<PAGE> 1
KEMPER SELECT
PROSPECTUS
MAY 1, 1996
- - This prospectus does not constitute an offer to sell or a solicitation of an
offer to buy securities in any state, to any person, to whom it is not
lawful to make such an offer in such state.
A Variable Life Product Offered by
Kemper Investors Life Insurance Company
<PAGE> 2
PROSPECTUS--MAY 1, 1996
- --------------------------------------------------------------------------------
VARIABLE LIFE INSURANCE POLICY
- --------------------------------------------------------------------------------
KEMPER SELECT
ISSUED BY
KEMPER INVESTORS LIFE INSURANCE COMPANY
THROUGH ITS KILICO VARIABLE SEPARATE ACCOUNT
HOME OFFICE: 1 KEMPER DRIVE, LONG GROVE, ILLINOIS 60049 (847) 550-5500
This Prospectus describes a variable life insurance policy (the "Policy")
issued by Kemper Investors Life Insurance Company ("KILICO"). The Policy
provides for life insurance and for the accumulation of Cash Value on a variable
basis. The Death Benefit and Cash Value of the Policy may vary to reflect the
investment experience of the KILICO Variable Separate Account (the "Separate
Account").
The Policy is designed to permit the payment of a large initial premium
and, subject to certain restrictions, additional premiums. As designed, the
Policy operates substantially as a single premium policy, providing for an
initial premium payment of at least eighty percent of guideline single premiums,
as defined under Section 7702 of the Internal Revenue Code. This Policy, as
currently offered, is classified as a modified endowment contract for tax
purposes and, as such, distributions during the life of the Insured would be
taxed in a manner similar to an annuity. The minimum initial premium KILICO will
accept is $5,000. An Owner may allocate premiums and Separate Account Value
under a Policy to one or more of the Subaccounts of the Separate Account. Each
Subaccount invests in one of the following portfolios of the Kemper Investors
Fund (the "Fund"): Money Market, Total Return, High Yield, Growth (formerly
"Equity") and Government Securities. The other portfolios of the Fund are not
currently available for investment under the Policy. Zurich Kemper Investments,
Inc. (formerly named Kemper Financial Services, Inc.) ("ZKI"), is the investment
manager of the Money Market, Total Return, High Yield, Growth, and Government
Securities Portfolios. The accompanying Prospectus for the Fund describes the
investment objectives and the attendant risks of the portfolios of the Fund.
Until the Trade Date, the initial premium is held in KILICO's General
Account. The initial premium will be credited with interest equivalent to the
investment experience, less additional applicable charges, of the KILICO Money
Market Subaccount, from the later of the day following the date of receipt or
the Policy Date. On the Trade Date, the initial premium and any credited
investment return will be allocated to the KILICO Money Market Subaccount, and
15 days after the Trade Date, to one or more of the Subaccounts as specified in
the Owner's application.
KILICO guarantees that the Death Benefit payable for a Policy will never be
less than the Death Benefit stated on the Policy Schedule page, less Debt, as
long as the Policy is in force. There is no guaranteed Cash Value. If the
Surrender Value is insufficient to cover the charges under the Policy, the
Policy will lapse.
See "Federal Tax Matters", page 17 for a discussion of laws that affect the
tax treatment of the Policy.
The Owner may examine the Policy and return it to KILICO for a refund
during the Free-Look Period.
It may not be advantageous to purchase a Policy as a replacement for
another type of life insurance policy, or to obtain additional insurance
protection if a flexible premium variable life insurance policy is already
owned.
THIS PROSPECTUS IS VALID ONLY IF ACCOMPANIED OR PRECEDED
BY A CURRENT PROSPECTUS FOR THE KEMPER INVESTORS FUND. ALL
PROSPECTUSES SHOULD BE READ AND RETAINED FOR FUTURE
REFERENCE.
THE POLICIES ARE NOT INSURED BY THE FDIC. THEY ARE
OBLIGATIONS OF THE ISSUING INSURANCE COMPANY AND ARE NOT A
DEPOSIT OF, OR GUARANTEED BY, ANY BANK OR SAVINGS
INSTITUTION AND ARE SUBJECT TO RISKS, INCLUDING POSSIBLE
LOSS OF PRINCIPAL.
------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<PAGE> 3
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
-----
<S> <C>
DEFINITIONS................................................................................. 1
SUMMARY..................................................................................... 2
KILICO AND THE SEPARATE ACCOUNT............................................................. 4
THE FUND.................................................................................... 5
THE POLICY.................................................................................. 7
POLICY BENEFITS AND RIGHTS.................................................................. 9
CHARGES AND DEDUCTIONS...................................................................... 13
GENERAL PROVISIONS.......................................................................... 14
DISTRIBUTION OF POLICIES.................................................................... 17
FEDERAL TAX MATTERS......................................................................... 17
LEGAL CONSIDERATIONS........................................................................ 19
SAFEKEEPING OF THE SEPARATE ACCOUNT'S ASSETS................................................ 19
VOTING RIGHTS............................................................................... 19
STATE REGULATION OF KILICO.................................................................. 19
DIRECTORS AND OFFICERS OF KILICO............................................................ 20
LEGAL MATTERS............................................................................... 23
LEGAL PROCEEDINGS........................................................................... 23
EXPERTS..................................................................................... 23
REGISTRATION STATEMENT...................................................................... 23
FINANCIAL STATEMENTS........................................................................ 23
APPENDIX.................................................................................... 53
</TABLE>
<PAGE> 4
DEFINITIONS
ACCUMULATION UNIT--An accounting unit of measure used to calculate the
value of each Subaccount.
AGE--The Insured's age on his or her last birthday.
BENEFICIARY--The person to whom the proceeds due on the Insured's death are
paid.
CASH VALUE--The sum of the value of Policy assets in the Separate Account
and any associated value in the General Account.
DATE OF RECEIPT--Date of receipt means the valuation date during which a
request, form or payment is received at KILICO's Home Office. KILICO is deemed
to have received any request, form or payment on the date it is actually
received at the Home Office, provided that it is received before the close of
the New York Stock Exchange (which is normally 3:00 p.m. Long Grove time) on any
date when the New York Stock Exchange is open. Otherwise, it will be deemed to
be received on the next such day.
DEBT--Debt means (1) the principal of any outstanding loan, plus (2) any
loan interest due or accrued to KILICO.
FREE-LOOK PERIOD--The period of time in which an Owner may cancel the
Policy and receive a refund. In most states, an Owner may cancel the Policy
within 10 days of the date it is received by the Owner. The applicable period of
time will depend on the state in which the Policy is issued; however, it will be
at least 10 days from the date the Policy is received by the Owner.
FUND--Kemper Investors Fund, an open-end diversified investment company in
which the Subaccounts of the Separate Account invest.
GENERAL ACCOUNT--The assets of KILICO other than those allocated to the
Separate Account or
any other separate account.
GUIDELINE SINGLE PREMIUM--Guideline Single Premium is the maximum initial
amount of premium that can be paid while retaining qualification as a life
insurance policy under the Internal Revenue Code.
INSURANCE AGE--The Insurance Age is the Age of the Insured on the first day
of any Policy Year. If the first day of a Policy Year falls on the Insured's
birthday, the Age attained on such date is the Insurance Age.
INSURED--The person whose life is covered by the Policy and who is named on
the Policy Schedule.
MATURITY DATE--The Policy Date anniversary coinciding with or next
following the Insured's 95th birthday.
MONTHLY PROCESSING DATE--The same day in each month as the Policy Date.
MORTALITY AND EXPENSE RISK CHARGE--The mortality and expense risk charge is
a charge deducted in the calculation of the Accumulation Unit Value for the
assumption of mortality risks and expense guarantees.
POLICY DATE--The date shown in the Policy Schedule. The Policy Date is the
date used to determine Policy Years and Monthly Processing Dates. The Policy
Date will be the date following receipt of the application, except that if such
date is the 29th, 30th, or 31st of a month, the Policy Date will be the first of
the following month.
POLICY YEAR--Each year commencing with the Policy Date and each Policy Date
anniversary thereafter.
SEPARATE ACCOUNT VALUE--The portion of the Cash Value in the Subaccount(s)
of the Separate Account.
SUBACCOUNT--The subdivisions of the Separate Account.
SURRENDER VALUE--The surrender value of a Policy is (1) the Cash Value
minus (2) any applicable Surrender Charge; minus (3) any Debt.
TRADE DATE--The Trade Date is stated in the Policy Schedule. It is the date
on which the initial premium and any credited investment experience, less
additional applicable charges, are allocated to the KILICO Money Market
Subaccount. The Trade Date is the date when KILICO accepts the risk of providing
insurance coverage to the Insured.
VALUATION DATE--Each business day on which valuation of the assets of the
Separate Account is required by applicable law, which currently is each day that
the New York Stock Exchange is open for trading.
VALUATION PERIOD--The period that starts at the close of a Valuation Date
and ends at the close of the next succeeding Valuation Date.
1
<PAGE> 5
SUMMARY
The following summary should be read in conjunction with the detailed
information in this prospectus. You should refer to the heading "Definitions"
for the meaning of certain terms. A Policy entered into on or after June 21,
1988 is considered a modified endowment contract. Further, a Policy entered into
before June 21, 1988 may, in certain circumstances, be considered a modified
endowment contract. For a Policy treated as a modified endowment contract,
certain assignments, loans and surrenders will be considered received by the
Owner and are included in the Owner's Federal gross income to the extent that
the Cash Value exceeds the Owner's investment in the Policy. Subject to
specified exceptions, the portion of any amount considered received by the Owner
that is includible in gross income is subject to an additional 10 percent tax.
(See "Federal Tax Matters," at page 17.) Variations from the information
appearing in this prospectus due to individual state requirements are described
in supplements which are attached to this Prospectus, or in endorsements to the
Policy, as appropriate. Unless otherwise indicated the description of the Policy
contained in this prospectus assumes that the Policy is in force, that there is
no indebtedness, that the current Death Benefit is required to be adjusted
through multiplication of the Cash Value by the Death Benefit Factor, and that
current Federal tax laws apply.
The Owner of a Policy pays a premium for life insurance coverage on the
person insured. The Policy provides for a Surrender Value which is payable if
the Policy is terminated during an Insured's lifetime. The Death Benefit and
Cash Value of the Policy may increase or decrease to reflect the investment
experience of the Subaccounts of the Separate Account to which premiums are
allocated. There is no guaranteed Cash Value. If the Surrender Value is
insufficient to pay charges under the Policy, the Policy will lapse unless an
additional premium payment or loan repayment is made. (See "The Policy--Premiums
and Allocation of Premiums and Separate Account Value," pages 7 and 8, "Charges
and Deductions," page 13, and "Policy Benefits and Rights," page 9.)
The purpose of the Policy is to provide insurance protection for the
beneficiary named therein. No claim is made that the Policy is in any way
similar or comparable to a systematic investment plan of a mutual fund.
POLICY BENEFITS
CASH VALUE. The Policy provides for a Cash Value. The Cash Value will
reflect the amount and frequency of premium payments, the investment experience
of the selected Subaccounts of the Separate Account, any values in the General
Account, and charges imposed in connection with the Policy. The entire
investment risk is borne by the Owner. KILICO does not guarantee a minimum
Separate Account Value. (See "Policy Benefits and Rights--Cash Value," page 10.)
The Owner may surrender a Policy at any time and receive the Surrender
Value, which equals the Cash Value less any applicable surrender charge and
outstanding Debt. (See "Policy Benefits and Rights--Surrender Privilege," page
13.)
POLICY LOANS. The Owner may borrow up to 90% of the Policy's Cash Value
minus applicable surrender charges, subject to the requirements of the Internal
Revenue Code. The minimum amount of a loan is $500. Interest at an effective
annual rate of 6.00% will be charged on outstanding loan amounts. (See "Federal
Tax Matters," page 17.)
When a loan is made, a portion of the Policy's Cash Value equal to the
amount of the loan will be transferred from the Separate Account
(proportionately from the Subaccounts, unless the Owner requests otherwise) to
KILICO's General Account. Cash Values within the General Account attributable to
premium will earn no less than 4.00% annual interest. That portion of the Cash
Values within the General Account attributable to amounts in excess of premium
will earn 6.00% annual interest. Such earnings will be allocated to the General
Account. (See "Policy Benefits and Rights--Policy Loans," page 12.)
DEATH BENEFITS. As long as the Policy remains in force, the Policy provides
a death benefit payment upon the death of the Insured. The death benefit is the
greater of the Death Benefit stated on the Policy Schedule, or a specified
multiple of the Cash Value. The Death Benefit stated on the Policy Schedule may
not be increased unless Cash Value times the Death Benefit Factor is at least
equal to the Death Benefit stated on the Policy Schedule. The death benefit
payable will be reduced by any Debt. (See "Policy
Benefits and Rights--Death Benefits," page 9.)
PREMIUMS
The minimum initial premium that may be paid under the Policy is $5,000.
The application for the Policy must accompany or precede the full minimum
initial premium. Subject to premium guidelines
2
<PAGE> 6
established under Federal tax law, additional premiums may be paid while the
Policy is in force, including when necessary to prevent lapse. (See "The
Policy--Premiums," page 7 and "Federal Tax Matters," page 17.)
THE SEPARATE ACCOUNT
ALLOCATION OF PREMIUMS. The portion of the premium available for allocation
equals the premium paid. An Owner indicates in the application for the Policy
the percentages of premium to be allocated among the Subaccounts of the Separate
Account. The Separate Account currently consists of five Subaccounts, each of
which invests in shares of a designated portfolio of the Fund. The investment
manager of the portfolios is Zurich Kemper Investments, Inc., an affiliate of
KILICO.
On the day following the date of receipt, the initial premium will be
allocated to the KILICO General Account. It will be credited with interest
equivalent to the investment experience of the Money Market Subaccount from the
later of the day following the date of receipt or the Policy Date. On the Trade
Date, such amount in the KILICO General Account will be allocated to the Money
Market Subaccount. Additional applicable charges which are currently the charge
for the cost of insurance will be deducted as of the Policy Date. On the Trade
Date, the Policy's Cash Value will thus be the same as if the initial premium
had been allocated to the Money Market Subaccount on the Policy Date. Fifteen
days from the Trade Date, the Separate Account Value in the Money Market
Subaccount will be allocated among the Subaccounts in accordance with the
Owner's instructions in the application. (See "Policy Issue," page 7.)
TRANSFERS. An Owner may transfer Separate Account Value among the
Subaccounts. One transfer of all or part of the Separate Account Value may be
made within a fifteen day period. (See "Allocation of Premiums and Separate
Account Value--Transfers," page 8.)
THE FUND
The portfolios of the Fund currently available for investment under this
Policy are summarized below:
MONEY MARKET PORTFOLIO seeks to provide maximum current income to the
extent consistent with stability of principal from a portfolio of high quality
money market instruments that mature in 12 months or less.
TOTAL RETURN PORTFOLIO seeks a high total return, a combination of income
and capital appreciation, by investing in a combination of debt securities and
common stocks.
HIGH YIELD PORTFOLIO seeks to provide a high level of current income by
investing in fixed-income securities.
GROWTH PORTFOLIO seeks maximum appreciation of capital through
diversification of investment securities having potential for capital
appreciation.
GOVERNMENT SECURITIES PORTFOLIO seeks high current return consistent with
preservation of capital from a portfolio composed primarily of U.S. Government
securities.
For a more detailed description of the Fund, see "KILICO and the Separate
Account--the Fund," page 5, the Fund prospectus, and Statement of Additional
Information available upon request.
CHARGES
Deductions will be made from the Policy's value in each Subaccount on the
Policy Date and on each Monthly Processing Date for the cost of insurance
charge. In addition, deductions will be imposed on the Policy's value in each
Subaccount on a daily basis for the assumption by KILICO of certain mortality
and expense risks incurred in connection with the Policy, at an annual rate of
.90%. (See "Charges and Deductions--Mortality and Expense Risk Charge," page
14.)
No sales charge is deducted from any premium payment. However, if the
Policy is surrendered or if the Cash Value is applied under a Settlement Option,
a Surrender Charge on the lesser of premium paid in the first Policy Year or
Cash Value under the Policy will be deducted from the amount payable. The
Surrender Charge starts at 9% in the first Policy Year and reduces by 1% each
Policy Year so that there is no charge in the tenth and later Policy Years.
Subject to other considerations, the Owner may decide to reduce the potential
Surrender Charge by paying less initial premium. (See "Policy Benefits and
Rights--Surrender Privilege," page 13.)
3
<PAGE> 7
No charges are currently made from the Separate Account for Federal, state
or other taxes. Should KILICO determine that such taxes may be imposed, it may
make deductions from the Separate Account to pay those taxes. (See "Federal Tax
Matters," page 17.)
In addition, the Subaccounts of the Separate Account purchase shares of the
Fund. For fees and expenses of the Fund, see the prospectus for the Fund.
TAX TREATMENT UNDER CURRENT FEDERAL TAX LAW
The Cash Value, while it remains in the Policy, and the Death Benefit
should be subject to the same Federal income tax treatment as the cash value
under a conventional fixed benefit life insurance policy. Under existing tax
law, the Owner is generally not deemed to be in constructive receipt of the Cash
Value under a Policy until a distribution occurs through a loan or surrender. A
change of Owners, an assignment, a loan or a surrender of the Policy generally
will have tax consequences.
Death Benefits payable under the Policy should be completely excludable
from the gross income of the Beneficiary. As a result, the Beneficiary generally
will not be subject to income tax on the Death Benefit. (See "Federal Tax
Matters," page 17.)
FREE-LOOK PERIOD AND EXCHANGE RIGHTS
The Owner is granted a period of time to examine a Policy and return it for
a refund. The applicable period of time will depend on the state in which the
Policy is issued; however, it will be at least 10 days from the date the Policy
is received by the Owner. (See "Policy Benefits and Rights--Free-Look Period and
Exchange Rights," page 13.)
The Owner may, while the Policy is in force, exchange it at any time after
its issue, for a non-variable permanent fixed benefit life insurance policy then
currently being offered by KILICO on the life of the Insured. Such policy would
be treated and taxed as a modified endowment contract. No evidence of
insurability will be required. During the first two years after the Policy Trade
Date, the amount of the new policy may be, at the election of the Owner, either
the initial Death Benefit or the same net amount at risk as the Policy on the
exchange date. After two years from the Policy Trade Date, the amount of the new
policy will be for the same net amount at risk as the Policy on the exchange
data. All Debt under the Policy must be repaid and the surrender of the Policy
is required before the exchange is made. The policy date and issue age will be
the same as existed under the Policy.
ILLUSTRATIONS OF SEPARATE ACCOUNT VALUES
SURRENDER VALUES AND DEATH BENEFITS
Tables in the Appendix illustrate the Separate Account Values, Surrender
Values and Death Benefits based upon certain hypothetical assumed rates of
return for the Separate Account and the charges deducted under the Policy.
KILICO AND THE SEPARATE ACCOUNT
KEMPER INVESTORS LIFE INSURANCE COMPANY
Kemper Investors Life Insurance Company ("KILICO"), 1 Kemper Drive, Long
Grove, Illinois 60049, was organized in 1947 and is a stock life insurance
company organized under the laws of the State of Illinois. KILICO offers annuity
and life insurance products and is admitted to do business in the District of
Columbia and all states except New York. KILICO is a wholly-owned subsidiary of
Kemper Corporation, a nonoperating holding company. Zurich Insurance Company
("Zurich"), Insurance Partners, L.P. ("IP") and Insurance Partners Offshore
(Bermuda), L.P. (together with IP, "Insurance Partners") indirectly and directly
own 80 percent and 20 percent, respectively, of Kemper Corporation.
KILICO Variable Separate Account (the "Separate Account") was established
by KILICO as a separate investment account on January 22, 1987. The Separate
Account will receive and invest the premiums under the Policy. In addition, the
Separate Account may receive and invest premiums for other variable life
insurance policies issued by KILICO.
The Separate Account is administered and accounted for as part of the
general business of KILICO, but the income, capital gains or capital losses of
the Separate Account are credited to or charged against the assets held in the
Separate Account, without regard to any other income, capital gains or capital
losses of
4
<PAGE> 8
any other separate account or arising out of any other business which KILICO may
conduct. The benefits provided under the Policy are obligations of KILICO.
The Separate Account is currently divided into five Subaccounts. Each
Subaccount invests exclusively in shares of one of the portfolios of the Fund
currently available for investment through the Separate Account. Income and both
realized and unrealized gains or losses from the assets of each Subaccount
generally are credited to or charged against that Subaccount without regard to
income, gains or losses from any other Subaccount of the Separate Account or
arising out of any business KILICO may conduct.
The Separate Account has been registered with the Securities and Exchange
Commission ("Commission") as a unit investment trust under the Investment
Company Act of 1940 (the "1940 Act"). Such registration does not involve
supervision by the Commission of the management, investment practices or
policies of the Separate Account or KILICO.
THE FUND
The Separate Account invests in shares of the Kemper Investors Fund, a
series type mutual fund registered with the Commission as an open-end,
diversified management investment company. Registration of the Fund does not
involve supervision of its management, investment practices or policies by the
Commission. The Fund is designed to provide an investment vehicle for variable
life insurance and variable annuity contracts. Shares of the Fund are sold only
to insurance company separate accounts. In addition to the Separate Account,
shares of the Fund may be sold to variable life insurance and variable annuity
separate accounts of insurance companies not affiliated with KILICO. It is
conceivable that in the future it may be disadvantageous for variable life
insurance separate accounts of companies unaffiliated with KILICO, or for both
variable life insurance separate accounts and variable annuity separate
accounts, to invest simultaneously in the Fund. Currently neither KILICO nor the
Fund foresees any such disadvantages to either variable life insurance or
variable annuity owners. Management of the Fund has an obligation to monitor
events to identify material conflicts between such owners and determine what
action, if any, should be taken. In addition, if KILICO believes that the Fund's
response to any of those events or conflicts insufficiently protects the Owners,
it will take appropriate action on its own.
The Separate Account invests in the following Portfolios of the Fund: Money
Market Portfolio, Total Return Portfolio, High Yield Portfolio, Growth Portfolio
and Government Securities Portfolio. The other portfolios of the Fund are not
currently available for investment under the Policy. 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 income or losses of one
Portfolio generally have no effect on the investment performance of any other
Portfolio.
The five portfolios of the Fund in which the Separate Account invests are
summarized below:
MONEY MARKET PORTFOLIO seeks maximum current income to the extent
consistent with stability of principal from a portfolio of high quality money
market instruments that mature in twelve months or less.
TOTAL RETURN PORTFOLIO seeks a high total return, a combination of income
and capital appreciation, by investing in a combination of debt securities and
common stocks.
HIGH YIELD PORTFOLIO seeks to provide a high level of current income by
investing in fixed-income securities.
GROWTH PORTFOLIO seeks maximum appreciation of capital through
diversification of investment securities having potential for capital
appreciation.
GOVERNMENT SECURITIES PORTFOLIO seeks high current return consistent with
preservation of capital from a portfolio composed primarily of U.S. Government
securities.
There is no assurance that any of the Portfolios of the Fund will achieve
its objective as stated in the prospectus for the Fund. More detailed
information, including a description of risks involved in investing in each of
the Portfolios, may be found in the prospectus for the Fund, which must
accompany or precede this Prospectus, and the Fund's Statement of Additional
Information available upon request from Kemper Investors Life Insurance Company,
1 Kemper Drive, Long Grove, Illinois 60049.
Zurich Kemper Investments, Inc., ("ZKI") an affiliate of KILICO, is the
investment manager of the Money Market, Total Return, High Yield, Growth and
Government Securities Portfolios. For its services to the Portfolios, ZKI
receives compensation monthly at annual rates equal to .50 of 1%, .55 of 1%, .60
of 1%, .60 of 1% and .55 of 1% of the average daily net asset values of the
Money Market Portfolio, the Total
5
<PAGE> 9
Return Portfolio, the High Yield Portfolio, the Growth Portfolio, and the
Government Securities Portfolio, respectively.
CHANGE OF INVESTMENTS
KILICO reserves the right, subject to applicable law, to make additions to,
deletions from, or substitutions for the shares held by the Separate Account or
that the Separate Account may purchase. KILICO reserves the right to eliminate
the shares of any of the portfolios of the Fund and to substitute shares of
another portfolio of the Fund or of another investment company, if the shares of
a portfolio are no longer available for investment, or if in its judgment
further investment in any portfolio becomes inappropriate in view of the
purposes of the Separate Account. KILICO will not substitute any shares
attributable to an Owner's interest in a Subaccount of the Separate Account
without notice to the Owner and prior approval of the Commission, to the extent
required by the 1940 Act or other applicable law. Nothing contained in this
Prospectus shall prevent the Separate Account from purchasing other securities
for other series or classes of policies, or from permitting a conversion between
series or classes of policies on the basis of requests made by Owners.
KILICO also reserves the right to establish additional subaccounts of the
Separate Account, each of which would invest in a new portfolio of the Fund, or
in shares of another investment company, with a specified investment objective.
New subaccounts may be established when, in the sole discretion of KILICO,
marketing needs or investment conditions warrant, and any new subaccounts may be
made available to existing Owners as determined by KILICO. KILICO may also
eliminate or combine one or more subaccounts, transfer assets, or it may
substitute one subaccount for another subaccount, if, in its sole discretion,
marketing, tax or investment conditions warrant. KILICO will notify all Owners
of any such changes.
If deemed by KILICO to be in the best interests of persons having voting
rights under the Policy, the Separate Account may be: (a) operated as a
management company under the 1940 Act; (b) deregistered under that Act in the
event such registration is no longer required; or (c) combined with other KILICO
separate accounts. To the extent permitted by law, KILICO may also transfer the
assets of the Separate Account associated with the Policy to another separate
account, or to the General Account.
6
<PAGE> 10
THE POLICY
POLICY ISSUE
Before KILICO will issue a Policy, it must receive a completed application
and a full initial premium at its Home Office. A Policy ordinarily will be
issued only for Insureds Age 0 through 75 who supply satisfactory evidence of
insurability to KILICO. Acceptance of an application is subject to underwriting
by KILICO. KILICO reserves the right to decline an application for any reason.
After underwriting is complete and the Policy is delivered to the Owner,
insurance coverage under the Policy will be deemed to have begun as of the day
following the date of receipt of a completed application and the full initial
premium. (See "Premiums," below.) This date is the Policy Date.
PREMIUMS
Premiums are to be paid to KILICO at its Home Office. (See "Distribution of
Policies.") Checks ordinarily must be made payable to KILICO.
INITIAL PREMIUM. The minimum initial premium that KILICO will accept under
a Policy is $5,000. KILICO reserves the right to increase or decrease this
amount for a class of Policies issued after some future date.
For a given initial premium, the minimum death benefit will depend upon the
Insurance Age, sex, and rate class of the Insured. The minimum death benefit for
a given initial premium will be consistent with the assumptions for the
Guideline Single Premium calculated under section 7702 of the Internal Revenue
Code (the "Code"). (See "Federal Tax Matters.")
The initial premium will be allocated to the KILICO General Account. It
will be credited with interest equivalent to the investment experience of the
Money Market Subaccount. This premium will remain in the KILICO General Account
until the Trade Date. On the Trade Date, the initial premium, plus interest,
will be allocated to the Money Market Subaccount. Additional applicable charges,
including the charge for the cost of insurance, will be deducted as of the
Policy Date. On the Trade Date, the Policy Cash Value will thus be the same as
if the initial premium had been allocated to the Money Market Subaccount on the
Policy Date. The Separate Account Value will remain in the Money Market
Subaccount until 15 days from the Trade Date of the Policy. At the end of the 15
day period, the Separate Account Value in the Money Market Subaccount will be
allocated to the Subaccounts elected by the Owner in the application for the
Policy.
The Policy Date is the date used to determine Policy Years and Monthly
Processing Dates. The Policy Date will be the date following receipt of the
application, except that if such date is the 29th, 30th, or 31st of a month, the
Policy Date will be the first of the following month. Acceptance is subject to
KILICO's underwriting rules, and KILICO reserves the right to reject an
application for any reason. The contestability period and suicide exclusion
period are measured from the Policy Date.
The Trade Date is the date when KILICO accepts the risk of providing
insurance coverage to the Insured. Insurance coverage will be limited to a
maximum of $200,000 net amount at risk by the temporary insurance provisions of
the application until the Trade Date. Monthly deductions and the crediting of
investment experience begin as of the Policy Date, even if the Trade Date of the
Policy is delayed due to underwriting requirements.
In the event an application is declined by KILICO, the initial premium will
be refunded, together with the earnings credited based on the investment
experience of the KILICO Money Market Subaccount.
The full initial premium is the only premium required to be paid under a
Policy. However, additional premiums may be necessary to keep the Policy in
force. (See "The Policy--Policy Lapse and Reinstatement.")
ADDITIONAL PREMIUMS. Subject to the premium guidelines established under
Federal tax law, additional premiums may be contributed while this Policy is in
force, including when necessary to prevent lapse. Upon request, KILICO will tell
the Owner whether an additional premium payment can be made and what its maximum
amount is. These premium payments will not increase the maximum possible
Surrender Charge. Except to prevent lapse, such an additional premium payment
must be at least $1,000. KILICO reserves the right to limit the ability to make
more than one additional premium payment in each Policy Year. Evidence of
insurability may be required if an additional premium payment would result in an
increase in the Death Benefit.
Several factors affect when additional premium payments may be made. For
example, assuming the maximum initial premium payment, the Policy Years in which
an Owner issue age 45 may make additional payments depend upon investment
experience. Based upon a hypothetical gross annual rate of return of 6% in the
selected Kemper Investors Fund Portfolio(s), an additional payment may first be
made in year
7
<PAGE> 11
13, and additional payments may be made each year thereafter subject to any
applicable underwriting requirements. A higher annual rate of return may cause
the Death Benefit to exceed the minimum guaranteed death benefit. (See "Policy
Rights and Benefits.") When this occurs additional payments are subject to
underwriting requirements.
EFFECT OF ADDITIONAL PREMIUMS ON DEATH BENEFIT. Any additional premiums
paid under a Policy may cause the Death Benefit to increase. (See "Policy
Benefits and Rights--Death Benefits.") An increase in the Death Benefit may
cause the cost of insurance charge to increase. (See "Charges and
Deductions--Cost of Insurance.")
ALLOCATION OF PREMIUMS AND SEPARATE ACCOUNT VALUE
ALLOCATION OF PREMIUMS. The Owner allocates premiums to Subaccounts of the
Separate Account. The Owner must indicate the initial allocation in the Policy
application.
Fifteen days after the Trade Date (see "Policy Benefits and
Rights--Free-Look Period."), the Policy's Separate Account Value in the Money
Market Subaccount will be allocated to the Subaccounts of the Separate Account
in accordance with the Owner's allocation instructions in the application.
Additional premiums received will continue to be allocated in accordance with
the Owner's instructions in the application unless contrary written instructions
are received. Once a change in allocation is made, all future premiums will be
allocated in accordance with the new allocation, unless contrary written
instructions are received.
The Separate Account Value will vary with the investment experience of the
chosen Subaccounts. The Owner bears the entire investment risk.
TRANSFERS. Separate Account Value may be transferred among the Subaccounts
of the Separate Account. One transfer of all or a part of the Separate Account
Value may be made within a fifteen day period. All transfers made during a
business day will be treated as one request.
Transfer requests must be in writing in a form acceptable to KILICO, or by
telephone authorization under forms authorized by KILICO. (See "General
Provisions--Written Notices and Requests.") The minimum transfer amount is $500.
No partial transfer may be made if the value of the Owner's remaining interest
in a Subaccount, from which amounts are to be transferred, would be less than
$500 after such transfer. Transfers will be based on the Accumulation Unit
Values next determined following receipt of valid, complete transfer
instructions by KILICO. The transfer provision may be suspended, modified or
terminated at any time by KILICO. KILICO disclaims all liability for acting in
good faith in following instructions which are given in accordance with
procedures established by KILICO, including requests for personal identifying
information, that are designed to limit unauthorized use of the privilege.
Therefore, the Owner would bear the risk of loss in the event of a fraudulent
telephone transfer.
POLICY LAPSE AND REINSTATEMENT
LAPSE. Lapse will occur when the Surrender Value of a Policy is
insufficient to cover the monthly deduction for the cost of insurance, and a
grace period expires without a sufficient payment being made. (See "Charges and
Deductions.")
A grace period of 61 days will be given to the Owner. It begins when notice
is sent that the Surrender Value of the Policy is insufficient to cover the
monthly deduction for the cost of insurance. Failure to make a premium payment
or loan repayment during the grace period sufficient to keep the Policy in force
for three months will cause the Policy to lapse and terminate without value.
If payment is received within the grace period, the premium or loan
repayment will be allocated to the Subaccounts in accordance with the most
current allocation instructions, unless otherwise requested. Amounts over and
above the amounts necessary to prevent lapse may be paid as additional premiums,
however, to the extent otherwise permitted. (See "The Policy--Additional
Premiums.")
KILICO will not accept any payment that would cause the total premium
payment to exceed the maximum payment permitted by the Code for life insurance
under the guideline premium limits. However, the Owner may voluntarily repay a
portion of Debt to avoid lapse. (See "Federal Tax Matters.")
If premium payments have not exceeded the maximum payment permitted by the
Code, the Owner may choose to make a larger payment than the minimum required
payment to avoid the recurrence of the potential lapse of coverage. The Owner
may also combine premium payments with Debt repayments.
The death benefit payable during the grace period will be the Death Benefit
in effect immediately prior to the grace period, less any Debt.
8
<PAGE> 12
REINSTATEMENT. If a Policy lapses because of insufficient Cash Value to
cover the monthly cost of insurance deduction, and it has not been surrendered
for its Surrender Value, it may be reinstated at any time within five years
after the date of lapse. Tax consequences may affect the decision to reinstate.
Reinstatement is subject to:
(1) receipt of evidence of insurability satisfactory to KILICO;
(2) payment of a minimum premium sufficient to keep the Policy in force
three months; and
(3) payment or reinstatement of any Debt against the Policy which existed
at the date of termination of coverage.
The effective date of reinstatement of a Policy will be the Monthly
Processing Date that coincides with or next follows the date the application for
reinstatement is approved by KILICO. Suicide and incontestability provisions
will apply from the effective date of reinstatement. If the Policy has been in
force for two years during the lifetime of the Insured, it will be contestable
only as to statements made in the reinstatement application.
POLICY BENEFITS AND RIGHTS
DEATH BENEFITS
While the Policy is in force (see "Policy Lapse and Reinstatement--Lapse,"
above), the Death Benefit can never be less than the Death Benefit stated on the
Policy Schedule page ("guaranteed minimum death benefit").
The Death Benefit may vary with the Cash Value of the Policy, which depends
on the investment experience of the Separate Account Subaccounts to which a
Policy's Separate Account Value is allocated. An increase in the Cash Value may
increase the Death Benefit. However, while the Policy is in force, because the
Death Benefit will never be less than the guaranteed minimum death benefit, a
decrease in Cash Value may decrease the Death Benefit but never below the
guaranteed minimum death benefit.
The Death Benefit will be the greater of the guaranteed minimum death
benefit or the applicable multiple of the Cash Value. If investment experience
is sufficiently favorable, the Death Benefit may increase. Increases in the
Death Benefit are calculated by KILICO by multiplying the Cash Value by the
Death Benefit Factor. If the Cash Value were to drop because of unfavorable
investment experience, the Death Benefit would drop, but not below the Death
Benefit stated on the Policy Schedule page.
The guaranteed minimum death benefit is based on the 1980 Commissioner's
Standard Ordinary Smoker and Non-Smoker Mortality Tables [age last birthday]
(called the "1980 CSO Tables"), the Insured's sex, rate class and insurance age
at issue, and an assumed interest rate of 5.10 percent. The guaranteed minimum
death benefit is calculated by KILICO based on the applicable 1980 CSO Table and
the initial premium paid.
Representative guaranteed minimum death benefits are shown below:
<TABLE>
<CAPTION>
GUARANTEED MINIMUM DEATH BENEFIT
PER $1 SINGLE PREMIUM
-----------------------------------------------
MALE FEMALE
INSURANCE -------------------- --------------------
AGE NON-SMOKER SMOKER NON-SMOKER SMOKER
--- ---------- ------ ---------- ------
<S> <C> <C> <C> <C>
5 ........................................ 18.196 N/A 21.735 N/A
15 ........................................ 12.510 N/A 14.975 N/A
25 ........................................ 8.852 6.854 10.186 8.652
35 ........................................ 5.915 4.614 6.785 5.783
45 ........................................ 3.929 3.138 4.537 3.939
55 ........................................ 2.671 2.236 3.098 2.787
65 ........................................ 1.905 1.696 2.164 2.203
75 ........................................ 1.461 1.379 1.582 1.530
</TABLE>
9
<PAGE> 13
Representative multiples, each of which is referred to as a Death Benefit
Factor, are shown in the table below:
<TABLE>
<CAPTION>
DEATH BENEFIT IS NO
LESS THAN THE
CASH VALUE TIMES
THE FOLLOWING
MULTIPLE (DEATH
BENEFIT FACTOR)
ASSUMING NO DEBT
INSURANCE -------------------
AGE MALE FEMALE
---
<S> <C> <C>
5 .................................... 2.50 2.50
15 .................................... 2.50 2.50
25 .................................... 2.50 2.50
35 .................................... 2.50 2.50
45 .................................... 2.15 2.15
55 .................................... 1.50 1.50
65 .................................... 1.20 1.20
75 .................................... 1.05 1.05
85 .................................... 1.05 1.05
95 .................................... 1.00 1.00
</TABLE>
EXAMPLES:
<TABLE>
<CAPTION>
A B
-------- --------
<S> <C> <C>
Initial Premium: $ 25,000 $ 25,000
Death Benefit on Policy Schedule (guaranteed minimum death benefit): 98,225 98,225
Insurance Age at Issue: 45 45
Insurance Age at Death: 55 55
Cash Value on Date of Death: 75,000 50,000
Death Benefit Factor: 1.5 1.5
</TABLE>
In Example A, the Death Benefit equals $112,500, i.e., the greater of
$98,225 or $112,500 (the Cash Value at the date of death of $75,000,
multiplied by the Death Benefit Factor of 1.5). This amount less any
outstanding Debt constitutes the Death Benefit which we would pay to
the Beneficiary.
In Example B, the Death Benefit is $98,225, i.e., the greater of
$98,225 or $75,000 (the Cash Value of $50,000 multiplied by the Death
Benefit Factor of 1.5).
The difference in the Cash Value assumed is based upon different assumed
investment experience.
For a Policy, male age 45, non-smoker, under the above assumptions the
Death Benefit payable would exceed the guaranteed minimum death benefit in the
tenth Policy Year, assuming a 12% gross annual investment rate of return. (See
Appendix at pages 58 and 59.) With a lesser gross annual investment rate of
return, the Death Benefit would not exceed the guaranteed minimum death benefit
until a later Policy Year.
All or part of the Death Benefit may be paid in cash or applied under a
settlement option. (See "General Provisions--Settlement Options.")
Effect on Cost of Insurance Charge. Any change in the Death Benefit will
affect the net amount at risk, which would, in turn, affect the Owner's cost of
insurance charge. (See "Charges and Deductions--Cost of Insurance Charge".)
Payment of Death Benefit. Death Benefits under the Policy will ordinarily
be paid within seven days after KILICO receives all documentation required for
such a payment. Payments may be postponed in certain circumstances. (See
"General Provisions--Postponement of Payments.")
BENEFITS AT MATURITY
If the Insured is living on the Policy anniversary following the Insured's
Age 95, KILICO will pay the Owner the Surrender Value of the Policy, on
surrender of the Policy to KILICO. On the Maturity Date, the Policy will
terminate and KILICO will have no further obligations under the Policy.
CASH VALUE
The Policy's Cash Value will reflect the investment experience of the
selected Subaccounts of the Separate Account, the frequency and amount of
premiums paid, transfers between Subaccounts, any General Account values, and
any charges assessed in connection with the Policy. An Owner may at any time
surrender the Policy and receive the Policy's Surrender Value, which equals the
Cash Value less surrender charges and Debt. (See "Surrender Privilege.") There
is no minimum guaranteed Cash Value.
10
<PAGE> 14
CALCULATION OF CASH VALUE. The Cash Value of the Policy is the total of the
Policy's Separate Account Value and the Cash Value in the General Account. The
Cash Value is determined on each Valuation Date. It will first be calculated on
the Policy Date. On that date, the Cash Value equals the initial premium, less
the cost of insurance charge for the first Policy Month. (See "Charges and
Deductions.")
On any Valuation Date during the Policy Year, the Policy's Separate Account
Value in any Subaccount will equal:
(1) The Policy's Separate Account Value in the Subaccount at the end
of the preceding Valuation Period, multiplied by the Investment Experience
Factor (defined below) for the current Valuation Period; plus
(2) Any premium payments received during the current Valuation Period
which are allocated to the Subaccount; plus
(3) All amounts transferred to the Subaccount, either from another
Subaccount or from the General Account in connection with the repayment of
a Policy loan (see "Policy Benefits and Rights--Policy Loans," page 12)
during the current Valuation Period; minus
(4) All amounts transferred from the Subaccount during the current
Valuation Period; minus
(5) The pro rata portion of the monthly cost of insurance charge
attributable to the Subaccount if a Policy Month began during the Valuation
Period. (See "Charges and Deductions--Cost of Insurance Charge.")
There will also be Cash Value in the General Account if there is a Policy
loan outstanding. The General Account is credited with amounts transferred from
Subaccounts in connection with Policy loans. The General Account balance accrues
daily interest at an effective annual rate of 4.00% for values attributable to
premium and 6.00% for values attributable to amounts in excess of premium. (See
"Policy Benefits and Rights--Policy Loans.")
ACCUMULATION UNIT VALUE. Each Subaccount has a distinct Accumulation Unit
Value. When premiums or other amounts are allocated to a Subaccount, a number of
units are purchased based on the Accumulation Unit Value of the Subaccount at
the end of the Valuation Period during which the allocation is made. When
amounts are transferred out of, or deducted from, a Subaccount, units are
redeemed in a similar manner.
For each Subaccount, the Accumulation Unit Value was initially set at
$1.00. The Accumulation Unit Value for each subsequent Valuation Period is the
Investment Experience Factor for that Valuation Period multiplied by the
Accumulation Unit Value for the immediately preceding period. Each Valuation
Period has a single Accumulation Unit Value which applies for each day in the
period. The number of Accumulation Units will not change as a result of
investment experience. The Investment Experience Factor may be greater or less
than one; therefore, the Accumulation Unit Value may increase or decrease.
INVESTMENT EXPERIENCE FACTOR. The investment experience of the Separate
Account is calculated by applying the Investment Experience Factor to the
Separate Account Value in each Subaccount during a Valuation Period. Each
Subaccount has its own distinct Investment Experience Factor. The Investment
Experience Factor of a Subaccount for any Valuation Period is determined by
dividing (1) by (2) and subtracting (3) from the result, where:
(1) is the net result of:
a. The net asset value per share of the investment held in the
Subaccount determined at the end of the current Valuation Period; plus
b. the per share amount of any dividend or capital gain distributions
made by the investment held in the Subaccount division, if the
"ex-dividend" date occurs during the current Valuation Period; plus or
minus
c. a charge or credit for any taxes reserved for the current valuation
period which we determine to have resulted from the investment
operations of the Subaccount;
(2) is the net asset value per share of the investment held in the
Subaccount, determined at the end of the last prior Valuation Period;
11
<PAGE> 15
(3) is the factor representing the Mortality and Expense Risk Charge at an
annual rate of 0.90% of the assets of the Subaccount and compensates
KILICO for certain mortality and expense risks assumed. (See "Charges
and Deductions--Mortality and Expense Risk Charge.")
POLICY LOANS
On and after the first Monthly Processing Date after the Policy Date of the
Policy, the Owner may by written request to KILICO borrow all or part of the
Maximum Loan Amount of the Policy. The Maximum Loan Amount is 90% of the
Policy's Cash Value minus applicable surrender charges, subject to the
requirements of the Internal Revenue Code. The amount of any new loan may not
exceed the Maximum Loan Amount less Debt on the date a loan is granted. The
minimum amount of a loan is $500. Any amount due an Owner under a Policy Loan
ordinarily will be paid within 7 days after KILICO receives a loan request at
its Home Office, although payments may be postponed under certain circumstances.
(See "Postponement of Payments," and "Federal Tax Matters.") If the Policy is
treated as a modified endowment contract, the loan will be treated as a
distribution for federal income tax purposes and may be subject to tax,
withholding and penalties.
On the date a loan is made, Separate Account Value equal to the loan amount
will be transferred from the Separate Account to the loan account in the General
Account. Unless the Owner directs otherwise, the loaned amount will be deducted
from the Subaccounts in proportion to the values that each Subaccount bears to
the Separate Account Value of the Policy in all of the Subaccounts at the end of
the Valuation Period during which the request is received.
The loan interest will be assessed at an effective annual rate of 6.00%.
Interest not paid when due will be added to the loan amount due and bear
interest at the same rate.
Cash Value in the loan account within the General Account attributable to
the premium will earn no less than 4.00% annual interest. Cash Value in the loan
account within the General Account attributable to amounts in excess of premium
will earn no less than 6.00% annual interest. Such earnings will be allocated to
the General Account.
LOAN REPAYMENT. While the Policy is in force, policy loans may be repaid
at any time, in whole or in part. Payments will be treated as payment of
outstanding Debt unless the Owner indicates that the payments should be treated
otherwise. If otherwise permitted by the guideline premium limits of the Code
where there is no indication made, the portion of a payment that exceeds the
amount of any Debt will be treated as a premium payment. If not permitted by the
Code, the amount that exceeds any Debt will be refunded to the Owner.
At the time of repayment, Cash Value in the loan account of the General
Account equal to the amount of the repayment which exceeds the difference
between interest due and interest earned will be allocated to the Subaccounts
according to the Owner's current allocation instructions, unless otherwise
requested by the Owner. Loan repayments will be applied first to reduce that
portion of the loan account attributable to interest due on loaned premium;
second, to that portion of the loan account attributable to premium; third, to
that portion of the loan account attributable to interest due on loaned amounts
in excess of premium; and fourth to that portion of the loan account
attributable to loaned amounts in excess of premium. Transfers from the General
Account to the Separate Account as a result of the repayment of Debt will be
allocated at the end of the Valuation Period during which the repayment is
received. Such transfers will not be counted in determining the transfers made
within a 15 day period.
EFFECTS OF POLICY LOAN. Policy loans decrease Surrender Value and,
therefore, the amount available to pay the charges necessary to keep the Policy
in force. If Surrender Value on the day immediately preceding a Monthly
Processing Date is less than the monthly cost of insurance deduction for the
next month, KILICO will notify the Owner and any assignee of record. (See
"General Provisions--Written Notices and Requests.") This Policy will lapse and
terminate without value, unless a sufficient payment is made to KILICO within 61
days of the date such notice is sent to the Owner. (See "The Policy--Policy
Lapse and Reinstatement".)
EFFECT ON INVESTMENT EXPERIENCE. A Policy Loan will have an effect on the
Cash Value of a Policy. The collateral for the loan (the amount held in the
General Account) does not participate in the experience of the Subaccounts while
the loan is outstanding. If the amount credited to the General Account is more
than the amount that would have been earned in the Subaccounts, the Cash Value
will, and the Death Benefit may, be higher as a result of the loan. Conversely,
if the amount credited to the General Account is less than would have been
earned in the Subaccounts, the Cash Value, as well as the Death Benefit, may be
less.
12
<PAGE> 16
SURRENDER PRIVILEGE
While the Insured is living and the Policy is in force, the Owner may
surrender the Policy for its Surrender Value. To surrender the Policy, the Owner
must make written request to KILICO at its Home Office and return the Policy to
KILICO. The Surrender Value is equal to the Cash Value less any applicable
Surrender Charge and any Debt. (See "Surrender Charge," below.) Partial
surrenders are not permitted.
SURRENDER CHARGE. No sales charge is deducted from any premium payment.
However, a contingent deferred sales charge ("Surrender Charge") will be used to
cover expenses relating to the sale of the Policy including commissions paid to
sales personnel, and other promotion and acquisition expenses. If this Policy is
surrendered or if the Cash Value is applied under a Settlement Option (see
"General Provisions--Settlement Options"), the amount payable may reflect a
deduction for applicable Surrender Charges. A Surrender Charge will not be
assessed against Cash Values applied under a settlement option if the Policy has
been in force for five or more years and the settlement option elected provides
for benefit payments of at least five years. The amount of the Surrender Charge
will be calculated as a percentage of the lesser of premium paid in the first
Policy Year or Cash Value under the Policy. The charge decreases from 9% to 0%
depending on the length of time between the Policy Date and the date of
surrender or application under a settlement option, provided, however, that the
Surrender Charge will never exceed $60 per $1,000 of initial Death Benefit.
During the period from the Policy Date to the first Policy Anniversary, the rate
is 9%; on the first Policy Anniversary, the rate decreases to 8%, and on each of
the next eight Policy Anniversaries it will decrease an additional 1%. Thus,
there will be no Surrender Charge with respect to the premium paid in the first
Policy Year beginning on the ninth Policy Anniversary.
The applicable Surrender Charge will be determined based upon the date of
receipt of the written request for surrender.
FREE-LOOK PERIOD AND EXCHANGE RIGHTS
The Owner may, until the end of the period of time specified in the Policy,
examine the Policy and return it for a refund. The applicable period of time
will depend on the state in which the Policy is issued; however, it will be at
least 10 days from the date the Policy is received by the Owner. The amount of
the refund will be the premium paid. An Owner seeking a refund should return the
Policy to KILICO at its Home Office or to the agent who sold the Policy.
The Owner may, while the Policy is in force, exchange it at any time after
its issue, for a non-variable permanent fixed benefit life insurance policy then
currently being offered by KILICO on the life of the Insured. Such policy would
be treated and taxed as a modified endowment contract. No evidence of
insurability will be required. During the first two years after the Policy Trade
Date, the amount of the new policy may be, at the election of the Owner, either
the initial Death Benefit or the same net amount at risk as the Policy on the
exchange date. After two years from the Policy Trade Date, the amount of the new
policy will be for the same net amount at risk as the Policy on the exchange
date. All Debt under the Policy must be repaid and the surrender of the Policy
is required before the exchange is made. The Policy Date and issue age will be
the same as existed under the Policy.
CHARGES AND DEDUCTIONS
COST OF INSURANCE CHARGE
A monthly deduction is made from the Subaccounts for the cost of insurance
to cover KILICO's anticipated mortality costs. The cost of insurance charge is
deducted monthly in advance and is allocated among the Subaccounts in proportion
to the value of each Subaccount to the Separate Account Value.
The cost of insurance will be deducted on the Policy Date and on each
Monthly Processing Date thereafter. If the Monthly Processing Date falls on a
day other than a Valuation Date, the charge will be determined on the next
Valuation Date. The cost of insurance charge is determined by multiplying the
applicable cost of insurance rate (see below) by the "net amount at risk" for
each policy month. The net amount at risk is equal to the Death Benefit minus
the Cash Value on the Monthly Processing Date.
COST OF INSURANCE RATE. The monthly cost of insurance rates are based on
the sex, Insurance Age and rate class of the Insured. The monthly cost of
insurance rates will be determined by KILICO based on its expectations as to
future mortality experience. Any change in the schedule of rates will apply to
all individuals of the same class as the Insured. The cost of insurance rate may
never exceed those shown in the table of guaranteed maximum cost of insurance
rates in the Policy. The guaranteed maximum cost of
13
<PAGE> 17
insurance rates are based on the 1980 Commissioner's Standard Ordinary Smoker
and Non-Smoker Mortality Tables, published by the National Association of
Insurance Commissioners.
RATE CLASS. The rate class of an Insured will affect the cost of insurance
rate. KILICO currently places Insureds in standard rate classes and rate classes
involving a higher mortality risk. The cost of insurance rates for rate classes
involving a higher mortality risk are multiples of the standard rates. (See
"Charges and Deductions--Cost of Insurance Rate," above.)
MORTALITY AND EXPENSE RISK CHARGE
A daily charge is deducted from the Subaccounts of the Separate Account for
mortality and expense risks assumed by KILICO. This charge will be at an annual
rate of 0.90%. This rate is guaranteed not to increase for the duration of the
Policy. If these charges are insufficient to cover the risks and costs, any loss
or deficiency will fall on KILICO. Conversely, if the charges are more than
sufficient, the gain will accrue to KILICO, creating a profit which would be
available for any proper corporate purpose including, among other things,
payment of distribution expenses.
The mortality and expense risk assumed is that KILICO's estimates of
longevity and of the expenses incurred over the lengthy period the Policy may be
in effect--which estimates are the basis for the level of other charges KILICO
makes under the Policy--will not be correct.
OTHER CHARGES
SURRENDER CHARGE. If the Policy is surrendered or if the Cash Value is
applied under a Settlement Option, a Surrender Charge on the lesser of the
premium paid in the first Policy Year or the Cash Value under the Policy will be
deducted from the amount payable. The charge starts at 9% in the first Policy
Year and reduces to 0%, depending on the length of time between the payment and
the date of surrender or application under a Settlement Option. Subject to other
considerations, the Owner may decide to reduce the potential Surrender Charge by
paying less initial premium. The Surrender Charges are intended to compensate
KILICO for expenses in connection with the distribution of the Policy. Under
current assumptions KILICO anticipates Surrender Charges will not fully cover
distribution expenses. To the extent that distribution expenses are not
recovered from Surrender Charges, those expenses may be recovered from other
sources, including the cost of insurance and the mortality and expense risk
charges described above. Surrender Charges are described in more detail under
"Policy Benefits--Surrender Privilege."
TAXES. Currently, no charges are made against the Separate Account for
Federal, state or other taxes that may be attributable to the Separate Account.
KILICO may, however, in the future impose charges for Federal income taxes
attributable to the Separate Account. Charges for other taxes, if any,
attributable to the Policy may also be made. (See "Federal Tax Matters.")
CHARGES AGAINST THE FUND. Under the investment advisory agreement between
the Fund, on behalf of the Portfolios, and the Adviser, the Adviser provides
investment advisory services for the Portfolios. The Fund is responsible for the
advisory fee and all its other expenses. The investment advisory fee differs
with respect to each of the Portfolios of the Fund and is described beginning on
page 5 of this Prospectus. For more information concerning the investment
advisory fee and other charges against the Portfolios of the Fund, see the
prospectus for the Fund and the Statement of Additional Information available
upon request.
REDUCTION OF CHARGES. KILICO may reduce certain charges and the minimum
initial premium in special circumstances that result in lower sales,
administrative, or mortality expenses. For example, special circumstances may
exist in connection with group or sponsored arrangements, sales to KILICO
policyowners, or sales to employees or clients of members of the Kemper group of
companies. The amounts of any reductions will reflect the reduced sales effort
and administrative costs resulting from, or the different mortality experience
expected as a result of, the special circumstances. Reductions will not be
unfairly discriminatory against any person, including the affected Owners and
owners of all other policies funded by the Separate Account.
GENERAL PROVISIONS
SETTLEMENT OPTIONS
The Owner, or Beneficiary at the death of the Insured, may elect to have
all of the Death Benefit or Surrender Value of this Policy paid in a lump sum or
have the amount applied to one of the Settlement Options. The minimum amount
that may be placed under a Settlement Option is $4,000 unless KILICO consents to
a lesser amount. Payments under these options will not be affected by the
investment
14
<PAGE> 18
experience of the Separate Account after proceeds are applied under a Settlement
Option. Payment will be made as elected by the payee on a monthly, quarterly,
semi-annual or annual basis. If the amount of any payment under a Settlement
Option is less than $100, KILICO may increase the interval between payments to a
quarterly, semi-annual or annual payment to make the payment at least $100.
The Cash Value on the day immediately preceding the date on which the first
benefit payment is due shall first be reduced by any applicable Surrender Charge
and Debt. The Surrender Value shall be used to determine the benefit payment.
For Settlement Options 1 through 5, the payment shall be based upon the
settlement option elected in accordance with the appropriate settlement option
table.
OPTION 1--INCOME FOR SPECIFIED PERIOD. KILICO will pay income for the
period and payment mode elected but not less than 3 years nor more than 30
years.
OPTION 2--LIFE INCOME. KILICO will pay a monthly income to the payee during
the payee's lifetime. If this Option is elected, annuity payments terminate
automatically and immediately on the death of the annuitant 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. KILICO will pay a
monthly income for the guaranteed period elected and thereafter for the
remaining lifetime of the payee. The period elected may only be 5, 10, 15 or 20
years.
OPTION 4--JOINT AND SURVIVOR ANNUITY. KILICO will pay the full monthly
income while both payees are living. Upon the death of either payee, the income
will continue during the lifetime of the surviving payee. The surviving payee's
income shall be the percentage of such full amount chosen at the time of
election of this option. Annuity payments terminate automatically and
immediately upon the death of the surviving payee without regard to the number
or total amount of payments received.
OPTION 5--PENSION AND SURVIVOR ANNUITY. KILICO will pay the full monthly
income during the lifetime of the primary payee. Such payments will continue
whether or not the secondary payee is living. If the primary payee dies before
the secondary payee dies, the benefits will continue during the lifetime of the
secondary payee. However, such benefits will be for the percentage chosen for
such continuation at the time this option is elected. Annuity payments terminate
automatically and immediately upon the death of the surviving payee without
regard to the number or total amount of payments received.
OPTION 6--INCOME OF SPECIFIED AMOUNT. KILICO will pay the amount elected
for as long as the amount applied and interest will last. The minimum income
which may be elected is $10.00 per month for each $1,000 applied.
OPTION 7--PROCEEDS LEFT AT INTEREST. KILICO will hold the amount applied on
deposit, subject to any withdrawal limits stated in the supplementary contract.
Interest will be paid on the amount deposited.
KILICO consent is necessary for any other payment methods.
Interest on funds held by KILICO under Options 1, 6 and 7 shall be at the
rate of 4% per year. The sums payable under Options 2, 3, 4 and 5 are based on
the 1971 Individual Annuity Mortality Tables, male and female, at 4% interest
per year, unless otherwise required by law. Interest shall be compounded
annually. Additional interest, if any, will be paid as determined by KILICO, in
its sole discretion.
POSTPONEMENT OF PAYMENTS
GENERAL. Payment of any amount due upon: (a) Policy termination at the
Maturity Date, (b) surrender of the Policy, (c) payment of any Policy loan, or
(d) death of the Insured, may be postponed whenever:
(1) The New York Stock Exchange is closed other than customary weekend
and holiday closings, or trading on the New York Stock Exchange is
restricted as determined by the SEC;
(2) The SEC by order permits postponement for the protection of
Owners; or
(3) An emergency exists, as determined by the SEC, as a result of
which disposal of securities of the Fund is not reasonably practicable or
it is not reasonably practicable to determine the value of the net assets
of the Separate Account.
Transfers may also be postponed under these circumstances.
15
<PAGE> 19
PAYMENT NOT HONORED BY BANK. The portion of any payment due under the
Policy which is derived from any amount paid to KILICO by check or draft may be
postponed until such time as KILICO determines that such instrument has been
honored by the bank upon which it was drawn.
THE CONTRACT
The Policy, any endorsements, and the application constitute the entire
contract between KILICO and the Owner. All statements made by the Insured or
contained in the application will, in the absence of fraud or misrepresentation,
be deemed representations and not warranties.
Only the President, the Secretary, or an Assistant Secretary of KILICO is
authorized to change or waive the terms of a Policy. Any change or waiver must
be in writing and signed by one of those persons.
MISSTATEMENT OF AGE OR SEX
If the age or sex of the Insured is misstated, the Cash Value and Death
Benefit will be recalculated from the Policy Date based on the correct sex and
age.
SUICIDE
Suicide by the Insured, while sane or insane, within two years from the
Policy Date of the Policy is a risk not assumed under the Policy. KILICO's
liability for such suicide is limited to the Cash Value less any Debt. When the
laws of the state in which a Policy is delivered require less than a two year
period, or return of premium paid, the period or amount paid will be as stated
in such laws.
ASSIGNMENT
No assignment of a Policy is binding on KILICO until it is received by
KILICO at its Home Office. KILICO assumes no responsibility for the validity of
the assignment. Any claim under an assignment is subject to proof of the extent
of the interest of the assignee. If this Policy is assigned, the rights of the
Owner and Beneficiary are subject to the rights of the assignee of record.
NONPARTICIPATING
This Policy will not pay dividends. It will not participate in any of
KILICO's surplus or earnings.
OWNER AND BENEFICIARY
The Owner may, at any time during the life of the Insured and while the
Policy is in force, designate a new Owner.
Primary and secondary Beneficiaries may be designated by the Owner in the
application. If changed, the primary or secondary Beneficiary is as shown in the
latest change filed with KILICO. If no Beneficiary survives the Insured, the
Insured's estate will be the Beneficiary. The interest of any Beneficiary may be
subject to that of an assignee.
Any change of Owner or Beneficiary must be made in writing in a form
acceptable to KILICO. The change will take effect as of the date the request is
signed. KILICO will not be liable for any payment made or other action taken
before the notice has been received at KILICO's Home Office.
RECORDS AND REPORTS
KILICO will maintain all records relating to the Separate Account. KILICO
will send Owners, at their last known address of record, an annual report
stating the Death Benefit, the Accumulation Unit Value, the Cash Value and
Surrender Value under the Policy, and indicating any additional premium
payments, transfers, Policy loans and repayments and charges made during the
Policy Year. Owners will also be sent annual and semi-annual reports for the
Fund to the extent required by the 1940 Act.
WRITTEN NOTICES AND REQUESTS
Any written notice or request to be sent to KILICO should be sent to its
Home Office, 1 Kemper Drive, Long Grove, Illinois 60049. The notice or request
should include the Policy number and the Insured's full name. Any notice sent by
KILICO to an Owner will be sent to the address shown in the application unless
an address change has been filed with KILICO.
16
<PAGE> 20
DISTRIBUTION OF POLICIES
The Policy is sold by licensed insurance representatives who represent
KILICO and 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 Policy is distributed
through the principal underwriter, Investors Brokerage Services, Inc. ("IBS"), a
wholly owned subsidiary of KILICO.
Gross commissions paid by KILICO on the sale of the Policy plus fees for
marketing services provided by affiliates of KILICO are not more than 6.75%. In
lieu of part of the 6.75%, a service fee at an annual rate of .25 of 1% on
assets which have been maintained and serviced may also be paid to the principal
underwriter or the licensed broker-dealers. Firms to which service fees and
commissions may be paid include affiliated broker-dealers. In addition to the
commissions described above, KILICO may, from time to time, pay or allow
additional promotional incentives, in the form of cash or other compensation, to
licensed broker-dealers that sell the Policies. In some instances, such other
incentives may be offered only to certain licensed broker-dealers that sell or
are expected to sell during specified time periods certain minimum amounts of
the Policy or other contracts issued by KILICO. The aggregate amount of gross
commissions paid by KILICO on the sale of the Policy was $2,231, $25,764, and
$12,700, in 1995, 1994 and 1993, respectively.
FEDERAL TAX MATTERS
The ultimate effect of Federal income taxes on the Policy, on settlement
options and on the economic benefit to the Owner, Beneficiary or payee depends
on KILICO's tax status, and upon the tax status of the individual concerned.
KILICO'S TAX STATUS
Under current interpretations of Federal income tax law, KILICO is taxed as
a life insurance company and the operations of the Separate Account are treated
as part of the total operations of KILICO. The operations of the Separate
Account do not materially affect KILICO's Federal income tax liability because
KILICO is allowed a deduction to the extent that net investment income of the
Separate Account is applied to increase Owners' equity. KILICO may incur state
and local taxes attributable to the Separate Account. At present, these taxes
are not significant. Accordingly, KILICO does not charge or credit the Separate
Account for Federal, state or local taxes. Thus, the Separate Account may
realize net investment income, such as interest, dividends or capital gains, and
reinvest such income all without tax consequences to the Separate Account.
If there is a material change in applicable Federal, state or local law,
however, charges or credits may be made to the Separate Account for Federal,
state or local taxes, or reserves for such taxes, if any, attributable to the
Separate Account. Such charges or credits will be determined independent of the
taxes actually paid by KILICO.
TAX STATUS OF THE POLICY
The Technical and Miscellaneous Revenue Act of 1988 altered the Federal
income tax treatment of loans and predeath distributions under life insurance
policies classified as "modified endowment contracts."
A Policy entered into on or after June 21, 1988 is considered a modified
endowment contract. Further, a Policy entered into before June 21, 1988 is
considered a modified endowment contract if the Death Benefit payable under the
Policy is increased on or after June 21, 1988 as a result of the payment of
additional premium and the Owner did not have a unilateral right before June 21,
1988 to obtain such increase without providing additional evidence of
insurability. Finally, a Policy is considered a modified endowment contract if
the Death Benefit increases by more than $150,000 over the Death Benefit on
October 20, 1988 and, on or after the date of such increase, there is a
"material change" to the Policy. A material change does not include an increase
in the Death Benefit, if the increase is attributable to (1) premiums necessary
to fund the Death Benefit as of October 20, 1988 increased by $150,000, or (2)
the crediting of earnings with respect to such premiums. An exchange of a policy
entered into before June 21, 1988 under section 1035 of the Internal Revenue
Code is considered a material change, but does not cause the new policy to be
treated as a modified endowment contract so long as no additional premiums are
paid.
A Policy treated as a modified endowment contract is subject to the
following rules:
First, the amount of a Policy loan (or, if a Policy is assigned or pledged,
the amount of Cash Value assigned or pledged) is considered received by the
Owner and is included in the Owner's Federal gross income to the extent that the
Cash Value exceeds the Owner's investment in the Policy. The Owner's
17
<PAGE> 21
investment in the Policy is the initial premium (or, if a Policy is issued in
exchange for another policy under section 1035 of the Internal Revenue Code, the
Owner's investment in the other policy), increased by additional premiums and by
amounts included in the Owner's gross income.
Second, all modified endowment contracts issued by KILICO (or an affiliate)
to the same Owner during a calendar year are to be aggregated and considered a
single contract for purposes of determining the amount includible in gross
income. Under this rule, amounts received by the Owner are includible in gross
income to the extent that total cash value exceeds total investment in such
aggregated contracts.
Third, the portion of any amount considered received by the Owner that is
includible in gross income is subject to an additional 10-percent tax. The
additional tax does not apply to any amount that is (1) received on or after the
date the Owner attains age 59 1/2; (2) distributed as a result of the Owner
becoming disabled; or (3) one of a series of substantially equal periodic
payments (not less frequently than annually) made for the life (of life
expectancy) of the Owner or the joint lives (or life expectancies) of the Owner
and the Owner's beneficiary.
The United States Congress may in the future consider additional
legislation that, if enacted, could adversely affect the tax treatment of life
insurance policies, including loans and other distributions and undistributed
appreciation. There is no way of predicting whether, when or in what form
Congress will enact any such proposal or any other legislation affecting life
insurance policies. Any such legislation could have retroactive effect
regardless of the date of enactment.
The Policy is a life insurance contract for Federal income tax purposes
under current Section 7702 of the Internal Revenue Code. As such, the Death
Benefit is excludable from the gross income of the Beneficiary. Also, the Owner
is not deemed to be in constructive receipt of the Cash Value, including
increments thereon, until a distribution occurs through a loan or actual
surrender. Interest paid on a loan under the Policy is not deductible by the
individual Owner. Section 7702 of the Internal Revenue Code imposes certain
conditions with respect to premiums received under the Policy. KILICO intends to
monitor the premiums to assure compliance.
If there is a surrender or exchange of a Policy, KILICO may be required to
withhold Federal income tax from the portion of the money received that is
includable in the Owner's Federal gross income. An Owner may, however, make an
election not to have such tax withheld but the election must be made before
KILICO makes payment.
Federal estate and state and local estate, inheritance and other tax
consequences of ownership or receipt of Policy proceeds depend on the
circumstances of each Owner and Beneficiary.
The Secretary of the Treasury has issued final regulations establishing
diversification provisions for variable life insurance contracts. Failure to
meet the diversification requirements could result in taxation of KILICO and
immediate taxation of the Owner of the Policy to the extent of appreciation on
the Owner's investment. KILICO will monitor compliance with these tests. A
special test exists for variable life insurance contracts that invest in United
States Treasury obligations. A separate account that issues variable life
insurance contracts need not meet the diversification test to the extent that it
invests in securities issued by the United States Treasury.
OTHER CONSIDERATIONS
Because of the complexity of the law in its application to a specific
individual, tax advice may be needed by a person contemplating purchase of a
Policy or the exercise of elections under a Policy. The above comments
concerning the Federal income tax consequences are not exhaustive and are not
intended as tax advice. Counsel and other competent advisers should be consulted
for more complete information. This discussion is based on KILICO's
understanding of Federal income tax laws as they are currently interpreted by
the Internal Revenue Service. No representation is made as to the likelihood of
continuation of these current laws and interpretations. KILICO also believes the
Policy meets other requirements concerning Owner control over investments.
However, the Secretary of Treasury has not issued regulations on this subject.
Such regulations, if adopted, could include requirements not included in the
Policy. Because the guidance has not been published, there can be no assurance
as to content or even whether application will be prospective only. KILICO will
make modifications to the Policy to comply with such regulations.
18
<PAGE> 22
LEGAL CONSIDERATIONS
On July 6, 1983, the Supreme Court held in ARIZONA GOVERNING COMMITTEE V.
NORRIS that certain annuity benefits provided by employers' retirement and
fringe benefit programs may not vary between men and women on the basis of sex.
The Policy described in this Prospectus contains cost of insurance rates that
distinguish between men and women. Accordingly, employers and employee
organizations should consider, in consultation with legal counsel, the impact of
federal, state and local laws, including Title VII of the Civil Rights Act, the
Equal Pay Act, and Norris and subsequent cases on any employment-related
insurance or fringe benefit program before purchasing this Policy.
SAFEKEEPING OF THE SEPARATE ACCOUNT'S ASSETS
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 the shares of each
portfolio of the Fund by each of the Subaccounts.
VOTING RIGHTS
To the extent required by law, KILICO will vote the Fund's shares held in
the Separate Account at regular and special shareholder meetings of the Fund in
accordance with instructions received from persons having voting interests in
the corresponding Subaccounts of the Separate Account. If, however, the 1940 Act
or any regulation thereunder should be amended or if the present interpretation
thereof should change, and as a result KILICO determines that it is permitted to
vote the Fund's shares in its own right, it may elect to do so.
Owners of all Policies participating in each Subaccount shall have voting
rights with respect to that Subaccount, based upon each Owner's proportionate
interest in that Subaccount as measured by units.
Each person having a voting interest in a Subaccount will receive proxy
material, reports, and other materials relating to the appropriate Portfolio of
the Fund.
KILICO will vote shares of the Fund for which it has not received timely
instructions in proportion to the voting instructions that KILICO has received
with respect to all variable policies participating in a portfolio. KILICO will
also vote any Fund shares attributed to amounts it has accumulated in the
Subaccounts in the same proportions that Owners vote.
KILICO may, when required by state insurance regulatory authorities,
disregard voting instructions if the instructions require that the shares be
voted so as to cause a change in the subclassification or investment objective
of the Fund or of one or more of its portfolios or to approve or disapprove an
investment advisory contract for a Portfolio of the Fund. In addition, KILICO
itself may disregard voting instructions in favor of changes initiated by an
Owner in the investment policy or the investment adviser of a Portfolio of the
Fund if KILICO reasonably disapproves of such changes. A proposed change would
be disapproved only if the change is contrary to state law or prohibited by
state regulatory authorities, or if KILICO determines that the change would have
an adverse effect on its General Account in that the proposed investment policy
for a Portfolio may result in overly speculative or unsound investments. In the
event KILICO does disregard voting instructions, a summary of that action and
the reasons for such action will be included in the next annual report to
Owners.
STATE REGULATION OF KILICO
KILICO, a stock life insurance company organized under the laws of
Illinois, is subject to regulation by the Illinois Department of Insurance. An
annual statement is filed with the Director of Insurance on or before March 1st
of each year covering the operations and reporting on the financial condition of
KILICO as of December 31st of the preceding year. Periodically, the Director of
Insurance examines the liabilities and reserves of KILICO and the Separate
Account and certifies to their adequacy, and a full examination of KILICO's
operations is conducted by the National Association of Insurance Commissioners
at least once every three years.
In addition, KILICO is subject to the insurance laws and regulations of
other states within which it is licensed to operate. Generally, the insurance
department of any other state applies the laws of the state of domicile in
determining permissible investments.
19
<PAGE> 23
DIRECTORS AND OFFICERS OF KILICO
The directors and principal officers of KILICO are listed below together
with their current positions and their other business experience during the past
five years. The address of each officer and director is 1 Kemper Drive, Long
Grove, Illinois 60049.
<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 (51) Chief Executive Officer and President of Federal Kemper Life
Chief Executive Officer since Assurance Company and Fidelity Life Association since 1988. Chief
February 1992. President since Executive Officer and President of Zurich Life Insurance Company
November 1993. Director since of America since January 1996. Chairman of the Board of Federal
1992. Kemper Life Assurance Company 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
from January 1994 and March 1996, respectively. Executive Vice
President of Kemper Financial Companies, Inc. from January 1994 to
January 1996 and Director from 1992 to January 1996.
Jerome J. Cwiok (48) Executive Vice President of Federal Kemper Life Assurance Company
Executive Vice President since and Fidelity Life Association since 1995. Executive Vice President
1995. of Zurich Life Insurance Company of America since March 1996.
Senior Vice President of KILICO, Federal Kemper Life Assurance
Company and Fidelity Life Association from 1993 to 1995. Vice
President of Federal Kemper Life Assurance Company and Fidelity
Life Association since 1993. Executive Vice President of Academy
Insurance Group from 1986 to 1993.
Eliane C. Frye (47) Executive Vice President of Federal Kemper Life Assurance Company
Executive Vice President since and Fidelity Life Association since 1995. Executive Vice President
1995. of Zurich Life Insurance Company of America since March 1996.
Senior Vice President of KILICO from 1992 to 1995. Senior Vice
President of Federal Kemper Life Assurance Company and Fidelity
Life Association from 1993 to 1995. Vice President of Federal
Kemper Life Assurance Company and Fidelity Life Association from
1988 to 1993.
Frederick L. Blackmon (43) Senior Vice President and Chief Financial Officer of Federal
Senior Vice President and Kemper Life Assurance Company and Fidelity Life Association since
Chief Financial Officer since November 1995. Treasurer and Chief Financial Officer of Kemper
November 1995. Corporation since January 1996. Senior Vice President and Chief
Financial Officer of Zurich Life Insurance Company of America
since March 1996. Chief Financial Officer of Alexander Hamilton
Life Insurance Company from April 1989 to November 1995.
</TABLE>
20
<PAGE> 24
<TABLE>
<CAPTION>
NAME AND AGE
POSITION WITH KILICO
YEAR OF ELECTION OTHER BUSINESS EXPERIENCE DURING PAST 5 YEARS OR MORE
- ------------------------------ ------------------------------------------------------------------
<S> <C>
</TABLE>
<TABLE>
<S> <C>
James E. Hohmann (40) Senior Vice President and Chief Actuary of Federal Kemper Life
Senior Vice President and Assurance Company and Fidelity Life Association since December
Chief Actuary since December 1995. Senior Vice President and Chief Actuary of Zurich Life
1995. Insurance Company of America since March 1996. Managing Principal
(Partner) of Tillinghast--Towers Perrin from January 1991 to
December 1995. Consultant/Principal (Partner) of
Tillinghast--Towers Perrin from November 1986 to January 1991.
Debra P. Rezabek (40) Senior Vice President of Federal Kemper Life Assurance Company and
Senior Vice President since Fidelity Life Association since 1996. General Counsel of Federal
1996. General Counsel since Kemper Life Assurance Company and Fidelity Life Association since
1992. Corporate Secretary 1992. Corporate Secretary of Federal Kemper Life Assurance Company
since January 1996. and Fidelity Life Association since January 1996. Senior Vice
President and General Counsel of Zurich Life Insurance Company of
America since March 1996. Assistant General Counsel of Federal
Kemper Life Assurance Company and Fidelity Life Association from
1988 to 1992. Assistant Secretary of KILICO, Federal Kemper Life
Assurance Company and Fidelity Life Association from 1992 to 1996.
Assistant Secretary of Kemper Corporation since January 1996.
Loren J. Alter (57) Director of Federal Kemper Life Assurance Company, Fidelity Life
Director since January 1996. Association and Zurich Kemper Investments, Inc. since January
1996. Director of Zurich Life Insurance Company of America since
May 1979. Executive Vice President of Zurich Insurance Company
since 1979. President, Chief Executive Officer and Director of
Kemper Corporation since January 1996.
William H. Bolinder (52) Chairman of the Board and Director of Federal Kemper Life
Chairman of the Board and Assurance Company and Fidelity Life Association since January
Director since January 1996. 1996. Chairman of the Board and Director of Zurich Life Insurance
Company of America since March 1995. Chairman of the Board of
Kemper Corporation since January 1996. Vice Chairman and Director
of Zurich Kemper Investments, Inc. since January 1996. 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 1986.
Chief Executive Officer of American Guarantee and Liability
Company, Zurich American Insurance Company of Illinois, American
Zurich Insurance Company and Steadfast Insurance Company from 1986
to June 1995. President of Zurich Holding Company of America since
1986. U.S. Manager of Zurich Insurance Company, U.S. Branch since
1986. Underwriter for Zurich American Lloyds since 1986.
</TABLE>
21
<PAGE> 25
<TABLE>
<CAPTION>
NAME AND AGE
POSITION WITH KILICO
YEAR OF ELECTION OTHER BUSINESS EXPERIENCE DURING PAST 5 YEARS OR MORE
- ------------------------------ ------------------------------------------------------------------
<S> <C>
Daniel L. Doctoroff (37) Director of Kemper Corporation, Federal Kemper Life Assurance
Director since January 1996. Company and Fidelity Life Association since January 1996. Managing
Partner of Insurance Partners Advisors, L.P. since February 1994.
Vice President of Keystone, Inc. since October 1992. Managing
Director of Rosecliff Inc./Oak Hill Partners, Inc. since August
1987. Director of Bell & Howell Company since 1989; National Re
Corporation since 1990; Specialty Foods Corporation since 1993;
and Transport Holdings Inc. since 1995.
Steven M. Gluckstern (45) Director of Kemper Corporation, Federal Kemper Life Assurance
Director since January 1996. Company and Fidelity Life Association since January 1996. Chairman
of the Board and Director of Zurich Kemper Investments, Inc. since
January 1996. Chairman of the Board and Chief Executive Officer of
Zurich Reinsurance Centre, Inc. since May 1993. President of
Centre Re, Bermuda from December 1986 to May 1993.
Michael P. Stramaglia (36) Director of Federal Kemper Life Assurance Company and Fidelity
Director since January 1996. Life Association since January 1996. Chief Executive Officer and
President of Zurich Life Insurance Company of Canada since June
1994. Executive Vice-President and Chief Operating Officer of
Zurich Life Insurance Company of Canada from June 1993 to June
1994. Senior Vice-President of the Corporate Division of Zurich
Life Insurance Company of Canada from November 1990 to January
1993. Director of Zurich Life Insurance Company of Canada, Zurich
Life of Canada Holdings Limited, Zurich Indemnity Company of
Canada, Zurich Canadian Holdings Limited, and Zurmex Canada
Holdings Limited.
Paul H. Warren (40) Director of Kemper Corporation, Federal Kemper Life Assurance
Director since January 1996. Company and Fidelity Life Association since January 1996. Partner
of Insurance Partners Advisors, L.P. since March 1994. Managing
Director of International Insurance Advisors since March 1992.
Vice President of J.P. Morgan from June 1986 to March 1992.
Director of Unionamerica Holdings plc since 1993; Unionamerica
Insurance Company since 1993; Tarquin plc since 1994; and Chairman
Underwriting Agencies Ltd. since 1994.
</TABLE>
22
<PAGE> 26
LEGAL MATTERS
All matters of Illinois law pertaining to the Policy, including the
validity of the Policy and KILICO's right to issue the Policy under Illinois
Insurance Law, have been passed upon by Debra P. Rezabek, Senior Vice President,
General Counsel, and Corporate Secretary of KILICO. Katten Muchin & Zavis,
Washington, D.C., has advised KILICO on certain legal matters concerning federal
securities laws applicable to the issue and sale of Policies.
LEGAL PROCEEDINGS
There are no legal proceedings to which the Separate Account is a party or
to which the assets of the Separate Account are subject. KILICO is not a party
in any litigation that is of material importance in relation to its total assets
or that relates to the Separate Account.
EXPERTS
The financial statements of KILICO and the Separate Account have been
included in the Prospectus in reliance upon the reports of KPMG Peat Marwick
LLP, independent certified public accountants, appearing elsewhere herein, and
upon the authority of said firm as experts in accounting and auditing. As
discussed in the notes to KILICO's consolidated financial statements, effective
January 1, 1994, KILICO changed its method of accounting for investment
securities to adopt the provisions of the Financial Accounting Standards Board's
Statement of Financial Accounting Standards ("SFAS") 115, ACCOUNTING FOR CERTAIN
INVESTMENTS IN DEBT AND EQUITY SECURITIES. Also, as discussed in the notes
effective January 1, 1993, KILICO changed its method of accounting for
impairment of loans receivable to adopt the provisions of SFAS 114, ACCOUNTING
BY CREDITORS FOR IMPAIRMENT OF A LOAN, and changed its method of accounting for
income taxes to adopt the provisions of SFAS 109, ACCOUNTING FOR INCOME TAXES.
Actuarial matters included in this prospectus have been examined by Steven
D. Powell, FSA as stated in the opinion filed as an exhibit to Post-Effective
Amendment No. 3 to the Registration Statement.
REGISTRATION STATEMENT
A registration statement has been filed with the Securities and Exchange
Commission under the Securities Act of 1933, as amended, with respect to the
Policies. For further information concerning the Separate Account, KILICO and
the Policy, reference is made to the Registration Statement as amended with
exhibits. Copies of the Registration Statement are available from the
Commission.
FINANCIAL STATEMENTS
The financial statements of KILICO that are included should be considered
only as bearing upon KILICO's ability to meet its contractual obligations under
the Policy. KILICO's financial statements do not bear on the investment
experience of the assets held in the Separate Account.
23
<PAGE> 27
[THIS PAGE IS INTENTIONALLY LEFT BLANK]
24
<PAGE> 28
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS
KEMPER INVESTORS LIFE INSURANCE COMPANY:
We have audited the accompanying combined statement of assets and
liabilities and policy owners' equity of the KILICO Variable Separate Account as
of December 31, 1995, and the related combined statement of operations for the
year then ended, and the combined statements of changes in policy owners' equity
for the years ended December 31, 1995 and 1994. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of the KILICO
Variable Separate Account as of December 31, 1995, and the combined results of
its operations for the year then ended, and the combined changes in its policy
owners' equity for the years ended December 31, 1995 and 1994, in conformity
with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Chicago, Illinois
February 16, 1996
25
<PAGE> 29
KILICO VARIABLE SEPARATE ACCOUNT
COMBINED STATEMENT OF ASSETS AND LIABILITIES AND POLICY OWNERS' EQUITY
DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
MONEY GOVERNMENT
MARKET TOTAL RETURN HIGH YIELD EQUITY SECURITIES
COMBINED SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
-------- ---------- ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Investments, at current value.......... $11,671 1,001 2,557 2,087 1,925 4,101
Dividends and other receivables........ 7 3 -- 4 -- --
------- ----- ----- ----- ----- -----
Total assets..................... 11,678 1,004 2,557 2,091 1,925 4,101
LIABILITIES AND POLICY OWNERS' EQUITY
Liabilities:
Mortality and expense risk charges... 14 2 4 2 2 4
------- ----- ----- ----- ----- -----
Policy owners' equity.................. $11,664 1,002 2,553 2,089 1,923 4,097
======= ===== ===== ===== ===== =====
ANALYSIS OF POLICY OWNERS' EQUITY
Excess of proceeds from units sold over
payments for units redeemed.......... $ 6,441 530 1,165 1,447 1,070 2,229
Accumulated net investment income...... 3,059 472 677 591 218 1,101
Accumulated net realized gain on sales
of investments....................... 810 -- 329 3 220 258
Unrealized appreciation of
investments.......................... 1,354 -- 382 48 415 509
------- ----- ----- ----- ----- -----
Policy owners' equity.................. $11,664 1,002 2,553 2,089 1,923 4,097
======= ===== ===== ===== ===== =====
</TABLE>
See accompanying notes to combined financial statements.
26
<PAGE> 30
KILICO VARIABLE SEPARATE ACCOUNT
COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
MONEY GOVERNMENT
MARKET TOTAL RETURN HIGH YIELD EQUITY SECURITIES
COMBINED SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
-------- ---------- ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Dividends and capital gains
distributions..................... $ 613 88 67 90 116 252
Mortality and expense risk
charges........................... 107 20 20 15 14 38
------ ---- --- --- --- ---
Net investment income............... 506 68 47 75 102 214
------ ---- --- --- --- ---
Net realized and unrealized gain on
investments:
Net realized gain on sales of
investments..................... 144 -- 14 54 31 45
Change in unrealized appreciation
of investments.................. 1,253 -- 442 106 301 404
------ ---- --- --- --- ---
Net realized and unrealized gain on
investments....................... 1,397 -- 456 160 332 449
------ ---- --- --- --- ---
Net increase in policy owners'
equity resulting from
operations........................ $1,903 68 503 235 434 663
====== ==== === === === ===
</TABLE>
See accompanying notes to combined financial statements.
27
<PAGE> 31
KILICO VARIABLE SEPARATE ACCOUNT
COMBINED STATEMENTS OF CHANGES IN POLICY OWNERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
MONEY MARKET
COMBINED SUBACCOUNT
----------------------- --------------------
1995 1994 1995 1994
------- ------ ----- -----
<S> <C> <C> <C> <C>
Operations:
Net investment income................................................ $ 506 615 68 43
Net realized gain (loss) on sales of investments..................... 144 55 -- --
Change in unrealized appreciation (depreciation)
of investments..................................................... 1,253 (1,154) -- --
------- ------ ----- -----
Net increase (decrease) in policy owners' equity
resulting from operations........................................ 1,903 (484) 68 43
------- ------ ----- -----
Account unit transactions:
Proceeds from units sold............................................. 108 514 76 507
Net transfers (to) from subaccounts.................................. -- -- (348) 14
Payments for units redeemed.......................................... (791) (563) (104) (96)
------- ------ ----- -----
Net increase (decrease) in policy owners' equity
from account unit transactions................................... (683) (49) (376) 425
------- ------ ----- -----
Total increase (decrease) in policy owners' equity..................... 1,220 (533) (308) 468
Policy owners' equity:
Beginning of year.................................................... 10,444 10,977 1,310 842
------- ------ ----- -----
End of year.......................................................... $11,664 10,444 1,002 1,310
======= ====== ===== =====
</TABLE>
See accompanying notes to combined financial statements.
28
<PAGE> 32
<TABLE>
<CAPTION>
GOVERNMENT
TOTAL RETURN HIGH YIELD EQUITY SECURITIES
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
- --------------- --------------- --------------- ---------------
1995 1994 1995 1994 1995 1994 1995 1994
- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
47 188 75 88 102 57 214 239
14 20 54 28 31 (1) 45 8
442 (458) 106 (171) 301 (143) 404 (382)
- ----- ----- ----- ----- ----- ----- ----- -----
503 (250) 235 (55) 434 (87) 663 (135)
- ----- ----- ----- ----- ----- ----- ----- -----
-- -- 17 6 3 1 12 --
72 (455) 270 13 508 (71) (502) 499
(146) (133) (147) (177) (143) (75) (251) (82)
- ----- ----- ----- ----- ----- ----- ----- -----
(74) (588) 140 (158) 368 (145) (741) 417
- ----- ----- ----- ----- ----- ----- ----- -----
429 (838) 375 (213) 802 (232) (78) 282
2,124 2,962 1,714 1,927 1,121 1,353 4,175 3,893
- ----- ----- ----- ----- ----- ----- ----- -----
2,553 2,124 2,089 1,714 1,923 1,121 4,097 4,175
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
29
<PAGE> 33
KILICO VARIABLE SEPARATE ACCOUNT
NOTES TO COMBINED FINANCIAL STATEMENTS
(1) GENERAL INFORMATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
KILICO Variable Separate Account (the "Separate Account") is a unit
investment trust registered under the Investment Company Act of 1940, as
amended, established by Kemper Investors Life Insurance Company ("KILICO").
KILICO is owned by Kemper Corporation which was acquired by an investor group
led by Zurich Insurance Company ("Zurich") on January 4, 1996.
The Separate Account receives and invests premiums under a variable life
insurance policy ("Policy"). The Separate Account is divided into five
Subaccounts and each Subaccount invests exclusively in a corresponding Portfolio
of the Kemper Investors Fund (The "Fund"), an open-end diversified management
investment company. The Fund has added two additional Subaccounts, the
International Portfolio and the Small Capitalization Equity Portfolio, which are
not available investment vehicles to policy owners of the Separate Account.
SECURITY VALUATION
The investments are stated at current value which is based on the closing
bid price, net asset value, at December 31, 1995.
SECURITY TRANSACTIONS AND INVESTMENT INCOME
Security transactions are accounted for on the trade date (date when KILICO
accepts risks of providing insurance coverage to the insured). Dividends and
capital gains distributions are recorded as income on the ex-dividend date.
Realized gains and losses from security transactions are reported on an
identified cost basis.
ACCOUNT UNIT TRANSACTIONS
Proceeds from a Policy are automatically allocated to the Money Market
Subaccount on the trade date for a 15 day period. At the end of this period, the
Separate Account value (cash value) may be allocated to other Subaccounts as
designated by the owner of the Policy.
ACCUMULATION UNIT VALUATION
On each day the New York Stock Exchange (the "Exchange") is open for
trading, the accumulation unit value is determined as of the earlier of 3:00
p.m. (Chicago time) or the close of the Exchange by dividing the total value of
each Subaccount's investments and other assets, less liabilities, by the number
of accumulation units outstanding in the respective Subaccount.
FEDERAL INCOME TAXES
The operations of the Separate Account are included in the Federal income
tax return of KILICO. Under existing Federal income tax law, investment income
and realized capital gains and losses of the Separate Account increase
liabilities under the policy and are, therefore, not taxed. Thus the Separate
Account may realize net investment income and capital gains and losses without
Federal income tax consequences.
30
<PAGE> 34
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(2) SUMMARY OF INVESTMENTS
Investments, at cost, at December 31, 1995, are as follows (in thousands):
<TABLE>
<CAPTION>
SHARES
OWNED COST
----- -------
<S> <C> <C>
INVESTMENT PORTFOLIO
Kemper Investors Fund Money Market Portfolio.............................. 1,001 $ 1,001
Kemper Investors Fund Total Return Portfolio.............................. 991 2,175
Kemper Investors Fund High Yield Portfolio................................ 1,658 2,039
Kemper Investors Fund Equity Portfolio.................................... 590 1,510
Kemper Investors Fund Government Securities Portfolio..................... 3,231 3,592
-------
TOTAL INVESTMENTS.................................................... $10,317
=======
</TABLE>
The underlying investments and significant industry concentrations are
summarized below.
MONEY MARKET PORTFOLIO: This Portfolio invests primarily in short-term
obligations of major banks and corporations. At December 31, 1995, no industry
exceeded 20% of the Portfolio's assets.
TOTAL RETURN PORTFOLIO: This Portfolio's investments will normally consist
of fixed-income and equity securities. Fixed-income securities will include
bonds and other debt securities and preferred stocks. Equity investments
normally will consist of common stocks and securities convertible into or
exchangeable for common stocks, however, the Portfolio may also make private
placement investments (which are normally restricted securities). At December
31, 1995, 21.9% of the Portfolio's assets were invested in U.S. Government
obligations. No other industry exceeded 20% of the Portfolio's assets.
HIGH YIELD PORTFOLIO: This Portfolio invests in fixed-income securities, a
substantial portion of which are high yielding fixed-income securities. These
securities ordinarily will be in the lower rating categories of recognized
rating agencies or will be non-rated, and generally will involve more risk than
securities in the higher rating categories. At December 31, 1995, 21.4% of the
Portfolio's assets were invested in the broadcasting, cable systems and
publishing industry. No other industry exceeded 20% of the Portfolio's assets.
EQUITY PORTFOLIO: This Portfolio's investments normally will consist of
common stocks and securities convertible into or exchangeable for common stocks,
however, it may also make private placement investments (which are normally
restricted securities). At December 31, 1995, no industry exceeded 20% of the
Portfolio's assets.
GOVERNMENT SECURITIES PORTFOLIO: This Portfolio invests primarily in U.S.
Government Securities. The Portfolio will also invest in fixed-income securities
other than U.S. Government securities and will engage in options and financial
futures transactions. At December 31, 1995, the Portfolio had 84.2% of its
assets invested in U.S. Government obligations. No other industry exceeded 20%
of the Portfolio's assets.
(3) TRANSACTIONS WITH AFFILIATES
KILICO assesses a monthly charge to the Subaccounts for the cost of
insurance. The cost of insurance charge is allocated among the Subaccounts in
the proportion of each Subaccount to the Separate Account value. Cost of
insurance charges totaled approximately $140,300 for the year ended December 31,
1995. Additionally, KILICO assesses a daily charge to the Subaccounts for
mortality and expense risk assumed by KILICO at an annual rate of .90% of
assets.
Proceeds payable on the surrender of a Policy are reduced by the amount of
any applicable contingent deferred sales charge. During the year ended December
31, 1995, KILICO received contingent deferred sales charges of approximately
$5,200.
Kemper Financial Services, Inc. ("KFS"), an affiliated company, is the
investment manager of the Portfolios of the Fund which serve as the underlying
investments of the Separate Account. In connection with the acquisition of
Kemper Corporation on January 4, 1996, Zurich also acquired 100% of KFS.
31
<PAGE> 35
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(4) POLICY OWNERS' EQUITY
Policy owners' equity at December 31, 1995 is as follows (in thousands,
except unit value; differences are due to rounding):
<TABLE>
<CAPTION>
NUMBER POLICY
OF UNIT OWNERS'
UNITS VALUE EQUITY
------ ------ -------
<S> <C> <C> <C>
Money Market Subaccount................................................ 666 $1.505 $ 1,002
Total Return Subaccount................................................ 1,412 1.808 2,553
High Yield Subaccount.................................................. 1,068 1.956 2,089
Equity Subaccount...................................................... 831 2.314 1,923
Government Securities Subaccount....................................... 2,235 1.834 4,097
-------
TOTAL POLICY OWNERS' EQUITY.................................. $11,664
=======
</TABLE>
32
<PAGE> 36
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors
Kemper Investors Life Insurance Company:
We have audited the consolidated balance sheet of Kemper Investors Life
Insurance Company and subsidiaries as of December 31, 1995 and 1994, and the
related consolidated statements of operations, stockholder's equity and cash
flows for each of the years in the three-year period ended December 31, 1995.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on the consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Kemper
Investors Life Insurance Company and subsidiaries at December 31, 1995 and 1994,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 1995, in conformity with generally
accepted accounting principles.
As discussed in the notes to the consolidated financial statements,
effective January 1, 1994, the Company changed its method of accounting for
investment securities to adopt the provisions of the Financial Accounting
Standards Board's Statement of Financial Accounting Standards ("SFAS") 115,
ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES. Also, as
discussed in the notes, effective January 1, 1993, the Company changed its
method of accounting for impairment of loans receivable to adopt the provisions
of SFAS 114, ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN, and changed its
method of accounting for income taxes to adopt the provisions of SFAS 109,
ACCOUNTING FOR INCOME TAXES.
KPMG PEAT MARWICK LLP
Chicago, Illinois
March 15, 1996
33
<PAGE> 37
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in thousands, except share data)
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------
1995 1994
----------- -----------
<S> <C> <C>
ASSETS
Fixed maturities, available for sale, at fair value (cost: 1995,
$3,643,985; 1994, $3,707,356).................................... $ 3,752,325 $ 3,463,732
Short-term investments............................................. 372,515 204,164
Joint venture mortgage loans....................................... 120,359 351,359
Third-party mortgage loans......................................... 144,450 318,682
Other real estate-related investments.............................. 34,780 237,242
Policy loans....................................................... 289,390 277,743
Other invested assets.............................................. 29,809 40,527
---------- ----------
Total investments........................................ 4,743,628 4,893,449
Cash............................................................... 25,811 23,189
Accrued investment income.......................................... 104,402 125,543
Deferred insurance acquisition costs............................... 318,636 310,465
Federal income tax receivable...................................... 112,646 25,656
Reinsurance recoverable............................................ 502,836 642,801
Other assets and receivables....................................... 12,617 7,993
Assets held in separate accounts................................... 1,761,110 1,507,984
---------- ----------
Total assets............................................. $ 7,581,686 $ 7,537,080
========== ==========
LIABILITIES
Future policy benefits............................................. $ 4,573,212 $ 4,843,690
Ceded future policy benefits....................................... 502,836 642,801
Other accounts payable and liabilities............................. 25,943 67,261
Deferred income taxes.............................................. 112,709 41,364
Liabilities related to separate accounts........................... 1,761,110 1,507,984
---------- ----------
Total liabilities........................................ 6,975,810 7,103,100
---------- ----------
Commitments and contingent liabilities
STOCKHOLDER'S EQUITY
Capital stock--$10 par value,
authorized 300,000 shares; outstanding 250,000 shares............ 2,500 2,500
Additional paid-in capital......................................... 491,994 491,994
Unrealized gain (loss) on investments.............................. 68,502 (236,443)
Retained earnings.................................................. 42,880 175,929
---------- ----------
Total stockholder's equity............................... 605,876 433,980
---------- ----------
Total liabilities and stockholder's equity............... $ 7,581,686 $ 7,537,080
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
34
<PAGE> 38
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------
1995 1994 1993
---------- --------- ---------
<S> <C> <C> <C>
REVENUE
Net investment income.................................... $ 348,448 $ 353,084 $ 339,274
Realized investment losses............................... (318,700) (54,557) (27,584)
Fees and other income.................................... 38,337 31,950 25,687
--------- -------- --------
Total revenue.................................. 68,085 330,477 337,377
--------- -------- --------
BENEFITS AND EXPENSES
Benefits and interest credited to policyholders.......... 245,615 248,494 275,689
Commissions, taxes, licenses and fees.................... 31,793 26,910 33,875
Operating expenses....................................... 20,837 25,324 24,383
Deferral of insurance acquisition costs.................. (36,870) (31,852) (31,781)
Amortization of insurance acquisition costs.............. 14,423 20,809 12,376
--------- -------- --------
Total benefits and expenses.................... 275,798 289,685 314,542
--------- -------- --------
Income (loss) before income tax expense (benefit) and
cumulative effect of change in accounting principle.... (207,713) 40,792 22,835
Income tax expense (benefit)............................. (74,664) 14,431 11,142
--------- -------- --------
Income (loss) before cumulative effect of
change in accounting principle............... (133,049) 26,361 11,693
Cumulative effect of change in accounting principle...... -- -- 2,350
--------- -------- --------
Net income (loss).............................. $ (133,049) $ 26,361 $ 14,043
========= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
35
<PAGE> 39
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
(in thousands)
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ---------
<S> <C> <C> <C>
CAPITAL STOCK, beginning and end of year.............. $ 2,500 $ 2,500 $ 2,500
--------- --------- --------
ADDITIONAL PAID-IN CAPITAL, beginning of year......... 491,994 409,423 310,237
Capital contributions from parent..................... -- 82,500 90,000
Transfer of limited partnership interest to parent.... -- 71 9,186
--------- --------- --------
End of year................................. 491,994 491,994 409,423
--------- --------- --------
UNREALIZED GAIN (LOSS) ON INVESTMENTS, beginning of
year................................................ (236,443) 93,096 39,872
Unrealized gain (loss) on revaluation of investments,
net................................................. 304,945 (329,539) 53,224
--------- --------- --------
End of year................................. 68,502 (236,443) 93,096
--------- --------- --------
RETAINED EARNINGS, beginning of year.................. 175,929 149,568 136,055
Net income (loss)..................................... (133,049) 26,361 14,043
Dividend of limited partnership interest to parent.... -- -- (530)
--------- --------- --------
End of year................................. 42,880 175,929 149,568
--------- --------- --------
Total stockholder's equity.................. $ 605,876 $ 433,980 $ 654,587
========= ========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
36
<PAGE> 40
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------------
1995 1994 1993
--------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)................................. $(133,049) $ 26,361 $ 14,043
Reconcilement of net income (loss) to net cash
provided:
Realized investment losses..................... 318,700 54,557 27,584
Interest credited and other charges............ 237,984 242,591 269,766
Deferred insurance acquisition costs........... (22,447) (11,043) (19,405)
Amortization of discount and premium on
investments.................................. 4,586 (1,383) (203)
Deferred income taxes.......................... 38,423 20,809 14,596
Federal income tax receivable.................. (86,990) 809 (10,110)
Other, net..................................... (29,905) (14,161) 40,258
--------- ----------- -----------
Net cash provided from operating
activities.............................. 327,302 318,540 336,529
--------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash from investments sold or matured:
Fixed maturities held to maturity.............. 320,143 144,717 187,949
Fixed maturities sold prior to maturity........ 297,637 910,913 1,652,119
Mortgage loans, policy loans and other invested
assets....................................... 450,573 536,668 881,505
Cost of investments purchased or loans originated:
Fixed maturities............................... (549,867) (1,447,393) (2,322,085)
Mortgage loans, policy loans and other invested
assets....................................... (131,966) (281,059) (443,445)
Short-term investments, net....................... (168,351) 198,299 (214,999)
Net change in receivable and payable for
securities transactions........................ (1,397) (16,553) 39,078
Net reductions in other assets.................... 1,996 2,678 8,062
--------- ----------- -----------
Net cash provided by (used in) investing
activities.............................. 218,768 48,270 (211,816)
--------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Policyholder account balances:
Deposits....................................... 247,778 215,034 246,219
Withdrawals.................................... (755,917) (652,513) (516,340)
Capital contributions from parent................. -- 82,500 90,000
Other............................................. (35,309) 3,871 16,776
--------- ----------- -----------
Net cash used in financing activities..... (543,448) (351,108) (163,345)
--------- ----------- -----------
Net increase (decrease) in cash...... 2,622 15,702 (38,632)
CASH, beginning of period........................... 23,189 7,487 46,119
--------- ----------- -----------
CASH, end of period................................. $ 25,811 $ 23,189 $ 7,487
========= =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
37
<PAGE> 41
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Kemper Investors Life Insurance Company and subsidiaries (the "Company")
issues fixed and variable annuity products and interest-sensitive life insurance
products marketed primarily through a network of financial institutions,
nonaffiliated and affiliated securities brokerage firms, insurance agents and
financial planners. The Company is licensed in the District of Columbia and all
states except New York. The Company is a wholly-owned subsidiary of Kemper
Corporation ("Kemper"). On January 4, 1996, an investors group comprised of
Zurich Insurance Company ("Zurich"), Insurance Partners, L.P. ("IP") and
Insurance Partners Offshore (Bermuda), L.P. (together with IP, "Insurance
Partners") acquired all of the issued and outstanding common stock of Kemper. As
a result of the change in control, Zurich and Insurance Partners indirectly and
directly own 80 percent and 20 percent, respectively, of Kemper and therefore
the Company. The consolidated financial statements of the Company as of December
31, 1995 have been prepared on a historical cost basis and have not been
adjusted to reflect the fair values of the Company's assets and liabilities as
of the date of the acquisition by Zurich and Insurance Partners.
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles. The statements include the accounts of
the Company on a consolidated basis. All significant intercompany balances and
transactions have been eliminated.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that could affect the reported amounts of assets and liabilities as
well as the disclosure of contingent assets or liabilities at the date of the
financial statements. As a result, actual results reported as revenue and
expenses could differ from the estimates reported in the accompanying financial
statements. As further discussed in the accompanying notes to the consolidated
financial statements, significant estimates and assumptions affect deferred
insurance acquisition costs, provisions for real estate-related losses and
reserves, other than temporary declines in values for fixed maturities, the
valuation allowance for deferred income taxes and the calculation of fair value
disclosures for certain financial instruments.
LIFE INSURANCE REVENUE AND EXPENSES
Revenue for annuities and interest-sensitive life insurance products
consists of investment income, and policy charges such as mortality, expense and
surrender charges. Expenses consist of benefits and interest credited to
contracts, policy maintenance costs and amortization of deferred insurance
acquisition costs. Also reflected in fees and other income is a ceding
commission experience adjustment received in 1995 as a result of certain
reinsurance transactions entered into by the Company during 1992. (See the note
captioned "Reinsurance".)
DEFERRED INSURANCE ACQUISITION COSTS
The costs of acquiring new business, principally commission expense and
certain policy issuance and underwriting expenses, have been deferred to the
extent they are recoverable from estimated future gross profits on the related
contracts and policies. The deferred insurance acquisition costs for annuities,
separate account business and interest-sensitive life insurance products are
being amortized over the estimated contract life in relation to the present
value of estimated gross profits. Beginning in 1994, deferred insurance
acquisition costs reflect the estimated impact of unrealized gains or losses on
fixed maturities held as available for sale in the investment portfolio, through
a credit or charge to stockholder's equity, net of income tax.
FUTURE POLICY BENEFITS
Liabilities for future policy benefits related to annuities and
interest-sensitive life contracts reflect net premiums received plus interest
credited during the contract accumulation period and the present value of future
payments for contracts that have annuitized. Current interest rates credited
during the contract accumulation period range from 4 percent to 8.35 percent.
Future minimum guaranteed interest rates vary from 4 percent to 8.35 percent for
periods ranging from a portion of 1996 up to a portion of 1998 and are
38
<PAGE> 42
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
generally 3 percent to 4.5 percent thereafter. For contracts that have
annuitized, interest rates used in determining the present value of future
payments range principally from 3 percent to 11.25 percent.
INVESTED ASSETS AND RELATED INCOME
Investments in fixed maturities are carried at fair value. Short-term
investments are carried at cost, which approximates fair value. (See the note
captioned "Fair Value of Financial Instruments".)
Mortgage loans are carried at their unpaid balance net of unamortized
discount and any applicable reserves or write-downs. Other real estate-related
investments net of any applicable reserve and write-downs include certain bonds
issued by real estate finance or development companies; notes receivable from
real estate ventures; investments in real estate ventures carried at cost,
adjusted for the equity in the operating income or loss of such ventures; and
real estate owned carried primarily at fair value.
Real estate reserves are established when declines in collateral values,
estimated in light of current economic conditions and calculated in conformity
with Statement of Financial Accounting Standards ("SFAS") 114, ACCOUNTING BY
CREDITORS FOR IMPAIRMENT OF A LOAN, indicate a likelihood of loss. Prior to
year-end 1995, the Company evaluated its real estate-related assets (including
accrued interest) by estimating the probabilities of loss utilizing various
projections that included several factors relating to the borrower, property,
term of the loan, tenant composition, rental rates, other supply and demand
factors and overall economic conditions. Generally, at that time, the reserve
was based upon the excess of the loan amount over the estimated future cash
flows from the loan discounted at the loan's contractual rate of interest taking
into consideration the effects of recourse to, and subordination of loans held
by, affiliated non-life realty companies. At year-end 1995, reflecting the
Company's change in strategy with respect to its real estate portfolio, and the
disposition thereof, real estate-related investments were valued using an
estimate of the investments observable market price, net of estimated costs to
sell.
SFAS 114 defines "impaired loans" as loans in which it is probable that a
creditor will be unable to collect all amounts due according to the contractual
terms of the loan agreement. In the fourth quarter of 1994, the Company adopted
SFAS 118, ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN--INCOME RECOGNITION
AND DISCLOSURES. SFAS 118 amends SFAS 114, providing clarification of income
recognition issues and requiring additional disclosures relating to impaired
loans. The adoption of SFAS 118 had no effect on the Company's financial
position or results of operations at or for the year ended December 31, 1994.
Realized gains or losses on sales of investments, determined on the basis
of identifiable cost on the disposition of the respective investment,
recognition of other-than-temporary declines in value and changes in real
estate-related reserves and write-downs are included in revenue. Unrealized
gains or losses on revaluation of investments are credited or charged to
stockholder's equity. Such unrealized gains are recorded net of deferred income
tax expense, while unrealized losses are not tax benefitted.
The amortized cost of fixed maturities is adjusted for amortization of
premiums and accretion of discounts to maturity, or in the case of
mortgage-backed securities, over the estimated life of the security. Such
amortization is included in net interest income. Amortization of the discount or
premium from mortgage-backed securities is recognized using a level effective
yield method which considers the estimated timing and amount of prepayments of
the underlying mortgage loans and is adjusted to reflect differences which arise
between the prepayments originally anticipated and the actual prepayments
received and currently anticipated. To the extent that the estimated lives of
mortgage-backed securities change as a result of changes in prepayment rates,
the adjustment is also included in net investment income. The Company does not
accrue interest income on fixed maturities deemed to be impaired on an
other-than-temporary basis, or on mortgage loans, real estate-related bonds and
other real estate loans where the likelihood of collection of interest is
doubtful.
Policy loans are carried at their unpaid balance. Other invested assets
consist primarily of venture capital investments and a leveraged lease and are
carried at cost. Other invested assets also included equity securities which are
carried at fair value.
39
<PAGE> 43
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SEPARATE ACCOUNT BUSINESS
The assets and liabilities of the separate accounts represent segregated
funds administered and invested by the Company for purposes of funding variable
annuity and variable life insurance contracts for the exclusive benefit of
variable annuity and variable life insurance contract holders. The Company
receives fees from the separate account and retains varying amounts of
withdrawal charges to cover expenses in the event of early withdrawals by
contract holders. The assets and liabilities of the separate accounts are
carried at fair value.
INCOME TAX
The operations of the Company have been included in the consolidated
Federal income tax return of Kemper. Income taxes receivable or payable have
been determined on a separate return basis, and payments have been received from
or remitted to Kemper pursuant to a tax allocation arrangement between Kemper
and its subsidiaries, including the Company. The Company generally had received
a tax benefit for losses to the extent such losses can be utilized in Kemper's
Federal consolidated tax return.
Under SFAS 109, ACCOUNTING FOR INCOME TAXES, deferred taxes are provided on
the temporary differences between the tax and financial statement basis of
assets and liabilities.
(2) CASH FLOW INFORMATION
The Company defines cash as cash in banks and money market accounts.
Federal income tax paid to (refunded by) Kemper under the tax allocation
arrangement for the years ended December 31, 1995, 1994 and 1993 amounted to
$(25.2 million), $(10.7 million) and $4.2 million, respectively.
Not reflected in the statement of cash flows are rollovers of mortgage
loans, other loans and investments totaling approximately $57.0 million and
$146.0 million in 1994 and 1993, respectively.
The Company also transferred its equity ownership interests in two limited
partnerships during 1994 and 1993. (See the note captioned "Related-Party
Transactions".)
(3) INVESTED ASSETS AND RELATED INCOME
The Company is carrying its fixed maturity investment portfolio at
estimated fair value as fixed maturities are considered available for sale,
depending upon certain economic and business conditions.
40
<PAGE> 44
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) INVESTED ASSETS AND RELATED INCOME (CONTINUED)
The carrying value (estimated fair value) of fixed maturities compared with
amortized cost, adjusted for other-than-temporary declines in value, at December
31, 1995 and 1994, were as follows:
<TABLE>
<CAPTION>
ESTIMATED UNREALIZED
CARRYING AMORTIZED ---------------------
(in thousands) VALUE COST GAINS LOSSES
---------- ---------- -------- ---------
<S> <C> <C> <C> <C>
1995
U.S. treasury securities and obligations of U.S.
government agencies and authorities............ $ 215,637 $ 212,494 $ 3,163 $ (20)
Obligations of states and political subdivisions,
special revenue and nonguaranteed.............. 24,241 22,469 1,772 --
Debt securities issued by foreign governments.... 139,361 134,715 5,120 (474)
Corporate securities............................. 1,698,270 1,638,178 65,075 (4,983)
Mortgage-backed securities....................... 1,674,816 1,636,129 40,278 (1,591)
---------- ---------- -------- ---------
Total fixed maturities.................... $3,752,325 $3,643,985 $115,408 $ (7,068)
========== ========== ======== =========
1994
U.S. treasury securities and obligations of U.S.
government agencies and authorities............ $ 10,682 $ 10,998 $ 24 $ (340)
Obligations of states and political subdivisions,
special revenue and nonguaranteed.............. 25,021 25,691 -- (670)
Debt securities issued by foreign governments.... 109,624 120,950 50 (11,376)
Corporate securities............................. 1,679,428 1,805,933 7,027 (133,532)
Mortgage-backed securities....................... 1,638,977 1,743,784 -- (104,807)
---------- ---------- -------- ---------
Total fixed maturities.................... $3,463,732 $3,707,356 $7,101 $(250,725)
========== ========== ======== =========
</TABLE>
Upon default or indication of potential default by an issuer of fixed
maturity securities, the Company-owned issue(s) of such issuer would be placed
on nonaccrual status and, since declines in fair value would no longer be
considered by the Company to be temporary, would be analyzed for possible
write-down. Any such issue would be written down to its net realizable value
during the fiscal quarter in which the impairment was determined to have become
other than temporary. Thereafter, each issue on nonaccrual status is regularly
reviewed, and additional write-downs may be taken in light of later
developments.
The Company's computation of net realizable value involves judgments and
estimates, so such value should be used with care. Such value determination
considers such factors as the existence and value of any collateral security;
the capital structure of the issuer; the level of actual and expected market
interest rates; where the issue ranks in comparison with other debt of the
issuer; the economic and competitive environment of the issuer and its business;
the Company's view on the likelihood of success of any proposed issuer
restructuring plan; and the timing, type and amount of any restructured
securities that the Company anticipates it will receive.
The Company's $300 million real estate portfolio consists of joint venture
and third-party mortgage loans and other real estate-related investments.
At December 31, 1995 and 1994, total impaired loans amounted to $21.9
million and $75.9 million, respectively. Impaired loans with reserves were $21.9
million and $67.6 million with corresponding reserves of $6.5 million and $18.8
million at December 31, 1995 and 1994, respectively. The Company had an average
balance of $124.2 million and $93.9 million in impaired loans for 1995 and 1994,
respectively. Cash payments received on impaired loans are generally applied to
reduce the outstanding loan balance. At December 31, 1995 and 1994, loans on
nonaccrual status amounted to $3.5 million and $274.6 million, respectively.
Impaired loans are generally included in the Company's nonaccrual loans.
41
<PAGE> 45
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) INVESTED ASSETS AND RELATED INCOME (CONTINUED)
At December 31, 1995, securities carried at approximately $5.9 million were
on deposit with governmental agencies as required by law.
Proceeds from sales of investments in fixed maturities prior to maturity
were $297.6 million, $910.9 million and $1.7 billion during 1995, 1994 and 1993,
respectively. Gross gains of $21.2 million, $6.0 million and $80.4 million and
gross losses of $4.7 million, $55.9 million and $37.8 million were realized on
sales of fixed maturities in 1995, 1994 and 1993, respectively.
The following table sets forth the maturity aging schedule of fixed
maturity investments at December 31, 1995:
<TABLE>
<CAPTION>
CARRYING AMORTIZED
(in thousands) VALUE COST VALUE
---------- ----------
<S> <C> <C>
One year or less........................................................ $ 25,617 $ 25,202
Over one year through five.............................................. 576,138 562,374
Over five years through ten............................................. 1,248,675 1,200,157
Over ten years.......................................................... 227,079 220,123
Securities not due at a single maturity date(1)......................... 1,674,816 1,636,129
---------- ----------
Total fixed maturities........................................... $3,752,325 $3,643,985
========== ==========
</TABLE>
- ---------------
(1) Weighted average maturity of 5.4 years.
The sources of net investment income were as follows:
<TABLE>
<CAPTION>
(in thousands) 1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Interest and dividends on fixed maturities................. $269,934 $274,231 $221,144
Dividends on equity securities............................. 681 1,751 3,084
Income from short-term investments......................... 13,159 10,668 12,155
Income from mortgage loans................................. 40,494 41,713 82,028
Income from policy loans................................... 19,658 18,517 16,826
Income from other real estate-related investments.......... 15,565 21,239 11,755
Income from other loans and investments.................... 1,555 3,533 8,008
-------- -------- --------
Total investment income............................. 361,046 371,652 355,000
Investment expense......................................... (12,598) (18,568) (15,726)
-------- -------- --------
Net investment income............................... $348,448 $353,084 $339,274
======== ======== ========
</TABLE>
Realized gains (losses) for the years ended December 31, 1995, 1994 and
1993, were as follows:
<TABLE>
<CAPTION>
REALIZED GAINS (LOSSES)
-------------------------------------------
(in thousands) 1995 1994 1993
--------- -------- --------
<S> <C> <C> <C>
Real estate-related................................. $(325,611) $(41,720) $(79,652)
Fixed maturities.................................... 9,336 (49,857) 36,234
Equity securities................................... (346) 28,243 17,086
Other............................................... (2,079) 8,777 (1,252)
--------- -------- --------
Realized investment losses before income tax
benefit........................................ (318,700) (54,557) (27,584)
Income tax benefit.................................. (111,545) (19,095) (7,917)
--------- -------- --------
Net realized investment losses.................... $(207,155) $(35,462) $(19,667)
========= ======== ========
</TABLE>
42
<PAGE> 46
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) INVESTED ASSETS AND RELATED INCOME (CONTINUED)
Unrealized gains (losses) are computed below as follows: fixed
maturities--the difference between fair value and amortized cost, adjusted for
other-than-temporary declines in value; equity securities and other--the
difference between fair value and cost. The change in unrealized investment
gains (losses) by class of investment for the years ended December 31, 1995,
1994 and 1993 were as follows:
<TABLE>
<CAPTION>
CHANGE IN UNREALIZED GAINS (LOSSES)
------------------------------------------
(in thousands) 1995 1994 1993
-------- --------- -------
<S> <C> <C> <C>
Fixed maturities.................................... $351,964 $(351,646) $60,258
Equity securities................................... 180 (32,710) 19,882
Adjustment to deferred insurance acquisition
costs............................................. (14,277) 11,325 --
-------- --------- -------
Unrealized gain (loss) before income tax expense
(benefit)...................................... 337,867 (373,031) 80,140
Income tax expense (benefit)........................ 32,922 (43,492) 26,916
-------- --------- -------
Net unrealized gain (loss) on investments.... $304,945 $(329,539) $53,224
======== ========= =======
</TABLE>
(4) UNCONSOLIDATED INVESTEES
At December 31, 1995, the Company, along with other Kemper subsidiaries,
directly held partnership interests or options to acquire equity interests (or
has made loans with additional interest features) in a number of real estate
joint ventures. The Company's direct and indirect real estate joint venture
investments are accounted for utilizing the equity method, with the Company
recording its share of the operating results of the respective partnerships. The
Company, as an equity owner, has the ability to fund, and historically has
elected to fund, operating requirements of certain of the joint ventures.
Consolidation accounting methods are not utilized as the Company, in most
instances, does not own more than 50 percent in the aggregate, and in any event,
major decisions of the partnership must be made jointly by all partners.
As of December 31, 1995 and 1994, the Company's net equity investment in
unconsolidated investees amounted to $17.1 million and $45.4 million,
respectively. The Company's share of net losses related to such unconsolidated
investees amounted to $453 thousand and $6.3 million for the years ended
December 31, 1995 and 1994, respectively.
Also at December 31, 1995, the Company had joint venture-related loans
totaling $21.8 million before reserves to partnerships in which Lumbermens
Mutual Casualty Company, an affiliate until August 1993 ("Lumbermens"), and
Fidelity Life Association ("FLA"), an affiliated mutual insurance company, had
equity interests. These joint venture-related loans totaled $37.5 million before
reserves at December 31, 1994. (See the note captioned "Financial
Instruments--Off-Balance-Sheet Risk".)
(5) CONCENTRATION OF CREDIT RISK
The Company generally strives to maintain a diversified invested asset
portfolio; however, certain concentrations of credit risk exist in
mortgage-backed securities and real estate. Approximately 45.7 percent of the
Company's investment-grade fixed maturities at December 31, 1995 were
mortgage-backed securities, down from 49.2 percent at December 31, 1994. These
investments consist primarily of marketable mortgage pass-through securities
issued by the Government National Mortgage Association, the Federal National
Mortgage Association or the Federal Home Loan Mortgage Corporation and other
investment-grade securities collateralized by mortgage pass-through securities
issued by these entities. The Company has not made any investments in
interest-only or other similarly volatile tranches of mortgage-backed
securities. The Company's mortgage-backed investments are generally of AAA
credit quality, and the markets for these investments have been and are expected
to remain liquid. The Company plans to continue to reduce its holding of such
investments over time.
Future investment income from mortgage-backed securities may be affected by
the timing of principal payments and the yields on reinvestment alternatives
available at the time of such payments. Due to the
43
<PAGE> 47
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) CONCENTRATION OF CREDIT RISK (CONTINUED)
fact that the Company's investments in mortgage-backed securities were
predominately made since 1992, the current interest rate environment is not
expected to cause any material extension of the average maturities of these
investments. With the exception of many of the Company's September 1994
purchases of such investments, most of these investments were purchased by the
Company at discounts. Prepayment activity on securities purchased at a discount
is not expected to result in any material losses to the Company because
prepayments would generally accelerate the reporting of the discounts as
investment income. Prepayment activity resulting from a decline in interest
rates on such securities purchased at a premium would accelerate the
amortization of the premiums which would result in reductions of investment
income related to such securities. At December 31, 1995, the Company had
unamortized discounts and premiums of $17.0 million and $11.0 million,
respectively, related to mortgage-backed securities. Given the credit quality,
liquidity and anticipated payment characteristics of the Company's investments
in mortgage-backed securities, the Company believes that the associated risk can
be managed without material adverse consequences on its consolidated financial
statements.
The Company's real estate portfolio is distributed by geographic location
and property type, as shown in the following two tables:
<TABLE>
<CAPTION>
GEOGRAPHIC DISTRIBUTION AS OF DECEMBER 31, 1995
<S> <C>
California................... 28.7%
Illinois..................... 24.4
Texas........................ 10.2
Oregon....................... 7.4
Colorado..................... 6.5
Hawaii....................... 6.2
Washington................... 5.7
Florida...................... 4.8
Ohio......................... 2.9
Other(1)..................... 3.2
-----
Total.............. 100.0%
=====
<CAPTION>
DISTRIBUTION BY PROPERTY TYPE AS OF DECEMBER 31, 1995
<S> <C>
Hotel........................ 34.3%
Office....................... 30.2
Land......................... 17.2
Residential.................. 4.8
Retail....................... 4.5
Industrial................... 3.0
Other........................ 6.0
-----
Total.............. 100.0%
=====
</TABLE>
- ---------------
(1) No other single location exceeded 2.0 percent.
Real estate markets have been depressed in recent periods in areas where
most of the Company's real estate portfolio is located. California real estate
market conditions have continued to be worse than in many other areas of the
country. Real estate markets in northern California and Illinois show some
stabilization and improvement.
Undeveloped land represented approximately 17.2 percent of the Company's
real estate portfolio at December 31, 1995. To maximize the value of certain
land and other projects, additional development has been proceeding or has been
planned. Such development of existing projects would continue to require
funding, either from the Company or third parties. In the present real estate
markets, third-party financing can require credit enhancing arrangements (e.g.,
standby financing arrangements and loan commitments) from the Company. The
values of development projects are dependent on a number of factors, including
Kemper's and the Company's plans with respect thereto, obtaining necessary
permits and market demand for the permitted use of the property. The values of
certain development projects have been written down as of December 31, 1995,
reflecting changes in plans in connection with the Zurich-led acquisition of
Kemper. There can be no assurance that such permits will be obtained as planned
or at all, nor that such expenditures will occur as scheduled, nor that Kemper's
and the Company's plans with respect to such projects may not change
substantially.
The majority of the Company's real estate loans are on properties or
projects where the Company, Kemper, or their affiliates have taken ownership
positions in joint ventures with a small number of partners. (See the note
captioned "Unconsolidated Investees".)
44
<PAGE> 48
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) CONCENTRATION OF CREDIT RISK (CONTINUED)
At December 31, 1995, loans to and investments in joint ventures in which
Patrick M. Nesbitt or his affiliates ("Nesbitt") have interests constituted
approximately $99.7 million, or 33.3 percent, of the Company's real estate
portfolio. The Nesbitt ventures primarily consist of eleven hotel properties. At
December 31, 1995, the Company did not have any Nesbitt-related
off-balance-sheet legal funding commitments outstanding.
At December 31, 1995, loans to and investments in a master limited
partnership (the "MLP") between subsidiaries of Kemper and subsidiaries of
Lumbermens, constituted approximately $66.0 million, or 22.0 percent, of the
Company's real estate portfolio. The Company's interest in the MLP is a less
than one percent limited partnership interest, and Kemper's interest is 75
percent at December 31, 1995. Prior to 1995, Kemper's interest was 50 percent.
At December 31, 1995, MLP-related commitments accounted for approximately $29.8
million of the Company's off-balance-sheet legal commitments, of which the
Company expects to fund $17.0 million.
At December 31, 1995, the Company's loans to and investments in projects
with the Prime Group, Inc. or its affiliates totaled approximately $24.8
million, or 8.3 percent, of the Company's real estate portfolio. Prime
Group-related commitments accounted for $165.6 million of the off-balance-sheet
legal commitments at December 31, 1995, of which the Company expects to fund
$15.0 million.
(6) INCOME TAXES
Income tax expense (benefit) was as follows for the years ended December
31, 1995, 1994 and 1993:
<TABLE>
<CAPTION>
(in thousands) 1995 1994 1993
---------- -------- --------
<S> <C> <C> <C>
Current.................................................. $ (113,087) $ (6,898) $ (5,773)
Deferred................................................. 38,423 21,329 16,915
--------- ------- -------
Total.......................................... $ (74,664) $ 14,431 $ 11,142
========= ======= =======
</TABLE>
Included in the current tax benefit is the recognition of a net operating
loss carryover at December 31, 1995 which will be utilized against taxable
income on Kemper's consolidated short period Federal income tax return for the
January 1 through January 4, 1996 tax year. Beginning January 5, 1996, the
Company will file a stand alone Federal income tax return. Previously, the
Company had filed a consolidated Federal income tax return with Kemper. In the
first quarter of 1996, the Company and Kemper settled the outstanding balances
for the short period under the tax allocation agreement with Kemper making a
payment to the Company of approximately $30 million. The Company's receivable
from Kemper for all remaining balances under the tax allocation agreement, after
adjusting for the $30 million payment, totaled approximately $82.6 million at
December 31, 1995. Such remaining amounts are expected to be settled in the
fourth quarter of 1996.
The actual income tax expense (benefit) for 1995, 1994 and 1993 differed
from the "expected" tax expense (benefit) for those years as displayed below.
"Expected" tax expense (benefit) was computed by
45
<PAGE> 49
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) INCOME TAXES (CONTINUED)
applying the U.S. Federal corporate tax rate of 35 percent in 1995, 1994, and
1993 to income (loss) before income tax expense (benefit) and cumulative effect
of change in accounting principle.
<TABLE>
<CAPTION>
(in thousands) 1995 1994 1993
--------- -------- --------
<S> <C> <C> <C>
Computed expected tax expense (benefit).................... $ (72,700) $ 14,277 $ 7,992
Difference between "expected" and actual tax expense
(benefit):
State taxes.............................................. (1,370) 645 332
Foreign tax credit....................................... (183) (155) 358
Change in tax rate....................................... -- -- 1,441
Change in valuation allowance............................ -- -- 701
Other, net............................................... (411) (336) 318
-------- ------- -------
Total actual tax expense (benefit)............... $ (74,664) $ 14,431 $ 11,142
======== ======= =======
</TABLE>
Under SFAS 109 ACCOUNTING FOR INCOME TAXES, deferred tax assets and
liabilities are generally determined based on the difference between the
financial statement and tax bases of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.
Under SFAS 109, the effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the enactment
date. SFAS 109 allows recognition of deferred tax assets if future realization
of the tax benefit is more likely than not, with a valuation allowance for the
portion that is not likely to be realized.
The implementation of SFAS 109 in 1993 resulted in a one-time increase to
earnings of $2.4 million.
Under SFAS 109, a valuation allowance is established to reduce the deferred
Federal tax asset related to real estate and other investments to the amount
that, based upon available evidence, is, in management's judgment, more likely
than not to be realized. Any reversals of the valuation allowance are contingent
upon the recognition of future capital gains in Kemper's Federal income tax
return or a change in circumstances which causes the recognition of the benefits
to become more likely than not. During 1995 and 1994, the change in the
valuation allowance related solely to the change in the net deferred Federal tax
asset or liability from unrealized gains or losses on investments.
46
<PAGE> 50
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the Company's net deferred Federal tax liability were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------
(in thousands) 1995 1994 1993
--------- --------- --------
<S> <C> <C> <C>
Deferred Federal tax assets:
Unrealized losses on investments..................... $ -- $ 85,331 $ --
Life policy reserves................................. 42,512 51,519 60,446
Real estate-related.................................. 21,920 39,360 45,851
Other investment-related............................. 1,725 7,435 12,498
Other................................................ 6,864 6,415 5,804
--------- --------- --------
Total deferred Federal tax assets................. 73,021 190,060 124,599
Valuation allowance.................................. (15,201) (100,532) (15,201)
--------- --------- --------
Total deferred Federal tax assets after valuation
allowance....................................... 57,820 89,528 109,398
--------- --------- --------
Deferred Federal tax liabilities:
Deferred insurance acquisition costs................. 111,523 108,663 100,834
Unrealized gains on investments...................... 37,919 -- 49,193
Depreciation and amortization........................ 18,767 18,878 21,367
Other................................................ 2,320 3,351 2,049
--------- --------- --------
Total deferred Federal tax liabilities............ 170,529 130,892 173,443
--------- --------- --------
Net deferred Federal tax liabilities................... $(112,709) $ (41,364) $(64,045)
========= ========= ========
</TABLE>
The valuation allowance is subject to future adjustments based on, among
other items, Kemper's estimates of future operating earnings and capital gains.
The tax returns through the year 1986 have been examined by the Internal
Revenue Service ("IRS"). Changes proposed are not material to the Company's
financial position. The tax returns for the years 1987 through 1990 are
currently under examination by the IRS.
(7) RELATED-PARTY TRANSACTIONS
The Company received cash capital contributions of $82.5 million and $90.0
million during 1994 and 1993, respectively.
In 1994 and 1993, the Company transferred the majority of its deficit
equity ownership interest in two limited partnerships to another Kemper
subsidiary resulting in an increase of the Company's additional paid-in capital
of $71 thousand and $9.2 million, respectively. The Company also paid a non-cash
dividend of $530 thousand in December 1993, which represented the positive
equity ownership interests of the majority of one of its limited partnerships.
Net losses associated with the Company's ownership interests in these limited
partnerships amounted to $0.4 million, $1.4 million and $5.4 million in 1995,
1994 and 1993, respectively, and are included in the Company's consolidated
statement of operations.
The Company has loans to joint ventures, consisting primarily of mortgage
loans on real estate, in which the Company and/or one of its affiliates has an
ownership interest. At December 31, 1995 and 1994, joint venture mortgage loans
totaled $120 million and $351 million, respectively, and during 1995, 1994 and
1993, the Company earned interest income on these joint venture loans of $19.6
million, $22.0 million and $63.1 million, respectively.
All of the Company's personnel are employees of Federal Kemper Life
Assurance Company ("FKLA"), an affiliated company. The Company is allocated
expenses for the utilization of FKLA employees and facilities, the investment
management services of Zurich Kemper Investments, Inc. ("ZKI"), an affiliated
company, and the information systems of Kemper Service Company ("KSvC"), a ZKI
subsidiary, based on
47
<PAGE> 51
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(7) RELATED-PARTY TRANSACTIONS (CONTINUED)
the Company's share of administrative, legal, marketing, investment management,
information systems and operation and support services. During 1995, 1994 and
1993, expenses allocated to the Company from ZKI and KSvC amounted to $4.4
million, $6.5 million and $3.1 million, respectively. The Company also paid to
ZKI investment management fees of $3.4 million, $6.0 million and $6.7 million
during 1995, 1994 and 1993, respectively. In addition, expenses allocated to the
Company from FKLA during 1995, 1994 and 1993 amounted to $14.3 million, $11.1
million and $13.1 million, respectively.
During 1995, 1994 and 1993, the Company sold certain mortgages and real
estate-related investments, net of reserves, amounting to approximately $3.5
million, $154.0 million and $343.7 million respectively, to KFC Portfolio Corp.,
an affiliated non-life realty company, in exchange for cash. No gain or loss was
recognized on these sales. The Company also paid KFC Portfolio Corp. $1.8
million in 1995 related to the management of the Company's real estate
portfolio.
(8) REINSURANCE
In the ordinary course of business, the Company enters into reinsurance
agreements to diversify risk and limit its overall financial exposure to certain
blocks of fixed-rate annuities. The Company generally cedes 100 percent of the
related annuity liabilities under the terms of the reinsurance agreements.
Although these reinsurance agreements contractually obligate the reinsurers to
reimburse the Company, they do not discharge the Company from its primary
liabilities and obligations to policyholders. As such, these amounts paid or
deemed to have been paid are recorded on the Company's consolidated balance
sheet as reinsurance recoverables and ceded future policy benefits.
In 1992 and 1991, the Company entered into 100 percent indemnity
reinsurance agreements ceding $515.7 million and $416.3 million, respectively,
of its fixed-rate annuity liabilities to FLA. FLA is a mutual insurance company
that shares common management with the Company and FKLA and common board members
with the Company, FKLA and Kemper. As of December 31, 1995, the reinsurance
recoverable related to the fixed-rate annuity liabilities ceded to FLA amounted
to approximately $503 million. During 1995 the Company recorded income of $4.4
million related to a ceding commission experience adjustment from the 1992
reinsurance agreement.
(9) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company and FKLA sponsor a welfare plan that provides medical and life
insurance benefits to their retired and active employees and the Company is
allocated a portion of the costs of providing such benefits. The Company is self
insured with respect to medical benefits, and the plan is not funded except with
respect to certain disability-related medical claims. The medical plan provides
for medical insurance benefits at retirement, with eligibility based upon age
and the participant's number of years of participation attained at retirement.
The plan is contributory for pre-Medicare retirees, and will be contributory for
all retiree coverage for most current employees, with contributions generally
adjusted annually. Postretirement life insurance benefits are noncontributory
and are limited to $10,000 per participant.
The discount rate used in determining the allocated postretirement benefit
obligation was 7.25 percent and 8 percent for 1995 and 1994, respectively. The
assumed health care trend rate used was based on projected experience for 1995
and 1996, 10 percent in 1997, gradually declining to 6 percent by the year 2000
and remaining at that level thereafter.
48
<PAGE> 52
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (CONTINUED)
The status of the plan as of December 31, 1995 and 1994, was as follows:
Accumulated postretirement benefit obligation:
<TABLE>
<CAPTION>
(in thousands) 1995 1994
---- ----
<S> <C> <C>
Retirees.......................................................................... $234 $206
Fully eligible active plan participants........................................... 111 58
Other active plan participants.................................................... 427 101
Unrecognized gain (loss) from actuarial experience................................ (85) 314
---- ----
Accrued liability....................................................... $687 $679
==== ====
</TABLE>
Components of the net periodic postretirement benefit cost:
<TABLE>
<CAPTION>
(in thousands) 1995 1994
---- ----
<S> <C> <C>
Service cost-benefits attributed to service during the period..................... $ 58 $ 31
Interest cost on accumulated postretirement benefit obligations................... 41 43
Amortization of unrecognized actuarial gain....................................... (19) (35)
---- ----
Total................................................................... $ 80 $ 39
===== =====
</TABLE>
A one percentage point increase in the assumed health care cost trend rate
for each year would increase the accumulated postretirement benefit obligation
as of December 31, 1995 and 1994 by $146 thousand and $48 thousand,
respectively, and the net postretirement health care interest and service costs
for the years ended December 31, 1995 and 1994 by $24 thousand and $14 thousand,
respectively.
During 1994, the Company adopted certain severance-related policies to
provide benefits, generally limited in time, to former or inactive employees
after employment but before retirement. The effect of adopting these policies
was immaterial.
(10) COMMITMENTS AND CONTINGENT LIABILITIES
The Company is involved in various legal actions for which it establishes
liabilities where appropriate. In the opinion of the Company's management, based
upon the advice of legal counsel, the resolution of such litigation is not
expected to have a material adverse effect on the consolidated financial
statements.
Although none of the Company or its joint venture projects have been
identified as a "potentially responsible party" under Federal environmental
guidelines, inherent in the ownership of or lending to real estate projects is
the possibility that environmental pollution conditions may exist on or near or
relate to properties owned or previously owned on properties securing loans.
Where the Company has presently identified remediation costs, they have been
taken into account in determining the cash flows and resulting valuations of the
related real estate assets. Based on the Company's receipt and review of
environmental reports on most of the projects in which it is involved, the
Company believes its environmental exposure would be immaterial to its
consolidated results of operations. However, the Company may be required in the
future to take actions to remedy environmental exposures, and there can be no
assurance that material environmental exposures will not develop or be
identified in the future. The amount of future environmental costs is impossible
to estimate due to, among other factors, the unknown magnitude of possible
exposures, the unknown timing and extent of corrective actions that may be
required, the determination of the Company's liability in proportion to others
and the extent such costs may be covered by insurance or various environmental
indemnification agreements.
See the note captioned "Financial Instruments--Off-Balance-Sheet Risk"
below for the discussion regarding the Company's loan commitments and standby
financing agreements.
The Company is liable for guaranty fund assessments related to certain
unaffiliated insurance companies that have become insolvent during the years
1995 and prior. The Company's financial statements include provisions for all
known assessments that are expected to be levied against the Company as well as
an estimate of amounts (net of estimated future premium tax recoveries) that the
Company believes it will be assessed in the future for which the life insurance
industry has estimated the cost to cover losses to
49
<PAGE> 53
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(10) COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
policyholders. Assessments levied against the Company and charged to expense in
1995, 1994 and 1993 amounted to $5.8 million, $0.0 million and $5.8 million,
respectively. Such amounts relate to accrued guaranty fund assessments of $5.0
million and $4.0 million at December 31, 1995 and 1994, respectively. The
Company is also contingently liable for any future guaranty fund assessments
related to insolvencies of unaffiliated insurance companies, for which the life
insurance industry has been unable to estimate the cost to cover losses to
policyholders. No specific amount can be reasonably estimated for such
insolvencies as of December 31, 1995.
(11) FINANCIAL INSTRUMENTS--OFF-BALANCE-SHEET RISK
At December 31, 1995, the Company had loan commitments and stand-by
financing agreements totaling $248.2 million to support the financing needs of
various real estate investments. To the extent these arrangements are called
upon, amounts loaned would be secured by assets of the joint ventures, including
first mortgage liens on the real estate. The Company's criteria in making these
arrangements are the same as for its mortgage loans and other real estate
investments. The Company presently expects to fund approximately $56.4 million
of these arrangements. These commitments are included in the Company's analysis
of real estate-related reserves and write-downs. The fair values of loan
commitments and standby financing agreements are estimated in conjunction with
and using the same methodology as the fair value estimates of mortgage loans and
other real estate-related investments.
(12) DERIVATIVE FINANCIAL INSTRUMENTS
The Company is party to derivative financial instruments in the normal
course of business for other than trading purposes to hedge exposures in foreign
currency fluctuations related to certain foreign fixed maturity securities held
by the Company. The following table summarizes various information regarding
these derivative financial instruments as of December 31, 1995 and 1994:
<TABLE>
<CAPTION>
WEIGHTED
WEIGHTED AVERAGE
AVERAGE REPRICING
(in thousands) NOTIONAL CARRYING ESTIMATED YEARS TO FREQUENCY
1995 AMOUNT VALUE FAIR VALUE EXPIRATION (DAYS)
- ----------------------------------------------------------------- -------- -------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Non-trading foreign exchange forward options..................... $ 43,754 $112 $112 .32 30
1994
- -----------------------------------------------------------------
Non-trading foreign exchange forward options..................... 34,541 18 18 .25 30
</TABLE>
The Company's hedges relating to foreign currency exposure are implemented
using forward contracts on foreign currencies. These are generally short
duration contracts with U.S. money-center banks. The Company records realized
and unrealized gains and losses on such investments in net income on a current
basis. The amounts of gain (loss) included in net income during 1995, 1994 and
1993 totaled $(1.0 million), $6.4 million and $(2.8 million), respectively.
(13) FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates are made at specific points in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from offering
for sale at one time the Company's entire holdings of a particular financial
instrument. A significant portion of the Company's financial instruments are
carried at fair value. (See the note captioned "Invested Assets and Related
Income".) Fair value estimates for financial instruments not carried at fair
value are generally determined using discounted cash flow models and assumptions
that are based on judgments regarding current and future economic conditions and
the risk characteristics of the investments. Although fair value estimates are
calculated using assumptions that management believes are appropriate, changes
in assumptions could significantly affect the estimates and such estimates
should be used with care.
Fair value estimates are determined for existing on- and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and certain liabilities that are not
considered financial instruments. Accordingly, the aggregate fair value
estimates presented do
50
<PAGE> 54
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(13) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
not represent the underlying value of the Company. For example, the Company's
subsidiaries are not considered financial instruments, and their value has not
been incorporated into the fair value estimates. In addition, tax ramifications
related to the realization of unrealized gains and losses can have a significant
effect on fair value estimates and have not been considered in any of the
estimates.
The following methods and assumptions were used by the Company in
estimating the fair value of its financial instruments:
Fixed maturities and equity securities: Fair values for fixed maturity
securities and for equity securities were determined by using market quotations,
or independent pricing services that use prices provided by market makers or
estimates of fair values obtained from yield data relating to instruments or
securities with similar characteristics, or fair value as determined in good
faith by the Company's portfolio manager, ZKI.
Cash and short-term investments: The carrying amounts reported in the
consolidated balance sheet for these instruments approximate fair values.
Mortgage loans and other real estate-related investments: Fair values for
mortgage loans and other real estate-related investments for year-end 1994 were
estimated on a project-by-project basis. Generally, the projected cash flows of
the collateral were discounted using a discount rate of 10 to 12 percent. The
resulting collateral estimates were then used to determine the value of the
Company's real estate-related investments. Fair values for mortgage loans and
other real estate-related investments for year-end 1995 were estimated based
upon the investments observable market price, net of estimated costs to sell.
The estimates of fair value should be used with care given the inherent
difficulty of estimating the fair value of real estate due to the lack of a
liquid quotable market.
Other loans and investments: The carrying amounts reported in the
consolidated balance sheet for these instruments approximate fair values. The
fair values of policy loans were estimated by discounting the expected future
cash flows using an interest rate charged on policy loans for similar policies
currently being issued.
Life policy benefits: Fair values of the life policy benefits regarding
investment contracts (primarily deferred annuities) and universal life contracts
were estimated by discounting gross benefit payments, net of contractual
premiums, using the average crediting rate currently being offered in the
marketplace for similar contracts with maturities consistent with those
remaining for the contracts being valued. The Company had projected its future
average crediting rate in 1995 and 1994 to be 4.5 percent and 5.5 percent,
respectively, while the assumed average market crediting rate was 5.5 percent in
1995 and 6.5 percent in 1994.
The carrying values and estimated fair values of the Company's financial
instruments at December 31, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------------------------------
1995 1994
------------------------ ------------------------
CARRYING FAIR CARRYING FAIR
(in thousands) VALUE VALUE VALUE VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Financial instruments recorded as assets:
Fixed maturities(1)........................ $3,752,325 $3,752,325 $3,463,732 $3,463,732
Cash and short-term investments............ 398,326 398,326 227,353 227,353
Mortgage loans and other real
estate-related assets................... 299,589 299,589 907,283 804,867
Policy loans............................... 289,390 289,390 277,743 277,743
Other invested assets...................... 29,809 21,043 40,527 40,527
Financial instruments recorded as
liabilities:
Life policy benefits....................... 4,573,212 4,488,297 4,843,690 4,709,561
</TABLE>
- ---------------
(1) Includes $112 and $18 carrying value and fair value for 1995 and 1994,
respectively, of derivative securities used to hedge the foreign currency
exposure on certain specific foreign fixed maturity investments.
51
<PAGE> 55
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(14) STOCKHOLDER'S EQUITY--RETAINED EARNINGS
The maximum amount of dividends which can be paid by insurance companies
domiciled in the State of Illinois to shareholders without prior approval of
regulatory authorities is restricted. The maximum amount of dividends which can
be paid by the Company without prior approval in 1996, assuming that there is
sufficient statutory earned surplus, is $38.3 million. The Company paid no cash
dividends in 1995, 1994 or 1993.
The Company's net income (loss) and stockholder's equity as determined in
accordance with statutory accounting principles were as follows:
<TABLE>
<CAPTION>
(in thousands) 1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Net income (loss)............................................. $(64,707) $ 44,491 $(36,178)
======== ======== ========
Statutory surplus............................................. $383,374 $416,243 $329,430
======== ======== ========
</TABLE>
52
<PAGE> 56
APPENDIX
ILLUSTRATIONS OF CASH VALUES,
CASH SURRENDER VALUES,
DEATH BENEFITS
The tables in this Prospectus have been prepared to help show how values
under a Policy change with investment experience. The tables illustrate how Cash
Values, Surrender Values (reflecting the deduction of Surrender Charges, if any)
and Death Benefits under a Policy issued on an insured of a given age would vary
over time if the hypothetical gross investment rates of return were a uniform,
after tax, annual rate of 0%, 6%, and 12%. If the hypothetical gross investment
rate of return averages 0%, 6%, or 12%, but fluctuates over or under those
averages throughout the years, the Cash Values, Surrender Values and Death
Benefits may be different.
The amounts shown for the Cash Value, Surrender Value and Death Benefit as
of each Policy Anniversary reflect the fact that the net investment return on
the assets held in the Subaccounts is lower than the gross return. This is
because of a daily charge to the Subaccounts for assuming mortality and expense
risks, which is equivalent to an effective annual charge of 0.90%. In addition,
the net investment returns also reflect the deduction of the Fund investment
advisory fees and other Fund expenses, approximated at 0.65%. The tables also
reflect the fact that KILICO makes monthly charges for providing insurance
protection. For each hypothetical gross investment rate of return, tables are
provided reflecting current and guaranteed cost of insurance charges.
Hypothetical gross average investment rates of return of 0%, 6% and 12%
correspond to the following approximate net annual investment rate of return of
- -1.55%, 4.45% and 10.45%, respectively. Cost of insurance rates vary by age, sex
and rating class and, therefore, are not reflected in the approximate net annual
investment rate of return above.
The values shown are for Policies which are issued as standard. Values for
Policies issued on a substandard basis would result in lower Cash Values,
Surrender Values and Death Benefits than those illustrated.
The tables also reflect the fact that no charges for federal, state or
other income taxes are currently made against the Separate Account. If such a
charge is made in the future, it will take a higher gross rate of return than
illustrated to produce the net after-tax returns shown in the tables.
Upon request, KILICO will furnish an illustration based on the proposed
Insured's age, sex and premium payment requested.
53
<PAGE> 57
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
MALE NON-SMOKER $10,000 INITIAL PREMIUM ISSUE AGE 25
$88,520 INITIAL DEATH BENEFIT:
VALUES--CURRENT COST OF INSURANCE
<TABLE>
<CAPTION>
PREMIUM 0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL
PAID GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
PLUS ------------------------------ -------------------------------- -----------------------------------
POLICY INTEREST CASH SURRENDER DEATH CASH SURRENDER DEATH CASH SURRENDER DEATH
YEAR AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- ---------- -------- ------- ------- -------- -------- -------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1........ $ 10,500 $ 9,733 $ 8,857 $ 88,520 $ 10,329 $ 9,429 $ 88,520 $ 10,926 $ 10,026 $ 88,520
2........ 11,025 9,469 8,712 88,520 10,674 9,874 88,520 11,951 11,151 88,520
3........ 11,576 9,209 8,565 88,520 11,035 10,335 88,520 13,084 12,384 88,520
4........ 12,155 8,953 8,416 88,520 11,412 10,812 88,520 14,337 13,737 88,520
5........ 12,763 8,701 8,266 88,520 11,806 11,306 88,520 15,724 15,224 88,520
6........ 13,401 8,452 8,114 88,520 12,218 11,818 88,520 17,257 16,857 88,520
7........ 14,071 8,206 7,960 88,520 12,650 12,350 88,520 18,953 18,653 88,520
8........ 14,775 7,964 7,805 88,520 13,101 12,901 88,520 20,830 20,630 88,520
9........ 15,513 7,726 7,648 88,520 13,573 13,473 88,520 22,905 22,805 88,520
10........ 16,289 7,481 7,481 88,520 14,058 14,058 88,520 25,192 25,192 88,520
15........ 20,789 6,191 6,191 88,520 16,726 16,726 88,520 40,721 40,721 101,804
20........ 26,533 4,649 4,649 88,520 19,744 19,744 88,520 65,732 65,732 145,924
25........ 33,864 2,661 2,661 88,520 23,051 23,051 88,520 105,857 105,857 202,188
30........ 43,219 0 0 0 26,499 26,499 88,520 170,337 170,337 267,429
</TABLE>
ASSUMPTIONS:
(1) NO ADDITIONAL PREMIUMS PAID AND NO POLICY LOANS HAVE BEEN MADE.
(2) VALUES REFLECT CURRENT COST OF INSURANCE CHARGES.
(3) NET INVESTMENT RETURNS ARE CALCULATED AS THE HYPOTHETICAL GROSS INVESTMENT
RETURN LESS ALL CHARGES AND DEDUCTIONS SHOWN IN THE PROSPECTUS APPENDIX.
(4) DEATH BENEFIT REFLECTS CURRENT INTERNAL REVENUE CODE REQUIREMENTS.
(5) ZERO VALUES INDICATE POLICY LAPSE IN ABSENCE OF AN ADDITIONAL PREMIUM
PAYMENT.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN
THIS PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION
OF PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE
OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER AND ACTUAL EXPENSES. THE DEATH BENEFIT,
CASH VALUE AND SURRENDER VALUE FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN
IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% AND 12% OVER A PERIOD OF YEARS BUT
ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. NO
REPRESENTATIONS CAN BE MADE BY KEMPER INVESTORS LIFE INSURANCE COMPANY THAT
THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED
OVER ANY PERIOD OF TIME.
54
<PAGE> 58
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
MALE NON-SMOKER $10,000 INITIAL PREMIUM ISSUE AGE 25
$88,520 INITIAL DEATH BENEFIT:
VALUES--GUARANTEED COST OF INSURANCE
<TABLE>
<CAPTION>
PREMIUM 0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL
PAID GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
PLUS ------------------------------ -------------------------------- -----------------------------------
POLICY INTEREST CASH SURRENDER DEATH CASH SURRENDER DEATH CASH SURRENDER DEATH
YEAR AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- ---------- -------- ------- ------- -------- -------- -------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1........ $ 10,500 $ 9,728 $ 8,852 $ 88,520 $ 10,325 $ 9,425 $ 88,520 $ 10,921 $ 10,021 $ 88,520
2........ 11,025 9,462 8,705 88,520 10,667 9,867 88,520 11,943 11,143 88,520
3........ 11,576 9,202 8,557 88,520 11,026 10,326 88,520 13,074 12,374 88,520
4........ 12,155 8,946 8,408 88,520 11,403 10,803 88,520 14,327 13,727 88,520
5........ 12,763 8,693 8,258 88,520 11,796 11,296 88,520 15,712 15,212 88,520
6........ 13,401 8,443 8,105 88,520 12,208 11,808 88,520 17,243 16,843 88,520
7........ 14,071 8,195 7,949 88,520 12,636 12,336 88,520 18,935 18,635 88,520
8........ 14,775 7,947 7,787 88,520 13,080 12,880 88,520 20,804 20,604 88,520
9........ 15,513 7,697 7,620 88,520 13,540 13,440 88,520 22,866 22,766 88,520
10........ 16,289 7,445 7,445 88,520 14,017 14,017 88,520 25,143 25,143 88,520
15........ 20,789 6,116 6,116 88,520 16,629 16,629 88,520 40,597 40,597 101,493
20........ 26,533 4,547 4,547 88,520 19,589 19,589 88,520 65,495 65,495 145,399
25........ 33,864 2,543 2,543 88,520 22,834 22,834 88,520 105,448 105,448 201,405
30........ 43,219 0 0 0 26,179 26,179 88,520 169,610 169,610 266,288
</TABLE>
ASSUMPTIONS:
(1) NO ADDITIONAL PREMIUMS PAID AND NO POLICY LOANS HAVE BEEN MADE.
(2) VALUES REFLECT GUARANTEED COST OF INSURANCE CHARGES.
(3) NET INVESTMENT RETURNS ARE CALCULATED AS THE HYPOTHETICAL GROSS INVESTMENT
RETURN LESS ALL CHARGES AND DEDUCTIONS SHOWN IN THE PROSPECTUS APPENDIX.
(4) DEATH BENEFIT REFLECTS CURRENT INTERNAL REVENUE CODE REQUIREMENTS.
(5) ZERO VALUES INDICATE POLICY LAPSE IN ABSENCE OF AN ADDITIONAL PREMIUM
PAYMENT.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN
THIS PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION
OF PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE
OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER AND ACTUAL EXPENSES. THE DEATH BENEFIT,
CASH VALUE AND SURRENDER VALUE FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN
IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% AND 12% OVER A PERIOD OF YEARS BUT
ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. NO
REPRESENTATIONS CAN BE MADE BY KEMPER INVESTORS LIFE INSURANCE COMPANY THAT
THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED
OVER ANY PERIOD OF TIME.
55
<PAGE> 59
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
MALE NON-SMOKER $10,000 INITIAL PREMIUM ISSUE AGE 45
$39,290 INITIAL DEATH BENEFIT:
VALUES--CURRENT COST OF INSURANCE
<TABLE>
<CAPTION>
PREMIUM 0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL
PAID GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
PLUS ------------------------------ -------------------------------- -----------------------------------
POLICY INTEREST CASH SURRENDER DEATH CASH SURRENDER DEATH CASH SURRENDER DEATH
YEAR AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- ---------- -------- ------- ------- -------- -------- -------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1........ $ 10,500 $ 9,747 $ 8,870 $ 39,290 $ 10,345 $ 9,445 $ 39,290 $ 10,943 $ 10,043 $ 39,290
2........ 11,325 9,487 8,728 39,290 10,695 9,895 39,290 11,977 11,177 39,290
3........ 11,576 9,222 8,576 39,290 11,056 10,356 39,290 13,116 12,416 39,290
4........ 12,155 8,950 8,413 39,290 11,424 10,824 39,290 14,370 13,770 39,290
5........ 12,763 8,670 8,236 39,290 11,800 11,300 39,290 15,751 15,251 39,290
6........ 13,401 8,382 8,046 39,290 12,184 11,784 39,290 17,276 16,876 39,290
7........ 14,071 8,082 7,839 39,290 12,574 12,274 39,290 18,957 18,657 39,290
8........ 14,775 7,766 7,611 39,290 12,967 12,767 39,290 20,812 20,612 39,290
9........ 15,513 7,435 7,360 39,290 13,364 13,264 39,290 22,862 22,762 39,290
10........ 16,289 7,095 7,095 39,290 13,772 13,772 39,290 25,136 25,136 39,463
15........ 20,789 5,125 5,125 39,290 15,903 15,903 39,290 40,553 40,553 54,340
20........ 26,533 2,294 2,294 39,290 18,008 18,008 39,290 65,452 65,452 79,851
25........ 33,864 0 0 0 19,735 19,735 39,290 105,357 105,357 122,214
30........ 43,219 0 0 0 20,624 20,624 39,290 169,799 169,799 181,685
</TABLE>
ASSUMPTIONS:
(1) NO ADDITIONAL PREMIUMS AND NO POLICY LOANS HAVE BEEN MADE.
(2) VALUES REFLECT CURRENT COST OF INSURANCE CHARGES.
(3) NET INVESTMENT RETURNS ARE CALCULATED AS THE HYPOTHETICAL GROSS INVESTMENT
RETURN LESS ALL CHARGES AND DEDUCTIONS SHOWN IN THE PROSPECTUS APPENDIX.
(4) DEATH BENEFIT REFLECTS CURRENT INTERNAL REVENUE CODE REQUIREMENTS.
(5) ZERO VALUES INDICATE POLICY LAPSE IN ABSENCE OF AN ADDITIONAL PREMIUM
PAYMENT.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN
THIS PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION
OF PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE
OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER AND ACTUAL EXPENSES. THE DEATH BENEFIT,
CASH VALUE AND SURRENDER VALUE FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN
IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% AND 12% OVER A PERIOD OF YEARS BUT
ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. NO
REPRESENTATIONS CAN BE MADE BY KEMPER INVESTORS LIFE INSURANCE COMPANY THAT
THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED
OVER ANY PERIOD OF TIME.
56
<PAGE> 60
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
MALE NON-SMOKER $10,000 INITIAL PREMIUM ISSUE AGE 45
$39,209 INITIAL DEATH BENEFIT:
VALUES--GUARANTEED COST OF INSURANCE
<TABLE>
<CAPTION>
PREMIUM 0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL
PAID GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
PLUS ------------------------------ -------------------------------- -----------------------------------
POLICY INTEREST CASH SURRENDER DEATH CASH SURRENDER DEATH CASH SURRENDER DEATH
YEAR AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- ---------- -------- ------- ------- -------- -------- -------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1........ $ 10,500 $ 9,744 $ 8,867 $ 39,290 $ 10,342 $ 9,442 $ 39,290 $ 10,940 $ 10,040 $ 39,290
2........ 11,325 9,484 8,725 39,290 10,692 9,892 39,290 11,973 11,173 39,290
3........ 11,576 9,217 8,571 39,290 11,051 10,351 39,290 13,110 12,410 39,290
4........ 12,155 8,932 8,406 39,290 11,417 10,817 39,290 14,362 13,762 39,290
5........ 12,763 8,662 8,229 39,290 11,791 11,291 39,290 15,742 15,242 39,290
6........ 13,401 8,371 8,036 39,290 12,172 11,772 39,290 17,263 16,863 39,290
7........ 14,071 8,069 7,827 39,290 12,559 12,259 39,290 18,941 18,641 39,290
8........ 14,775 7,753 7,598 39,290 12,951 12,751 39,290 20,794 20,594 39,290
9........ 15,513 7,420 7,346 39,290 13,346 13,246 39,290 22,841 22,741 39,290
10........ 16,289 7,068 7,068 39,290 13,744 13,744 39,290 25,106 25,106 39,417
15........ 20,789 4,923 4,923 39,290 15,718 15,718 39,290 40,415 40,415 54,156
20........ 26,533 1,693 1,693 39,290 17,472 17,462 39,290 65,045 65,045 79,355
25........ 33,864 0 0 0 18,490 18,490 39,290 104,335 104,335 121,028
30........ 43,219 0 0 0 17,668 17,668 39,290 167,401 167,401 179,120
</TABLE>
ASSUMPTIONS:
(1) NO ADDITIONAL PREMIUMS AND NO POLICY LOANS HAVE BEEN MADE.
(2) VALUES REFLECT GUARANTEED COST OF INSURANCE CHARGES.
(3) NET INVESTMENT RETURNS ARE CALCULATED AS THE HYPOTHETICAL GROSS INVESTMENT
RETURN LESS ALL CHARGES AND DEDUCTIONS SHOWN IN THE PROSPECTUS APPENDIX.
(4) DEATH BENEFIT REFLECTS CURRENT INTERNAL REVENUE CODE REQUIREMENTS.
(5) ZERO VALUES INDICATE POLICY LAPSE IN ABSENCE OF AN ADDITIONAL PREMIUM
PAYMENT.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN
THIS PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION
OF PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE
OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER AND ACTUAL EXPENSES. THE DEATH BENEFIT,
CASH VALUE AND SURRENDER VALUE FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN
IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% AND 12% OVER A PERIOD OF YEARS BUT
ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. NO
REPRESENTATIONS CAN BE MADE BY KEMPER INVESTORS LIFE INSURANCE COMPANY THAT
THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED
OVER ANY PERIOD OF TIME.
57
<PAGE> 61
Distributor:
INVESTORS BROKERAGE SERVICES, INC.
A Variable Life Product Offered by
KEMPER INVESTORS LIFE INSURANCE COMPANY
1 Kemper Drive
Long Grove, IL 60049
847/550-5500
[Recycled Logo] PRINTED ON RECYCLED PAPER
SEL 01 Policy Form Series L-8001
