of Illinois. We are licensed
in the District of Columbia and all states except New York. We are a
wholly-owned subsidiary of Kemper Corporation ("Kemper"), a nonoperating holding
company.
CORPORATE CONTROL EVENTS
Effective January 4, 1996, Zurich Insurance Company ("Zurich"), Insurance
Partners, L.P. ("IP") and Insurance Partners Offshore (Bermuda), L.P. (together
with IP, "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.
Effective September 7, 1998, the businesses of Zurich merged with the financial
services business of B.A.T. Industries forming Zurich Financial Services
("ZFS"). ZFS is owned by Zurich Allied AG and Allied Zurich p.l.c., fifty-seven
percent and forty-three percent, respectively. Zurich Allied AG, representing
the financial interest of the former Zurich Group, is listed on the Swiss Market
Index, replacing Zurich. Allied Zurich p.l.c., representing the financial
interest of B.A.T. Industries, is included in the FTSE-100 Share Index in
London.
The acquisition of KILICO on January 4, 1996, was accounted for using the
purchase method of accounting. Our consolidated financial statements prior to
January 4, 1996, were prepared on a historical cost basis and have been labeled
as "preacquisition" where appropriate in this Prospectus. Our included
consolidated financial statements have been prepared in conformity with
generally accepted accounting principles.
We originally began to amortize goodwill resulting from the acquisition on a
straight-line basis over twenty-five years. However, in the fourth quarter of
1997, We changed Our amortization period to twenty years. The change in
amortization periods was made to conform to Zurich's accounting practices and
policies. The change resulted in an increase in goodwill amortization of $5.1
million in 1997.
STRATEGIC INITIATIVES
Our management, operations and strategic directions are integrated 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.
Over the last several years, We increased the competitiveness of Our variable
annuity products by adding multiple variable subaccount investment options and
investment managers to existing variable annuity products. In 1996, We
introduced a registered flexible individual variable life insurance product. In
1997, We introduced a non-registered individual and group variable bank-owned
life insurance contract ("BOLI") and a series of individual variable life
insurance contracts. In 1998, We introduced a new
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<PAGE> 42
registered individual variable annuity product with 29 variable subaccount
investment options and various investment managers.
NARRATIVE DESCRIPTION OF BUSINESS
We offer 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. We offer 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
Our products. Our 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.
Our 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, We have increased Our emphasis on marketing Our existing and new
separate account products. Unlike the fixed-rate annuity business where We
manage spread revenue, such variable products pose minimal investment risk for
Us, as policyholders direct their premium to one or more subaccounts that invest
in underlying investment funds. We, in turn, receive administrative fee revenue
on such variable products which compensates Us for providing death benefits
potentially in excess of cash surrender values. In addition, on variable life
insurance contracts, cost of insurance charges compensate Us for providing death
benefit coverage substantially in excess of surrender values.
As a result of this strategy, Our separate account assets and related sales of
Our variable annuity and life products have increased as follows (in millions):
<TABLE>
<CAPTION>
DECEMBER 31
------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Separate account assets................................ $7,099.2 $5,122.0 $2,127.2
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Variable annuity sales................................. $ 300.4 $ 259.8 $ 254.6
Variable life sales.................................... 1,523.0 2,708.6 .2
-------- -------- --------
Total separate account sales......................... $1,823.4 $2,968.4 $ 254.8
======== ======== ========
</TABLE>
In 1996, We added several new subaccounts and new investment managers as
investment portfolio choices for certain purchasers of the Kemper Advantage III
variable annuity product. During mid-1998, We introduced Destinations, a
registered individual variable annuity product. Destinations offers 29 variable
subaccount investment options with various investment managers, ten guarantee
period accounts and a fixed account, dollar cost averaging and a guaranteed
retirement income benefit option.
During late 1996, We introduced Power V, a registered flexible premium variable
life insurance product. During mid-1997, We also introduced variable BOLI, a
group variable life insurance contract that is primarily marketed to banks and
other large corporate entities. Also in 1997, We issued a series of non-
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<PAGE> 43
registered variable individual universal life insurance contracts that are
marketed primarily to high net worth individuals. Significant fluctuations in
Our sales of the variable life products are due mainly to the nature of the BOLI
product--high dollar volume per sale, low frequency of sales--and the
uncertainty surrounding BOLI's tax advantaged status since the release of the
Clinton Administration's Fiscal Year 1998 Budget, continuing with the release of
the 1999 Budget.
Investors Brokerage Services, Inc. ("IBS"), Our wholly-owned subsidiary, is the
principal underwriter and distributor of the variable annuity and variable life
products. Another Zurich affiliate is the principal underwriter and distributor
for the BOLI and high net worth products.
Current crediting rates, a conservative investment strategy and the interest
rate environment have impacted Our general account annuity sales over the last
several years. Our general account fixed annuity sales were as follows (in
millions):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
General account fixed annuity sales......................... $179.9 $145.7 $140.6
====== ====== ======
</TABLE>
Strong stock and bond markets during 1996 and most of 1997, which influenced
potential buyers of fixed annuity products to purchase variable annuity
products, caused sales of general account annuities to increase only slightly in
1997, compared with 1996. Sales of general account annuities increased in 1998,
compared with 1997, as certain investors opted for fixed crediting rates rather
than other investment alternatives available during a period of market
uncertainty, primarily in the second half of 1998.
During 1998 and 1997, We assumed $21.6 million and $21.1 million, respectively,
of term life insurance premiums from FKLA. Excluding the amounts assumed from
FKLA, Our total term life sales, including new and renewal premiums, net of
reinsurance ceded, amounted to $846 thousand in 1998, compared with $1.1 million
in 1997 and $565 thousand in 1996.
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. Currently, twelve IRIS ratios are
calculated. The primary purpose of the ratios is to provide an "early warning"
of any negative developments. The NAIC reports a company's ratios to state
regulators who may then contact the company if three or more ratios fall outside
the NAIC's "usual ranges".
Based on statutory financial data as of December 31, 1998, We had two ratios
outside the usual ranges, the change in reserving ratio and the change in
premium ratio. Our change in reserving ratio reflected the level of
interest-sensitive life surrenders and withdrawals during 1998, as well as the
effects of a reinsurance agreement with FKLA. Our change in premium ratio
reflected the $1.2 billion decrease in BOLI premiums received during 1998,
compared with 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 Our IRIS ratios for 1998 or
earlier years.
RISK-BASED CAPITAL, ASSET ADEQUACY AND CODIFICATION
Under Illinois' asset adequacy and risk-based capital rules, state regulators
may mandate remedial action for inadequately reserved or inadequately
capitalized companies. The asset adequacy rules are designed to
40
<PAGE> 44
assure that assets supporting reserves are adequate to cover liabilities under a
variety of economic scenarios. The focus of risk-based 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. We
have capital levels substantially exceeding any that would mandate action under
the risk-based capital rules and is in compliance with applicable asset adequacy
rules.
In March 1998, the NAIC approved the codification of statutory accounting
principles. Codification is effective January 1, 2001; however, Our domiciliary
state of Illinois has yet to adopt codification. In any event, We have not
quantified the impact that codification will have on Our statutory financial
position or results of operations.
RESERVES AND REINSURANCE
The following table provides a breakdown of Our reserves for future policy
benefits by product type (in millions):
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31
1998 1997
----------- -----------
<S> <C> <C>
General account annuities................................... $2,864 $3,137
Interest-sensitive life insurance and other................. 688 709
Term life reserves.......................................... 9 10
Ceded future policy benefits................................ 345 383
------ ------
Total............................................. $3,906 $4,239
====== ======
</TABLE>
Ceded future policy benefits shown above reflect coinsurance (indemnity
reinsurance) transactions where We insured liabilities of approximately $516
million in 1992 and $416 million in 1991 with our affiliate Fidelity Life
Association, A Mutual Legal Reserve Company ("FLA"). 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, 1998 and 1997, Our reinsurance reserve credit from FLA related to these
coinsurance transactions totaled approximately $344.8 million and $382.6
million, respectively. Utilizing FKLA's employees, We are the servicing company
for this coinsured business and We are reimbursed by FLA for the related
servicing expenses.
During December 1997, We entered into a funds withheld reinsurance agreement
with a Zurich affiliated company, ZC Life Reinsurance Limited ("ZC Life"),
formerly EPICENTRE Reinsurance (Bermuda) Limited. Under the terms of this
agreement, We 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 Our
separate accounts. During 1998, We modified the reinsurance agreement to
increase the reinsurance from ninety percent to one hundred percent. During 1998
and 1997, We issued $6.9 billion (face amount) and $59.3 billion (face amount),
respectively, of new BOLI business and ceded $11.1 billion (face amount) and
$51.5 billion (face amount), respectively, to ZC Life under the terms of the
treaty. During 1998 and 1997, We also ceded $175.5 million and $24.3 million,
respectively, of separate account fees (cost of insurance charges) to ZC Life.
We have also withheld approximately $170.9 million and $23.4 million of the
funds due to ZC Life under the terms of the reinsurance agreement as a component
of benefits and funds payable in the accompanying consolidated balance sheets in
this Prospectus as of December 31, 1998 and 1997, respectively.
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<PAGE> 45
We have a large and growing funds withheld account ("FWA") supporting reserve
credits on reinsurance ceded on the BOLI product. Amendments to the reinsurance
contracts during 1998 changed the methodology used to determine increases to the
FWA. A substantial portion of the FWA is now marked-to-market based upon the
Total Return of the Governmental Bond Division of the KILICO Variable Series I
Separate Account. During 1998, We recorded a $2.5 million increase to the FWA
related to this mark-to-market. In November 1998, to properly match revenue and
expenses, We placed assets supporting the FWA in a segmented portion of its
General Account. This portfolio is classified as "trading" under Statement of
Financial Accounting Standards No. 115 ("FAS 115"). FAS 115 mandates that assets
held in a trading account be valued at fair value, with changes in fair value
flowing through the income statement as realized capital gains and losses.
During 1998, We recorded a realized capital gain of $2.8 million upon transfer
of these assets from "available for sale" to the trading portfolio as required
by FAS 115. In addition, We recorded realized capital losses of $151 thousand
related to the changes in fair value of this portfolio during 1998. The fair
value of this portfolio was $101.8 million at December 31, 1998, and the
amortized cost was $99.1 million. We periodically purchase assets into this
segmented portfolio to support changes in the FWA.
During 1996, We 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, We also recorded reserves in 1998 and 1997 of approximately $8.5
million and $7.9 million, respectively.
COMPETITION
We are in a highly competitive business. We compete 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. With Our emphasis on annuity
products, We also compete 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.
Our 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.
To address Our competition, We have adopted certain business strategies. These
include:
- systematic review of investment risk and 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
EMPLOYEES
At December 31, 1998, We used the services of approximately 861 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
We are generally subject to regulation and supervision by the insurance
departments of Illinois and other jurisdictions where we are licensed to do
business. These departments enforce laws and regulations designed
42
<PAGE> 46
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,
policy forms 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 our variable life insurance and annuity products, and
the related separate accounts, are subject to regulation by the SEC.
We believe we are in compliance in all material respects with all applicable
regulations.
INVESTMENTS
A changing marketplace has affected the life insurance industry. To accommodate
customers' increased preference for safety over higher yields, we have
systematically reduced Our investment risk and strengthened Our capital
position.
Our 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") and its
subsidiaries and affiliates. Our real estate-related investments are handled by
a majority-owned Kemper real estate subsidiary. Investment policy is directed by
our board of directors. Our 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.
FORWARD-LOOKING STATEMENTS
All statements, trend analyses and other information contained in this
Prospectus and elsewhere (such as in Our filings with the SEC, press releases,
presentations by KILICO or its management or oral statements) about markets for
our products and trends in our 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. These factors include,
among other things:
(i) general economic conditions and other factors, including prevailing
interest rate levels and stock market performance, which may affect Our
ability to sell Our products, the market value of Our investments and the
lapse rate and profitability of Our contracts
(ii) Our 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 Our insurance products
43
<PAGE> 47
(v) changes in the federal income tax laws and regulations which may affect the
relative tax advantages of some of Our products
(vi) increasing competition which could affect the sale of Our products
(vii) regulatory changes or actions, including those relating to regulation of
financial services affecting (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 Our filings
with the SEC
PROPERTIES
We primarily share 84,270 sq. ft. of office space leased by FKLA from Lumbermens
Mutual Casualty Company, a former affiliate, ("Lumbermens"), located in Long
Grove, Illinois. We also share 74,000 sq. ft. of office space leased by FKLA and
ZLICA from Zurich American Insurance Company, an affiliate, located in
Schaumburg, Illinois.
LEGAL PROCEEDINGS
KILICO has been named as defendant in certain lawsuits incidental to Our
insurance business. Based upon the advice of legal counsel, Our management
believes that the resolution of these various lawsuits will not result in any
material adverse effect on KILICO's consolidated financial position.
44
<PAGE> 48
SELECTED FINANCIAL DATA
[TO BE UPDATED BY AMENDMENT]
The following table sets forth selected financial information for KILICO for the
five years ended December 31, 1998, and for the opening balance sheet as of the
acquisition date, January 4, 1996. This 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 DECEMBER 31 JANUARY 4 ----------------------
1998 1997 1996 1996(2) 1995 1994
----------- ----------- ----------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
TOTAL REVENUE............... $ 419.7 $ 425.5 $ 356.2 $ -- $ 68.1(1) $ 330.5
========= ========= ======== ======== ======== ========
NET INCOME EXCLUDING
REALIZED INVESTMENT
RESULTS................... $ 31.4 $ 31.9 $ 25.6 $ -- $ 74.2 $ 61.9
========= ========= ======== ======== ======== ========
NET INCOME (LOSS)........... $ 65.1 $ 38.7 $ 34.4 $ -- $ (133.0)(1) $ 26.4
========= ========= ======== ======== ======== ========
FINANCIAL SUMMARY
Total separate account
assets.................... $ 7,099.2 $ 5,122.0 $2,127.2 $1,761.1 $1,761.1 $1,508.0
========= ========= ======== ======== ======== ========
Total assets................ $12,239.7 $10,589.7 $7,717.9 $7,682.7 $7,581.7 $7,537.1
========= ========= ======== ======== ======== ========
Future policy benefits...... $ 3,561.6 $ 3,856.9 $4,256.5 $4,585.1 $4,573.2 $4,843.7
========= ========= ======== ======== ======== ========
Stockholder's equity........ $ 853.9 $ 865.6 $ 751.0 $ 745.6 $ 605.9 $ 434.0
========= ========= ======== ======== ======== ========
</TABLE>
- ---------------
(1) Real estate-related investment losses adversely impacted total revenue and
net income (loss) for 1995. These losses reflect a change in KILICO's
strategy with respect to its real estate-related investments resulting from
the January 4, 1996 acquisition of Kemper by the Zurich-led investor group.
(2) The consolidated information presented as of the acquisition on January 4,
1996 is accounted for using the purchase method of accounting.
45
<PAGE> 49
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
[TO BE UPDATED BY AMENDMENT]
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.
RESULTS OF OPERATIONS
KILICO recorded net income of $65.1 million in 1998, compared with net income of
$38.7 million in 1997 and $34.4 million in 1996. The increase in net income in
1998, compared with 1997, was due to a significant increase in net realized
capital gains and a decrease in goodwill amortization, offset by a slight
decline in operating earnings before amortization of goodwill.
The following table reflects the components of net income:
NET INCOME
(in millions)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Operating earnings before
amortization of goodwill..... $ 44.1 $ 47.2 $ 35.8
Amortization of goodwill....... (12.7) (15.3) (10.2)
Net realized investment
gains........................ 33.7 6.8 8.8
------ ------ ------
Net income........... $ 65.1 $ 38.7 $ 34.4
====== ====== ======
</TABLE>
The following table reflects the major components of realized investment results
included in net income above.
REALIZED INVESTMENT RESULTS, AFTER TAX
(in millions)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Real estate-related gains...... $ 26.9 $ 12.8 $ 11.4
Fixed maturity write-downs..... (2.0) (2.8) (.9)
Other gains (losses), net...... 8.8 (3.2) (1.7)
------ ------ ------
Total................ $ 33.7 $ 6.8 $ 8.8
====== ====== ======
</TABLE>
The real estate-related gains over the last three years, reflect Our adoption of
Zurich's strategy for disposition of real estate-related investments. This
strategy to reduce exposure to real estate-related investments, as well as
improving real estate market conditions in most areas of the country, generated
the increasing real estate-related gains during the last three years. Fixed
maturity write-downs in 1998 and 1997 primarily reflect other-than-temporary
declines in value of certain U.S. dollar denominated fixed maturity
46
<PAGE> 50
investments which have significant exposure to countries in Southeast Asia, as
well as other U.S. dollar denominated securities that had other-than-temporary
declines in value in 1998. Other realized investment gains and losses for 1998,
1997 and 1996 relate primarily to the sale of fixed maturity investments, as
well as gains from equity securities in 1998. The 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 Our 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.
Operating earnings before the amortization of goodwill decreased to $44.1
million in 1998, compared with $47.2 million in 1997. Operating earnings
decreased in 1998 before the amortization of goodwill, compared with 1997,
primarily due to:
- a decrease in separate account fees and charges
- an increase in commissions and operating expenses
- an increase in the amortization of insurance acquisition costs, offset by
- a decrease in taxes, licenses and fees
- an increase in the deferral of insurance acquisition costs, and
- a decrease in the amortization of the value of business acquired
Operating earnings before the amortization of goodwill increased to $47.2
million in 1997, compared with $35.8 million in 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
- an increase in the deferral of insurance acquisition costs, offset by
- an increase in claims incurred and other policyholder benefits
- an increase in taxes, licenses and fees, and
- an increase in commissions and operating expenses
Investment income and interest credited declined in 1998, compared with 1997 and
1996, 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
also decreased in 1998, compared with 1997, due to reinvestment of 1998 fixed
maturity sales proceeds at lower yields than in 1997 and higher amortization of
bond premium. This amortization was due to an increase in certain collateralized
mortgage obligation prepayments due to the low interest rate environment in
1998.
Investment income was also reduced over the last three years 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 the
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
47
<PAGE> 51
environment as of January 4, 1996, the market value of KILICO's fixed maturity
investments was approximately $133.9 million greater than original par. Premium
amortization decreased investment income by approximately $14.4 million in 1998,
compared with $15.3 million in 1997 and $22.7 million in 1996.
Investment income was also negatively impacted during 1996 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 negatively impacted by dividends paid to Kemper in 1998.
Investment income was positively impacted in 1997 and 1996 from the benefits of
capital contributions to KILICO and from the above-mentioned repositionings of
Our investment portfolio.
The following table reflects KILICO's sales.
SALES
(in millions)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------
1998 1997 1996
-------- -------- ------
<S> <C> <C> <C>
Annuities:
General account..................... $ 179.9 $ 145.7 $140.6
Separate account.................... 300.4 259.8 254.6
-------- -------- ------
Total annuities.................. 480.3 405.5 395.2
-------- -------- ------
Life Insurance:
Separate account bank-owned variable
universal life ("BOLI").......... 1,501.0 2,700.0 --
Separate account variable universal
life............................. 22.0 8.6 .2
Term life........................... 22.4 22.2 7.8
Interest-sensitive life............. .2 -- .6
-------- -------- ------
Total life....................... 1,545.6 2,730.8 8.6
-------- -------- ------
Total sales............ $2,025.9 $3,136.3 $403.8
======== ======== ======
</TABLE>
Sales of annuity products consist of total deposits received. General account
annuity sales increased in 1998, compared with 1997, as certain investors opted
for fixed crediting rates rather than other investment alternatives available
during a period of market uncertainty, primarily in the second half of 1998. The
slight increase in 1997 general account (fixed annuity) sales, compared with
1996, reflected the low interest rate environment and the strong equity market
during 1997.
The increase in separate account (variable sales) in 1998, compared with 1997
and 1996, was in part due to:
- the addition of new separate account investment fund options
- the addition of new investment fund managers
- a strong overall underlying stock and bond market, and
- a new variable annuity product introduced during 1998
Sales of variable annuities increase administrative fees earned. In addition,
they pose minimal investment risk for KILICO, as policyholders direct their
premium to one or more subaccounts that invest in underlying
48
<PAGE> 52
investment funds which invest in stocks and bonds. We believe that the increase
in Our financial strength and performance ratings in January 1996, together with
Our association with Zurich, will continue to assist in Our future sales
efforts.
In 1997, We 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 direct their premium to
one or more subaccounts that invest in underlying investment funds which invest
in stocks and bonds. We receive premium tax and DAC tax expense loads from
certain contract holders, as well as administrative fees and cost of insurance
charges. These fees and charges compensate Us 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 $7.7
billion in 1998, compared with $59.6 billion in 1997. The decrease in face
amount issued in 1998, compared to 1997 is due to a significant portion of
renewal premiums in 1998 and higher funded policies issued in 1998, compared to
those issued in 1997.
In 1998 and 1997, KILICO assumed $21.6 million and $21.1 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,
amounted to $846 thousand in 1998, compared with $1.1 million in 1997 and $565
thousand in 1996. The face amounts of new term business issued during 1998, 1997
and 1996 totaled approximately $276 million, $278 million and $187 million,
respectively.
Included in separate account fees and charges are administrative fees received
from Our separate account products of $38.3 million in 1998, compared with $31.0
million and $25.3 million in 1997 and 1996, respectively. 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 1998 and 1997 are cost of
insurance ("COI") charges related to variable universal life insurance,
primarily BOLI, of $167.6 million and $27.6 million, respectively. Of these COI
charges, $175.5 million and $24.3 million of such fees were ceded in 1998 and
1997, respectively, to a Zurich affiliated company, ZC Life Reinsurance Limited
("ZC Life"), formerly EPICENTER Reinsurance (Bermuda) Limited. In 1998, KILICO
ceded in excess of 100 percent of the COI charges received due to changes to the
reinsurance agreement with ZC Life. Separate account fees and charges in 1998
and 1997 also include BOLI-related premium tax expense loads of $29.1 million
and $51.1 million, respectively.
Other income includes surrender charge revenue of $4.0 million in 1998, compared
with $5.2 million and $5.4 million in 1997 and 1996, respectively. The decrease
in surrender charge revenue in 1998, compared with 1997, primarily reflects a
decrease in total general account and separate account policyholder surrenders
and withdrawals. The slight decrease in surrender charge revenue in 1997,
compared with 1996, reflects that 46 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.
49
<PAGE> 53
This decrease in surrender charge revenue in 1997 was offset somewhat by an
increase in total general account and separate account policyholder surrenders
and withdrawals.
POLICYHOLDER SURRENDERS, WITHDRAWALS AND DEATH BENEFITS
(in millions)
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
General account................ $645.5 $703.1 $652.0
Separate account............... 260.9 236.2 196.7
------ ------ ------
Total..................... $906.4 $939.3 $848.7
====== ====== ======
</TABLE>
Reflecting the current interest rate environment and other competitive market
factors, We adjust Our crediting rates on interest-sensitive products over time
in order to manage spread revenue and policyholder surrender and withdrawal
activity. We can also improve spread revenue over time by increasing investment
income. The current interest rate environment during 1997 and 1998, has
mitigated at present, competitive pressures to increase existing renewal
crediting rates.
General account surrenders, withdrawals and death benefits decreased $57.6
million in 1998, compared with 1997. This decrease primarily reflects a decrease
in surrenders and withdrawals due to uncertainty with alternative investment
options because of market instability during the second half of 1998.
Taxes, licenses and fees decreased $22.3 million in 1998 to $30.3 million,
reflecting the decrease in premium taxes on BOLI. Excluding the taxes due on
BOLI, for which We received a corresponding expense load in separate account
fees and other charges, taxes, licenses and fees amounted to $1.5 million,
compared with $1.5 million in 1997 and $2.2 million in 1996.
Commission expense was higher in 1998, compared with both 1997 and 1996, due to
an increase in total sales, excluding BOLI.
Operating expenses increased in 1998 and 1997, compared with 1996, as a result
of:
- restaffing after the completion of the acquisition and for new business
initiatives
- an increase in various outside consulting fees
- an increase in printing and stationary expenses for sales materials, and
- an increase in data processing expenses
Data processing expenses increased to $12.9 million in 1998, compared with $10.8
million in 1997 and $4.1 million in 1996, primarily due to:
- infrastructure improvements related to new product development
- new systems implemented and put into production
- system conversion projects
- development of a data warehouse, and
- costs related to bringing Our systems in compliance with the year 2000
50
<PAGE> 54
Data processing expenses related to bringing Our systems in compliance with the
year 2000 amounted to $1.3 million in 1998. We currently anticipate that it will
cost an additional $662 thousand to bring all remaining systems in compliance.
Operating earnings were positively impacted by the deferral of insurance
acquisition costs in 1998, compared with 1997 and 1996. The deferral of
insurance acquisition costs increased in 1998, compared with both 1997 and 1996.
This reflects 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 in 1998 and 1997, compared with 1996, with the most dramatic
increase occurring in 1998. The increase in amortization of insurance
acquisition costs in 1998, compared with 1997, was primarily due to the increase
in production of new business in 1998, as well as increased profits in 1998.
These increases tend to accelerate amortization. Deferred insurance acquisition
costs, and their related amortization, 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. Deferred insurance acquisition costs are established
on all new policies sold after January 4, 1996.
The amortization of the value of business acquired decreased in 1998, compared
with 1997, as a result of:
- a significant increase in separate account assets, which increases
estimated future gross profits and shifts amortization to later years
- a decreasing block of business previously acquired, resulting in less
amortization as gross profits on this business decrease, offset by
- a significant increase in realized capital gains which tend to accelerate
the amortization of the value of business acquired as the gains tend to
decrease Our 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, We began to amortize goodwill on a straight-line basis over
twenty-five years. In December of 1997, We changed Our 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, We recorded an increase in
amortization expense of $5.1 million during 1997.
INVESTMENTS
Our principal investment strategy is to maintain a balanced, well-diversified
portfolio supporting the insurance contracts written. We make shifts in Our
investment portfolio depending on, among other factors:
- its evaluation of risk and return in various markets
- consistency with Our business strategy and investment guidelines approved
by the board of directors
- the interest rate environment
- liability durations, and
- changes in market and business conditions
51
<PAGE> 55
INVESTED ASSETS AND CASH
(in millions)
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31
1998 1997
--------------- ---------------
<S> <C> <C> <C> <C>
Cash and short-term investments........................ $ 72 1.7% $ 260 5.8%
Fixed maturities:
Investment-grade:
NAIC(1) Class 1................................... 2,663 63.7 3,004 67.1
NAIC(1) Class 2................................... 724 17.3 651 14.5
Below investment grade:
Performing........................................ 96 2.3 14 .3
Nonperforming..................................... -- -- -- --
Trading account securities............................. 102 2.4 -- --
Joint venture mortgage loans........................... 66 1.6 73 1.6
Third-party mortgage loans............................. 76 1.8 103 2.3
Other real estate-related investments.................. 22 .5 44 1.0
Policy loans........................................... 271 6.5 282 6.3
Equity securities...................................... 67 1.6 25 .6
Other.................................................. 24 .6 21 .5
------ ----- ------ -----
Total(2)..................................... $4,183 100.0% $4,477 100.0%
====== ===== ====== =====
</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
We are carrying Our fixed maturity investment portfolio, which We consider
available for sale, at estimated fair value. The aggregate unrealized
appreciation or depreciation is recorded as a component of accumulated other
comprehensive income, net of any applicable income tax expense. The aggregate
unrealized appreciation (depreciation) on fixed maturities at December 31, 1998
and 1997 was $61.3 million and $24.6 million, respectively. 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, 1998, investment-grade fixed maturities and cash and short-term
investments accounted for 82.7 percent of Our invested assets and cash, compared
with 87.4 percent at December 31, 1997. Approximately 53.4 percent of Our NAIC
Class 1 bonds were rated AAA or equivalent at year-end 1998, compared with 54.0
percent at December 31, 1997.
Approximately 28.0 percent of Our investment-grade fixed maturities at December
31, 1998 were mortgage-backed securities, down from 35.1 percent at December 31,
1997, due to sales and paydowns during 1998. 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. We
have not made any investments in interest-only or other similarly
52
<PAGE> 56
volatile tranches of mortgage-backed securities. Our mortgage-backed investments
are generally of AAA credit quality, and the markets for these investments have
been and are expected to remain liquid. We plan to continue to reduce Our
holding of these investments over time.
As a result of the previously discussed repositionings of Our fixed maturity
portfolio, approximately 15.4 percent and 10.8 percent of Our investment-grade
fixed maturities at December 31, 1998 and 1997, respectively, consisted of
corporate asset-backed securities. The majority of Our investments in
asset-backed securities were backed by home equity loans (21.9%), auto loans
(8.2%), manufactured housing loans (14.8%), equipment loans (5.2%), and
commercial mortgage backed securities ("CMBs") (22.1%).
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 Our 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. Accelerated amortization would
result in reductions of investment income related to such securities.
At December 31, 1998 and 1997 We had unamortized premiums and discounts related
to mortgage-backed and asset-backed securities as follows (in millions):
<TABLE>
<CAPTION>
DECEMBER 31
-------------
1998 1997
----- -----
<S> <C> <C>
Unamortized premiums........................................ $15.8 $19.6
===== =====
Unamortized discounts....................................... $ 4.6 $ 5.2
===== =====
</TABLE>
Amortization of the discount or premium from mortgage-backed and asset-backed
securities is recognized using a level effective yield method. This method
considers the estimated timing and amount of prepayments of the underlying loans
and is adjusted to reflect differences between the prepayments originally
anticipated and the actual prepayments received and currently anticipated. To
the extent that the estimated lives of these 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 Our 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) 1998 1999 2000 2001 2002 2003 THEREAFTER TOTAL 1998
------------- ------------ ---- ---- ---- ---- ---- ---------- ----- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed Maturities:
Mortgage-backed
bonds............ $ 946.7 $137.2 $ 85.7 $ 48.3 $47.7 $149.6 $478.2 $ 946.7 $ 946.7
Average yield.... 6.45% 6.46% 6.42% 6.43% 6.42% 6.42% 6.42% 6.45% 6.45%
Asset-backed
bonds............ $ 407.4 $ 17.9 $ 36.1 $ 49.8 $36.1 $ 31.9 $235.6 $ 407.4 $ 407.4
Average yield.... 6.67% 6.73% 6.75% 6.82% 6.90% 6.90% 6.95% 6.67% 6.67%
CMBs............... $ 115.5 $ 1.3 $ 1.2 $ 1.4 $ 1.5 $ 12.3 $ 97.8 $ 115.5 $ 115.5
Average yield.... 6.25% 6.28% 6.28% 6.28% 6.28% 6.28% 6.28% 6.25% 6.25%
-------- -------- --------
$1,469.6 $1,469.6 $1,469.6
======== ======== ========
</TABLE>
53
<PAGE> 57
<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>
The current weighted average maturity of the mortgage-backed and asset-backed
securities at December 31, 1998, is 4.0 years. A 200 basis point increase in
interest rates would extend the weighted average maturity by approximately .65
of a year, while a 200 basis point decrease in interest rates would decrease the
weighted average maturity by approximately 1.45 years.
The weighted average maturity of the mortgage-backed and asset-backed securities
at December 31, 1997, was 3.8 years. A 200 basis point increase in interest
rates would have extended the weighted average maturity by approximately 1.0
year, 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, 1998, We had $29.9 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 $3.5 million of these securities were from Korea, $17.6 million
were from Hong Kong, China, $2.9 million were from South Korea and the remainder
were from a United Kingdom bank with most of its loans issued to countries in
Southeast Asia. Write-downs on these securities, which were considered to be
other-than-temporary, as of December 31, 1998 and 1997 amounted to $1.1 million
and $3.1 million, respectively. 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 40 issuers at December 31, 1998, totaled 2.3 percent
of cash and invested assets at December 31, 1998 and .3 percent at December 31,
1997. 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. Our strategy of limiting
exposure to below investment-grade securities takes into account the more
conservative nature of today's consumer and the resulting demand for
higher-quality investments in the life insurance and annuity marketplace.
REAL ESTATE-RELATED INVESTMENTS
The $164.4 million real estate-related portfolio We hold, consists of joint
venture and third-party mortgage loans and other real estate-related
investments. The real estate-related portfolio constituted 3.9 percent of cash
and invested assets at December 31, 1998, compared with $220.0 million, or 4.9
percent, at December 31, 1997. The decrease in real estate-related investments
during 1998 was primarily due to asset sales and a net increase of $16.1 million
in real estate-related reserves during 1998.
54
<PAGE> 58
As reflected in the "Real estate portfolio" table below, We have continued to
fund both existing projects and legal commitments. The future legal commitments
were $64.4 million at December 31, 1998. This amount represented a net decrease
of $10.9 million since December 31, 1997, primarily due to sales in 1998. As of
December 31, 1998, We expect to fund approximately $.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. We do not currently expect to fund these
commitments. The total legal commitments, along with estimated working capital
requirements, are considered in Our evaluation of reserves and write-downs.
Excluding the $1.2 million of net equity investments in joint ventures, Our real
estate loans totaled $163.2 million at December 31, 1998, after reserves and
write-downs. Of this amount, $131.3 million are on accrual status with a
weighted average interest rate of approximately 8.79 percent. Of these accrual
loans:
- 17.0 percent have terms requiring current periodic payments of their full
contractual interest
- 46.1 percent require only partial payments or payments to the extent of
borrowers' cash flow, and
- 36.9 percent defer all interest to maturity
55
<PAGE> 59
The equity investments in real estate at December 31, 1998 consisted of Our
other equity investments in joint ventures. These equity investments include Our
share of periodic operating results. As an equity owner or affiliate of an
equity owner, We have the ability to fund, and historically have elected to
fund, operating requirements of certain joint ventures.
REAL ESTATE PORTFOLIO
(in millions)
<TABLE>
<CAPTION>
OTHER REAL ESTATE-RELATED
MORTGAGE LOANS INVESTMENTS
---------------- ------------------------------------
JOINT THIRD- OTHER REAL ESTATE EQUITY
VENTURE PARTY LOANS(2) OWNED INVESTMENTS TOTAL
------- ------ -------- ----------- ----------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997........... $ 72.7 $103.0 $ 21.1 $ 4.0 $ 19.2 $220.0(1)
Additions (deductions):
Fundings............................... 13.1 -- -- .2 -- 13.3
Interest added to principal............ 6.3 2.8 -- -- -- 9.1
Sales/paydowns/distributions........... (11.8) (30.1) (.3) (6.6) (27.0) (75.8)
Operating gain......................... -- -- -- -- .2 .2
Transfers.............................. -- -- -- (.7) -- (.7)
Net realized investments gains
(losses)............................. (3.0) 32.4 .4 3.1 8.5 41.4(4)
Other transactions, net................ (11.5) (31.6) (.3) -- .3 (43.1)(4)
------ ------ ------ ----- ------ ------
Balance at December 31, 1998........... $ 65.8 $ 76.5 $ 20.9 $ 0 $ 1.2 $164.4(3)
====== ====== ====== ===== ====== ======
</TABLE>
- ---------------
(1) Net of $9.2 million reserve and write-downs. Excludes $9.5 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 $25.3 million reserve and write-downs. Excludes $8.7 million of real
estate-related accrued interest.
(4) Included in this amount is $37.0 million of contingent interest payments
related to a 1995 real estate sale. These payments were recorded as
realized investment gains and then deducted from other transactions because
they did not affect the carrying value.
REAL ESTATE CONCENTRATIONS AND OUTLOOK
Our real estate portfolio is distributed by geographic location and property
type. However, We have concentration exposures in certain states and in certain
types of properties. In addition to these exposures, We also have exposures to
certain real estate developers and partnerships.
As a result of Our ongoing strategy to reduce Our exposure to real
estate-related investments, as of December 31, 1998, We had three remaining
properties which account for approximately 87.2 percent of Our $164.4 million
real estate-related portfolio.
The largest of these investments at December 31, 1998 amounted to $64.5 million
and consisted of second mortgages on nine hotel properties and two office
buildings. Patrick M. Nesbitt or his affiliates, a third-party real estate
developer, have ownership interests in these properties. These hotels and office
buildings are
56
<PAGE> 60
geographically dispersed and the current market values of the underlying
properties substantially exceed the balances due on Our mortgages. These loans
are on accrual status.
Our loans to a master limited partnership (the "MLP") between subsidiaries of
Kemper and subsidiaries of Lumbermens, amounted to $51.6 million at December 31,
1998. 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. Loans to the MLP are on accrual status.
The remaining significant real estate-related investment amounted to $27.3
million at December 31, 1998 and consisted of various zoned and unzoned
residential and commercial lots located in Hawaii. Due to certain negative
zoning restriction developments in January 1997 and a continuing economic slump
in Hawaii, We have placed these real estate-related investments on nonaccrual
status as of December 31, 1996. We are 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,
We anticipate that it could be several additional years until We completely
dispose of all investments in Hawaii.
We evaluate Our real estate-related investments (including accrued interest)
using an estimate of the investments observable market price, net of estimated
selling costs. Because Our process includes estimates involving changing
economic conditions and other factors, there can be no assurance that current
estimates will prove accurate over time. Our real estate-related investments are
expected to continue to decline further through future sales. Our net income
could be materially reduced in future periods if:
- real estate market conditions worsen in areas where Our portfolio is
located
- Kemper's and KILICO's plans with respect to certain projects change, or
- necessary construction or zoning permits are not obtained
The following table is a summary of Our 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
1998 1997
----------- -----------
<S> <C> <C>
Potential problem loans(1)............ $-- $--
Past due loans(2)..................... -- --
Nonaccrual loans (primarily Hawaiian
properties)(3)...................... 37.4 47.4
Real estate owned..................... -- 4.0
----- -----
Total....................... $37.4 $51.4
===== =====
</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 We anticipate may go into nonaccrual,
past due or restructured status.
(2) Interest more than 90 days past due but not on nonaccrual status.
57
<PAGE> 61
(3) We do not accrue interest on real estate-related investments when We judge
that the likelihood of interest collection is doubtful. Loans on nonaccrual
status after reserves and write-downs amounted to $31.8 million and $41.8
million at December 31, 1998 and December 31, 1997, respectively.
NET INVESTMENT INCOME
Our pre-tax net investment income totaled $273.5 million in 1998, compared with
$296.2 million in 1997 and $299.7 million in 1996. This includes Our 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 which are on nonaccrual status. As previously
discussed, Our net investment income in 1998 and 1997, compared with 1996, has
been negatively impacted by purchase accounting adjustments.
Our 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
------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Fixed maturities...................... $.3 $.5 $ .7
Real estate-related investments....... 3.2 3.9 .5
---- ---- ----
Total.......................... $3.5 $4.4 $1.2
==== ==== ====
Basis points.......................... 8 10 3
==== ==== ====
</TABLE>
Foregone investment income from the nonaccrual of real estate-related
investments is net of Our share of interest expense on these loans excluded from
Our share of joint venture operating results. Any increase in nonperforming
securities, and either worsening or stagnant real estate conditions, would
increase the expected adverse effect on Our future investment income and
realized investment results.
REALIZED INVESTMENT RESULTS
Net income reflects after-tax realized investment gains of $33.7 million, $6.8
million and $8.8 million in 1998, 1997 and 1996, respectively. Included in the
after-tax realized investment gains are trading account security gains of $1.7
million in 1998. As previously discussed, We segregated a portion of Our General
Account investment portfolio in 1998 into a "trading" account under Statement of
Financial Accounting Standards No. 115 ("FAS 115"). FAS 115 mandates that assets
held in a trading account be valued at fair value, with changes in fair value
flowing through the income statement as realized capital gains and losses.
Unrealized gains and losses on fixed maturity investments which are available
for sale are not reflected in KILICO's net income. These changes in unrealized
value are recorded as a component of accumulated other comprehensive income, net
of any applicable income taxes. If and to the extent a fixed maturity investment
suffers an other-than-temporary decline in value, however, the security is
written down to net realizable value, and the write-down adversely impacts net
income.
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<PAGE> 62
We regularly monitor Our investment portfolio and as part of this process review
Our assets for possible impairments of carrying value. Because the review
process includes estimates involving changing economic conditions and other
factors, there can be no assurance that current estimates will prove accurate
over time.
A valuation allowance has been established 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. The valuation
allowance is evaluated as of each balance sheet date.
INTEREST RATES
Interest rates remained relatively stable during 1996 and 1997, before declining
in 1998. The Federal Reserve Board lowered rates 3 times during the second half
of 1998, resulting in a steeper yield curve due to the lower short-term interest
rates.
When maturing or sold investments are reinvested at lower yields in a low
interest rate environment, We can adjust Our 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. This 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. 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. We mitigate this risk somewhat by charging surrender
fees, which decrease over time, when annuity holders withdraw funds prior to
maturity on certain annuity products. Approximately 46 percent of KILICO's fixed
and variable annuity liabilities as of December 31, 1998, however, were no
longer subject to significant surrender fees.
LIQUIDITY AND CAPITAL RESOURCES
We carefully monitor 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 Our
liquidity are deposits for fixed annuities, premium income, investment income,
separate account fees, other operating revenue and cash provided from maturing
or sold investments.
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 Our claims-paying ability or
financial strength ratings could result in Our products being less attractive to
consumers. Any reductions in Our parent's ratings could also adversely impact
Our 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.
59
<PAGE> 63
STOCKHOLDER'S EQUITY
Stockholder's equity totaled $853.9 million at December 31, 1998, compared with
$865.6 million at December 31, 1997, and $751.0 million at December 31, 1996.
The 1998 decrease in stockholder's equity was primarily due to dividends of
$95.0 million paid to Kemper during 1998. This decrease was offset by 1998 net
income of $65.1 million and an increase of $20.3 million in accumulated other
comprehensive income. The increase in accumulated other comprehensive income was
primarily related to the change in unrealized appreciation related to Our fixed
maturity investment portfolio due to falling interest rates during 1998. 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 accumulated
other comprehensive income related to the change in unrealized appreciation of
$60.1 million related to Our fixed maturity investment portfolio. These
increases were offset by a dividend of $29.2 million to Kemper.
EMERGING ISSUE
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. This statement is effective for fiscal years
beginning after June 15, 1999. Full implementation of SFAS No. 133 is expected
in December 1999. The impact of implementation is not expected to be material to
KILICO.
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<PAGE> 64
KILICO'S DIRECTORS AND EXECUTIVE OFFICERS
[TO BE UPDATED BY AMENDMENT]
<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 (54) 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) since 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 (51) 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 since May 1998. Director of FLA since December 1997. Director of FKLA and
ZLICA since May 1998. 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 (47) 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 FLA since May 1998.
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 (40) 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 and since March 1998. Vice President of ZLICA
from 1992 to 1995. Chief Actuary of ZLICA from 1991 to 1994.
Assistant Vice President of ZLICA from 1990 to 1992. Vice
President of ZD from 1994 to 1995.
</TABLE>
61
<PAGE> 65
<TABLE>
<CAPTION>
NAME AND AGE
POSITION WITH KILICO
YEAR OF ELECTION OTHER BUSINESS EXPERIENCE DURING PAST 5 YEARS OR MORE
-------------------- -----------------------------------------------------
<S> <C>
James E. Hohmann (43) Senior Vice President of FKLA since December 1995. Chief
Senior Vice President since December Actuary of FKLA and KILICO from December 1995 to January
1995. Director since May 1998. 1999. Senior Vice President of FLA since January 1996. Chief
Actuary of FLA from January 1996 to January 1999. Senior
Vice President of ZLICA and ZD since March 1996. Chief
Actuary of ZLICA and ZD from March 1996 to January 1999.
Director of FLA since June 1997. Director of FKLA and ZLICA
since May 1998. 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 (44) Senior Vice President and Corporate Development Officer of
Senior Vice President and Corporate FKLA and FLA since January 1996. Senior Vice President and
Development Officer since January Corporate Development Officer for ZLICA and ZD since March
1996. 1996. Senior Vice President of Human Resources of
Zurich-American Insurance Group from February 1992 to March
1996.
Debra P. Rezabek (43) Senior Vice President of FKLA and FLA since March 1996.
Senior Vice President since 1996. Corporate Secretary of FKLA and FLA since January 1996.
General Counsel since 1992. Corporate Director of FLA since May 1998. Vice President of KILICO,
Secretary since January 1996. FKLA and FLA since 1995. General 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 (53) Senior Vice President of FKLA, FLA and ZLICA since January
Senior Vice President since January 1998. Director of IBS since May 1998. Director of IBSIA
1998. since September 1998. Vice President--Aetna Life Brokerage
of Aetna Life & Annuity Company from February 1992 to
January 1998.
George Vlaisavljevich (56) 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 (60) 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 and Chief Financial Officer of
Zurich U.S. since 1979. President, Chief Executive Officer
and Director of Kemper since January 1996.
</TABLE>
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<PAGE> 66
<TABLE>
<CAPTION>
NAME AND AGE
POSITION WITH KILICO
YEAR OF ELECTION OTHER BUSINESS EXPERIENCE DURING PAST 5 YEARS OR MORE
-------------------- -----------------------------------------------------
<S> <C>
William H. Bolinder (55) 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. Director of SKI since January 1996. Vice
Chairman of SKI from January 1996 to 1998. Member of the
Group Executive Board of Zurich Financial Services Group
since 1998. Member of the Corporate Executive Board of
Zurich Insurance Group from October 1994 to 1998. Chairman
of Zurich American Insurance Company since 1998. 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 and American Zurich Insurance
Company from 1986 to June 1995. President of Zurich Holding
Company of America since 1986. Manager of Zurich Insurance
Company, U.S. Branch from 1986 to 1998. Underwriter for
Zurich American Lloyds since 1986.
David A. Bowers (52) 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 U.S. since August
1985. Vice President, General Counsel and Secretary of
Kemper since January 1996.
Gunther Gose (54) Director of FKLA, FLA and ZLICA since November 1998. Chief
Director since November 1998. Financial Officer and Member of the Group Executive Board of
Zurich Financial Services since October 1998. Member of the
Corporate Executive Board of Zurich Insurance Group from
April 1990 to October 1998.
</TABLE>
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<PAGE> 67
EXECUTIVE COMPENSATION
[TO BE UPDATED BY AMENDMENT]
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------------------------------------------
OTHER LONG TERM
ANNUAL INCENTIVE PLAN ALL OTHER
NAME AND COMPENSATION PAYOUTS COMPENSATION
PRINCIPAL POSITION YEAR SALARY ($) BONUS ($)(2) ($)(3) ($)(2) ($)(4)(5)(6)
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
John B. Scott.............. 1998 $171,000 $137,670 $-- $219,375 $ 42,465
Chief Executive Officer(1) 1997 171,000 112,100 -- 239,400 34,148
1996 212,500 94,000 -- 212,500 142,498
Eliane C. Frye............. 1998 107,160 64,860 -- 89,300 23,864
Executive Vice President(1) 1997 98,040 47,515 -- 91,590 18,886
1996 105,000 41,750 -- 69,750 58,520
Frederick L. Blackmon...... 1998 94,160 63,800 -- 78,540 22,077
Senior Vice President and 1997 96,300 54,225 -- 112,500 19,543
Chief Financial
Officer(1) 1996 100,583 47,000 27,924 71,250 11,226
George Vlaisavljevich...... 1998 260,000 146,000 -- 216,600 60,899
Senior Vice President(1) 1997 252,500 146,000 39,922 243,000 9,165
James E. Hohmann........... 1998 88,400 71,175 -- 79,560 21,938
Senior Vice President and 1997 79,333 45,500 -- 80,150 17,643
Chief Actuary(1) 1996 113,333 -- -- -- 11,333
</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.
(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 for Mr. Vlaisavljevich in 1997.
(4) The amounts in this column include:
(a) The amounts of employer contributions allocated to the accounts of the
named persons under profit sharing plans or under supplemental plans
maintained to provide benefits in excess of applicable ERISA limitations.
(b) Distributions from the Kemper and FKLA supplemental plans.
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(5) 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 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 entitled 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, 1996, were Mr. Scott 12,600 phantom units and Ms.
Frye 1,680 phantom units. 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.
(6) 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.
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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; Report of Independent Public Accountants;
Financial Statements of the Separate Account; Appendix A Table of Historical
Hypothetical Accumulation Unit Values and Performance Information; and Appendix
B State Premium Tax Chart. 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 our ability to meet our obligations under
the Certificates. The Certificates are not entitled to participate in our
earnings, dividends or surplus.
CHANGE OF ACCOUNTANTS
On September 12, 1997, we appointed the accounting firm of
PricewaterhouseCoopers LLP ("PricewaterhouseCoopers"), formerly Coopers &
Lybrand, L.L.P., as independent accountants for the year ended December 31, 1997
to replace KPMG LLP effective with such appointment. Our Board of Directors
approved the selection of PricewaterhouseCoopers as the new independent
accountants. Management had not consulted with PricewaterhouseCoopers on any
accounting, auditing or reporting matter, prior to that time.
During the fiscal year ended December 31, 1996, there were no disagreements with
KPMG LLP on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure or any reportable events.
KPMG LLP's report on the financial statements for 1996 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 PricewaterhouseCoopers on accounting or
financial disclosures for the years ended December 31, 1998 or 1997.
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[FINANCIAL STATEMENTS TO BE FILED BY AMENDMENT]
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APPENDIX A
ILLUSTRATION OF A MARKET VALUE ADJUSTMENT
<TABLE>
<S> <C>
Purchase Payment: $40,000
Guarantee Period: 5 Years
Guaranteed Interest Rate: 5% Annual Effective Rate
</TABLE>
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 we are 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 we are then crediting 6.5% for
a four-year Guarantee Period. Upon a full withdrawal, the market value
adjustment factor would be:
<TABLE>
<C> <C> <S> <C> <C> <C> <C>
(1 + .05) 4
-.0726961* = [ ----------------- ] -1
(1 + .065 + .005)
</TABLE>
The Market Value Adjustment is a reduction of $3,053.24 from the Guarantee
Period Value:
-3,053.24 = -.0726961 X 42,000.00
The Market Adjusted Value would be:
$38,946.76 = $42,000.00 - $3,053.24
A Withdrawal Charge of 6% would be assessed against the Market Adjusted Value in
excess of the amount available as a free withdrawal. In this case, there are no
prior withdrawals, so 15% of the Market Adjusted Value is not subject to a
Withdrawal Charge. The Withdrawal Charge is thus:
$1,986.29 = $38,946.76 X .85 X .06
Thus, the amount payable on a full withdrawal would be:
$36,960.48 = $38,946.76 - $1,986.29
- ---------------
* Actual calculation utilizes 10 decimal places.
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If instead of a full withdrawal, 50% of the Guarantee Period Value was withdrawn
(partial withdrawal of 50%), the Market Value Adjustment would be 50% of that of
the full withdrawal:
-$1,526.62 = -.0726961 X $21,000.00
The Market Adjusted Value would be:
$19,473.38 = $21,000.00 - $1,526.62
The Withdrawal Charge of 6% would apply to the Market Adjusted Value being
withdrawn, less 15% of the full Market Adjusted Value as there are no prior
withdrawals:
$819.68 = ($19,473.38 - .15 X $38,946.76) X .06
Thus, the amount payable on this partial withdrawal would be:
$18,653.70 = $19,473.38 - $819.68
EXAMPLE OF AN UPWARD MARKET VALUE ADJUSTMENT
An upward Market Value Adjustment results from a withdrawal that occurs when
interest rates have decreased. Assume interest rates have decreased one year
later and we are then crediting 4% for a four-year Guarantee Period. Upon a full
withdrawal, the market value adjustment factor would be:
<TABLE>
<C> <C> <S> <C> <C> <C> <C>
(1 + .05) 4
+.0192766 = [ ---------------- ] -1
(1 + .04 + .005)
</TABLE>
The Market Value Adjustment is an increase of $809.62 to the Guarantee Period
Value:
$809.62 = $42,000.00 X .0192766
The Market Adjusted Value would be:
$42,809.62 = $42,000.00 + $809.62
A Withdrawal Charge of 6% would apply to the Market Adjusted Value being
withdrawn, less 15% of the full Market Adjusted Value, as there were no prior
withdrawals:
$2,183.29 = $42,809.62 X .85 X .06
Thus, the amount payable on withdrawal would be:
$40,626.33 = $42,809.62 - $2,183.29
If instead of a full withdrawal, 50% of the Guarantee Period Value was withdrawn
(partial withdrawal of 50%), the Market Value Adjustment would be:
$404.81 = $21,000.00 X .0192766
The Market Adjusted Value of $21,000.00 would be:
$21,404.81 = $21,000.00 + $404.81
The Withdrawal Charge of 6% would apply to the Market Adjusted Value being
withdrawn, less 15% of the full Market Adjusted Value as there are no prior
withdrawals:
$899.00 = ($21,404.81 - .1 X $42,809.62) X .06
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Thus, the amount payable on this partial withdrawal would be:
$20,505.81 = $21,404.81 - $899.00
Actual Market Value Adjustment may have a greater or lesser impact than that
shown in the Examples, depending on the actual change in interest crediting
rates and the timing of the withdrawal or transfer in relation to the time
remaining in the Guarantee Period.
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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 Certificate and receive back 100% of your money. To do so, wire Kemper
Investors Life Insurance Company, 1 Kemper Drive, Long Grove, Illinois 60049, or
call 1-800-621-5001.
B. STATUTORY REQUIREMENTS
This Certificate is intended to meet the requirements of Section 408(b) of the
Internal Revenue Code (Code), 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 Certificate 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 Certificate, and does
not represent a determination on the merits of the Certificate.
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 Certificate must be nontransferable by the owner.
3. The Certificate 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 Certificate is distributed,
unless otherwise permitted under applicable law, any remaining interest in the
Certificate 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 Certificate will be treated as his or her own IRA, or, where
applicable, Roth IRA.
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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.
2. You must complete the transfer by the 60th day after the day you receive the
distribution from your IRA or other qualified employee benefit plan or SIMPLE
IRA.
3. A rollover distribution may be made to you only once a year. The one-year
period begins on the date you receive the rollover distribution, not on the date
you roll it over (reinvest it).
4. A direct transfer to an IRA of funds in an IRA from one trustee or insurance
company to another is NOT a rollover. It is a transfer that is not affected by
the one-year waiting period.
5. All or a part of the premium for this Certificate used as an IRA may be paid
from a rollover from an IRA, qualified pension or profit-sharing plan or
tax-sheltered annuity, or from a direct transfer from another IRA. All or part
of the premium for this Certificate used as a SIMPLE IRA may be paid from a
rollover from a SIMPLE IRA or SIMPLE Individual Retirement Account or, to the
extent permitted by law, from a direct transfer from a SIMPLE IRA or SIMPLE
Individual Retirement Account.
6. Beginning January 1, 1993, a distribution that is eligible for rollover
treatment from a qualified employee benefit plan or tax-sheltered annuity will
be subject to twenty percent (20%) withholding by the Internal Revenue Service
even if you roll the distribution over within the 60-day rollover period. One
way to avoid this withholding is to make the distribution as a direct transfer
to the IRA trustee or insurance company.
D. 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.
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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 not 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.
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.
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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 Certificate
and Section 401(a)(9) of the Code from your IRA and SIMPLE IRA starting with the
year you reach age 70 1/2 (your 70 1/2 year). Ordinarily, the required minimum
distribution for a particular year must be received by December 31 of that year.
However, you may delay the required minimum distribution for the year you reach
age 70 1/2 until April 1 of the following year (I.E., the required beginning
date).
Annuity payments which begin by April 1 of the year following your 70 1/2 year
satisfy the minimum distribution requirement if they provide for non-increasing
payments over the life or the lives of you and your spouse, provided that, if
installments are guaranteed, the guaranty period does not exceed the lesser of
20 years or the applicable life expectancy.
The applicable life expectancy is your remaining life expectancy or the
remaining joint life and last survivor expectancy of you and your designated
beneficiary. Life expectancies are determined using the expected return multiple
tables shown in IRS Publication 590 "Individual Retirement Arrangements." To
obtain a free copy of IRS Publication 590 and other IRS forms, phone the IRS
toll free at 1-800-729-3676 or write the IRS Forms Distribution Center for your
area as shown in your income tax return instructions.
If you have more than one IRA, you must determine the required minimum
distribution separately for each IRA; however, you can take the actual
distributions of these amounts from any one or more of your IRAs.
If the actual distribution from your Certificate is less than the minimum amount
that should be distributed in accordance with the minimum distribution
requirements mentioned above, the difference generally is an excess
accumulation. There is a 50% excise tax on any excess accumulations. If the
excess accumulation is due to reasonable error, and you have taken (or are
taking) steps to remedy the insufficient distribution, you can request that this
50% excise tax be excused by filing with your tax return an IRS Form 5329,
together with a letter of explanation and the excise tax payment.
I. ROTH IRAs
1. If your contract is a special type of individual retirement plan known as
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
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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 Certificate 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. We reserve 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
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from an IRA, but only if such rollover contribution also meets the rollover
requirements for IRAs under section 408(d)(3). In addition, a transfer may be
made to a Roth IRA directly from another Roth IRA or from an IRA.
You may not make a qualified rollover contribution or transfer in a taxable year
from an IRA to a Roth IRA if (a) your adjusted gross income for the taxable year
exceeds $100,000 or (b) you are married and file a separate return.
The rollover requirements of section 408(d)(3) are complex and should be
carefully considered before you make a rollover. One of the requirements is that
the amount received be paid into another IRA (or Roth IRA) within 60 days after
receipt of the distribution. In addition, a rollover contribution from a Roth
IRA may be made by you only once a year. The one-year period begins on the date
you receive the Roth IRA distribution, not on the date you roll it over
(reinvest it) into another Roth IRA. If you withdraw assets from a Roth IRA, you
may roll over part of the withdrawal tax free into another Roth IRA and keep the
rest of it. A portion of the amount you keep may be included in your gross
income.
2. Taxation of Rollovers And Transfers to Roth IRAs -- A qualified rollover
contribution or transfer from a Roth IRA maintained for your benefit to another
Roth IRA maintained for your benefit which meets the rollover requirements for
IRAs under section 408(d)(3) is tax-free.
In the case of a qualified rollover contribution or a transfer from an IRA
maintained for your benefit to a Roth IRA maintained for your benefit, any
portion of the amount rolled over or transferred which would be includible in
your gross income were it not part of a qualified rollover contribution or a
nontaxable transfer will be includible in your gross income. However, section
72(t) of the Code (relating to the 10 percent penalty tax on premature
distributions) will generally not apply unless the amounts rolled over or
transferred are withdrawn within the five-year period beginning with the taxable
year in which such contribution was made.
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 a 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
76
<PAGE> 80
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 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 Certificate. Generally, an excess contribution is the amount contributed to
your Certificate that is more than you can contribute. The excess is taxed for
the year of the excess contribution and for each year after that until you
correct it.
2. You will not have to pay the 6% excise tax if you withdraw the excess amount
by the date your tax return is due including extensions for the year of the
contribution. You do not have to include in your gross income an excess
contribution that you withdraw from your Certificate before your tax return is
due if the income earned on the excess was also withdrawn and no deduction was
allowed for the excess contribution. You must include in your gross income the
income earned on the excess contribution.
77
<PAGE> 81
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 high education expenses, certain medical expenses, or by an unemployed
individual to pay health insurance premiums.
O. IRA EXCISE TAX REPORTING
Use Form 5329, Additional Taxes Attributable to Qualified Retirement Plans
(Including IRAs), Annuities, and Modified Endowment Contracts, to report the
excise taxes on excess contributions, premature distributions, and excess
accumulations. If you do not owe any IRA, Roth IRA or SIMPLE 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 Certificate or use it as security for a loan,
the Certificate 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
Certificate 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.
78
<PAGE> 82
S. FINANCIAL DISCLOSURE FOR THE SEPARATE ACCOUNT (VARIABLE ACCOUNT)
AND MVA OPTION.
1. If on the enrollment application you indicated an allocation to a Subaccount,
this Certificate will be assessed a daily charge of an amount which will equal
an aggregate of 1.25% per annum.
2. An annual records maintenance charge of $30.00 will be assessed against the
Separate Account Value each Certificate Year. If no values are in the
Subaccounts, the charge will be assessed against Guarantee Period Value.
3. Withdrawal and early annuitization charges will be assessed based on the
Certificate Years elapsed since the Certificate was issued as described in the
prospectus under the heading "Withdrawal Charge."
Withdrawals, transfers and early annuitizations of Guarantee Period Value may be
subject to a Market Value Adjustment as described in the prospectus under the
heading "Market Value Adjustment."
4. The method used to compute and allocate the annual earnings is contained in
the prospectus under the heading "Accumulation Unit Value" for Separate Account
Value and under the headings "Guarantee Periods of the MVA Option" and
"Establishment of Guaranteed Interest Rates" for Guarantee Period Value.
5. The growth in value of your Certificate is neither guaranteed nor projected
but is based on the investment experience of the Subaccounts or rates of
interest as declared by Kemper Investors Life Insurance Company.
79
<PAGE> 83
STATEMENT OF ADDITIONAL INFORMATION
MARCH 16, 2000
- --------------------------------------------------------------------------------
INDIVIDUAL AND GROUP VARIABLE AND MARKET VALUE ADJUSTED
DEFERRED ANNUITY CONTRACTS
- --------------------------------------------------------------------------------
ZURICH PREFERRED
ISSUED BY
KILICO VARIABLE ANNUITY SEPARATE ACCOUNT
AND
KEMPER INVESTORS LIFE INSURANCE COMPANY
HOME OFFICE: 1 KEMPER DRIVE, LONG GROVE, ILLINOIS 60049 (847) 550-5500
This Statement of Additional Information is not a prospectus. This Statement of
Additional Information should be read in conjunction with the Prospectus of the
Separate Account dated , 2000. 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-4
Experts..................................................... B-4
Financial Statements........................................ B-4
Report of Independent Public Accountants....................
Financial Statements of the Separate Account................
Appendix A Table of Historical Hypothetical Accumulation
Unit Values and Performance Information................... B-6
Appendix B State Premium Tax Chart.......................... B-13
</TABLE>
<PAGE> 84
SERVICES TO THE SEPARATE ACCOUNT
[TO BE UPDATED BY AMENDMENT]
Kemper Investors Life Insurance Company ("KILICO") maintains the books and
records of the KILICO Variable Annuity Separate Account (the "Separate
Account"). KILICO holds the assets of the Separate Account. The assets are kept
segregated and held separate and apart from the general funds of KILICO. KILICO
maintains records of all purchases and redemptions of shares of each Portfolio
of the Kemper Investors Fund (the "Fund") by each of the Subaccounts. All
expenses incurred in the operations of the Separate Account, except the charge
for mortality and expense risk and administrative expenses, and records
maintenance charge (as described in the Prospectus) are borne by KILICO.
The independent auditors for the Separate Account are PricewaterhouseCoopers
LLP, Chicago, Illinois, for the years ended December 31, 1999 and 1998. The firm
performed the annual audit of the financial statements of the Separate Account
and KILICO for the years ended December 31, 1999 and 1998.
The Certificates are sold by licensed insurance agents, where the Certificates
may be lawfully sold, who are registered representatives of broker-dealers which
are registered under the Securities Exchange Act of 1934 and are members of the
National Association of Securities Dealers, Inc. The Certificates are
distributed through the principal underwriter for the Separate Account,
Investors Brokerage Services, Inc., a subsidiary of KILICO, which enters into
selling group agreements with the affiliated and unaffiliated broker-dealers.
Subject to the provisions of the Contracts, units of the Subaccounts under the
Contract are offered on a continuous basis.
KILICO pays commissions to the seller which may vary but are not anticipated to
exceed in the aggregate an amount equal to six percent (6%) of Purchase
Payments. During 1998, 1997 and 1996, KILICO incurred gross commissions payable
of approximately $ , $4.2 and $5.6 million, respectively, to licensed
insurance agents.
PERFORMANCE INFORMATION OF SUBACCOUNTS
[TO BE UPDATED BY AMENDMENT]
As described in the Prospectus, a Subaccount's historical performance may be
shown in the form of standardized "average annual total return" and
nonstandardized "total return" calculations in the case of all Subaccounts;
"yield" information may be provided in the case of the Kemper High Yield
Subaccount, Kemper Investment Grade Bond Subaccount, Kemper Government
Securities Subaccount, and Kemper Global Income Subaccount; and "yield" and
"effective yield" information may be provided in the case of the Kemper Money
Market Subaccount #1 and Kemper Money Market Subaccount #2 (collectively, the
"Kemper Money Market Subaccounts"). 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 Certificate to all Certificate 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
B-1
<PAGE> 85
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 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 (cumulative) nonstandardized total return figures
may be provided. Annualized nonstandardized total return figures represent the
average annual percentage change in the value of a Subaccount over the
applicable period while nonannualized (cumulative) figures represent the actual
percentage change over the applicable period.
Standardized average annual total return quotations will be current to the last
day of the calendar quarter and nonstandardized total return quotations will be
current to the last day of the calendar month preceding the date on which an
advertisement is submitted for publication. Standardized average annual total
return will cover periods of one, three, five and ten years, if applicable, and
a period covering the time the underlying Portfolio has been held in a
Subaccount (life of Subaccount). Nonstandardized total return will cover periods
of one, three, five and ten years, if applicable, and a period covering the time
the underlying Portfolio held in a Subaccount has been in existence (life of
Portfolio). For those underlying Portfolios which have not been held as
Subaccounts within the Separate Account for one of the quoted periods, the
nonstandardized total return quotations will show the investment performance
such underlying Portfolios would have achieved (reduced by the applicable
charges) had they been held as Subaccounts within the Separate Account for the
period quoted.
Performance information will be shown for periods from April 6, 1982 (inception)
for the Kemper Money Market Subaccount, Kemper Total Return Subaccount and
Kemper High Yield Subaccount, and for periods from December 9, 1983 (inception)
for the Kemper Growth Subaccount. This performance information is stated to
reflect that the Separate Account was reorganized on November 3, 1989 as a unit
investment trust with Subaccounts investing in corresponding Portfolios of the
Fund. In addition, on that date the Kemper Government Securities Subaccount was
added to the Separate Account to invest in the Fund's Government Securities
Portfolio. For the Kemper Government Securities Subaccount, performance figures
will reflect investment experience as if the Kemper Government Securities
Subaccount had been available under the Contracts since September 3, 1987, the
inception date of the Kemper Government Securities Portfolio.
The yield for the Kemper High Yield Subaccount, the Kemper Investment Grade Bond
Subaccount, and the Kemper Government Securities Subaccount, and the Kemper
Global Income Subaccount is computed in accordance with a standard method
prescribed by rules of the Securities and Exchange Commission. The yields for
the Kemper High Yield Subaccount, the Kemper Government Securities Subaccount,
the Kemper Investment Grade Bond Subaccount and the Kemper Global Income
Subaccount, based upon the one month period ended March 31, 2000 were %,
%, % and %, respectively. The yield quotation is computed by
dividing the net investment income per unit earned during the specified one
B-2
<PAGE> 86
month or 30-day period by the accumulation unit values on the last day of the
period, according to the following formula that assumes a semi-annual
reinvestment of income:
<TABLE>
<S> <C> <C>
a - b
-------
YIELD = 2[( +1)(6) - 1]
cd
</TABLE>
a = net dividends and interest earned during the period by the Fund attributable
to the Subaccount
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of Accumulation Units outstanding during the period
d = the Accumulation Unit value per unit on the last day of the period
The yield of each Subaccount reflects the deduction of all recurring fees and
charges applicable to each Subaccount, but does not reflect the deduction of
withdrawal charges or premium taxes.
The Kemper Money Market Subaccounts' yields are computed in accordance with a
standard method prescribed by rules of the Securities and Exchange Commission.
Under that method, the current yield quotation is based on a seven-day period
and computed as follows: the net change in the Accumulation Unit Value during
the period is divided by the Accumulation Unit Value at the beginning of the
period ("base period return") and the result is divided by 7 and multiplied by
365 and the current yield figure carried to the nearest one-hundredth of one
percent. Realized capital gains or losses and unrealized appreciation or
depreciation of the Account's portfolio are not included in the calculation. The
yield for the seven-day period ended March 31, 2000 was % for the Kemper
Money Market Subaccount #1 and % for Kemper Money Market Subaccount #2. The
average portfolio maturity was 14 days.
The Kemper Money Market Subaccounts' effective yields are 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 effective yield for the seven-day period ended
March 31, 2000 was % for the Kemper Money Market Subaccount #1 and %
for Kemper Money Market Subaccount #2.
In computing yield, the Separate Account follows certain standard accounting
practices specified by Securities and Exchange Commission rules. These practices
are not necessarily consistent with the accounting practices that the Separate
Account uses in the preparation of its annual and semi-annual financial
statements.
A Subaccount's performance quotations are based upon historical earnings and are
not necessarily representative of future performance. The Subaccount's units are
sold at Accumulation Unit value. Performance figures and Accumulation Unit value
will fluctuate. Factors affecting a Subaccount's performance include general
market conditions, operating expenses and investment management. Units of a
Subaccount are redeemable at Accumulation Unit value, which may be more or less
than original cost. The performance figures include the deduction of all
expenses and fees, including a prorated portion of the Records Maintenance
Charge. Redemptions within the first six years after purchase may be subject to
a Withdrawal Charge that ranges from 6% the first year to 0% after six years.
Yield, effective yield and nonstandardized total return do not reflect the
effect of the Withdrawal Charge or premium taxes that may be imposed upon the
redemption of units. Standardized average annual total return reflects the
effect of the applicable Withdrawal Charge (but not premium tax) that may be
imposed at the end of the period in question.
B-3
<PAGE> 87
The Subaccounts may also provide comparative information on an annualized or
nonannualized (cumulative) basis with regard to various indexes described in the
Prospectus. In addition, the Subaccounts may provide performance analysis
rankings of Lipper Analytical Services, Inc., the VARDS Report, MORNINGSTAR,
INC., Ibbotson Associates or Micropal. 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 tables in Appendix A include standardized average annual total return and
nonstandardized total return quotations for various periods as of December 31,
1999.
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
[TO BE UPDATED BY AMENDMENT]
The statements of assets and liabilities and contract owners' equity of the
Separate Account as of December 31, 1999 and the related statement of operations
for the year then ended and the statements of changes in contract owners' equity
for the years ended December 31, 1999 and 1998 have been included herein in
reliance upon the report of PricewaterhouseCoopers LLP, independent 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 the Certificates and also
reflect assets attributable to other variable annuity contracts offered by
KILICO through the Separate Account.
B-4
<PAGE> 88
[FINANCIAL STATEMENTS TO BE FILED BY AMENDMENT]
B-5
<PAGE> 89
APPENDIX A
[TO BE UPDATED BY AMENDMENT]
TABLE OF HISTORICAL HYPOTHETICAL* ACCUMULATION UNIT VALUES
AND PERFORMANCE INFORMATION
The historical accumulation unit values are for the life of the Separate Account
in its present organization as a unit investment trust and in its prior
organization as several managed separate accounts based on current deductions
and charges applicable to the Certificates. The Certificates were first offered
January 6, 1992. Values may have varied had assets actually been allocated to
the Separate Account under the Certificates.
HISTORICAL HYPOTHETICAL ACCUMULATION UNIT VALUES
<TABLE>
<CAPTION>
KEMPER MONEY MARKET
SUBACCOUNT #1
- ---------------------------------------
UNIT
DATE VALUES
- -------- --------
<S> <C> <C>
04/06/82 ................... .521904
12/31/82 ................... .561706
12/31/83 ................... .605415
12/31/84 ................... .661060
12/31/85 ................... .705934
12/31/86 ................... .743260
12/31/87 ................... .782353
12/31/88 ................... .830274
12/31/89 ................... .894703
12/31/90 ................... .955536
12/31/91 ................... .999459
12/31/92 ................... 1.021027
12/31/93 ................... 1.037409
12/31/94 ................... 1.065127
12/31/95 ................... 1.111573
12/31/96 ................... 1.153353
12/31/97 ................... 1.199008
12/31/98 ................... 1.245376
12/31/99 ...................
</TABLE>
<TABLE>
<CAPTION>
KEMPER MONEY MARKET
SUBACCOUNT #2
- ---------------------------------------
UNIT
DATE VALUES
- -------- --------
<S> <C> <C>
04/06/82 ................... .488861
12/31/82 ................... .526477
12/31/83 ................... .569164
12/31/84 ................... .623384
12/31/85 ................... .669150
12/31/86 ................... .709261
12/31/87 ................... .752167
12/31/88 ................... .804725
12/31/89 ................... .874829
12/31/90 ................... .944037
12/31/91 ................... .999255
12/31/92 ................... 1.033619
12/31/93 ................... 1.063332
12/31/94 ................... 1.105349
12/31/95 ................... 1.167919
12/31/96 ................... 1.227089
12/31/97 ................... 1.291613
12/31/98 ................... 1.358323
12/31/99 ...................
</TABLE>
<TABLE>
<CAPTION>
KEMPER TOTAL RETURN
SUBACCOUNT
- ---------------------------------------
UNIT
DATE VALUES
- -------- --------
<S> <C> <C>
04/14/82 ................... .271127
12/31/82 ................... .334579
12/31/83 ................... .388564
12/31/84 ................... .364932
12/31/85 ................... .462836
12/31/86 ................... .526008
12/31/87 ................... .522732
12/31/88 ................... .578123
12/31/89 ................... .707717
12/31/90 ................... .734077
12/31/91 ................... .997337
12/31/92 ................... 1.001657
12/31/93 ................... 1.109293
12/31/94 ................... .991561
12/31/95 ................... 1.233678
12/31/96 ................... 1.422563
12/31/97 ................... 1.685450
12/31/98 ................... 1.916699
12/31/99 ...................
</TABLE>
<TABLE>
<CAPTION>
KEMPER HIGH YIELD
SUBACCOUNT
- ---------------------------------------
UNIT
DATE VALUES
- -------- --------
<S> <C> <C>
04/14/82 ................... .309713
12/31/82 ................... .382894
12/31/83 ................... .433711
12/31/84 ................... .482077
12/31/85 ................... .579127
12/31/86 ................... .673071
12/31/87 ................... .703823
12/31/88 ................... .805071
12/31/89 ................... .784945
12/31/90 ................... .655406
12/31/91 ................... .982658
12/31/92 ................... 1.142847
12/31/93 ................... 1.354484
12/31/94 ................... 1.307729
12/31/95 ................... 1.516342
12/31/96 ................... 1.707976
12/31/97 ................... 1.882768
12/31/98 ................... 1.886520
12/31/99 ...................
</TABLE>
<TABLE>
<CAPTION>
KEMPER GROWTH
SUBACCOUNT
- ---------------------------------------
UNIT
DATE VALUES
- -------- --------
<S> <C> <C>
12/13/83 ................... .336632
12/31/83 ................... .346384
12/31/84 ................... .378954
12/31/85 ................... .468051
12/31/86 ................... .504874
12/31/87 ................... .507011
12/31/88 ................... .502672
12/31/89 ................... .636443
12/31/90 ................... .632214
12/31/91 ................... .995577
12/31/92 ................... 1.018405
12/31/93 ................... 1.152836
12/31/94 ................... 1.092975
12/31/95 ................... 1.435510
12/31/96 ................... 1.724222
12/31/97 ................... 2.066379
12/31/98 ................... 2.349101
12/31/99 ...................
</TABLE>
<TABLE>
<CAPTION>
KEMPER GOVERNMENT SECURITIES
SUBACCOUNT
- ---------------------------------------
UNIT
DATE VALUES
- -------- --------
<S> <C> <C>
07/13/87 ................... .700085
12/31/87 ................... .710087
12/31/88 ................... .723278
12/31/89 ................... .811610
12/31/90 ................... .881949
12/31/91 ................... 1.004106
12/31/92 ................... 1.050227
12/31/93 ................... 1.104499
12/31/94 ................... 1.060977
12/31/95 ................... 1.246817
12/31/96 ................... 1.262885
12/31/97 ................... 1.358996
12/31/98 ................... 1.436583
12/31/99 ...................
</TABLE>
B-6
<PAGE> 90
<TABLE>
<CAPTION>
KEMPER INTERNATIONAL SUBACCOUNT
- -----------------------------------------------------------
UNIT
DATE VALUES
- -------- --------
<S> <C> <C>
12/31/92 ....................................... .980721
12/31/93 ....................................... 1.286576
12/31/94 ....................................... 1.225134
12/31/95 ....................................... 1.365361
12/31/96 ....................................... 1.570689
12/31/97 ....................................... 1.698099
12/31/98 ....................................... 1.845192
12/31/99 .......................................
</TABLE>
<TABLE>
<CAPTION>
KEMPER SMALL CAP GROWTH SUBACCOUNT
- -----------------------------------------------------------
UNIT
DATE VALUES
- -------- --------
<S> <C> <C>
12/31/94 ....................................... 1.030937
12/31/95 ....................................... 1.324483
12/31/96 ....................................... 1.674797
12/31/97 ....................................... 2.219929
12/31/98 ....................................... 2.595291
12/31/99 .......................................
</TABLE>
<TABLE>
<CAPTION>
KEMPER
INVESTMENT GRADE
BOND SUBACCOUNT
- ---------------------------------------
UNIT
DATE VALUES
- -------- --------
<S> <C> <C>
12/31/96 ................... 1.027174
12/31/97 ................... 1.106151
12/31/98 ................... 1.179189
12/31/99 ...................
</TABLE>
<TABLE>
<CAPTION>
KEMPER CONTRARIAN VALUE
SUBACCOUNT
- ---------------------------------------
UNIT
DATE VALUES
- -------- --------
<S> <C> <C>
12/31/96 ................... 1.163902
12/31/97 ................... 1.498831
12/31/98 ................... 1.765483
12/31/99 ...................
</TABLE>
<TABLE>
<CAPTION>
KEMPER
SMALL CAP VALUE
SUBACCOUNT
- ---------------------------------------
UNIT
DATE VALUES
- -------- --------
<S> <C> <C>
12/31/96 ................... 1.010142
12/31/97 ................... 1.214542
12/31/98 ................... 1.064601
12/31/99 ...................
</TABLE>
<TABLE>
<CAPTION>
KEMPER
VALUE+GROWTH
SUBACCOUNT
- ---------------------------------------
UNIT
DATE VALUES
- -------- --------
<S> <C> <C>
12/31/96 ................... 1.136559
12/31/97 ................... 1.408420
12/31/98 ................... 1.671674
12/31/99 ...................
</TABLE>
<TABLE>
<CAPTION>
KEMPER
HORIZON 20+
SUBACCOUNT
- ---------------------------------------
UNIT
DATE VALUES
- -------- --------
<S> <C> <C>
12/31/96 ................... 1.144182
12/31/97 ................... 1.361426
12/31/98 ................... 1.519935
12/31/99 ...................
</TABLE>
<TABLE>
<CAPTION>
KEMPER
HORIZON 10+
SUBACCOUNT
- ---------------------------------------
UNIT
DATE VALUES
- -------- --------
<S> <C> <C>
12/31/96 ................... 1.104505
12/31/97 ................... 1.273820
12/31/98 ................... 1.400638
12/31/99 ...................
</TABLE>
<TABLE>
<CAPTION>
KEMPER
HORIZON 5 SUBACCOUNT
- ---------------------------------------
UNIT
DATE VALUES
- -------- --------
<S> <C> <C>
12/31/96 ................... 1.086828
12/31/97 ................... 1.209733
12/31/98 ................... 1.311331
12/31/99 ...................
</TABLE>
<TABLE>
<CAPTION>
KEMPER
BLUE CHIP SUBACCOUNT
- ---------------------------------------
UNIT
DATE VALUES
- -------- --------
<S> <C> <C>
12/31/97 ................... 1.106221
12/31/98 ................... 1.243830
12/31/99 ...................
</TABLE>
<TABLE>
<CAPTION>
KEMPER
GLOBAL INCOME SUBACCOUNT
- ---------------------------------------
UNIT
DATE VALUES
- -------- --------
<S> <C> <C>
12/31/97 ................... 1.020218
12/31/98 ................... 1.118307
12/31/99 ...................
</TABLE>
- ---------------
* As of January 6, 1992 the accumulation unit values are based on actual
performance.
B-7
<PAGE> 91
PERFORMANCE FIGURES
(AS OF DECEMBER 31, 1998)
<TABLE>
<CAPTION>
STANDARDIZED
AVERAGE
NONSTANDARDIZED ANNUAL
TOTAL RETURN(1) TOTAL
----------------------- RETURN(2)
YEAR TO DATE CUMULATIVE ------------
(%) ENDING (%) ANNUALIZED ANNUALIZED
RETURN(3) VALUE(4) RETURN (%) RETURN (%) RETURN
------------ -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
KEMPER CONTRARIAN VALUE SUBACCOUNT................... 17.79%
Life of Subaccount (from 05/01/96)................. 20.72%
Life of Portfolio (from 05/01/96).................. $ 70,580 76.45% 23.71% N/A
One Year........................................... 47,102 17.76 17.76 10.46
KEMPER VALUE+GROWTH SUBACCOUNT....................... 18.69
Life of Subaccount (from 05/01/96)................. 18.31
Life of Portfolio (from 05/01/96).................. 66,831 67.08 21.21 N/A
One Year........................................... 47,463 18.66 18.66 11.39
KEMPER HORIZON 20+ SUBACCOUNT........................ 11.64
Life of Subaccount (from 05/01/96)................. 13.68
Life of Portfolio (from 05/01/96).................. 60,748 51.87 16.95 N/A
One Year........................................... 44,640 11.60 11.60 4.28
KEMPER MONEY MARKET SUBACCOUNT(7).................... 3.87
Life of Subaccount (from 04/06/82)................. 4.26
Life of Portfolio (from 04/06/82).................. 95,070 137.68 5.31 N/A
Ten Years.......................................... 60,752 51.88 4.27 2.05
Five Years......................................... 48,110 20.27 3.76 0.93
Three Years........................................ 45,195 12.99 4.15 0.30
One Year........................................... 41,528 3.82 3.82 -3.20
KEMPER HIGH YIELD SUBACCOUNT(6)...................... 0.20
Life of Subaccount (from 04/06/82)................. 10.72
Life of Portfolio (from 04/06/82).................. 236,918 492.30 11.22 N/A
Ten Years.......................................... 93,387 133.47 8.85 7.17
Five Years......................................... 55,634 39.09 6.82 4.60
Three Years........................................ 49,707 24.27 7.51 4.34
One Year........................................... 40,064 0.16 0.16 -6.39
KEMPER GOVERNMENT SECURITIES SUBACCOUNT.............. 5.71
Life of Subaccount (from 11/03/89)................. 4.99
Life of Portfolio (from 09/03/87).................. 80,965 102.41 6.42 N/A
Ten Years.......................................... 79,226 98.06 7.07 5.83
Five Years......................................... 51,933 29.83 5.36 3.12
Three Years........................................ 46,033 15.08 4.79 1.65
One Year........................................... 42,269 5.67 5.67 -1.11
KEMPER INVESTMENT GRADE BOND SUBACCOUNT.............. 6.60
Life of Subaccount (from 05/01/96)................. 3.86
Life of Portfolio (from 05/01/96).................. 47,144 17.86 6.35 N/A
One Year........................................... 42,632 6.58 6.58 0.25
</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. See page B-29 for additional information.
B-8
<PAGE> 92
PERFORMANCE FIGURES
(AS OF DECEMBER 31, 1998)
(CONTINUED)
<TABLE>
<CAPTION>
STANDARDIZED
AVERAGE
NONSTANDARDIZED ANNUAL
TOTAL RETURN(1) TOTAL
----------------------- RETURN(2)
YEAR TO DATE CUMULATIVE ------------
(%) ENDING (%) ANNUALIZED ANNUALIZED
RETURN(3) VALUE(4) RETURN (%) RETURN (%) RETURN
------------ -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
KEMPER GLOBAL INCOME SUBACCOUNT(5)................... 9.61%
Life of Subaccount (from 05/01/97)................. 3.07%
Life of Portfolio (from 05/01/97).................. $ 44,722 11.81% 6.92% N/A
One Year........................................... 43,838 9.60 9.60 3.29
KEMPER GROWTH SUBACCOUNT............................. 13.68
Life of Subaccount (from 12/09/83)................. 13.14
Life of Portfolio (from 12/09/83).................. 278,184 595.46 13.74 N/A
Ten Years.......................................... 186,451 366.13 16.64 15.42
Five Years......................................... 81,380 103.45 15.26 13.05
Three Years........................................ 65,390 63.47 17.80 14.54
One Year........................................... 45,457 13.64 13.64 6.39
KEMPER SMALL CAP GROWTH.............................. 16.91
Life of Subaccount (from 05/02/94)................. 21.00
Life of Portfolio (from 05/02/94).................. 103,737 159.34 22.65 N/A
Three Years........................................ 78,328 95.82 25.11 22.25
One Year........................................... 46,752 16.88 16.88 9.89
KEMPER SMALL CAP VALUE SUBACCOUNT.................... -12.35
Life of Subaccount (from 05/01/96)................. -0.16
Life of Portfolio (from 05/01/96).................. 42,559 6.40 2.35 N/A
One Year........................................... 35,052 -12.37 -12.37 -17.73
KEMPER INTERNATIONAL SUBACCOUNT(5)................... 8.66
Life of Subaccount (from 01/06/92)................. 8.05
Life of Portfolio (from 01/06/92).................. 73,681 84.20 9.13 N/A
Five Years......................................... 57,276 43.19 7.44 5.34
Three Years........................................ 53,693 34.23 10.31 7.43
One Year........................................... 43,453 8.63 8.63 2.02
KEMPER TOTAL RETURN SUBACCOUNT(6).................... 13.72
Life of Subaccount (from 04/06/82)................. 11.04
Life of Portfolio (from 04/06/82).................. 263,276 558.19 11.92 N/A
Ten Years.......................................... 132,472 231.18 12.72 11.12
Five Years......................................... 68,982 72.46 11.52 9.04
Three Years........................................ 62,073 55.18 15.77 12.33
One Year........................................... 45,470 13.68 13.68 6.24
</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. See page B-29 for additional information.
B-9
<PAGE> 93
PERFORMANCE FIGURES
(AS OF DECEMBER 31, 1998)
(CONTINUED)
<TABLE>
<CAPTION>
STANDARDIZED
AVERAGE
NONSTANDARDIZED ANNUAL
TOTAL RETURN(1) TOTAL
----------------------- RETURN(2)
YEAR TO DATE CUMULATIVE ------------
(%) ENDING (%) ANNUALIZED ANNUALIZED
RETURN(3) VALUE(4) RETURN (%) RETURN (%) RETURN
------------ -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
KEMPER HORIZON 10+ SUBACCOUNT........................ 9.96%
Life of Subaccount (from 05/01/96)................. 10.18%
Life of Portfolio (from 05/01/96).................. $ 55,978 39.94% 13.42% N/A
One Year........................................... 43,964 9.91 9.91 2.64
KEMPER HORIZON 5 SUBACCOUNT.......................... 8.40
Life of Subaccount (from 05/01/96)................. 7.56
Life of Portfolio (from 05/01/96).................. 52,410 31.03 10.66 N/A
One Year........................................... 43,342 8.35 8.35 1.18
KEMPER BLUE CHIP SUBACCOUNT.......................... 12.44
Life of Subaccount (from 05/01/97)................. 9.67
Life of Portfolio (from 05/01/97).................. 49,739 24.35 13.95 N/A
One Year........................................... 44,965 12.41 12.41 5.72
</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. See page B-29 for additional information.
B-10
<PAGE> 94
PERFORMANCE FIGURES--NOTES
* N/A Not Applicable
(1) The Nonstandardized 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 for the period January 1, 1998 through December 31, 1998.
(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) 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.
(6) The high yield potential offered by these Subaccounts reflect the
substantial risks associated with investments in high-yield bonds.
(7) 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.
B-11
<PAGE> 95
TAX-DEFERRED ACCUMULATION
<TABLE>
<CAPTION>
NON-QUALIFIED CONVENTIONAL
ANNUITY SAVINGS PLAN
AFTER-TAX CONTRIBUTIONS
AND TAX-DEFERRED EARNINGS
--------------------------------
TAXABLE LUMP AFTER-TAX CONTRIBUTIONS
NO WITHDRAWALS SUM WITHDRAWAL AND TAXABLE EARNINGS
-------------- -------------- -----------------------
<S> <C> <C> <C>
10 Years............. $107,946 $ 86,448 $ 81,693
20 Years............. 233,048 165,137 133,476
30 Years............. 503,133 335,021 218,082
</TABLE>
This chart compares the accumulation of a $50,000 initial investment into a
Non-Qualified Annuity and a Conventional Savings Plan. Contributions to the
Non-qualified Annuity and the Conventional Savings Plan are made after-tax. Only
the gain in the Non-Qualified Annuity will be subject to income tax in a taxable
lump sum withdrawal. The chart assumes a 37.1% federal marginal tax rate and an
8% annual return. The 37.1% federal marginal tax is based on a marginal tax rate
of 36%, representative of the target market, adjusted to reflect a decrease of
$3 of itemized deductions for each $100 of income over $117,950. Tax rates are
subject to change as is the tax-deferred treatment of the Certificates. Income
on Non-Qualified Annuities is taxed as ordinary income upon withdrawal. A 10%
tax penalty may apply to early withdrawals. See "Federal Income Taxes" in the
prospectus. The chart does not reflect the following charges and expenses under
Kemper Passport: 1.10% mortality and expense risk; .15% administration charges;
6% maximum deferred withdrawal charge; and $30 annual records maintenance
charge. The tax-deferred accumulation would be reduced if these charges were
reflected. No implication is intended by the use of these assumptions that the
return shown is guaranteed in any way or that the return shown represents an
average or expected rate of return over the period of the Contracts.
[IMPORTANT--THIS IS NOT AN ILLUSTRATION OF YIELD OR RETURN]
Unlike savings plans, contributions to Non-Qualified Annuities provide
tax-deferred treatment on earnings. In addition, contributions to tax-deferred
retirement annuities are not subject to current tax in the year of contribution.
When monies are received from a Non-Qualified Annuity (and you have many
different options on how you receive your funds), they are subject to income
tax. At the time of receipt, if the person receiving the monies is retired, not
working or has additional tax exemptions, these monies may be taxed at a lesser
rate.
B-12
<PAGE> 96
APPENDIX B
STATE PREMIUM TAX CHART
<TABLE>
<CAPTION>
RATE OF TAX
-------------------------------
QUALIFIED NON-QUALIFIED
STATE PLANS PLANS
----- --------- -------------
<S> <C> <C>
California.................................................. .50% 2.35%*
District of Columbia........................................ 2.25% 2.25%*
Kentucky.................................................... 2.00%* 2.00%*
Maine....................................................... -- 2.00%
Nevada...................................................... -- 3.50%*
South Dakota................................................ -- 1.25%
West Virginia............................................... 1.00% 1.00%
Wyoming..................................................... -- 1.00%
</TABLE>
* Taxes become due when annuity benefits commence, rather than when the
premiums are collected. At the time of annuitization, the premium tax
payable will be charged against the Certificate Value.
B-13
<PAGE> 97
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(A) FINANCIAL STATEMENTS TO BE INCLUDED IN PART A: (TO BE FILED BY AMENDMENT)
Condensed Financial Information
Kemper Investors Life Insurance Company and Subsidiaries
Report of Independent Public Accountants
Kemper Investors Life Insurance Company and Subsidiaries Consolidated
Balance Sheets as of December 31, 1999 and 1998
Kemper Investors Life Insurance Company and Subsidiaries Consolidated
Statement of Operations, years ended December 31, 1999, 1998 and 1997
Kemper Investors Life Insurance Company and Subsidiaries Consolidated
Statements of Comprehensive Income, years ended December 31, 1999, 1998
and 1997
Kemper Investors Life Insurance Company and Subsidiaries Consolidated
Statement of Stockholder's Equity, years ended December 31, 1999, 1998 and
1997
Kemper Investors Life Insurance Company and Subsidiaries Consolidated
Statement of Cash Flows, years ended December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
(B) FINANCIAL STATEMENTS TO BE INCLUDED IN PART B: (TO BE FILED BY AMENDMENT)
KILICO Variable Annuity Separate Account
Reports of Independent Public Accountants
Statements of Assets and Liabilities and Contract Owners' Equity as of
December 31, 1999
Statements of Operations from the Year Ended December 31, 1999
Statements of Changes in Contract Owners' Equity for the Years Ended
December 31, 1999 and 1998
Notes to Financial Statements
(C) 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.
(2)3.1 Distribution Agreement between Investors Brokerage Services,
Inc. and KILICO.
(1)3.2 Addendum to Kemper Financial Services, Inc. Selling Group
Agreement.
4.1 Form of Group Variable and Market Value Adjusted Annuity
Contract. (To be filed by amendment)
4.2 Form of Certificate to Variable and Market Value Adjusted
Annuity Contract and Enrollment Application. (To be filed by
amendment)
4.3 Form of Individual Variable and Market Value Adjusted
Annuity Contract and Enrollment Application. (To be filed by
amendment)
4.4 Form of Endorsement to Variable and Market Value Adjusted
Deferred Annuity Contract. (To be filed by amendment)
4.5 Form of Endorsement to Certificate to Variable and Market
Value Adjusted Deferred Annuity Contract. (To be filed by
amendment)
5. Form of Application. (To be filed by amendment)
</TABLE>
C-1
<PAGE> 98
<TABLE>
<S> <C>
( 2)6.1 Kemper Investors Life Insurance Company Articles of Incorporation.
( 5)6.2 Kemper Investors Life Insurance Company Bylaws.
7. Inapplicable.
(9)8.1 Fund Participation Agreement among KILICO, Kemper Variable Series (formerly known as Kemper Investors Fund),
Zurich Kemper Investments, Inc. and Kemper Distributors, Inc.
(8)8.2(a) Participation Agreement between KILICO and Scudder Variable Life Investment Fund
(8)8.2(b) Participating Contract and Policy Agreement between KILICO and Scudder Kemper Investments, Inc.
(8)8.2(c) Indemnification Agreement between KILICO and Scudder Kemper Investments, Inc.
(7)8.3 Fund Participation Agreement by and among The Alger American Fund, KILICO and Fred Alger & Company,
Incorporated.
(10)8.4(a) Fund Participation Agreement among KILICO, Fidelity Variable Insurance Products Fund and Fidelity
Distributors Corporation.
(11)8.4(b) Amendment to Fund Participation Agreement among KILICO, Fidelity Variable Insurance Products Fund and
Fidelity Distributors Corporation.
(10)8.4(c) Fund Participation Agreement among KILICO, Fidelity Variable Insurance Products Fund II and Fidelity
Distributors Corporation.
(12)8.4(d) Amendment to Fund Participation Agreement among KILICO, Fidelity Variable Insurance Products Fund II and
Fidelity Distributors Corporation.
(13)8.5(a) Fund Participation Agreement among KILICO, Janus Aspen Series and Janus Capital Corporation.
(14)8.5(b) Service Agreement between KILICO and Janus Capital Corporation.
(18)8.6 Fund Participation Agreement by and between KILICO and American Century Investment Management, Inc.
(15)8.7 Form of Fund Participation Agreement between KILICO and J.P. Morgan Series Trust II.
( 9)8.8(a) Participation Agreement By and Among KILICO and Warburg, Pincus Trust and Credit Suisse Asset Management, LLC
(f/k/a Warburg Pincus Asset Management Inc.) and Counsellors Securities Inc.
(16)8.8(b) Service Agreement between Credit Suisse Asset Management, LLC (f/k/a Warburg Pincus Asset Management Inc.)
and Federal Kemper Life Assurance Company and KILICO
(15)8.9(a) Fund Participation Agreement between KILICO and The Dreyfus Socially Responsible Growth Fund, Inc.
(15)8.9(b) Administrative Services Agreement by and between The Dreyfus Corporation and KILICO.
(17)8.9(c) Form of Fund Participation Agreement between KILICO, The Dreyfus Socially Responsible Growth Fund, Inc.,
Dreyfus Investment Portfolios and Dreyfus Variable Investment Fund.
9. Opinion and Consent of Counsel. (To be filed by amendment)
10. Consents of PricewaterhouseCoopers LLP, Independent Public Accountants. (To be filed by amendment)
11. Inapplicable.
12. Inapplicable.
( 6)13.1 Schedules for Computation of Performance Information. [To be filed by amendment]
( 3)13.2 Schedule for Computation of Performance Information for Small Cap Growth Subaccount. [To be filed by
amendment]
( 3)13.3 Schedules for Computation of Performance Information for Investment Grade Bond, Value, Small Cap Value,
Value+Growth, Horizon 20+, Horizon 10+ and Horizon 5 Subaccounts. [To be filed by amendment]
(10)14. Organizational Chart.
( 8)16.1 Schedule IV: Reinsurance (year ended December 31, 1998).
( 7)16.2 Schedule IV: Reinsurance (year ended December 31, 1997).
( 9)16.3 Schedule IV: Reinsurance (year ended December 31, 1996).
( 8)16.4 Schedule V: Valuation and qualifying accounts (year ended December 31, 1998).
</TABLE>
C-2
<PAGE> 99
<TABLE>
<S> <C>
( 7)16.5 Schedule V: Valuation and qualifying accounts (year ended December 31, 1997).
( 5)16.6 Schedule V: Valuation and qualifying accounts (year ended December 31, 1996).
16.7 Schedule IV: Reinsurance (year ended December 31, 1999). [to be added by amendment]
16.8 Schedule V: Valuation and qualifying accounts (year ended December 31, 1999). [to be added by amendment]
</TABLE>
- ---------------
(1) Incorporated herein by reference to Exhibits filed with Amendment No. 32 to
the Registration Statement on Form N-4 for KILICO Variable Annuity Separate
Account (File No. 811-3199) filed on or about April 27, 1995.
(2) Incorporated herein by reference to Exhibits filed with the Registration
Statement on Form S-1 for KILICO (File No. 333-02491) filed on or about
April 12, 1996.
(3) Incorporated by reference to Exhibits filed with Amendment No. 9 to the
Statement on Form N-4 for KILICO (File No. 333-43501) filed on or about
April 26, 1996.
(4) Incorporated herein by reference to Exhibits filed with the Registration
Statement on Form N-4 for KILICO (File No. 333-22375) filed on or about
February 26, 1997.
(5) Incorporated herein by reference to Amendment No. 2 to the Registration
Statement on Form S-1 for KILICO (File No. 333-02491) filed on or about
April 23, 1997.
(6) Incorporated herein by reference to Amendment No. 10 to the Registration
Statement on Form N-4 (File No. 33-43501) filed on or about April 28, 1997.
(7) Incorporated herein by reference to Post-Effective Amendment No. 28 to the
Registration Statement on Form N-4 (File No. 2-72671) filed on or about
April 28, 1999.
(8) Incorporated herein by reference to Amendment No. 5 to the Registration
Statement on Form S-1 for KILICO (File No. 333-22389) filed on or about
April 20, 1999.
(9) Incorporated herein by reference to Amendment No. 3 to the Registration
Statement of KILICO on Form S-1 filed on or about April 8, 1998 (File No.
333-22389).
(10) Incorporated herein by reference to Post-Effective Amendment No. 24 to the
Registration Statement on Form N-4 (File No. 2-72671) filed on or about
April 26, 1996.
(11) Incorporated herein by reference to Pre-Effective Amendment No. 1 to the
Registration Statement on Form S-6 (File No. 333-88845) filed on or about
December 29, 1999.
(12) Incorporated herein by reference to Post-Effective Amendment No. 6 to the
Registration Statement on Form S-6 (File No. 33-65399) filed on or about
April 23, 1999.
(13) Incorporated herein by reference to Post-Effective Amendment No. 23 to the
Registration Statement on Form N-4 (File No. 2-72671) filed on or about
September 14, 1995.
(14) Incorporated herein by reference to Post-Effective Amendment No. 25 to the
Registration Statement on Form N-4 (File No. 2-72671) filed on or about
April 28, 1997.
(15) Incorporated herein by reference to Post-Effective Amendment No. 28 to the
Registration Statement on Form N-4 (File No. 2-72671) filed on or about
April 28, 1999.
(16) Incorporated herein by reference to Post-Effective Amendment No. 4 to the
Registration Statement of FKLA Variable Separate Account on Form S-6 (File
No. 33-79808) filed on or about April 30, 1997.
(17) Incorporated herein by reference to Post-Effective Amendment No. 7 to the
Registration Statement on Form N-4 (File No. 333-22375) filed on or about
November 1, 1999.
(18) Incorporated herein by reference to the Initial Registration Statement on
Form S-1 for KILICO (File No. 333- ) filed on or about March 16, 2000.
C-3
<PAGE> 100
ITEM 25. DIRECTORS AND OFFICERS OF KEMPER INVESTORS LIFE INSURANCE COMPANY
The directors and officers of KILICO are listed below together with
their current positions. The address of each officer and director is 1
Kemper Drive, Long Grove, Illinois 60049.
<TABLE>
<CAPTION>
OFFICE WITH KILICO
NAME ------------------
<S> <C>
Gale K. Caruso....................... President, Chief Executive Officer and Director
Frederick L. Blackmon................ Senior Vice President and Chief Financial Officer
Edward L. Robbins.................... Senior Vice President and Chief Actuary
James E. Hohmann..................... Senior Vice President and Director
John B. Scott........................ Chairman of the Board and Director
William H. Bolinder.................. Director
David A. Bowers...................... Director
Gunther Gose......................... Director
Eliane C. Frye....................... Executive Vice President and Director
Debra P. Rezabek..................... Senior Vice President, General Counsel and Corporate
Secretary
James C. Harkensee................... Senior Vice President
Edward K. Loughridge................. Senior Vice President and Corporate Development Officer
Kenneth M. Sapp...................... Senior Vice President
George Vlaisavljevich................ Senior Vice President
Russell M. Bostick................... Senior Vice President and Chief Information Officer
</TABLE>
ITEM 26. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE INSURANCE
COMPANY OR REGISTRANT
See Exhibit 14 for organizational charts of persons under common
control with Kemper Investors Life Insurance Company.
Investors Brokerage Services, Inc. and Investors Brokerage Services
Insurance Agency, Inc., Delaware corporations, are wholly owned
subsidiaries of KILICO.
ITEM 27. NUMBER OF CONTRACT OWNERS
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.
C-4
<PAGE> 101
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers, employees
or agents of KILICO pursuant to the foregoing provisions, or otherwise,
KILICO has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in
that Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by KILICO
of expenses incurred or paid by a director, officer, employee or agent of
KILICO in the successful defense of any action, suit or proceeding) is
asserted by such director, officer, employee or agent of KILICO in
connection with variable annuity contracts, KILICO will, unless in the
opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question
whether such indemnification by KILICO is against public policy as
expressed in that Act and will be governed by the final adjudication of
such issue.
ITEM 29.(A) PRINCIPAL UNDERWRITER
Investors Brokerage Services, Inc. acts as principal underwriter for
KILICO Variable Annuity Separate Account, KILICO Variable Separate Account,
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>
NAME AND PRINCIPAL POSITION AND OFFICES
BUSINESS ADDRESS WITH UNDERWRITER
------------------ --------------------
<S> <C>
John B. Scott............................................... Chairman and Director
Michael E. Scherrman ....................................... President and Director
David S. Jorgensen.......................................... Vice President and Treasurer
Michael A. Kelly............................................ Vice President
Debra P. Rezabek............................................ Secretary
Frank J. Julian............................................. Assistant Secretary
Eliane C. Frye.............................................. Director
Kenneth M. Sapp............................................. Director
George Vlaisavljevich....................................... Director
</TABLE>
ITEM 29.(C)
Inapplicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
Accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the Rules
promulgated thereunder are maintained by Kemper Investors Life Insurance
Company at its home office at 1 Kemper Drive, Long Grove, Illinois 60049 or
at Scudder Kemper Investments, Inc., 222 South Riverside Plaza, Chicago,
Illinois 60606-5808.
ITEM 31. MANAGEMENT SERVICES
Inapplicable.
ITEM 32. UNDERTAKINGS AND REPRESENTATIONS
Representation Regarding Fees and Charges Pursuant to Section 26 of
the Investment Company Act of 1940.
Kemper Investors Life Insurance Company ("KILICO") represents that the
fees and charges deducted under the Contract, in the aggregate, are
reasonable in relation to the services rendered, the expenses expected to
be incurred, and the risks assumed by KILICO.
KILICO 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.
C-5
<PAGE> 102
KILICO 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.
KILICO 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.
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<PAGE> 103
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act of
1940, the Registrant, KILICO Variable Annuity Separate Account has duly caused
this Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Long Grove and State of Illinois on
the 14th day of March, 2000.
KILICO VARIABLE ANNUITY SEPARATE
ACCOUNT
(Registrant)
By: Kemper Investors Life Insurance
Company
BY: /s/ GALE K. CARUSO
--------------------------------------
Gale K. Caruso,
President and Chief Executive
Officer
KEMPER INVESTORS LIFE INSURANCE
COMPANY
(Depositor)
BY: /s/ GALE K. CARUSO
--------------------------------------
Gale K. Caruso,
President and Chief Executive
Officer
As required by the Securities Act of 1933, this 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 14th day of
March, 2000.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ GALE K. CARUSO President, Chief Executive Officer and Director
- ----------------------------------------------------- (Principal Executive Officer)
Gale K. Caruso
/s/ JOHN B. SCOTT Chairman of the Board and Director
- -----------------------------------------------------
John B. Scott
/s/ FREDERICK L. BLACKMON Senior Vice President Chief Financial Officer
- ----------------------------------------------------- (Principal Financial Officer and
Frederick L. Blackmon Principal Accounting Officer)
/s/ WILLIAM H. BOLINDER Director
- -----------------------------------------------------
William H. Bolinder
/s/ DAVID A. BOWERS Director
- -----------------------------------------------------
David A. Bowers
/s/ ELIANE C. FRYE Director
- -----------------------------------------------------
Eliane C. Frye
/s/ GUNTHER GOSE Director
- -----------------------------------------------------
Gunther Gose
/s/ JAMES E. HOHMANN Director
- -----------------------------------------------------
James E. Hohmann
</TABLE>
C-7
