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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 27, 1998
REGISTRATION STATEMENT 33-65399
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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POST-EFFECTIVE AMENDMENT NO. 2
TO
FORM S-6
FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933
OF SECURITIES OF UNIT INVESTMENT TRUSTS
REGISTERED ON FORM N-8B-2
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A. Exact name of trust: KILICO VARIABLE SEPARATE ACCOUNT
B. Name of depositor: KEMPER INVESTORS LIFE INSURANCE COMPANY
C. Complete address of depositor's principal executive offices:
1 Kemper Drive
Long Grove, Illinois 60049
D. Name and complete address of agent for service:
DEBRA P. REZABEK, ESQ.
Kemper Investors Life Insurance Company
1 Kemper Drive
Long Grove, Illinois 60049
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COPIES TO:
KURT W. BERNLOHR, ESQ. JOAN E. BOROS, ESQ.
Kemper Investors Life Insurance Company Jorden Burt Boros Cicchetti Berenson & Johnson
1 Kemper Drive 1025 Thomas Jefferson Street, N.W.
Long Grove, Illinois 60049 Suite 400E
Washington, D.C. 20007
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It is proposed that this filing will become effective (check appropriate
box)
[ ] Immediately upon filing pursuant to paragraph (b), or
[ ] 60 days after filing pursuant to paragraph (a)(1), or
[X] on May 1, 1998 pursuant to paragraph (b), or
[ ] on (date) pursuant to paragraph (a)(1) of Rule 485.
If appropriate, check the following box:
[ ] this post effective amendment designates a new effective date for a
previously filed post-effective amendment.
E. Title and amount of securities being registered:
Units of Interests in the Separate Account under
Flexible Premium Variable Life Insurance Policies.
F. Approximate date of proposed public offering:
Continuous.
[ ] Check box if it is proposed that this filing will become effective on
(date) at (time) pursuant to Rule 487.
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SUPPLEMENT DATED MAY 1, 1998 TO
PROSPECTUS DATED MAY 1, 1998 FOR
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICIES
ISSUED BY
KEMPER INVESTORS LIFE INSURANCE COMPANY
THROUGH ITS KILICO VARIABLE SEPARATE ACCOUNT
This supplement updates certain information contained in your Prospectus. Please
read it carefully and keep it with your prospectus for future reference.
The following new Subaccounts of the Separate Account described in the
Prospectus are not yet available for investment under the Policy. KILICO will
notify Owners when such Subaccounts become available.
Fidelity Variable Insurance Products Fund ("VIP")
- Fidelity VIP Equity-Income
- Fidelity VIP High Income
Fidelity Variable Insurance Products Fund II ("VIP II")
- Fidelity VIP II Contrafund
- Fidelity VIP II Index 500
Fidelity Variable Insurance Products Fund III ("VIP III")
- Fidelity VIP III Growth Opportunities
Scudder Variable Life Investment Fund ("VLIF")
- Scudder VLIF International (B-Shares)
- Scudder VLIF Growth and Income (B-Shares)
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PROSPECTUS--MAY 1, 1998
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FLEXIBLE PREMIUM VARIABLE
LIFE INSURANCE POLICY
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ISSUED BY
KEMPER INVESTORS LIFE INSURANCE COMPANY
THROUGH ITS KILICO VARIABLE SEPARATE ACCOUNT
HOME OFFICE: 1 KEMPER DRIVE, LONG GROVE, ILLINOIS 60049 (800) 321-9313
This Prospectus describes a variable life insurance policy (the "Policy")
offered by Kemper Investors Life Insurance Company ("KILICO"). The Policy
provides for life insurance and for the accumulation of Cash Value on a variable
basis. Premiums under the Policy are flexible, subject to certain restrictions.
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 meets the definition of "life insurance" under Section 7702 of
the Internal Revenue Code. The Policy may be issued as or become a modified
endowment contract. For a Policy treated as a modified endowment contract,
certain distributions will be includable in gross income for Federal income tax
purposes.
See "Federal Tax Matters", page 21 for a discussion of laws that affect the
tax treatment of the Policy.
An Owner may allocate premiums under a Policy to one or more of the
Subaccounts of the Separate Account and the Fixed Account. Each Subaccount
invests in shares of one portfolio of an underlying mutual fund. The underlying
mutual funds (and the portfolios of the underlying mutual funds) currently
available under the Policy are: (a) Investors Fund Series (formerly Kemper
Investors Fund) (portfolios--Kemper Money Market, Kemper Total Return, Kemper
High Yield, Kemper Growth, Kemper Government Securities, Kemper International
and Kemper Small Cap Growth); (b) American Skandia Trust (portfolios--Lord
Abbett Growth and Income, JanCap Growth, T. Rowe Price International Equity, T.
Rowe Price Asset Allocation, Founders Capital Appreciation, INVESCO Equity
Income, PIMCO Total Return Bond, PIMCO Limited Maturity Bond and Neuberger &
Berman Mid-Cap Growth (formerly Berger Capital Growth)); (c) Fidelity Variable
Insurance Products Fund ("VIP") (portfolios--Fidelity VIP Equity-Income and
Fidelity VIP High Income); (d) Fidelity Variable Insurance Products Fund II
("VIP II") (portfolios--Fidelity VIP II Contrafund and Fidelity VIP II Index
500); (e) Fidelity Variable Insurance Products Fund III ("VIP III")
(portfolio--Fidelity VIP III Growth Opportunities); and (f) Scudder Variable
Life Investment Fund ("VLIF") (portfolios--Scudder VLIF International (B-Shares)
and Scudder VLIF Growth and Income (B-Shares)). The other portfolios of the
Funds are not currently available for investment under the Policy. The
accompanying Prospectuses for the Funds describe the investment objectives and
the attendant risks of the portfolios of the Funds. The Cash Value in the Fixed
Account will accrue interest at a rate that is guaranteed by KILICO.
The Policy permits the Owner to choose from two death benefit options.
KILICO guarantees that the Death Benefit payable for a Policy will never be less
than the Death Benefit stated in the Policy Specifications, 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. A guarantee premium and guarantee period are stated in the Policy
Specifications. Payment of the guarantee premium is not required but if paid as
specified under the Policy will guarantee that the Policy will not lapse during
the guarantee period.
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 generally describes only that portion of the Cash Value
allocated to the Separate Account. For a brief summary of the Fixed Account
option see "The Fixed Account Option" on page 8.
THIS PROSPECTUS IS VALID ONLY IF ACCOMPANIED OR PRECEDED BY A CURRENT
PROSPECTUS FOR THE APPLICABLE UNDERLYING FUND. ALL PROSPECTUSES SHOULD
BE READ AND RETAINED FOR FUTURE REFERENCE.
THIS PROSPECTUS AND OTHER INFORMATION ABOUT THE SEPARATE ACCOUNT
REQUIRED TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION (SEC)
CAN BE FOUND IN THE SEC'S WEB SITE AT HTTP://WWW.SEC.GOV.
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.
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TABLE OF CONTENTS
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Page
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DEFINITIONS................................................. 1
SUMMARY..................................................... 2
KILICO AND THE SEPARATE ACCOUNT............................. 5
THE FUNDS................................................... 5
FIXED ACCOUNT OPTION........................................ 8
THE POLICY.................................................. 9
POLICY BENEFITS AND RIGHTS.................................. 11
CHARGES AND DEDUCTIONS...................................... 15
GENERAL PROVISIONS.......................................... 19
DOLLAR COST AVERAGING....................................... 21
SYSTEMATIC WITHDRAWAL PLAN.................................. 21
DISTRIBUTION OF POLICIES.................................... 22
FEDERAL TAX MATTERS......................................... 22
LEGAL CONSIDERATIONS........................................ 25
SAFEKEEPING OF THE SEPARATE ACCOUNT'S ASSETS................ 25
VOTING INTERESTS............................................ 26
STATE REGULATION OF KILICO.................................. 26
DIRECTORS AND OFFICERS OF KILICO............................ 27
LEGAL MATTERS............................................... 29
LEGAL PROCEEDINGS........................................... 29
YEAR 2000 COMPLIANCE........................................ 29
EXPERTS..................................................... 29
REGISTRATION STATEMENT...................................... 30
FINANCIAL STATEMENTS........................................ 30
CHANGE OF ACCOUNTANTS....................................... 30
APPENDIX A ILLUSTRATIONS OF CASH VALUES, CASH SURRENDER
VALUES AND DEATH BENEFITS................................. 67
APPENDIX B TABLE OF DEATH BENEFIT FACTORS................... 76
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<PAGE> 5
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 nearest 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,
Fixed Account and Loan 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.
FIXED ACCOUNT--The amount of assets held in the General Account
attributable to the fixed portion of the Policy.
FREE-LOOK PERIOD--The period of time in which an Owner may cancel the
Policy and receive 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.
FUNDS--The underlying mutual funds 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--The maximum initial amount of premium that can be
paid while retaining qualification as a life insurance policy under the Internal
Revenue Code.
INSURED--The person whose life is covered by the Policy and who is named in
the Policy Specifications.
ISSUE DATE--The date shown in the Policy Specifications. Incontestability
and suicide periods are measured from the Issue Date.
LOAN ACCOUNT--The amount of assets transferred from the Separate Account
and the Fixed Account and held in the General Account as collateral for Policy
Loans.
MATURITY DATE--The Policy Date anniversary nearest the Insured's 100th
birthday.
MONTHLY PROCESSING DATE--The same day in each month as the Policy Date.
MORTALITY AND EXPENSE RISK CHARGE--A charge deducted in the calculation of
the Accumulation Unit Value for the assumption of mortality risks and expense
guarantees.
PLANNED PREMIUM--The scheduled premium specified by the Owner in the
application.
POLICY DATE--The date shown in the Policy Specifications. The Policy Date
is the date used to determine Policy Years and Monthly Processing Dates. The
Policy Date is the date that insurance coverage takes effect subject to any
principles of conditional receipt under applicable law.
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.
SPECIFIED AMOUNT--The amount chosen by the Owner and used to calculate the
death benefit. The Specified Amount is shown in the Policy Specifications.
SUBACCOUNT--A subdivision 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 date 30 days following the date all requirements for
coverage have been completed by the Owner and coverage under the Policy is
recorded by KILICO as in force.
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.
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<PAGE> 6
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. 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, 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 is a flexible premium policy, so subject to certain
limitations, a Policy Owner may choose the amount and frequency of premium
payments. 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 investment experience.
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. A guarantee premium and a guarantee period
are stated in the Policy Specifications. The Policy is guaranteed to remain in
force during the guarantee period provided the sum of the premiums paid less
withdrawals and debt is equal to or greater than the sum of the guarantee
premiums. (See "The Policy--Premiums and Allocation of Premiums and Separate
Account Value," page 9, "Charges and Deductions," page 15, and "Policy Benefits
and Rights," page 11.)
Under certain circumstances, a Policy may be issued as or become a modified
endowment contract as a result of a material change or reduction in benefits as
defined by the Internal Revenue Code. Excess premiums paid may also cause the
Policy to become a modified endowment contract. For a Policy treated as a
modified endowment contract, certain distributions will be included in the
Owner's gross income for purposes of Federal income tax (See "Federal Tax
Matters," page 22.)
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, any values in the Fixed Account and Loan Account,
and charges imposed in connection with the Policy. The Owner bears the entire
investment risk on that portion of the net premiums and Cash Value allocated to
the Separate Account. KILICO does not guarantee a minimum Separate Account
Value. (See "Policy Benefits and Rights--Cash Value," page 13.)
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. Partial withdrawals are also available subject to
restrictions. (See "Policy Benefits and Rights--Surrender Privilege," page 15.)
POLICY LOANS. The Owner may borrow up to 90% of the Policy's Cash Value
minus applicable surrender charges. The minimum amount of a loan is $500.
Interest at an effective annual rate of 4.50% in the first nine Policy Years and
3.00% thereafter will be charged on outstanding loan amounts. (See "Federal Tax
Matters," page 22.)
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 and the Fixed
Account (proportionately, unless the Owner requests otherwise) to the Loan
Account. Cash Values within the Loan Account will earn 3.00% annual interest.
Such earnings will be allocated to the Loan Account. (See "Policy Benefits and
Rights--Policy Loans," page 14.)
If the Policy is treated as a modified endowment contract, a loan will be
treated as a distribution for Federal income tax purposes and may be subject to
tax, withholding and penalties. (See "Federal Tax Matters," page 22.)
DEATH BENEFITS. As long as the Policy remains in force, the Policy provides
a death benefit payment upon the death of the Insured. The Policy contains two
death benefit options. Under Option A, the death benefit is the Specified Amount
stated in the Policy Specifications. Under Option B, the death benefit is the
Specified Amount stated in the Policy Specifications plus the Cash Value. In
either case, the death benefit will not be less than a specified multiple of the
Cash Value. The death benefit payable will be reduced by any Debt. (See "Policy
Benefits and Rights--Death Benefits," page 11.)
2
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PREMIUMS
The Owner has flexibility concerning the amount and frequency of premium
payments. At the time of application, the Owner will determine a Planned
Premium. However, the Owner will not be required to adhere to the schedule and,
subject to certain restrictions, may make premium payments in any amount and at
any frequency. The amount, frequency, and period of time over which an Owner
pays premiums may affect whether the Policy will be classified as a modified
endowment contract. The minimum monthly premium payment is $50. Other minimums
apply for other payment modes.
Payment of the scheduled premium will not guarantee that a Policy will
remain in force. Instead, the duration of the Policy depends on the Policy's
Surrender Value. A guarantee premium and a guarantee period are stated in the
Policy Specifications. A Policy will remain in force during the guarantee period
provided the sum of the premiums paid less withdrawals and Debt is equal to or
greater than the sum of the guarantee premiums. (See "The Policy--Premiums,"
page 9.)
THE SEPARATE ACCOUNT
ALLOCATION OF PREMIUMS. The portion of the premium available for allocation
equals the premium paid less applicable charges. An Owner indicates in the
application for the Policy the percentages of premium to be allocated among the
Subaccounts of the Separate Account and the Fixed Account. The Policy currently
offers twenty-three Subaccounts, each of which invests in shares of a designated
portfolio of one of the Funds.
On the day following the date of receipt, the initial premium less
applicable charges will be allocated to the Kemper Money Market Subaccount. On
the Trade Date, the Separate Account Value in the Kemper Money Market Subaccount
will be allocated among the Subaccounts and the Fixed Account in accordance with
the Owner's instructions in the application. (See "The Policy -- Policy Issue,"
page 9.)
TRANSFERS. Separate Account Value may be transferred among the Subaccounts.
One transfer of all or part of the Separate Account Value may be made within a
fifteen day period. Transfers are also permitted between the Fixed Account and
the Subaccounts, subject to restrictions. (See "Allocation of Premiums and
Separate Account Value," page 9.)
THE FUNDS
The following portfolios of the Investors Fund Series (formerly Kemper
Investors Fund) are currently available for investment by the Separate Account:
KEMPER MONEY MARKET PORTFOLIO, KEMPER TOTAL RETURN PORTFOLIO, KEMPER HIGH
YIELD PORTFOLIO, KEMPER GROWTH PORTFOLIO, KEMPER GOVERNMENT SECURITIES
PORTFOLIO, KEMPER INTERNATIONAL PORTFOLIO AND KEMPER SMALL CAP GROWTH PORTFOLIO.
The following portfolios of American Skandia Trust are currently available
for investment by the Separate Account:
LORD ABBETT GROWTH AND INCOME, JANCAP GROWTH, T. ROWE PRICE INTERNATIONAL
EQUITY, T. ROWE PRICE ASSET ALLOCATION, FOUNDERS CAPITAL APPRECIATION, INVESCO
EQUITY INCOME, PIMCO TOTAL RETURN BOND, PIMCO LIMITED MATURITY BOND AND
NEUBERGER & BERMAN MID-CAP GROWTH (FORMERLY BERGER CAPITAL GROWTH).
The following portfolios of Fidelity Variable Insurance Products Fund,
Fidelity Variable Insurance Products Fund II and Fidelity Variable Insurance
Products Fund III are currently available for investment by the Separate
Account:
FIDELITY VIP EQUITY-INCOME, FIDELITY VIP HIGH INCOME, FIDELITY VIP II
CONTRAFUND, FIDELITY VIP II INDEX 500 AND FIDELITY VIP III GROWTH OPPORTUNITIES.
The following portfolios of Scudder Variable Life Investment Fund are currently
available for investment by the Separate Account:
SCUDDER VLIF INTERNATIONAL (B-SHARES) AND SCUDDER VLIF GROWTH AND INCOME
(B-SHARES).
For a more detailed description of the Funds, see "The Funds," page 5, the
Funds' prospectuses, and Statements of Additional Information available upon
request.
3
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CHARGES
A state and local premium tax charge of 2.5% is deducted from each premium
payment under the Policy prior to allocation of the net premium. In addition, a
charge of 1% of each premium payment will be deducted to compensate KILICO for
higher corporate income tax liability resulting from changes in the tax law made
by the Omnibus Budget Reconciliation Act of 1990. (See Charges and
Deductions--Deductions from Premiums, page 15.)
No other charges are currently made from premium or 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 22.)
Deductions will be made from the Policy's Cash Value in each Subaccount and
the Fixed Account on the Policy Date and on each Monthly Processing Date for the
cost of providing life insurance coverage for the Insured. In addition, KILICO
deducts an asset charge from 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--Cost of
Insurance Charge and Mortality and Expense Risk Charge," page 16.)
A $5 per month administrative expense charge is deducted from the Policy's
Cash Value on each Monthly Processing Date. (See "Charges and
Deductions--Monthly Administrative Charge," page 16.)
If, prior to the 15th Policy year or the 15th Policy Year following an
increase in Specified Amount, the Policy is surrendered or the Cash Value is
applied under a Settlement Option, a surrender charge will be deducted. (See
"Policy Benefits and Rights--Surrender Privilege," page 15.)
In addition, the Subaccounts of the Separate Account purchase shares of the
Funds. Each Portfolio of the Funds incurs annual fund operating expenses which
consist of management fees, 12b-1 fees and other expenses. (See "Charges and
Deductions--Charges Against the Funds," page 18.)
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 receipt of the Cash Value under
a Policy until a distribution occurs through a withdrawal or surrender.
Generally, distributions are not included in income until the amount of the
distributions exceed the premiums paid for the Policy. If the Policy is treated
as a modified endowment contract (MEC), a loan will also be treated as a
distribution. Generally, distributions from a MEC (including loans) are included
in income to the extent the Cash Value exceeds premiums paid for the Policy. A
change of Owners, an assignment, a loan or a surrender of the Policy may 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 22.)
FREE-LOOK PERIOD
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 15.)
ILLUSTRATIONS OF CASH VALUES, SURRENDER VALUES, DEATH BENEFITS
Tables in Appendix A illustrate the Cash 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.
4
<PAGE> 9
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 is a
wholly-owned subsidiary of Kemper Corporation, a nonoperating holding company.
Kemper Corporation is a wholly-owned subsidiary of Zurich Holding Company of
America ("ZHCA"), which is a wholly-owned subsidiary of Zurich Insurance Company
("Zurich"). KILICO offers life insurance and annuity products and is admitted to
do business in the District of Columbia and all states except New York.
SEPARATE ACCOUNT
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 net premiums under the Policy. In addition, the
Separate Account may receive and invest net premiums for other variable life
insurance policies offered 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 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 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 Policy currently offers twenty-three Subaccounts. Each Subaccount
invests exclusively in shares of one of the corresponding portfolios of the
Funds. 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. Additional
Subaccounts may be added in the future. Not all Subaccounts may be available in
all jurisdictions or under all Policies.
THE FUNDS
The Separate Account invests in shares of the Investors Fund Series
(formerly Kemper Investors Fund) American Skandia Trust, Fidelity Variable
Insurance Products Fund, Fidelity Variable Insurance Products Fund II, Fidelity
Variable Insurance Products Fund III and Scudder Variable Life Investment Fund,
series type mutual funds registered with the Commission as open-end management
investment companies. Registration of the Funds does not involve supervision of
their management, investment practices or policies by the Commission. The Funds
are designed to provide investment vehicles for variable life insurance and
variable annuity contracts. Shares of the Funds currently are sold only to
insurance company separate accounts and certain qualified retirement plans. In
addition to the Separate Account, shares of the Funds 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 variable life insurance separate accounts,
variable annuity separate accounts and qualified retirement plans to invest
simultaneously in the Funds. Currently neither KILICO nor the Funds foresees any
such disadvantages to variable life insurance owners, variable annuity owners or
qualified retirement plans. Management of the Funds has an obligation to monitor
events to identify material conflicts between such owners and determine what
action, if any, should be taken. In addition, if KILICO believes that a Fund's
response to any of those events or conflicts insufficiently protects the Owners,
it will take appropriate action on its own.
The Separate Account invests in the underlying portfolios of the Funds. 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,
gains or losses of one portfolio generally have no effect on the investment
performance of any other portfolio.
5
<PAGE> 10
INVESTORS FUND SERIES (FORMERLY KEMPER INVESTORS FUND)
The Investors Fund Series portfolios in which the Separate Account invests
are summarized below:
KEMPER MONEY MARKET PORTFOLIO: This 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.
KEMPER TOTAL RETURN PORTFOLIO: This Portfolio seeks a high total return, a
combination of income and capital appreciation, by investing in a combination of
debt securities and common stocks.
KEMPER HIGH YIELD PORTFOLIO: This Portfolio seeks a high level of current
income by investing in fixed-income securities.
KEMPER GROWTH PORTFOLIO: This Portfolio seeks maximum appreciation of
capital through diversification of investment securities having potential for
capital appreciation.
KEMPER GOVERNMENT SECURITIES PORTFOLIO: This Portfolio seeks high current
return consistent with preservation of capital from a portfolio composed
primarily of U.S. Government securities.
KEMPER INTERNATIONAL PORTFOLIO: This Portfolio seeks a total return, a
combination of capital growth and income, principally through an internationally
diversified portfolio of equity securities.
KEMPER SMALL CAP GROWTH PORTFOLIO: This Portfolio seeks maximum
appreciation of investors' capital.
Scudder Kemper Investments, Inc. ("SKI") (formerly Zurich Kemper
Investments, Inc.), an affiliate of KILICO, serves as the investment adviser to
each Portfolio of the Investors Fund Series specified above. Zurich Investment
Management Limited ("ZIML"), an affiliate of SKI, serves as sub-adviser for the
Kemper International Portfolio.
AMERICAN SKANDIA TRUST
The American Skandia Trust portfolios in which the Separate Account invests
are summarized below:
LORD ABBETT GROWTH AND INCOME PORTFOLIO: This Portfolio seeks long-term
growth of capital and income while attempting to avoid excessive fluctuations in
market value by investing in common stocks of seasoned companies which are
expected to show above-average growth.
JANCAP GROWTH PORTFOLIO: This Portfolio seeks growth of capital in a manner
consistent with preservation of capital by emphasizing investments in common
stocks.
T. ROWE PRICE INTERNATIONAL EQUITY PORTFOLIO: This Portfolio seeks total
return on its assets from long-term growth of capital and income principally
through investment primarily in common stocks of established, non-U.S.
companies.
T. ROWE PRICE ASSET ALLOCATION PORTFOLIO: This Portfolio seeks a high level
of total return by investing primarily in a diversified group of fixed income
and equity securities.
FOUNDERS CAPITAL APPRECIATION PORTFOLIO: This Portfolio seeks capital
appreciation through investment primarily in common stocks of U.S. companies
with market capitalizations of $1.5 billion or less. These stocks normally will
be traded in the over-the-counter market.
INVESCO EQUITY INCOME PORTFOLIO: This Portfolio seeks high current income
while following sound investment practices, with capital growth potential as an
additional but secondary consideration. The Portfolio invests primarily in
dividend-paying, marketable common stocks of domestic and foreign industrial
issuers.
PIMCO TOTAL RETURN BOND PORTFOLIO: This Portfolio seeks to maximize total
return, consistent with preservation of capital by investing primarily in fixed
income securities of various types.
PIMCO LIMITED MATURITY BOND PORTFOLIO: This Portfolio seeks to maximize
total return, consistent with preservation of capital and prudent investment
management by investing primarily in fixed income securities of various types.
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<PAGE> 11
NEUBERGER & BERMAN MID-CAP GROWTH PORTFOLIO (FORMERLY BERGER CAPITAL GROWTH
PORTFOLIO): This Portfolio seeks capital appreciation.
American Skandia Investment Services, Incorporated ("ASISI") is the
investment manager for the American Skandia Trust. ASISI engages a sub-adviser
for each Portfolio as described in the prospectus to the American Skandia Trust.
FIDELITY VARIABLE INSURANCE PRODUCTS FUND
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II
FIDELITY VARIABLE INSURANCE PRODUCTS FUND III
The Fidelity Variable Insurance Products Fund, Fidelity Variable Insurance
Products Fund II, and Fidelity Variable Insurance Products Fund III portfolios
in which the Separate Account invests are summarized below:
FIDELITY VIP EQUITY-INCOME PORTFOLIO: This Portfolio seeks reasonable
income by investing primarily in income-producing equity securities.
FIDELITY VIP HIGH INCOME PORTFOLIO: This Portfolio seeks to obtain a high
level of current income by investing primarily in high-yielding, lower rated,
fixed income securities.
FIDELITY VIP II CONTRAFUND PORTFOLIO: This Portfolio seeks long-term
capital appreciation.
FIDELITY VIP II INDEX 500 PORTFOLIO: This Portfolio seeks investment
results that correspond to the total return of common stocks publicly traded in
the United States, as represented by the S&P 500.
FIDELITY VIP III GROWTH OPPORTUNITIES PORTFOLIO: This Portfolio seeks
capital growth by investing in a wide range of common stocks, convertible and
foreign securities and bonds that may offer long-term growth potential.
Fidelity Management & Research Company ("FMR") is the investment manager of
the Fidelity VIP, VIP II and VIP III Funds.
SCUDDER VARIABLE LIFE INVESTMENT FUND
The Scudder Variable Life Investment Fund portfolios in which the Separate
Account invests are summarized below:
SCUDDER VLIF INTERNATIONAL PORTFOLIO (B-SHARES): This Portfolio seeks
long-term growth of capital principally from a diversified portfolio of foreign
equity securities.
SCUDDER VLIF GROWTH AND INCOME PORTFOLIO (B-SHARES): This Portfolio seeks
long-term growth of capital, current income and growth of income from a
portfolio consisting primarily of common stocks and securities convertible into
common stocks.
Scudder Kemper Investments, Inc. ("SKI") is the investment advisor of each
portfolio of the Scudder Variable Life Investment Fund specified above.
There is no assurance that any of the Portfolios of the Funds will achieve
its stated objective. More detailed information, including a description of
risks involved in investing in each of the Portfolios may be found in the
prospectus for each Fund and each Fund's Statement of Additional Information.
CHANGE OF INVESTMENTS
KILICO reserves the right, subject to applicable law, to make additions to,
deletions from, or substitutions for the shares held by the Separate Account or
that the Separate Account may purchase. KILICO reserves the right to eliminate
the shares of any of the portfolios of the Funds and to substitute shares of
another portfolio of the Funds or of another investment company, if the shares
of a portfolio are no longer available for investment, or if in its judgment
further investment in any portfolio becomes inappropriate in view of the
purposes of the Policy or the Separate Account. 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 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
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<PAGE> 12
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 Funds, or
in shares of another investment company, with a specified investment objective.
New subaccounts may be established when, in the sole discretion of KILICO,
marketing needs or investment conditions warrant, and any new subaccounts may be
made available to existing Owners as determined by KILICO.
If deemed by KILICO to be in the best interests of persons having voting
interests 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 and subject to any regulatory
approvals, KILICO may also transfer the assets of the Separate Account to
another separate account, or to the General Account.
FIXED ACCOUNT OPTION
NET PREMIUMS ALLOCATED BY POLICY OWNERS TO THE FIXED ACCOUNT OF THE POLICY
AND TRANSFERS TO THE FIXED ACCOUNT BECOME PART OF THE GENERAL ACCOUNT OF KILICO,
WHICH SUPPORTS INSURANCE AND ANNUITY OBLIGATIONS. BECAUSE OF EXEMPTIVE AND
EXCLUSIONARY PROVISIONS, INTERESTS IN THE FIXED ACCOUNT HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 ("1933 ACT") NOR IS THE FIXED ACCOUNT
REGISTERED AS AN INVESTMENT COMPANY UNDER THE INVESTMENT COMPANY ACT OF 1940
("1940 ACT"). ACCORDINGLY, NEITHER THE FIXED ACCOUNT NOR ANY INTERESTS THEREIN
GENERALLY ARE SUBJECT TO THE PROVISIONS OF THE 1933 OR 1940 ACTS AND KILICO HAS
BEEN ADVISED THAT THE STAFF OF THE SECURITIES AND EXCHANGE COMMISSION HAS NOT
REVIEWED THE DISCLOSURES IN THIS PROSPECTUS WHICH RELATE TO THE FIXED PORTION.
DISCLOSURES REGARDING THE FIXED ACCOUNT, HOWEVER, MAY BE SUBJECT TO CERTAIN
GENERALLY APPLICABLE PROVISIONS OF THE FEDERAL SECURITIES LAWS RELATING TO THE
ACCURACY AND COMPLETENESS OF STATEMENTS MADE IN PROSPECTUSES.
Under the Fixed Account Option offered under the Policies, KILICO allocates
payments to its General Account and pays a fixed interest rate for stated
periods. This Prospectus describes only the element of the Contract pertaining
to the Separate Account except where it makes specific reference to fixed
accumulation and settlement elements.
The Policies guarantee that payments allocated to the Fixed Account will
earn a minimum fixed interest rate of 3%. KILICO, at its discretion, may credit
interest in excess of 3%. KILICO reserves the right to change the rate of excess
interest credited as provided under the terms of the Policy. KILICO also
reserves the right to declare separate rates of excess interest for net premiums
or amounts transferred at designated times, with the result that amounts at any
given designated time may be credited with a higher or lower rate of excess
interest than the rate or rates of excess interest previously credited to such
amounts and net premiums or amounts transferred at any other designated time.
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<PAGE> 13
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 1 through 75 who supply satisfactory evidence of
insurability to KILICO. Acceptance of an application is subject to underwriting
by KILICO.
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
Policy Date. (See "Premiums," below.)
PREMIUMS
Premiums are to be paid to KILICO at its Home Office. (See "Distribution of
Policies.") Checks ordinarily must be made payable to KILICO.
PLANNED PREMIUMS. When applying for a Policy, a Policy Owner will specify a
Planned Premium payment that provides for the payment of level premiums over a
specified period of time. However, the Policy Owner is not required to pay
Planned Premiums.
The minimum monthly premium that will be accepted by KILICO is $50. For
modes other than monthly the minimums are: single premium $5,000; annual $600;
semi-annual $300; quarterly $150. The amount, frequency and period of time over
which a Policy Owner pays premiums may affect whether the Policy will be
classified as a modified endowment contract, which is a type of life insurance
contract subject to different tax treatment than conventional life insurance
contracts for certain pre-death distributions. (See "Federal Tax Matters.")
Accordingly, variations from the Planned Premiums on a Policy that is not
otherwise a modified endowment contract may result in the Policy becoming a
modified endowment contract for tax purposes.
Payment of the Planned Premium will not guarantee that a Policy will remain
in force. Instead, the duration of the Policy depends upon the Policy's
Surrender Value. Even if Planned Premiums are paid, the Policy will lapse any
time Surrender Value is insufficient to pay the current monthly deductions and a
Grace Period expires without sufficient payment. (See "Policy Lapse and
Reinstatement.")
A guarantee period and a monthly guarantee premium are specified in the
Policy Specifications. The guarantee period is the period that ends on the third
Policy anniversary. During the guarantee period, the policy will remain in force
and no grace period will begin provided that the total premiums received, less
any withdrawals and any outstanding loans, equals or exceeds the monthly
guarantee premium times the number of months since the Policy Date, including
the current month.
KILICO may reject or limit any premium payment that is below the current
minimum premium amount requirements, or that would increase the death benefit by
more than the amount of the premium. All or a portion of a premium payment will
be rejected and returned to the Owner if it would disqualify the Policy as life
insurance under the Internal Revenue Code.
Certain charges will be deducted from each premium payment. (See "Charges
and Deductions.") The remainder of the premium, known as the net premium, will
be allocated as described below under "Allocation of Premiums and Separate
Account Value."
POLICY DATE. The Policy Date is the date used to determine Policy Years and
Monthly Processing Dates. The Policy Date will be the date that coverage on the
Insured takes effect. If such date is the 29th, 30th, or 31st of a month, the
Policy Date will be the first of the following month.
In the event an application is declined by KILICO, the Cash Value in the
Kemper Money Market Subaccount plus the total amount of monthly deductions and
deductions against premiums will be refunded.
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.")
ALLOCATION OF PREMIUMS AND SEPARATE ACCOUNT VALUE
ALLOCATION OF PREMIUMS. The initial net premium will be allocated to the
Kemper Money Market Subaccount. The Separate Account Value will remain in the
Kemper Money Market Subaccount until the Trade Date. On the Trade Date, the
Separate Account Value in the Kemper Money Market Subaccount will be allocated
to the Subaccounts and the Fixed Account as elected by the Owner in the
application for the Policy. Additional premiums received will continue to be
allocated in accordance with the Owner's instructions in the application unless
contrary instructions are received. Once a change in allocation is made, all
future premiums will be
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<PAGE> 14
allocated in accordance with the new allocation, unless contrary written
instructions are received. The minimum amount of any premium that may be
allocated to a Subaccount is $50. Cash Value may be allocated to a total of ten
accounts at any given time.
The Separate Account Value will vary with the investment experience of the
chosen Subaccounts. The Owner bears the entire investment risk.
TRANSFERS. After the Trade Date, Separate Account Value may be transferred
among the Subaccounts and into the Fixed 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.
Fixed Account Value may be transferred to one or more Subaccounts. One
transfer of part of the Fixed Account Value may be made once each Policy Year in
the thirty day period following the end of a Policy Year.
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 partial transfer amount
is $500. No partial transfer may be made if the value of the Owner's remaining
interest in a Subaccount or the Fixed Account, from which amounts are to be
transferred, would be less than $500 after such transfer. These minimums may be
waived for reallocations under established third party asset allocation
programs. 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 reserves the right to charge up to $25 for each transfer. KILICO
disclaims all liability for acting in good faith in following instructions which
are given in accordance with procedures established by KILICO, including
requests for personal identifying information, that are designed to limit
unauthorized use of the privilege. Therefore, a Policy Owner would bear this
risk of loss in the event of a fraudulent telephone transfer.
If a Policy Owner authorizes a third party to transact transfers on the
Policy Owner's behalf, we will reallocate the Cash Value pursuant to the asset
allocation program determined by such third party. However, we do not offer or
participate in any asset allocation program and we take no responsibility for
any third party asset allocation program. We may suspend or cancel acceptance of
a third party's instructions at any time and may restrict the investment options
that will be available for transfer under third party authorizations.
AUTOMATIC ASSET REALLOCATION. A Policy Owner may elect to have transfers
made automatically among the Subaccounts of the Separate Account on an annual or
a quarterly basis so that Cash Value is reallocated to match the percentage
allocations in the Policy Owner's predefined premium allocation elections.
Transfers under this program will not be subject to the $500 minimum transfer
amounts. An election to participate in the automatic asset reallocation program
must be in writing in the form prescribed by KILICO and returned to KILICO at
its home office.
POLICY LAPSE AND REINSTATEMENT
LAPSE. Lapse will occur when the Surrender Value of a Policy is
insufficient to cover the monthly deductions, 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 deductions. 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 and the Fixed Account 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--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 and any unpaid
monthly deductions.
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<PAGE> 15
REINSTATEMENT. If a Policy lapses because of insufficient Surrender Value
to cover the monthly deductions, and it has not been surrendered for its
Surrender Value, it may be reinstated at any time within three 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 cover monthly deductions for
the grace period and 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.
POLICY BENEFITS AND RIGHTS
DEATH BENEFITS
While the Policy is in force (see "Policy Lapse and Reinstatement--Lapse,"
above), the death benefit is based on the death benefit option, the Specified
Amount and the table of death benefit percentages applicable at the time of
death. The death benefit proceeds will be equal to the death benefit minus any
Debt and minus any monthly deductions due during the grace period.
A Policy Owner may select one of two death benefit options: Option A or
Option B. An applicant designates the death benefit option in the application.
Subject to certain restrictions, the Owner can change the death benefit option
selected. So long as the Policy remains in force, the death benefit under either
option will never be less than the Specified Amount.
The Specified Amount is chosen by the Owner on the application and is
stated in the Policy Specifications. The minimum Specified Amount permitted
under the Policy is $50,000.
OPTION A. Under Option A, the death benefit will be equal to the Specified
Amount or, if greater, the Cash Value (determined as of the end of the Valuation
Period during which the Insured dies) multiplied by a death benefit percentage.
The death benefit percentages vary according to the age of the Insured and will
be at least equal to the cash value corridor in Section 7702 of the Internal
Revenue Code. The death benefit percentage is 250% for an Insured at Age 40 or
under, and it declines for older Insureds. A table showing the death benefit
percentages is in the Appendix B to this Prospectus and in the Policy.
OPTION B. Under Option B, the death benefit will be equal to the Specified
Amount plus the Cash Value (determined as of the end of the Valuation Period
during which the Insured dies) or, if greater, the Cash Value multiplied by a
death benefit percentage. The specified percentage is the same as that used in
connection with Option A and as stated in the Appendix. The death benefit under
Option B will always vary as Cash Value varies.
EXAMPLES OF OPTIONS A AND B. The following examples demonstrate the
determination of death benefits under Options A and B. The examples show three
Policies--Policies I, II, and III--with the same Specified Amount, but Cash
Values that vary as shown, and which assume an Insured is Age 35 at the time of
death and that there is no outstanding Debt.
<TABLE>
<CAPTION>
POLICY I POLICY II POLICY III
-------- --------- ----------
<S> <C> <C> <C>
Specified Amount.......................... $100,000 $100,000 $100,000
Cash Value on Date of Death............... $ 25,000 $ 50,000 $ 75,000
Death Benefit Percentage.................. 250% 250% 250%
Death Benefit Under Option A.............. $100,000 $125,000 $187,500
Death Benefit Under Option B.............. $125,000 $150,000 $187,500
</TABLE>
Under Option A, the death benefit for Policy I is equal to $100,000 since
the death benefit is the greater of the Specified Amount ($100,000) or the Cash
Value at the date of death multiplied by the death benefit percentage ($25,000 X
250% = $62,500). For both Policies II and III under Option A, the Cash Value
multiplied by the death benefit percentage ($50,000 X 250% = $125,000 for Policy
II; $75,000 X 250% = $187,500 for Policy III) is greater than the Specified
Amount ($100,000), so the death benefit is equal to the higher value. Under
Option B, the death benefit for Policy I is equal to $125,000 since the death
benefit is the greater of Specified Amount plus Cash Value ($100,000 + $25,000 =
$125,000) or the Cash Value multiplied by the death
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<PAGE> 16
benefit percentage ($25,000 X 250% = $62,500). Similarly, in Policy II,
Specified Amount plus Cash Value ($100,000 + $50,000 = $150,000) is greater than
Cash Value multiplied by the death benefit percentage ($50,000 X 250% =
$125,000). In Policy III, the Cash Value multiplied by the death benefit
percentage ($75,000 X 250% = $187,500) is greater than the Specified Amount plus
Cash Value ($100,000 + $75,000 = $175,000), so the death benefit is equal to the
higher value.
All calculations of death benefit will be made as of the end of the
Valuation Period during which the Insured dies. Death benefit proceeds may be
paid to a Beneficiary in a lump sum or under a payment plan offered under the
Policy. The Policy should be consulted for details.
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")
CHANGES IN DEATH BENEFIT OPTION
After the first Policy Year, a Policy Owner may request that the death
benefit under the Policy be changed from Option A to Option B, or from Option B
to Option A. Changes in the death benefit option may be made only once per
Policy Year and should be made in writing to KILICO's Home Office. The effective
date of any such change is the next Monthly Processing Date after the change is
accepted.
A change in the death benefit from Option A to Option B will result in a
reduction in the Specified Amount of the Policy by the amount of the Policy's
Cash Value, with the result that the death benefit payable under Option B at the
time of the change will equal that which would have been payable under Option A
immediately prior to the change. The change in option will affect the
determination of the death benefit since Cash Value will then be added to the
new Specified Amount, and the death benefit will then vary with Cash Value.
A change in the death benefit from Option B to Option A will result in an
increase in the Specified Amount of the Policy by the amount of the Policy's
Cash Value, with the result that the death benefit payable under Option A at the
time of the change will equal that which would have been payable under Option B
immediately prior to the change. However, the change in option will affect the
determination of the death benefit since the Cash Value will no longer be added
to the Specified Amount in determining the death benefit. From that point on,
the death benefit will equal the new Specified Amount (or, if higher, the Cash
Value times the applicable specified percentage).
A change in death benefit option may affect the future monthly cost of
insurance charge since this charge varies with the net amount at risk, which
generally is the amount by which the death benefit exceeds Cash Value. (See
"Charges and Deductions--Cost of Insurance Charge.") Assuming that the Policy's
death benefit would not be equal to Cash Value times a death benefit percentage
under either Option A or B, changing from Option B to Option A will generally
decrease the future net amount at risk, and therefore decrease the future cost
of insurance charges. Changing from Option A to Option B will generally result
in a net amount at risk that remains level. Such a change, however, will result
in an increase in the cost of insurance charges over time, since the cost of
insurance rates increase with the Insured's Age.
CHANGES IN SPECIFIED AMOUNT
After the first Policy Year, a Policy Owner may request an increase or
decrease in the Specified Amount under a Policy subject to approval from KILICO.
A change in Specified Amount may only be made once per Policy Year and must be
in an amount at least equal to $25,000. Increases are not allowed after the
Insured attains age 75. Increasing the Specified Amount could increase the death
benefit under a Policy, and decreasing the Specified Amount could decrease the
death benefit. Decreases in the death benefit may have tax consequences. (See
"Federal Tax Matters.") The amount of change in the death benefit will depend,
among other things, upon the death benefit option chosen by the Owner and the
degree to which the death benefit under a Policy exceeds the Specified Amount
prior to the change. Changing the Specified Amount could affect the subsequent
level of the death benefit while the Policy is in force and the subsequent level
of Policy values. An increase in Specified Amount may increase the net amount at
risk under a Policy, which will increase an Owner's cost of insurance charge and
the guarantee premium amount. However, the guarantee period will not be extended
as a result of an increase in Specified Amount. Conversely, a decrease in
Specified Amount may decrease the net amount at risk, which will decrease an
Owner's cost of insurance charge. A decrease in Specified Amount will not
decrease the guarantee premium.
INCREASES. Additional evidence of insurability satisfactory to KILICO will
be required for an increase in Specified Amount.
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<PAGE> 17
DECREASES. Any decrease in Specified Amount will first be applied to the
most recent increases successively, then to the original Specified Amount. A
decrease will not be permitted if the Specified Amount would fall below the
lesser of the initial Specified Amount or $50,000. If a decrease in the
Specified Amount would result in total premiums paid exceeding the premium
limitations prescribed under tax law to qualify the Policy as a life insurance
contract, KILICO will refund the Policy Owner the amount of such excess above
the premium limitations. Some or all of the amount refunded may be subject to
tax. (See "Federal Tax Matters.")
KILICO reserves the right to disallow a requested decrease, and will not
permit a requested decrease, among other reasons, (1) if compliance with the
guideline premium limitations under tax law resulting from the requested
decrease would result in immediate termination of the Policy, or (2) if, to
effect the requested decrease, payments to the Owner would have to be made from
Cash Value for compliance with the guideline premium limitations, and the amount
of such payments would exceed the Surrender Value under the Policy.
Any request for an increase or decrease in Specified Amount must be made by
written application to KILICO's Home Office. It will become effective on the
Monthly Processing Date on or next following KILICO's acceptance of the request.
If the Owner is not the Insured, KILICO will also require the consent of the
Insured before accepting a request.
BENEFITS AT MATURITY
If the Insured is living on the Policy Date anniversary nearest the
Insured's 100th birthday, KILICO will pay the Owner the Surrender Value of the
Policy. 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, the frequency and amount of premiums paid, transfers
between Subaccounts, withdrawals, any Fixed Account or Loan Account values, and
any charges assessed in connection with the Policy. An Owner may make partial
withdrawals of Cash Value or 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.
CALCULATION OF CASH VALUE. The Cash Value of the Policy is the total of the
Policy's Separate Account Value, Fixed Account Value and Loan Account value. 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 monthly deductions 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 net premiums 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 the Fixed Account or from the Loan Account in connection with
the repayment of a Policy loan (see "Policy Benefits and Rights--Policy
Loans,") during the current Valuation Period; minus
(4) The pro rata portion of the monthly cost of insurance charge,
administrative charge, and any other charges assessed to the Subaccount.
(See "Charges and Deductions--Cost of Insurance Charge."); minus
(5) All amounts transferred from the Subaccount during the current
Valuation Period; minus
(6) All amounts withdrawn from the Subaccount during the current
Valuation Period; minus
(7) All amounts loaned from the Subaccount during the current
Valuation Period.
There will also be Cash Value in the Loan Account if there is a Policy loan
outstanding. The Loan Account is credited with amounts transferred from
Subaccounts in connection with Policy loans. The Loan Account balance accrues
daily interest at an effective annual rate of 3.00%. (See "Policy Benefits and
Rights--Policy Loans.")
The Cash Value in the Fixed Account is credited with interest at the annual
rate declared by KILICO. The annual rate will never be less than 3%.
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<PAGE> 18
ACCUMULATION UNIT VALUE. Each Subaccount has a distinct Accumulation Unit
Value. When net 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 the
same unit value as the net asset value of a share of the underlying Fund. 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;
(3) is the factor representing the Mortality and Expense Risk Charge. (See
"Charges and Deductions--Mortality and Expense Risk Charge.")
POLICY LOANS
After the first Policy Year, 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. 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.")
On the date a Policy loan is made, an amount equal to the loan amount will
be transferred from the Separate Account and Fixed Account to the Loan Account.
Unless the Owner directs otherwise, the loaned amount will be deducted from the
Subaccounts and the Fixed Account in proportion to the values that each bears to
the Separate Account Value of the Policy in all of the Subaccounts plus the
Fixed Account Value 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 4.5% in
the first nine Policy Years and 3.00% thereafter. Interest not paid when due
will be added to the loan amount due upon the earlier of the next Policy Date
anniversary or when coverage ceases upon lapse, surrender, death or maturity and
bear interest at the same rate. When interest is added to the loan amount, a
transfer in this amount will be made from the Separate Account and the Fixed
Account to the Loan Account.
Cash Value in the Loan Account will earn 3.00% annual interest. Such
earnings will be allocated to the Loan Account.
LOAN REPAYMENT. While the Policy is in force, policy loans may be repaid
at any time, in whole or in part. At the time of repayment, Cash Value in the
Loan Account equal to the amount of the repayment which exceeds the difference
between interest due and interest earned will be allocated to the Subaccounts
and the Fixed Account according to the Owner's current allocation instructions,
unless otherwise requested by the Owner. Transfers from the Loan Account to the
Separate Account or the Fixed Account as a result of the repayment of Debt will
14
<PAGE> 19
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 deductions for the next month, KILICO
will notify the Owner. (See "General Provisions--Written Notices and Requests.")
The 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 Loan
Account) does not participate in the experience of the Subaccounts or the
current interest rate of the Fixed Accounts while the loan is outstanding. If
the interest credited to the Loan Account is more than the amount that would
have been earned in the Subaccounts or the Fixed Account, the Cash Value will,
and the Death Benefit may, be higher as a result of the loan. Conversely, if the
amount credited to the Loan Account is less than would have been earned in the
Subaccounts or the Fixed Account, the Cash Value, as well as the Death Benefit,
may be less.
TAX TREATMENT. If the Policy is treated as a modified endowment contract, a
loan will be treated as a distribution and will be includible in income to the
extent the Cash Value exceeds the premiums paid for the Policy. Therefore, a
loan may be subject to Federal income tax and a 10% tax penalty may also apply.
(See "Federal Tax Matters.")
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 WITHDRAWALS. After the first Policy Year, a Policy Owner may make
withdrawals of amounts less than the Surrender Value. The minimum amount of each
withdrawal is $500 and the maximum amount at any time that a surrender charge is
assessable is 10% of the Surrender Value. A $25 withdrawal charge will be
imposed for processing each withdrawal. (See "Charges and Deductions.") A
withdrawal will decrease the Cash Value by the amount of the withdrawal and, if
Death Benefit Option A is in effect, will reduce the Specified Amount by the
amount of the withdrawal.
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, or, 45 days
after the Owner completes the application for insurance, whichever is later. The
amount of the refund will be the sum of the Cash Value in the Kemper Money
Market Subaccount plus the total amount of monthly deductions and deductions
made against Premiums. An Owner seeking a refund should return the Policy to
KILICO at its Home Office or to the agent who sold the Policy.
At any time during the first two years after the Issue Date, the Owner may
exchange the Policy for a non-variable permanent fixed benefit life insurance
policy then currently being offered by KILICO or an affiliate on the life of the
Insured. No evidence of insurability will be required. 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. 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
DEDUCTIONS FROM PREMIUMS
A state and local premium tax charge of 2.5% is deducted from each premium
payment under the Policy prior to allocation of the net premium. This charge is
to reimburse KILICO for the payment of state premium taxes. KILICO expects to
pay an average state premium tax rate of approximately 2.5% but the actual
premium tax attributable to a Policy may be more or less. In addition, a charge
for federal taxes equal to 1% of each
15
<PAGE> 20
premium payment will be deducted to compensate KILICO for a higher corporate
income tax liability resulting from changes made to the Internal Revenue Code by
the Omnibus Budget Reconciliation Act of 1990.
COST OF INSURANCE CHARGE
A monthly deduction is made from the Subaccounts and the Fixed Account 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 and the Fixed Account in proportion each bears to the Cash Value of
the Policy less Debt.
The cost of insurance will be deducted on the Policy Date and on each
Monthly Processing Date thereafter by the cancellation of units. 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 issue age, sex, rate class of the Insured and Policy Year. 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 insurance rates are based on
the 1980 Commissioner's Standard Ordinary Smoker and Non-Smoker Mortality
Tables, Age Nearest Birthday, 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 preferred 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 preferred 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%.
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.
MONTHLY ADMINISTRATIVE CHARGE
KILICO deducts a monthly administrative expense charge to reimburse it for
certain expenses related to maintenance of the Policies, accounting and record
keeping and periodic reporting to owners. This charge is designed only to
reimburse KILICO for certain actual administrative expenses. Currently, this
charge is $5 per month.
OTHER CHARGES
SURRENDER CHARGE. During the first fourteen (14) Policy Years and the first
fourteen (14) Policy Years following an increase in Specified Amount, if the
Policy is surrendered or if the Cash Value is applied under a Settlement Option,
a Surrender Charge will be deducted from the Policy's Cash Value. The Surrender
Charge consists of the sum of:
(a) an administrative component (issue charge); and
(b) a sales component (deferred sales charge).
The sum of (a) and (b) are multiplied by (c), the applicable surrender
charge percentage.
During the first fourteen (14) Policy Years following an increase in
Specified Amount, an additional surrender charge will apply. The additional
charge will be calculated as described below based on the amount of the
increase, years commencing on the date of the increase and Target Premium
associated with the increase.
The applicable Surrender Charge will be determined based upon the date of
receipt of the written request for surrender.
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<PAGE> 21
(a) Issue Charge. The issue charge is a level charge of $5.00 per thousand
of Specified Amount and the sum of coverage amounts for any other insureds.
This charge is designed to cover the administrative expenses associated
with underwriting and issuing a Policy, including the costs of processing
applications, conducting medical examinations, determining insurability and the
Insured's underwriting class, and establishing policy records.
(b) Deferred Sales Charge. The deferred sales charge is (i) 30% of premiums
paid up to one Target Premium shown in the Policy and (ii) for the sum of all
premiums paid in excess of one Target Premium ("excess premium charge"), a
percentage which varies by the issue age of the insured as follows:
<TABLE>
<CAPTION>
Excess Premium Charge Issue Ages
--------------------- ----------
<S> <C>
7.5% 0-65
5.0% 66-75
</TABLE>
The deferred sales charge is to reimburse KILICO for some of the expenses
of distributing the Policies.
(c) Surrender Charge Percentage. As stated above, a surrender charge
percentage is applied to the sum of the deferred issue charge and deferred sales
charge due during the first fourteen (14) Policy Years and the first fourteen
(14) Policy Years following an increase in Specified Amount. For issue ages up
to age 66, the surrender charge percentage is 100% for Policy Years 1-5 and will
decline by 10% each year in Policy Years 6-14 until reaching zero at the
beginning of Policy Year 15. For issue ages 66-75, the surrender charge
percentage is 100% for Policy Years 1-3 and will decline by 10% each year in
Policy Years 4-11 and by 5% in Policy Years 12-14 until reaching zero at the
beginning of Policy Year 15.
<TABLE>
<CAPTION>
SURRENDER CHARGE PERCENTAGES SURRENDER CHARGE PERCENTAGES
ISSUE AGES UP TO AGE 66 ISSUE AGES 66-75
--------------------------------- ---------------------------------
SURRENDER CHARGE SURRENDER CHARGE
PERCENTAGE AT PERCENTAGE AT
BEGINNING OF BEGINNING OF
POLICY YEAR PERCENTAGE POLICY YEAR PERCENTAGE
---------------- ---------- ---------------- ----------
<S> <C> <C> <C>
1-5 100% 1-3 100%
6 90% 4 90%
7 80% 5 80%
8 70% 6 70%
9 60% 7 60%
10 50% 8 50%
11 40% 9 40%
12 30% 10 30%
13 20% 11 20%
14 10% 12 15%
15+ 0% 13 10%
14 5%
15+ 0%
</TABLE>
(d) Example. Assume a female Insured purchases the Policy when age 40 for
$100,000 of Specified Amount, paying the Target Premium of $630 and an
additional premium amount of $1,000 in excess of the Target Premium, for a total
premium of $1,630. Assume further that she surrenders the Policy during the
second Policy Year. The Surrender Charge would be calculated as follows:
<TABLE>
<S> <C>
(i) Issue Charge -- [100 x $5.00]........................... $500.00
($5.00/$1,000.00 of Specified Amount)
(ii) Deferred Sales Charge
(1) 30% of Target Premium Paid......................... $189.00
(.30 x $630.00); and
(2) 7.5% of Premiums Paid In Excess of Target
Premium............................................... $ 75.00
(.075 x $1,000.00)
(iii) Applicable Surrender Charge Percentage................ 100%
(iv) Calculation of Surrender Charge
[(a)$500.00 + (b)$189.00 + $75.00)] x (c) 100%......... $764.00
</TABLE>
17
<PAGE> 22
WITHDRAWAL CHARGE. A charge of $25 will be imposed for each partial
withdrawal. This charge is designed to reimburse KILICO for the administrative
expenses related to the withdrawal.
TRANSFER CHARGE. KILICO reserves the right to charge up to $25 for each
transfer. The transfer charge is designed to reimburse KILICO for the
administrative expenses related to the transfer.
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 agreements between
each Fund, on behalf of the portfolios, and the investment manager and/or
adviser, such entities provide investment advisory and/or management services
for the portfolios. The Funds are responsible for the advisory fees and various
other expenses. The investment advisory fees differ with respect to each of the
portfolios of the Funds. (See "The Funds.")
In addition, the Subaccounts of the Separate Account purchase shares of the
Funds. Each Portfolio of the Funds incurs annual fund operating expenses which
consist of management fees, 12b-1 fees and other expenses. (See "Charges and
Deductions--Charges Against the Funds," page 18.) The management fees for each
Portfolio for the year ending December 31, 1997 as a percentage of average net
assets were as follows: Kemper Money Market 0.50%; Kemper Total Return 0.55%;
Kemper High Yield 0.60%; Kemper Growth 0.60%; Kemper Government Securities
0.55%; Kemper International 0.75%; Kemper Small Cap Growth 0.65%; Lord Abbett
Growth and Income 0.75%; JanCap Growth 0.90%; T. Rowe Price Asset Allocation
0.85%; T. Rowe Price International Equity 1.00%; Founders Capital Appreciation
0.90%; INVESCO Equity Income 0.75%; PIMCO Total Return Bond 0.65%; PIMCO Limited
Maturity Bond 0.65%; Neuberger & Berman Mid-Cap Growth 0.90%; Fidelity VIP
Equity-Income 0.50%; Fidelity VIP High Income 0.59%; Fidelity VIP II Contrafund
0.60%; Fidelity VIP II Index 500 0.24%; Fidelity VIP III Growth Opportunities
0.60%; Scudder VLIF International (B-Shares) 0.83%; and Scudder VLIF Growth and
Income (B-Shares) 0.48%. The investment manager of the JanCap Growth Portfolio
has voluntarily agreed to waive a portion of its management fee equal to 0.05%
of the average daily net assets of the Portfolio in excess of $1 billion. With
this fee waiver the management fee is 0.88%.
The other expenses for each Portfolio for the year ending December 31, 1997
as a percentage of average net assets were as follows: Kemper Money Market
0.05%; Kemper Total Return 0.05%; Kemper High Yield 0.05%; Kemper Growth 0.05%;
Kemper Government Securities 0.09%; Kemper International 0.16%; Kemper Small Cap
Growth 0.06%; Lord Abbett Growth and Income 0.18%; JanCap Growth 0.18%; T. Rowe
Price Asset Allocation 0.28%; T. Rowe Price International Equity 0.26%; Founders
Capital Appreciation 0.23%; INVESCO Equity Income 0.20%; PIMCO Total Return Bond
0.21%; PIMCO Limited Maturity Bond 0.23%; Neuberger & Berman Mid-Cap Growth
0.24%; Fidelity VIP Equity-Income 0.08%; Fidelity VIP High Income 0.12%;
Fidelity VIP II Contrafund 0.11%; Fidelity VIP II Index 500 0.04%; Fidelity VIP
III Growth Opportunities 0.14%; Scudder VLIF International (B-Shares) 0.16%; and
Scudder VLIF Growth and Income (B-Shares) 0.07%. In addition, the Scudder VLIF
International Portfolio and Scudder VLIF Growth and Income Portfolio each also
have a 12b-1 fee of 0.25%. The investment manager for the American Skandia Trust
has agreed to reimburse each Portfolio to the extent expenses exceed specified
percentage limits. For additional information about the fees and expenses of the
Funds, see "The Funds", page 5, and the prospectuses for the Funds.
KILICO may receive compensation from the investment advisers of the Funds
for services related to the Funds. Such compensation will be consistent with the
services rendered or the cost savings resulting from the arrangement. For more
information concerning the investment advisory fees and other charges against
the portfolios of the Funds, see the prospectuses for the Funds and the
Statements of Additional Information available upon request.
SYSTEMATIC WITHDRAWAL PLAN. A charge of $50 is imposed to enter into a
Systematic Withdrawal Plan (SWP.) In addition, a $25 charge will be imposed each
time a change is made to the SWP. These charges are to reimburse KILICO for
expenses related to the administration of the SWP. (See "Systematic Withdrawal
Plan.")
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.
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<PAGE> 23
GENERAL PROVISIONS
SETTLEMENT OPTIONS
The Owner, or Beneficiary at the death of the Insured if no election by the
Owner is in effect, 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. Payments under these options will not be affected by the
investment 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. The option selected must result in a
payment that is at least equal to KILICO's required minimum, according to rules
in effect at the time the option is chosen. If at any time the payments are less
than the minimum payment, KILICO may increase the period between payments to
quarterly, semi-annual or annual so that the payment is at least equal to our
minimum payment or to make the payment in one lump sum.
The Cash Value on the day immediately preceding the date on which the first
benefit payment is due will first be reduced by any applicable Surrender Charge
and Debt. The Surrender Value will be used to determine the benefit payment. The
payment will be based on 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 5 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 payee without regard to the
number or total amount of payments made. Thus, it is possible for an individual
to receive only one payment if death occurred prior to the date the second
payment was due.
OPTION 3--LIFE INCOME WITH INSTALLMENTS GUARANTEED. 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. The percentages available are 50%, 66 2/3%, 75% and
100%. Payments terminate automatically and immediately upon the death of the
surviving payee without regard to the number or total amount of payments
received.
KILICO's consent is necessary for any other payment methods.
The guaranteed monthly payments are based on an interest rate of 2.50% per
year and, where mortality is involved, the "1983 Table a" individual mortality
table developed by the Society of Actuaries, with a 5 year setback.
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 Commission;
(2) The Commission by order permits postponement for the protection of
Owners; or
(3) An emergency exists, as determined by the Commission, as a result
of which disposal of securities of the Funds 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.
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.
19
<PAGE> 24
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 Death Benefit will be
changed to what the cost of insurance on the previous Monthly Processing Date
would have purchased based on the correct sex and age.
INCONTESTABILITY
KILICO may contest the validity of a Policy if any material
misrepresentations are made in the application. However, a Policy will be
incontestable after it has been in force during the lifetime of the Insured for
two years from the Issue Date. A new two year contestability period will apply
to increases in insurance, and to reinstatements beginning with the effective
date of the increase or reinstatement.
SUICIDE
Suicide by the Insured, while sane or insane, within two years from the
Issue Date of the Policy is a risk not assumed under the Policy. KILICO's
liability for such suicide is limited to the premiums paid less any withdrawals
and Debt. When the laws of the state in which a Policy is delivered require less
than a two year period, 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, partial withdrawals, transfers, Policy loans and repayments and
charges made during the Policy Year. In addition, Owners will be sent
confirmations and acknowledgments of various transactions. Owners will also be
sent annual and semi-annual reports for the Fund to the extent required by the
1940 Act.
20
<PAGE> 25
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.
OPTIONAL INSURANCE BENEFITS
Subject to certain requirements, a Policy Owner may elect to add one or
more of the following optional insurance benefits to the Policy by a Rider at
the time of application for a Policy. These optional benefits are: waiver of all
monthly deductions against the Policy in the event of total disability of the
Insured; term insurance on the Insured's dependent children; acceleration of the
payment of a portion of the death benefit when the Insured is terminally ill;
and term insurance on an additional insured specified by the Owner. The cost of
any additional insurance benefits will be deducted as part of the monthly
deductions. Certain restrictions may apply. Restrictions and provisions related
to these benefits are more fully described in the applicable rider. Samples of
the provisions are available from KILICO upon written request.
DOLLAR COST AVERAGING
A Policy Owner may predesignate a portion of the Cash Value under a Policy
attributable to the Fixed Account, the Kemper Money Market Subaccount or the
Kemper Government Securities Subaccount (the designated account is referred to
as the "DCA Account") to be automatically transferred on a monthly basis to one
or more of the other Subaccounts and the Fixed Account. A Policy Owner may
enroll in this program at the time the Policy is issued or anytime thereafter by
properly completing the Dollar Cost Averaging enrollment form and returning it
to KILICO at its home office at least five (5) business days prior to the 10th
day of a month which is the date that all Dollar Cost Averaging transfers will
be made ("Transfer Date").
Transfers will commence on the first Transfer Date following the Trade
Date. Transfers will be made in the amounts designated by the Policy Owner and
must be at least $500 per Subaccount or General Account. The total Cash Value in
the DCA Account at the time Dollar Cost Averaging is elected must be at least
equal to the greater of $10,000 or the amount designated to be transferred on
each Transfer Date multiplied by the duration selected. Dollar Cost Averaging
will cease automatically if the Cash Value does not equal or exceed the amount
designated to be transferred on each Transfer Date and the remaining amount will
be transferred.
Dollar Cost Averaging will terminate when (i) the number of designated
monthly transfers has been completed, (ii) the Cash Value attributable to the
DCA Account is insufficient to complete the next transfer, (iii) the Policy
Owner requests termination in writing and such writing is received by KILICO at
its home office at least five business days prior to the next Transfer Date in
order to cancel the transfer scheduled to take effect on such date, or (iv) the
Policy is surrendered. KILICO reserves the right to amend Dollar Cost Averaging
on thirty days notice or terminate it at any time.
A Policy Owner may initiate, reinstate or change Dollar Cost Averaging or
change existing Dollar Cost Averaging terms by properly completing the new
enrollment form and returning it to KILICO at its home office at least five (5)
business days, (ten (10) business days for Fixed Account transfers), prior to
the next Transfer Date such transfer is to be made.
When utilizing Dollar Cost Averaging, a Policy Owner must be invested in
the DCA Account and may be invested in the Fixed Account and a maximum of eight
other Subaccounts at any given time.
SYSTEMATIC WITHDRAWAL PLAN
KILICO administers a Systematic Withdrawal Plan ("SWP") which allows
certain Policy Owners to preauthorize periodic withdrawals after the first
Policy Year. Policy Owners entering into a SWP agreement instruct KILICO to
withdraw selected amounts from the Fixed Account, or from a maximum of two
Subaccounts on a monthly, quarterly, semi-annual or annual basis. Currently the
SWP is available to Policy Owners who request a minimum $500 periodic payment.
The amounts distributed under the SWP are partial withdrawals and will be
subject to surrender charges, if applicable. (See "Policy Benefits and
Rights--Surrender Privileges," page 14.) The $25 withdrawal charge does not
apply. However, a charge of $50 will be imposed at the time a SWP is
established. In addition, a $25 charge will be imposed each time a change is
made to the SWP. These charges are designed to reimburse KILICO for expenses
related to the administration of the SWP. Withdrawals taken under the SWP may be
subject to income taxes, withholding and tax penalties. (See "Federal Tax
21
<PAGE> 26
Matters.") Policy Owners interested in the SWP may obtain an application and
full information concerning this program and its restrictions from their
representative or KILICO's home office. The right is reserved to amend the SWP
on thirty days' notice. The SWP may be terminated at any time by the Contract
Owner or KILICO.
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"),
an affiliate of KILICO. IBS is engaged in the sale and distribution of other
variable life policies and annuities.
The maximum sales commission payable to registered representatives will be
approximately 63% of premiums up to the commission target premium and 2.5% of
excess premium in the first year and 2.5% of total premium in renewal years two
through ten. Beginning in the second policy year, a service fee on assets which
have been maintained and serviced may also be paid. In addition, certain
overrides and production and managerial bonuses may be paid. These additional
amounts may constitute a substantial portion of total commissions and fees paid.
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.
FEDERAL TAX MATTERS
INTRODUCTION
The following discussion of the federal income tax treatment of the Policy
is not exhaustive, does not purport to cover all situations, and is not intended
as tax advice. The federal income tax treatment of the Policy is unclear in
certain circumstances, and a qualified tax adviser should always be consulted
with regard to the application of law to individual circumstances. This
discussion is based on the Internal Revenue Code of 1986, as amended (the
"Code"), Treasury Department regulations, and interpretations existing on the
date of this Prospectus. These authorities, however, are subject to change by
Congress, the Treasury Department, and judicial decisions.
This discussion does not address state or local tax consequences associated
with the purchase of the Policy. In addition, KILICO MAKES NO GUARANTEE
REGARDING ANY TAX TREATMENT -- FEDERAL, STATE OR LOCAL -- OF ANY POLICY OR OF
ANY TRANSACTION INVOLVING A POLICY.
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 Policy Cash Values. 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. However, KILICO's federal
income taxes are increased in respect of the Policies because of the federal tax
law's treatment of deferred acquisition costs. Accordingly, a charge equal to 1%
of each premium payment in all Policy Years is made to compensate KILICO for its
higher corporate income tax liability.
If there is a material change in applicable federal, state or local law,
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.
TAXATION OF LIFE INSURANCE POLICIES
TAX STATUS OF THE POLICY. Section 7702 of the Code establishes a statutory
definition of life insurance for federal tax purposes. KILICO believes that the
Policy will meet the current statutory definition of life insurance, which
places limitations on the amount of premiums that may be paid and the Cash
Values that can accumulate relative to the Death Benefit. As a result, the Death
Benefit payable under the Policy will generally be excludable
22
<PAGE> 27
from the Beneficiary's gross income, and interest and other income credited
under the Policy will not be taxable unless certain withdrawals are made (or are
deemed to be made) from the Policy prior to the Insured's death, as discussed
below. This tax treatment will only apply, however, if (1) the investments of
the Separate Account are "adequately diversified" in accordance with Treasury
Department regulations, and (2) KILICO, rather than the Policy Owner, is
considered the owner of the assets of the Separate Account for federal income
tax purposes.
DIVERSIFICATION REQUIREMENTS. The Code and Treasury Department regulations
prescribe the manner in which the investments of a segregated asset account,
such as the Separate Account, are to be "adequately diversified." If the
Separate Account fails to comply with these diversification standards, the
Policy will not be treated as a life insurance contract for federal income tax
purposes and the Owner would generally be taxable currently on the income on the
contract (as defined in the tax law). KILICO expects that the Separate Account,
through the Funds, will comply with the diversification requirements prescribed
by the Code and Treasury Department regulations.
OWNERSHIP TREATMENT. In certain circumstances, variable life insurance
contract owners may be considered the owners, for federal income tax purposes,
of the assets of a segregated asset account, such as the Separate Account, used
to support their contracts. In those circumstances, income and gains from the
segregated asset account would be includible in the contract owners' gross
income. The Internal Revenue Service (the "IRS") has stated in published rulings
that a variable contract owner will be considered the owner of the assets of a
segregated asset account if the owner possesses incidents of ownership in those
assets, such as the ability to exercise investment control over the assets. In
addition, the Treasury Department announced, in connection with the issuance of
regulations concerning investment diversification, that those regulations "do
not provide guidance concerning the circumstances in which investor control of
the investments of a segregated asset account may cause the investor, rather
than the insurance company, to be treated as the owner of the assets in the
account." This announcement also stated that guidance would be issued by way of
regulations or rulings on the "extent to which policyholders may direct their
investments to particular sub-accounts [of a segregated asset account] without
being treated as owners of the underlying assets." As of the date of this
Prospectus, no such guidance has been issued.
The ownership rights under the Policy are similar to, but different in
certain respects from, those described by the IRS in rulings in which it was
determined that contract owners were not owners of the assets of a segregated
asset account. For example, the Owner of this Policy has the choice of more
investment options to which to allocate premium payments and Separate Account
values, and may be able to transfer among investment options more frequently,
than in such rulings. These differences could result in the Policy Owner being
treated as the owner of a portion of the assets of the Separate Account and thus
subject to current taxation on the income and gains from those assets. In
addition, KILICO does not know what standards will be set forth in the
regulations or rulings which the Treasury Department has stated it expects to
issue. KILICO therefore reserves the right to modify the Policy as necessary to
attempt to prevent Policy Owners from being considered the owners of the assets
of the Separate Account. However, there is no assurance that such efforts would
be successful.
The remainder of this discussion assumes that the Policy will be treated as
a life insurance contract for federal tax purposes.
TAX TREATMENT OF LIFE INSURANCE DEATH BENEFIT PROCEEDS. In general, the
amount of the Death Benefit payable under a Policy by reason of the death of the
Insured is excludable from gross income under Section 101 of the Code. Certain
transfers of the Policy for valuable consideration, however, may result in a
portion of the Death Benefit being taxable. If the Death Benefit is not received
in a lump sum and is, instead, applied under a Settlement Option, generally
payments will be prorated between amounts attributable to the Death Benefit,
which will be excludable from the Beneficiary's income, and amounts attributable
to interest (accruing after the Insured's death), which will be includible in
the Beneficiary's income.
TAX DEFERRAL DURING ACCUMULATION PERIOD. Under existing provisions of the
Code, except as described below, any increase in an Owner's Cash Value is
generally not taxable to the Owner unless amounts are received (or are deemed to
be received) from the Policy prior to the Insured's death. If there is a
surrender of the Policy, an amount equal to the excess of the Cash Value over
the "investment in the contract" will be includible in the Owner's income. The
"investment in the contract" generally is the aggregate premium payments less
the aggregate amount received under the Policy previously to the extent such
amounts received were excludable from gross income. Whether withdrawals (or
other amounts deemed to be distributed) from the Policy constitute income to the
Owner depends, in part, upon whether the Policy is considered a "modified
endowment contract" ("MEC") for federal income tax purposes.
23
<PAGE> 28
POLICIES WHICH ARE NOT MECS
TAX TREATMENT OF WITHDRAWALS GENERALLY. If the Policy is not a MEC
(described below), the amount of any withdrawal from the Policy generally will
be treated first as non-taxable recovery of premiums paid and then as income
from the Policy. Thus, a withdrawal from a Policy that is not a MEC generally
will not be includible in income except to the extent the withdrawal exceeds the
investment in the contract immediately before the withdrawal.
CERTAIN DISTRIBUTIONS REQUIRED BY THE TAX LAW IN THE FIRST 15 POLICY
YEARS. As indicated above, section 7702 places limitations on the amount of
premiums that may be paid and the Cash Values that can accumulate relative to
the Death Benefit. Where cash distributions are required under section 7702 in
connection with a reduction in benefits during the first 15 years after the
Policy is issued (or if withdrawals are made in anticipation of a reduction in
benefits, within the meaning of the tax law, during this period), some or all of
such amounts may be includible in income notwithstanding the general rule
described in the preceding paragraph. A reduction in benefits may result upon a
decrease in the Specified Amount, a change from an Option B Death Benefit to an
Option A Death Benefit, if withdrawals are made, and in certain other instances.
TAX TREATMENT OF LOANS. If a Policy is not classified as a MEC, a loan
under the Policy generally will be treated as indebtedness of the Owner. As a
result, no part of any loan under a Policy will constitute income to the Owner
so long as the Policy remains in force. However, in those situations where the
interest rate credited to the Loan Account equals the interest rate charged for
the loan, it is possible that some or all of the loan proceeds may be includible
in income. If a Policy lapses when a loan is outstanding, the amount of the loan
outstanding will be treated as the proceeds of a surrender for purposes of
determining whether any amounts are includible in the Owner's income.
Generally, interest paid on any loans under this Policy will not be tax
deductible. The nondeductibility of interest includes interest paid or accrued
on indebtedness with respect to one or more life insurance policies owned by a
taxpayer covering any individual who is or has been an officer or employee of,
or financially interested in, any trade or business carried on by the taxpayer.
A limited exception to this rule exists for certain interest paid in connection
with certain "key person" insurance. In the case of interest paid in connection
with a loan with respect to a Policy covering the life of any key person,
interest is deductible only to the extent that the aggregate amount of loans
under one or more life insurance policies does not exceed $50,000. Further, even
as to such loans up to $50,000, interest would not be deductible if the Policy
were deemed for federal tax purposes to be a single premium life insurance
policy or, in certain circumstances, if the loans were treated as "systematic
borrowing" within the meaning of the tax law. A "key person" is an individual
who is either an officer or a twenty percent owner of the taxpayer. The maximum
number of individuals who can be treated as key persons may not exceed the
greater of (1) 5 individuals or (2) the lesser of 5 percent of the total number
of officers and employees of the taxpayer or 20 individuals. Owners should
consult a tax advisor regarding the deductibility of interest incurred in
connection with loans under this Policy.
In addition, in the case of Policies issued to a non-natural taxpayer, or
held for the benefit of such an entity, a portion of the taxpayer's otherwise
deductible interest expenses may not be deductible as a result of ownership of a
policy even if no loans are taken under the policy. An exception to the latter
rule is provided for certain life Policies which cover the life of an individual
who is a 20-percent owner, or an officer, director, or employee of, a trade or
business. However, this exception is not applicable to Survivorship Policies,
other than where the Insureds are a 20-percent owner and his or her spouse.
Entities that are considering purchasing the Policy, or entities that will be
beneficiaries under a policy, should consult a tax advisor.
POLICIES WHICH ARE MECS
CHARACTERIZATION OF A POLICY AS A MEC. In general, a Policy will be
considered a MEC for federal income tax purposes if (1) the Policy is received
in exchange for a life insurance contract that was a MEC, or (2) the Policy is
entered into after June 21, 1988 and premiums are paid into the Policy more
rapidly than the rate defined by a "7-Pay Test." This test generally provides
that a Policy will fail this test (and thus be considered a MEC) if the
accumulated amount paid under the Policy at any time during the 1st 7 Policy
Years exceeds the cumulative sum of the net level premiums which would have been
paid to that time if the Policy provided for paid-up future benefits after the
payment of 7 level annual premiums. A material change of the Policy (as defined
in the tax law) will generally result in a reapplication of the 7-Pay Test. In
addition, any reduction in benefits during the 7-Pay period will affect the
application of this test.
KILICO will monitor the Policies and will attempt to notify Owners on a
timely basis if a Policy is in jeopardy of becoming a MEC. The Policy Owner may
then request that KILICO take whatever steps are available to avoid treating the
Policy as a MEC, if that is desired.
24
<PAGE> 29
TAX TREATMENT OF WITHDRAWALS, LOANS, ASSIGNMENTS AND PLEDGES UNDER MECS. If
the Policy is a MEC, withdrawals from the Policy will be treated first as
withdrawals of income and then as a recovery of premiums paid. Thus, withdrawals
will be includible in income to the extent the Cash Value exceeds the investment
in the contract. The amount of any Policy loan will be treated as a withdrawal
for tax purposes. In addition, the discussion of interest on loans and of lapses
while loans are outstanding under the caption "Policies Which Are Not MECs" also
applies to Policies which are MECs.
If the Owner assigns or pledges any portion of the Cash Value (or agrees to
assign or pledge any portion), such portion will be treated as a withdrawal for
tax purposes. The Owner's investment in the contract is increased by the amount
includible in income with respect to any assignment, pledge, or loan, though it
is not affected by any other aspect of the assignment, pledge, or loan
(including its release or repayment). Before assigning, pledging, or requesting
a loan under a Policy treated as a MEC, an Owner should consult a qualified tax
advisor.
PENALTY TAX. Generally, proceeds of a surrender or a withdrawal (or the
amount of any deemed withdrawal) from a MEC are subject to a penalty tax equal
to 10% of the portion of the proceeds that is includible in income, unless the
surrender or withdrawal is made (1) after the Owner attains age 59 1/2, (2)
because the Owner has become disabled (as defined in the tax law), or (3) as
substantially equal periodic payments over the life or life expectancy of the
Owner (or the joint lives or life expectancies of the Owner and his or her
beneficiary, as defined in the tax law).
AGGREGATION OF POLICIES. All life insurance contracts which are treated as
MECs and which are purchased by the same person from KILICO or any of is
affiliates within the same calendar year will be aggregated and treated as one
contract for purpose of determining the tax on withdrawals (including deemed
withdrawals). The effects of such aggregation are not clear; however, it could
affect the amount of a withdrawal (or a deemed withdrawal) that is taxable and
the amount which might be subject to the 10% penalty tax described above.
ACTIONS TO ENSURE COMPLIANCE WITH THE TAX LAW. KILICO reserves the right to
refund premiums which exceed those permitted by the federal tax definition of
life insurance. KILICO also reserves the right to increase the Death Benefit
(which may result in larger charges under a Policy) or to take any other action
deemed necessary to ensure the compliance of the Policy with the federal tax
definition of life insurance.
OTHER CONSIDERATIONS. Changing the Owner, exchanging the Policy, changing
from one Death Benefit option to another, and other changes under the Policy may
have tax consequences (other than those discussed herein) depending on the
circumstances of such change or withdrawal. 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 Policy Owner or Beneficiary.
FEDERAL INCOME TAX WITHHOLDING
KILICO will withhold and remit to the Federal government a part of the
taxable portion of withdrawals made under a Policy unless the Owner notifies
KILICO in writing at or before the time of the withdrawal that he or she elects
not to have any amounts withheld. Regardless of whether the Owner requests that
no taxes be withheld or whether KILICO withholds a sufficient amount of taxes,
the Owner will be responsible for the payment of any taxes and early
distribution penalties that may be due on the amounts received. The Owner may
also be required to pay penalties under the estimated tax rules, if the Owner's
withholding and estimated tax payments are insufficient to satisfy the Owner's
total tax liability.
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 Funds by each of the Subaccounts.
25
<PAGE> 30
VOTING INTERESTS
To the extent required by law, KILICO will vote a 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 a Fund's shares in its own right, it may elect to do so.
Owners of all Policies participating in each Subaccount shall have voting
interests 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 Funds.
KILICO will vote shares of the Funds 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 a
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.
26
<PAGE> 31
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 (53) Chief Executive Officer, President and Director of Federal
Chief Executive Officer since Kemper Life Assurance Company (FKLA) and Fidelity Life
February 1992. President since Association (FLA) since 1988. Chief Executive Officer,
November 1993. Director since 1992. President and Director of Zurich Life Insurance Company of
America (ZLICA) and Zurich Direct, Inc. (ZD) since March
1996. Chairman of the Board and Director of Investors
Brokerage Services, Inc. (IBS) and Investors Brokerage
Services Insurance Agency, Inc. (IBSIA) since 1993. Chairman
of the Board of FKLA and FLA from April 1988 to January
1996. Chairman of the Board of KILICO from February 1992 to
January 1996. Executive Vice President and Director of
Kemper Corporation (Kemper) from January 1994 and March
1996, respectively. Executive Vice President of Kemper
Financial Companies, Inc. from January 1994 to January 1996
and Director from 1992 to January 1996.
Eliane C. Frye (50) Executive Vice President of FKLA and FLA since 1995.
Executive Vice President since 1995. Executive Vice President of ZLICA and ZD since March 1996.
Director of FLA since December 1997. Director of ZD from
March 1996 to March 1997. Director of IBS and IBSIA since
1995. Senior Vice President of KILICO, FKLA and FLA from
1993 to 1995. Vice President of FKLA and FLA from 1988 to
1993.
Frederick L. Blackmon (46) Senior Vice President and Chief Financial Officer of FKLA
Senior Vice President and Chief since December 1995. Senior Vice President and Chief
Financial Officer since December Financial Officer of FLA since January 1996. Senior Vice
1995. President and Chief Financial Officer of ZLICA since March
1996. Senior Vice President and Chief Financial Officer of
ZD since March 1996. Director of ZD from March 1996 to March
1997. Treasurer and Chief Financial Officer of Kemper since
January 1996. Chief Financial Officer of Alexander Hamilton
Life Insurance Company from April 1989 to November 1995.
James C. Harkensee (39) Senior Vice President of FKLA and FLA since January 1996.
Senior Vice President since January Senior Vice President of ZLICA since 1995. Senior Vice
1996. President of ZD since 1995. Director of ZD from April 1993
to March 1997. Vice President of ZLICA from 1992 to 1995.
Chief Actuary of ZLICA from 1991 to 1994. Assistant Vice
President of ZLICA from 1990 to 1992. Vice President of ZD
from 1994 to 1995.
James E. Hohmann (42) Senior Vice President and Chief Actuary of FKLA since
Senior Vice President and Chief December 1995. Senior Vice President and Chief Actuary of
Actuary since December 1995. FLA since January 1996. Senior Vice President and Chief
Actuary of ZLICA since March 1996. Senior Vice President and
Chief Actuary of ZD since March 1996. Director of FLA since
June 1997. Director of ZD from March 1996 to March 1997.
Managing Principal (Partner) of Tillinghast-Towers Perrin
from January 1991 to December 1995. Consultant/Principal
(Partner) of Tillinghast-Towers Perrin from November 1986 to
January 1991.
Edward K. Loughridge (43) Senior Vice President and Corporate Development Officer of
Senior Vice President and Corporate FKLA and FLA since January 1996. Senior Vice President and
Development Officer since January Corporate Development Officer for ZLICA and ZD since March
1996. 1996. Senior Vice President of Human Resources of
Zurich-American Insurance Group from February 1992 to March
1996.
</TABLE>
27
<PAGE> 32
<TABLE>
<CAPTION>
NAME AND AGE
POSITION WITH KILICO
YEAR OF ELECTION OTHER BUSINESS EXPERIENCE DURING PAST 5 YEARS OR MORE
-------------------- -----------------------------------------------------
<S> <C>
Phillip D. Meserve (47) Senior Vice President of FKLA, FLA, ZLICA and ZD since March
Senior Vice President since March 1997. Director of IBSIA and IBS since March and May, 1997,
1997 respectively. Managing Director of Equitable Distributors
from May 1996 to March 1997. Senior Vice President of
Banker's Trust from April 1995 to April 1996. Senior Vice
President of Fidelity Investments Insurance Services from
February 1992 to March 1995.
Debra P. Rezabek (42) Senior Vice President of FKLA and FLA since March 1996.
Senior Vice President since 1996. Corporate Secretary of FKLA and FLA since January 1996. Vice
General Counsel since 1992. Corporate President of KILICO, FKLA and FLA since 1995. General
Secretary since January 1996. Counsel and Director of Government Affairs of FKLA and FLA
since 1992 and of KILICO since 1993. Senior Vice President,
General Counsel and Corporate Secretary of ZLICA since March
1996. Senior Vice President, General Counsel and Corporate
Secretary of ZD since March 1996. Director of ZD from March
1996 to March 1997. Secretary of IBS and IBSIA since 1993.
Director of IBS and IBSIA from 1993 to 1996. Assistant
General Counsel of FKLA and FLA from 1988 to 1992. General
Counsel and Assistant Secretary of KILICO, FKLA and FLA from
1992 to 1996. Assistant Secretary of Kemper since January
1996.
Kenneth M. Sapp (52) Senior Vice President of FKLA, FLA and ZLICA since January
Senior Vice President since January 1998. Vice President -- Aetna Life Brokerage of Aetna Life &
1998. Annuity Company from February 1992 to January 1998.
George Vlaisavljevich (55) Senior Vice President of FKLA, FLA and ZLICA since October
Senior Vice President since October 1996. Senior Vice President of ZD since March 1997. Director
1996. of IBS and IBSIA since October 1996. Executive Vice
President of The Copeland Companies from April 1983 to
September 1996.
Loren J. Alter (59) Director of FKLA, FLA and Scudder Kemper Investments, Inc.
Director since January 1996. (SKI) since January 1996. Director of ZLICA since May 1979.
Executive Vice President of Zurich Insurance Company since
1979. President, Chief Executive Officer and Director of
Kemper since January 1996.
William H. Bolinder (54) Chairman of the Board and Director of FKLA and FLA since
Chairman of the Board and Director January 1996. Chairman of the Board of ZLICA and ZD since
since January 1996. March 1995. Chairman of the Board and Director of Kemper
since January 1996. Vice Chairman and Director of SKI since
January 1996. Member of the Corporate Executive Board of
Zurich Insurance Group since October 1994. Chairman of the
Board of American Guarantee and Liability Insurance Company,
Zurich American Insurance Company of Illinois, American
Zurich Insurance Company and Steadfast Insurance Company
since 1995. Chief Executive Officer of American Guarantee
and Liability Insurance Company, Zurich American Insurance
Company of Illinois, American Zurich Insurance Company and
Steadfast Insurance Company from 1986 to June 1995.
President of Zurich Holding Company of America since 1986.
Manager of Zurich Insurance Company, U.S. Branch since 1986.
Underwriter for Zurich American Lloyds since 1986.
David A. Bowers (51) Director of FKLA and ZLICA since May 1997. Director of FLA
Director since May 1997. since June 1997. Executive Vice President, Corporate
Secretary and General Counsel of Zurich-American Insurance
Group since August 1985. Vice President, General Council and
Secretary of Kemper since January 1996.
Markus Rohrbasser (43) Director of FKLA, FLA and ZLICA since May 1997. Chief
Director since May 1997. Financial Officer and Member of the Corporate Executive
Board of Zurich Insurance Company since January 1997. Member
of Enlarged Corporate Executive Board and Chief Executive
Officer of Union Bank of Switzerland (North America) from
1992 to 1997.
</TABLE>
28
<PAGE> 33
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 Frank J. Julian, Associate General
Counsel of KILICO. Jorden Burt Boros Cicchetti Berenson & Johnson, Washington,
D.C., has advised KILICO on certain legal matters concerning Federal securities
laws applicable to the issue and sale of 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.
YEAR 2000 COMPLIANCE
Many existing computer programs were originally designed without
considering the impact of the year 2000 and currently use only two digits to
identify the year in the date field. This issue affects nearly all companies and
organizations and could cause computer applications and systems to fail or
create erroneous results to occur for any transaction with a date of January 1,
2000, or later.
Many companies must undertake major projects to address the year 2000 issue
and each company's costs and uncertainties will depend on a number of factors,
including its software and hardware, and the nature of the industry. Companies
must also coordinate with other entities with which they electronically
interact, including suppliers, customers, creditors and other financial services
institutions.
If a company does not successfully address its year 2000 issues it could
face material adverse consequences in the form of lawsuits against the company,
lost business, erroneous results and substantial operating problems after
January 1, 2000.
KILICO has taken substantial steps over the last several years to ensure
that its systems will be compliant for the year 2000. Such steps have included
the replacement of older systems with new systems which are already compliant.
In 1996, KILICO replaced its investment accounting system and in 1997 KILICO
replaced its general ledger and accounts payable system. KILICO has also ensured
that new systems developed to support new product introductions in 1996 and 1997
are already year 2000 compliant. Data processing expenses related solely to
bringing KILICO's systems in compliance with the year 2000 amounted to $88
thousand in 1997 and KILICO anticipates that it will cost an additional $895
thousand to bring all remaining systems into compliance. KILICO has also
undertaken steps which require that all other entities with which KILICO
electronically interacts, including suppliers and other financial services
institutions, attest in writing to KILICO that their systems are year 2000
compliant.
EXPERTS
The consolidated balance sheet of KILICO as of December 31, 1997 and the
related consolidated statements of operations, stockholder's equity, and cash
flows for the year ended December 31, 1997 have been included herein and in the
registration statement in reliance upon the report of Coopers & Lybrand L.L.P.,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing. The
consolidated balance sheet of KILICO as of December 31, 1996 and the related
consolidated statements of operations, stockholder's equity, and cash flows for
the periods from January 4, 1996 to December 31, 1996 and for the year ended
December 31, 1995 have been included herein and in the registration statement in
reliance upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing. The report of KPMG Peat Marwick LLP covering
KILICO's financial statements referred to above contains an explanatory
paragraph that states as a result of the acquisition of its parent, Kemper
Corporation, the consolidated financial information for the period after the
acquisition is presented on a different cost basis than that for the period
before the acquisition and, therefore, is not comparable.
The statements of assets and liabilities and policy owners' equity of the
Separate Account as of December 31, 1997 and the related statements of
operations for the year then ended and the statements of changes in policy
owners' equity for the year then ended has been included herein in reliance upon
the report of Coopers & Lybrand L.L.P., independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
29
<PAGE> 34
The statement of changes in policy owners' equity of the Separate Account
for the year ended December 31, 1996 has been included herein in reliance upon
the report of KPMG Peat Marwick LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
Actuarial matters included in this prospectus have been examined by
Christopher J. Nickele, FSA as stated in the opinion filed as an exhibit 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
upon payment of a fee.
FINANCIAL STATEMENTS
The financial statements of the Separate Account relate to life insurance
policies other than those offered by this Prospectus. 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.
CHANGE OF ACCOUNTANTS
On September 12, 1997, Kemper Investors Life Insurance Company ("KILICO")
appointed the accounting firm of Coopers & Lybrand L.L.P. as independent
accountants for the year ended December 31, 1997 to replace KPMG Peat Marwick
LLP effective with such appointment. KILICO's Board of Directors approved the
selection of Coopers & Lybrand L.L.P. as the new independent accountants.
Management had not consulted with Coopers & Lybrand L.L.P. on any accounting,
auditing or reporting matter, prior to that time.
During the two most recent fiscal years ended December 31, 1996, there have
been no disagreements with KPMG Peat Marwick LLP on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure or any reportable events. KPMG Peat Marwick LLP's report on the
financial statements for the past two years contained no adverse opinion or
disclaimer of opinion and was not qualified or modified as to uncertainty, audit
scope or accounting principles.
There were no disagreements with Coopers & Lybrand L.L.P. on accounting or
financial disclosures for the year ended December 31, 1997.
30
<PAGE> 35
REPORT OF INDEPENDENT ACCOUNTANTS
THE BOARD OF DIRECTORS OF
KEMPER INVESTORS LIFE INSURANCE COMPANY AND
POLICY OWNERS OF KILICO VARIABLE SEPARATE ACCOUNT:
We have audited the accompanying statements of assets and liabilities and
policy owners' equity of the Kemper Money Market Subaccount, Kemper Total Return
Subaccount, Kemper High Yield Subaccount, Kemper Growth Subaccount, Kemper
Government Securities Subaccount, Kemper International Subaccount and Kemper
SmallCap Growth Subaccount (investment options within the Investors Fund
Series), Founders Capital Appreciation Subaccount, Neuberger & Berman Mid-Cap
Growth Subaccount, Jancap Growth Subaccount, Lord Abbett Growth & Income
Subaccount, T. Rowe Price International Equity Subaccount, T. Rowe Price Asset
Allocation Subaccount, PIMCO Limited Maturity Bond Subaccount, PIMCO Total
Return Subaccount and INVESCO Equity Income Subaccount (investment options
within the American Skandia Trust), of KILICO Variable Separate Account as of
December 31, 1997 and the related statements of operations and the statements of
changes in policy owners' equity for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. The statement of changes in policy owners' equity for the year ended
December 31, 1996 was audited by other auditors, whose report, dated March 26,
1997, expressed an unqualified opinion on that statement.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of investments owned at December 31, 1997 by correspondence with
transfer agents. An audit also includes assessing the accounting principles used
and significant estimates made by management as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the December 31, 1997 financial statements referred to
above present fairly, in all material respects, the financial position of the
subaccounts of KILICO Variable Separate Account at December 31, 1997 and the
results of their operations and changes in their policy owners' equity for the
year then ended, in conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Chicago, Illinois
February 20, 1998
31
<PAGE> 36
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS
KEMPER INVESTORS LIFE INSURANCE COMPANY:
We have audited the accompanying statement of changes in policy owners'
equity of the Kemper Money Market Subaccount, Kemper Total Return Subaccount,
Kemper High Yield Subaccount, Kemper Growth Subaccount, Kemper Government
Securities Subaccount, Kemper International Subaccount, Kemper SmallCap Growth
Subaccount (investment options within the Investors Fund Series), Founders
Capital Appreciation Subaccount, Neuberger & Berman Mid-Cap Growth Subaccount,
Jancap Growth Subaccount, Lord Abbett Growth & Income Subaccount, T. Rowe Price
International Equity Subaccount, T. Rowe Price Asset Allocation Subaccount,
PIMCO Limited Maturity Bond Subaccount, PIMCO Total Return Subaccount, and
INVESCO Equity Income Subaccount (investment options within the American Skandia
Trust), of KILICO Variable Separate Account (the Account) for the year ended
December 31, 1996. This financial statement is the responsibility of the
Account's management. Our responsibility is to express an opinion on this
financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statement referred to above presents fairly,
in all material respects, the changes in policy owners' equity of the
subaccounts of KILICO Variable Separate Account for the year ended December 31,
1996 in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Chicago, Illinois
March 26, 1997
32
<PAGE> 37
[THIS PAGE INTENTIONALLY LEFT BLANK]
33
<PAGE> 38
KILICO VARIABLE SEPARATE ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES AND POLICY OWNERS' EQUITY
DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
INVESTORS FUND SERIES
---------------------------------------------------------------------------------------------
KEMPER KEMPER KEMPER
MONEY KEMPER KEMPER KEMPER GOVERNMENT KEMPER SMALLCAP
MARKET TOTAL RETURN HIGH YIELD GROWTH SECURITIES INTERNATIONAL GROWTH
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ------------ ---------- ---------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Investments in underlying
portfolio funds, at current
value......................... $885 2,890 1,934 2,758 4,709 48 224
Dividends and other
receivables................... 101 148 1 -- -- -- 1
---- ----- ----- ----- ----- --- ---
Total assets.............. 986 3,038 1,935 2,758 4,709 48 225
LIABILITIES AND POLICY OWNERS'
EQUITY
Liabilities:
Mortality and expense risk
charges..................... 1 2 1 2 3 -- --
Other......................... 19 -- -- 15 9 -- 1
---- ----- ----- ----- ----- --- ---
Total liabilities......... 20 2 1 17 12 -- 1
---- ----- ----- ----- ----- --- ---
Policy owners' equity........... $966 3,036 1,934 2,741 4,697 48 224
==== ===== ===== ===== ===== === ===
ANALYSIS OF POLICY OWNERS' EQUITY
Excess of proceeds from units
sold over payments for units
redeemed...................... 414 726 939 993 2,445 49 204
Accumulated net investment
income (loss)................. 552 1,209 832 975 1,635 -- 2
Accumulated net realized gain on
sales of investments.......... -- 883 108 607 294 -- --
Unrealized appreciation
(depreciation) of
investments................... -- 218 55 166 323 (1) 18
---- ----- ----- ----- ----- --- ---
Policy owners' equity........... $966 3,036 1,934 2,741 4,697 48 224
==== ===== ===== ===== ===== === ===
</TABLE>
See accompanying notes to financial statements.
34
<PAGE> 39
<TABLE>
<CAPTION>
AMERICAN SKANDIA TRUST
------------------------------------------------------------------------------------------------------------
FOUNDERS NEUBERGER & BERMAN LORD ABBETT T. ROWE PRICE T. ROWE PRICE PIMCO LIMITED
CAPITAL MID-CAP JANCAP GROWTH & INTERNATIONAL ASSET MATURITY
APPRECIATION GROWTH GROWTH INCOME EQUITY ALLOCATION BOND
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
------------ ------------------ ---------- ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
135 201 527 112 96 58 8
-- -- -- -- -- -- --
--- --- --- --- --- --- ---
135 201 527 112 96 58 8
-- -- -- -- -- -- --
-- -- -- -- -- -- --
--- --- --- --- --- --- ---
-- -- -- -- -- -- --
--- --- --- --- --- --- ---
135 201 527 112 96 58 8
=== === === === === === ===
131 197 507 109 100 56 8
-- (1) -- -- (1) -- --
-- -- -- -- -- -- --
4 5 20 3 (3) 2 --
--- --- --- --- --- --- ---
135 201 527 112 96 58 8
=== === === === === === ===
<CAPTION>
AMERICAN SKANDIA TRUST
---------------------------
PIMCO TOTAL INVESCO
RETURN EQUITY INCOME
SUBACCOUNT SUBACCOUNT
----------- -------------
<S> <C>
17 72
-- --
--- ---
17 72
-- --
-- --
--- ---
-- --
--- ---
17 72
== ==
17 70
-- --
-- --
-- 2
--- ---
17 72
=== ===
</TABLE>
35
<PAGE> 40
KILICO VARIABLE SEPARATE ACCOUNT
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
INVESTORS FUND SERIES
---------------------------------------------------------------------------------------------
KEMPER KEMPER KEMPER
MONEY KEMPER KEMPER KEMPER GOVERNMENT KEMPER SMALLCAP
MARKET TOTAL RETURN HIGH YIELD GROWTH SECURITIES INTERNATIONAL GROWTH
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ------------ ---------- ---------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Dividends and capital gains
distributions................... $66 414 101 522 325 -- 2
Mortality and expense risk
charges......................... 32 24 14 26 42 -- --
--- ---- --- ---- ---- -- --
Net investment income (loss).... 34 390 87 496 283 -- 2
--- ---- --- ---- ---- -- --
Net realized and unrealized gain
(loss) on investments:
Net realized gain (loss) on
sales of investments.......... -- 426 96 (10) 19 -- --
Change in unrealized
appreciation (depreciation) of
investments................... -- (281) (27) (21) 17 (1) 18
--- ---- --- ---- ---- -- --
Net realized and unrealized gain
(loss) on investments........... -- 145 69 (31) 36 (1) 18
--- ---- --- ---- ---- -- --
Net increase (decrease) in policy
owners' equity resulting from
operations...................... $34 535 156 465 319 (1) 20
=== ==== === ==== ==== == ==
</TABLE>
See accompanying notes to financial statements.
36
<PAGE> 41
<TABLE>
<CAPTION>
AMERICAN SKANDIA TRUST
------------------------------------------------------------------------------------------------------------
FOUNDERS NEUBERGER & BERMAN LORD ABBETT T. ROWE PRICE T. ROWE PRICE PIMCO LIMITED
CAPITAL MID-CAP JANCAP GROWTH & INTERNATIONAL ASSET MATURITY
APPRECIATION GROWTH GROWTH INCOME EQUITY ALLOCATION BOND
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
------------ ------------------ ---------- ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
-- -- -- -- -- -- --
-- 1 -- -- 1 -- --
-- -- -- -- -- -- --
-- (1) -- -- (1) -- --
-- -- -- -- -- -- --
-- -- -- -- -- -- --
4 5 20 3 (3) 2 --
-- -- -- -- -- -- --
4 5 20 3 (3) 2 --
-- -- -- -- -- -- --
4 4 20 3 (4) 2 --
== == == == == == ==
<CAPTION>
AMERICAN SKANDIA TRUST
----------------------------
PIMCO TOTAL INVESCO EQUITY
RETURN INCOME
SUBACCOUNT SUBACCOUNT
----------- --------------
<S> <C>
-- --
-- --
-- --
-- --
-- --
-- 2
-- --
-- 2
-- --
-- 2
== ==
</TABLE>
37
<PAGE> 42
KILICO VARIABLE SEPARATE ACCOUNT
STATEMENTS OF CHANGES IN POLICY OWNERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
INVESTORS FUND SERIES
-----------------------------------------------------------------------------
KEMPER KEMPER KEMPER
MONEY MARKET TOTAL RETURN HIGH YIELD
SUBACCOUNT SUBACCOUNT SUBACCOUNT
--------------------- ------------------- -------------------
1997 1996 1997 1996 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Operations:
Net investment income................... $ 34 46 390 142 87 154
Net realized gain (loss) on sales of
investments........................... -- -- 426 128 96 9
Change in unrealized appreciation
(depreciation) of investments......... -- -- (281) 117 (27) 34
------- ----- ----- ----- ----- -----
Net increase (decrease) in policy
owners' equity resulting from
operations.......................... 34 46 535 387 156 197
------- ----- ----- ----- ----- -----
Account unit transactions:
Proceeds from units sold................ 2,965 270 27 43 22 6
Net transfers (to) from affiliated
divisions and subaccounts............. (1,059) 55 (400) 484 298 (567)
Payments for units redeemed............. (2,011) (336) (217) (376) (50) (217)
------- ----- ----- ----- ----- -----
Net increase (decrease) in policy
owners' equity from account unit
transactions........................ (105) (11) (590) 151 270 (778)
------- ----- ----- ----- ----- -----
Total increase (decrease) in policy
owners' equity.......................... (71) 35 (55) 538 426 (581)
Policy owners' equity:
Beginning of year....................... 1,037 1,002 3,091 2,553 1,508 2,089
------- ----- ----- ----- ----- -----
End of year............................. $ 966 1,037 3,036 3,091 1,934 1,508
======= ===== ===== ===== ===== =====
</TABLE>
See accompanying notes to financial statements.
38
<PAGE> 43
<TABLE>
<CAPTION>
INVESTORS FUND SERIES
- ---------------------------------------------------------------
KEMPER
KEMPER GOVERNMENT KEMPER KEMPER
GROWTH SECURITIES INTERNATIONAL SMALLCAP GROWTH
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
- ------------- ------------- ------------- ---------------
1997 1996 1997 1996 1997 1996 1997 1996
- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
496 261 283 251 -- -- 2 --
(10) 397 19 17 -- -- -- --
(21) (228) 17 (203) (1) -- 18 --
- ----- ----- ----- ----- -- -- --- --
465 430 319 65 (1) -- 20 --
- ----- ----- ----- ----- -- -- --- --
92 121 32 22 35 -- 137 2
(38) 65 492 (37) 19 -- 93 --
(138) (179) (131) (162) (5) -- (28) --
- ----- ----- ----- ----- -- -- --- --
(84) 7 393 (177) 49 -- 202 2
- ----- ----- ----- ----- -- -- --- --
381 437 712 (112) 48 -- 222 2
2,360 1,923 3,985 4,097 -- -- 2 --
- ----- ----- ----- ----- -- -- --- --
2,741 2,360 4,697 3,985 48 -- 224 2
===== ===== ===== ===== == == === ==
</TABLE>
\
39
<PAGE> 44
KILICO VARIABLE SEPARATE ACCOUNT
STATEMENTS OF CHANGES IN POLICY OWNERS' EQUITY (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
AMERICAN SKANDIA TRUST
-------------------------------------------------------
NEUBERGER &
FOUNDERS BERMAN LORD ABBETT
CAPITAL MID-CAP JANCAP GROWTH &
APPRECIATION GROWTH GROWTH INCOME
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
------------- ----------- ----------- -----------
1997 1996 1997 1996 1997 1996 1997 1996
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operations:
Net investment loss................................ $ -- -- (1) -- -- -- -- --
Net realized gain on sales of investments.......... -- -- -- -- -- -- -- --
Change in unrealized appreciation (depreciation) of
investments...................................... 4 -- 5 -- 20 -- 3 --
---- --- --- -- --- -- --- --
Net increase (decrease) in policy owners' equity
resulting from operations...................... 4 -- 4 -- 20 -- 3 --
---- --- --- -- --- -- --- --
Account unit transactions:
Proceeds from units sold........................... 89 -- 124 2 330 4 58 2
Net transfers from affiliated divisions and
subaccounts...................................... 63 -- 99 -- 242 -- 61 --
Payments for units redeemed........................ (21) -- (28) -- (69) -- (12) --
---- --- --- -- --- -- --- --
Net increase in policy owners' equity from
account unit transactions...................... 131 -- 195 2 503 4 107 2
---- --- --- -- --- -- --- --
Total increase in policy owners' equity.............. 135 -- 199 2 523 4 110 2
Policy owners' equity:
Beginning of year.................................. -- -- 2 -- 4 -- 2 --
---- --- --- -- --- -- --- --
End of year........................................ $135 -- 201 2 527 4 112 2
==== === === == === == === ==
</TABLE>
See accompanying notes to financial statements.
40
<PAGE> 45
<TABLE>
<CAPTION>
AMERICAN SKANDIA TRUST
-------------------------------------------------------------------------
T. ROWE PRICE T. ROWE PRICE PIMCO LIMITED INVESCO
INTERNATIONAL ASSET MATURITY PIMCO TOTAL EQUITY
EQUITY ALLOCATION BOND RETURN INCOME
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
------------- ------------- ------------- ----------- -----------
1997 1996 1997 1996 1997 1996 1997 1996 1997 1996
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(1) -- -- -- -- -- -- -- -- --
-- -- -- -- -- -- -- -- -- --
(3) -- 2 -- -- -- -- -- 2 --
--- -- -- -- -- -- -- -- -- --
(4) -- 2 -- -- -- -- -- 2 --
--- -- -- -- -- -- -- -- -- --
63 -- 35 -- 4 -- 11 -- 49 --
50 -- 27 -- 5 -- 8 -- 28 --
(13) -- (6) -- (1) -- (2) -- (7) --
--- -- -- -- -- -- -- -- -- --
100 -- 56 -- 8 -- 17 -- 70 --
--- -- -- -- -- -- -- -- -- --
96 -- 58 -- 8 -- 17 -- 72 --
-- -- -- -- -- -- -- -- -- --
--- -- -- -- -- -- -- -- -- --
96 -- 58 -- 8 -- 17 -- 72 --
=== == == == == == == == == ==
</TABLE>
41
<PAGE> 46
KILICO VARIABLE SEPARATE ACCOUNT
NOTES TO 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 a wholly-owned subsidiary of Kemper Corporation. Kemper Corporation
was acquired by an investor group led by Zurich Insurance Company ("Zurich") on
January 4, 1996. Effective February 27, 1998, KILICO and Kemper Corporation
became wholly-owned subsidiaries of Zurich.
The Separate Account is used to fund policies ("Policy") for the Select
variable universal life policies and the Power V flexible premium variable
universal life policies. The Separate Account is divided into sixteen
subaccounts. The Select policies have five subaccounts which are available to
Policy Owners and each subaccount invests exclusively in the shares of a
corresponding portfolio of the Investors Fund Series (the "Fund"), an open-end
diversified management investment company. The Power V policies have sixteen
subaccounts which are available to Policy Owners and each subaccount invests
exclusively in the shares of a corresponding portfolio of the Investors Fund
Series and the American Skandia Trust, also an open-end diversified management
investment company.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that could affect the reported amounts of assets and liabilities as
well as the disclosure of contingent amounts at the date of the financial
statements. As a result, actual results reported as income and expenses could
differ from the estimates reported in the accompanying financial statements.
SECURITY VALUATION
The investments are stated at current value which is based on the closing
bid price, net asset value, at December 31, 1997.
SECURITY TRANSACTIONS AND INVESTMENT INCOME
Security transactions are accounted for on the trade date (date 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 a first in,
first out ("FIFO") cost basis.
ACCOUNT UNIT TRANSACTIONS
Proceeds from a Policy are automatically allocated to the Kemper 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.
42
<PAGE> 47
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
In early 1998, the Clinton Administration's Fiscal Year 1999 Budget was
released and contained certain proposals to change the taxation of non-qualified
fixed and variable annuities as well as variable universal life contracts. It is
currently unknown whether such proposals will be adopted, amended or omitted in
the final 1999 budget approved by Congress.
(2) SUMMARY OF INVESTMENTS
Investments, at cost, at December 31, 1997, are as follows (in thousands):
<TABLE>
<CAPTION>
SHARES
OWNED COST
------ ----
<S> <C> <C>
INVESTORS FUND SERIES
Kemper Money Market Subaccount............................ 885 $ 885
Kemper Total Return Subaccount............................ 1,024 2,672
Kemper High Yield Subaccount.............................. 1,493 1,879
Kemper Growth Subaccount.................................. 919 2,592
Kemper Government Securities Subaccount................... 3,900 4,386
Kemper International Subaccount........................... 30 49
Kemper Small Cap Growth Subaccount........................ 114 206
AMERICAN SKANDIA TRUST
Founders Capital Appreciation Subaccount.................. 8 131
Neuberger & Berman Mid-Cap Growth Subaccount.............. 12 196
Jancap Growth Subaccount.................................. 23 507
Lord Abbett Growth & Income Subaccount.................... 5 109
T. Rowe Price International Equity Subaccount............. 8 99
T. Rowe Price Asset Allocation Subaccount................. 4 56
PIMCO Limited Maturity Bond Subaccount.................... 1 8
PIMCO Total Return Subaccount............................. 1 17
INVESCO Equity Income Subaccount.......................... 4 70
-------
TOTAL INVESTMENTS.................................... $13,862
=======
</TABLE>
The underlying investments are summarized below.
INVESTORS FUND SERIES
KEMPER MONEY MARKET SUBACCOUNT: This subaccount invests primarily in
short-term obligations of major banks and corporations.
KEMPER TOTAL RETURN SUBACCOUNT: This subaccount's investments will
normally consist of fixed-income and equity securities. Fixed-income securities
will include bonds and other debt securities and preferred stocks. Equity
investments normally will consist of common stocks and securities convertible
into or exchangeable for common stocks, however, the subaccount may also make
private placement investments (which are normally restricted securities).
KEMPER HIGH YIELD SUBACCOUNT: This subaccount invests in fixed-income
securities, a substantial portion of which are high yielding fixed-income
securities. These securities ordinarily will be in the lower rating categories
of recognized rating agencies or will be non-rated, and generally will involve
more risk than securities in the higher rating categories.
KEMPER GROWTH SUBACCOUNT: This subaccount's investments normally will
consist of common stocks and securities convertible into or exchangeable for
common stocks, however, it may also make private placement investments (which
are normally restricted securities).
KEMPER GOVERNMENT SECURITIES SUBACCOUNT: This subaccount invests primarily
in U.S. Government Securities. The subaccount may also invest in fixed-income
securities other than U.S. Government securities and may engage in options and
financial futures transactions.
KEMPER INTERNATIONAL SUBACCOUNT: This subaccount's investments will
normally consist of equity securities of non-United States issuers, however, it
may also invest in convertible and debt securities of non-United States issuers
and foreign currencies.
43
<PAGE> 48
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
KEMPER SMALL CAP GROWTH SUBACCOUNT: This subaccount's investments will
consist primarily of common stocks and securities convertible into or
exchangeable for common stocks and to a limited degree in preferred stocks and
debt securities. At least 65% of the subaccount's total assets will be invested
in equity securities of companies having a market capitalization of $1 billion
or less at the time of initial investment.
AMERICAN SKANDIA TRUST
FOUNDERS CAPITAL APPRECIATION SUBACCOUNT: This subaccount seeks capital
appreciation through investment primarily in common stocks of U.S. companies
with market capitalizations of $1.5 billion or less. These stocks normally will
be traded in the over-the-counter market.
NEUBERGER & BERMAN MID-CAP GROWTH (FORMERLY BERGER CAPITAL GROWTH)
SUBACCOUNT: This subaccount seeks long-term capital appreciation by investing
primarily in the common stocks of established companies.
JANCAP GROWTH SUBACCOUNT: This subaccount seeks growth of capital in a
manner consistent with preservation of capital by emphasizing investments in
common stocks.
LORD ABBETT GROWTH & INCOME SUBACCOUNT: This subaccount seeks long-term
growth of capital and income while attempting to avoid excessive fluctuations in
market value by investing in common stocks of seasoned companies which are
expected to show above-average growth.
T. ROWE PRICE INTERNATIONAL EQUITY SUBACCOUNT: This subaccount seeks total
return on its assets from long-term growth of capital and income principally
through investment primarily in common stocks of established, non-U.S.
companies.
T. ROWE PRICE ASSET ALLOCATION SUBACCOUNT: This subaccount seeks a high
level of total return by investing primarily in a diversified group of fixed
income and equity securities.
PIMCO LIMITED MATURITY BOND SUBACCOUNT: This subaccount seeks to maximize
total return, consistent with preservation of capital and prudent investment
management by investing primarily in fixed income securities of various types.
PIMCO TOTAL RETURN SUBACCOUNT: This subaccount seeks to maximize total
return, consistent with preservation of capital by investing primarily in fixed
income securities of various types.
INVESCO EQUITY INCOME SUBACCOUNT: This subaccount seeks high current
income while following sound investment practices, with capital growth potential
as an additional but secondary consideration. The subaccount invests primarily
in dividend-paying, marketable common stocks of domestic and foreign industrial
issuers.
(3) TRANSACTIONS WITH AFFILIATES
KILICO provides a death benefit payment upon the death of the Policy Owner
under the terms of the death benefit option selected by the Policy Owner as
further described in the Policy. KILICO assesses a monthly charge to the
subaccounts for the cost of providing this insurance protection to the Policy
Owner. These cost of insurance charges vary with the issue age, sex and rate
class of the Policy Owner, and are allocated among the subaccounts in the
proportion of each subaccount to the Separate Account value. Cost of insurance
charges totaled approximately $121,300 and $396,200 for the Select and Power V
variable universal life products, respectively, for the year ended December 31,
1997. 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.
A state and local premium tax charge of 2.5% is deducted from each premium
payment under the Power V policy prior to allocation of the net premium. This
charge is to reimburse KILICO for the payment of state premium taxes. KILICO
expects to pay an average state premium tax rate of approximately 2.5% but the
actual premium tax attributable to a Policy may be more or less. In addition, a
charge for Federal taxes equal to 1% of each premium payment will be deducted to
compensate KILICO for a higher corporate income tax liability resulting from
changes made to the Internal Revenue Code by the Omnibus Budget Reconciliation
Act of 1990.
Policy loans are also provided for under the terms of the Policy. The
minimum amount of the loan is $500 and is limited to 90% of the Policy's
investment value, less applicable surrender charges. Interest is assessed
against the policy loan under the terms of the Policy. Policy loans are carried
in KILICO's general account.
Proceeds payable on the surrender of a Policy are reduced by the amount of
any applicable contingent deferred sales charge.
44
<PAGE> 49
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Scudder Kemper Investments, Inc. ("SKI"), formerly Zurich Kemper
Investments, Inc., an affiliated company, is the investment manager of the
portfolios of the Investors Fund Series portfolios. American Skandia Investment
Services, Incorporated ("ASISI"), an unaffiliated company, is the investment
manager for the American Skandia Trust.
Investors Brokerage Services, Inc. ("IBS"), a wholly-owned subsidiary of
KILICO, is the principal underwriter for the Separate Account.
(4) NET TRANSFERS (TO) FROM AFFILIATED DIVISIONS AND SUBACCOUNTS
Net transfers (to) from affiliated divisions or accounts include transfers
of all or part of the Policy Owner's interest to or from another subaccount or
to the general account of KILICO.
(5) POLICY OWNERS' EQUITY
Policy Owners' equity at December 31, 1997, 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>
POWER V POLICIES
INVESTORS FUND SERIES:
Kemper Money Market Subaccount.............................. 362 $ 1.054 $ 382
Kemper Total Return Subaccount.............................. 4 3.340 14
Kemper High Yield Subaccount................................ 26 1.413 36
Kemper Growth Subaccount.................................... 32 4.045 129
Kemper Government Securities Subaccount..................... 5 1.301 7
Kemper International Subaccount............................. 29 1.693 48
Kemper Small Cap Growth Subaccount.......................... 101 2.225 224
AMERICAN SKANDIA TRUST:
Founders Capital Appreciation Subaccount.................... 8 17.611 135
Neuberger & Berman Mid-Cap Growth Subaccount................ 12 16.603 201
JanCap Growth Subaccount.................................... 22 23.905 527
Lord Abbett Growth & Income Subaccount...................... 5 21.040 112
T. Rowe Price International Equity Subaccount............... 8 12.098 96
T. Rowe Price Asset Allocation Subaccount................... 4 15.536 58
PIMCO Limited Maturity Bond Subaccount...................... -- 11.487 8
PIMCO Total Return Subaccount............................... 1 12.071 17
Invesco Equity Income Subaccount............................ 4 17.062 72
-------
TOTAL POWER V POLICY OWNERS' EQUITY.................... $ 2,066
=======
SELECT POLICIES
INVESTORS FUND SERIES:
Kemper Money Market Subaccount.............................. 357 $ 1.635 $ 584
Kemper Total Return Subaccount.............................. 1,215 2.488 3,022
Kemper High Yield Subaccount................................ 776 2.446 1,898
Kemper Growth Subaccount.................................... 779 3.354 2,612
Kemper Government Securities Subaccount..................... 2,330 2.013 4,690
-------
TOTAL SELECT POLICY OWNERS' EQUITY..................... $12,806
=======
</TABLE>
45
<PAGE> 50
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
THE BOARD OF DIRECTORS AND STOCKHOLDER'S
KEMPER INVESTORS LIFE INSURANCE COMPANY:
We have audited the accompanying consolidated balance sheet of Kemper
Investors Life Insurance Company and subsidiaries as of December 31, 1997, and
the related consolidated statements of operations, stockholder's equity, and
cash flows for the year then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audit. The
financial statements of Kemper Investors Life Insurance Company and subsidiaries
for the period from January 4, 1996 to December 31, 1996 (post-acquisition
basis) and for the year ended December 31, 1995 (pre-acquisition basis), were
audited by other auditors, whose unqualified report, dated March 21, 1997,
included an explanatory paragraph that described the acquisition of Kemper
Investors Life Insurance Company as discussed in Note 1 to the financial
statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Kemper Investors Life Insurance Company and subsidiaries as of December 31,
1997, and the results of their operations and their cash flows for the year then
ended in conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Chicago, Illinois
March 18, 1998
46
<PAGE> 51
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
THE BOARD OF DIRECTORS AND STOCKHOLDER
KEMPER INVESTORS LIFE INSURANCE COMPANY:
We have audited the accompanying consolidated balance sheet of Kemper
Investors Life Insurance Company and subsidiaries as of December 31, 1996 and
the related consolidated statements of operations, stockholder's equity, and
cash flows for the period from January 4, 1996 to December 31, 1996
(post-acquisition), and for the year ended December 31, 1995 (pre-acquisition).
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the aforementioned post-acquisition consolidated financial
statements present fairly, in all material respects, the financial position of
Kemper Investors Life Insurance Company and subsidiaries as of December 31, 1996
and the results of their operations and their cash flows for the
post-acquisition period, in conformity with generally accepted accounting
principles. Also, in our opinion, the aforementioned pre-acquisition
consolidated financial statements present fairly, in all material respects, the
results of their operations and their cash flows for the pre-acquisition period,
in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, effective
January 4, 1996, an investor group as described in Note 1, acquired all of the
outstanding stock of Kemper Corporation, the parent of Kemper Investors Life
Insurance Company, in a business combination accounted for as a purchase. As a
result of the acquisition, the consolidated financial information for the
periods after the acquisition is presented on a different cost basis than that
for the periods before the acquisition and, therefore, is not comparable.
KPMG PEAT MARWICK LLP
Chicago, Illinois
March 21, 1997
47
<PAGE> 52
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Fixed maturities, available for sale, at fair value
(amortized cost: December 31, 1997, $3,644,075; December
31, 1996, $3,929,650)..................................... $ 3,668,643 $3,866,431
Short-term investments...................................... 236,057 71,696
Joint venture mortgage loans................................ 72,663 110,971
Third-party mortgage loans.................................. 102,974 106,585
Other real estate-related investments....................... 44,409 50,157
Policy loans................................................ 282,439 288,302
Equity securities........................................... 24,839 9,910
Other invested assets....................................... 20,820 13,597
----------- ----------
Total investments................................. 4,452,844 4,517,649
Cash........................................................ 23,868 2,776
Accrued investment income................................... 117,789 115,199
Goodwill.................................................... 229,393 244,688
Value of business acquired.................................. 138,482 189,639
Deferred insurance acquisition costs........................ 59,459 26,811
Deferred income taxes....................................... 39,993 --
Reinsurance recoverable..................................... 382,609 427,165
Receivable on sales of securities........................... 20,076 32,569
Other assets and receivables................................ 3,187 34,117
Assets held in separate accounts............................ 5,121,950 2,127,247
----------- ----------
Total assets...................................... $10,589,650 $7,717,860
=========== ==========
LIABILITIES
Future policy benefits...................................... $ 3,856,871 $4,256,521
Ceded future policy benefits................................ 382,609 427,165
Benefits and funds payable.................................. 150,524 36,142
Other accounts payable and liabilities...................... 212,133 59,462
Deferred income taxes....................................... -- 60,362
Liabilities related to separate accounts.................... 5,121,950 2,127,247
----------- ----------
Total liabilities................................. 9,724,087 6,966,899
----------- ----------
Commitments and contingent liabilities
STOCKHOLDER'S EQUITY
Capital stock--$10 par value,
authorized 300,000 shares; outstanding 250,000 shares..... 2,500 2,500
Additional paid-in capital.................................. 806,538 761,538
Unrealized gain (loss) on investments....................... 12,637 (47,498)
Retained earnings........................................... 43,888 34,421
----------- ----------
Total stockholder's equity........................ 865,563 750,961
----------- ----------
Total liabilities and stockholder's equity........ $10,589,650 $7,717,860
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
48
<PAGE> 53
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------
PREACQUISITION
--------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
REVENUE
Net investment income....................................... $296,195 $299,688 $ 348,448
Realized investment gains (losses).......................... 10,546 13,602 (318,700)
Premium income.............................................. 22,239 7,822 236
Separate account fees and charges........................... 85,413 25,309 21,909
Other income................................................ 11,087 9,786 16,192
-------- -------- ---------
Total revenue..................................... 425,480 356,207 68,085
-------- -------- ---------
BENEFITS AND EXPENSES
Interest credited to policyholders.......................... 199,782 223,094 237,984
Claims incurred and other policyholder benefits............. 28,372 14,255 7,631
Taxes, licenses and fees.................................... 52,608 2,173 6,912
Commissions................................................. 32,602 25,962 24,881
Operating expenses.......................................... 36,837 24,678 20,837
Deferral of insurance acquisition costs..................... (38,177) (27,820) (36,870)
Amortization of insurance acquisition costs................. 3,204 2,316 14,423
Amortization of value of business acquired.................. 24,948 21,530 --
Amortization of goodwill.................................... 15,295 10,195 --
-------- -------- ---------
Total benefits and expenses....................... 355,471 296,383 275,798
-------- -------- ---------
Income (loss) before income tax expense (benefit)........... 70,009 59,824 (207,713)
Income tax expense (benefit)................................ 31,292 25,403 (74,664)
-------- -------- ---------
Net income (loss)................................. $ 38,717 $ 34,421 $(133,049)
======== ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
49
<PAGE> 54
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(in thousands)
<TABLE>
<CAPTION>
PREACQUISITION
--------------
DECEMBER 31 DECEMBER 31 JANUARY 4 DECEMBER 31
1997 1996 1996 1995
----------- ----------- --------- -----------
<S> <C> <C> <C> <C>
CAPITAL STOCK, beginning and end of period........... $ 2,500 $ 2,500 $ 2,500 $ 2,500
-------- -------- -------- ---------
ADDITIONAL PAID-IN CAPITAL, beginning of period...... 761,538 743,104 491,994 491,994
Capital contributions from parent.................... 45,000 18,434 -- --
Adjustment to reflect purchase accounting method..... -- -- 251,110 --
-------- -------- -------- ---------
End of period.............................. 806,538 761,538 743,104 491,994
-------- -------- -------- ---------
UNREALIZED GAIN (LOSS) ON INVESTMENTS, beginning of
period............................................. (47,498) -- 68,502 (236,443)
Unrealized gain (loss) on revaluation of investments,
net................................................ 60,135 (47,498) -- 304,945
Adjustment to reflect purchase accounting method..... -- -- (68,502) --
-------- -------- -------- ---------
End of period.............................. 12,637 (47,498) -- 68,502
-------- -------- -------- ---------
RETAINED EARNINGS, beginning of period............... 34,421 -- 42,880 175,929
Net income (loss).................................... 38,717 34,421 -- (133,049)
Dividends to parent.................................. (29,250) -- -- --
Adjustment to reflect purchase accounting method..... -- -- (42,880) --
-------- -------- -------- ---------
End of period.............................. 43,888 34,421 -- 42,880
-------- -------- -------- ---------
Total stockholder's equity................. $865,563 $750,961 $745,604 $ 605,876
======== ======== ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
50
<PAGE> 55
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------
PREACQUISITION
--------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)...................................... $ 38,717 $ 34,421 $(133,049)
Reconcilement of net income (loss) to net cash
provided:
Realized investment losses (gains).................. (10,546) (13,602) 318,700
Interest credited and other charges................. 198,206 230,298 237,984
Deferred insurance acquisition costs................ (34,973) (25,504) (22,447)
Amortization of value of business acquired.......... 24,948 21,530 --
Amortization of goodwill............................ 15,295 10,195 --
Amortization of discount and premium on
investments....................................... 17,866 25,743 4,586
Deferred income taxes............................... (99,370) (897) 38,423
Net change in current Federal income taxes.......... 97,386 108,806 (86,990)
Benefits and premium taxes due related to separate
account bank-owned life insurance................. 180,546 -- --
Other, net.......................................... 17,168 (22,283) (29,905)
--------- ----------- ---------
Net cash provided from operating activities.... 445,243 368,707 327,302
--------- ----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash from investments sold or matured:
Fixed maturities held to maturity................... 229,208 264,383 320,143
Fixed maturities sold prior to maturity............. 633,872 891,995 297,637
Mortgage loans, policy loans and other invested
assets............................................ 131,866 168,727 450,573
Cost of investments purchased or loans originated:
Fixed maturities.................................... (606,028) (1,369,091) (549,867)
Mortgage loans, policy loans and other invested
assets............................................ (76,350) (119,044) (131,966)
Short-term investments, net............................ (164,361) 300,819 (168,351)
Net change in receivable and payable for securities
transactions........................................ 29,746 (31,667) (1,397)
Net reductions in other assets......................... 244 115 1,996
--------- ----------- ---------
Net cash provided by investing activities...... 178,197 106,237 218,768
--------- ----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Policyholder account balances:
Deposits............................................ 145,687 141,159 247,778
Withdrawals......................................... (745,510) (700,084) (755,917)
Capital contributions from parent...................... 45,000 18,434 --
Dividends to parent.................................... (29,250) -- --
Other.................................................. (18,275) 42,512 (35,309)
--------- ----------- ---------
Net cash used in financing activities.......... (602,348) (497,979) (543,448)
--------- ----------- ---------
Net increase (decrease) in cash........... 21,092 (23,035) 2,622
CASH, beginning of period................................ 2,776 25,811 23,189
--------- ----------- ---------
CASH, end of period...................................... $ 23,868 $ 2,776 $ 25,811
========= =========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
51
<PAGE> 56
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Kemper Investors Life Insurance Company and subsidiaries (the "Company")
issues fixed and variable annuity products, variable life, term life and
interest-sensitive life insurance products marketed primarily through a network
of financial institutions, securities brokerage firms, insurance agents and
financial planners. The Company is licensed in the District of Columbia and all
states except New York. The Company is a wholly-owned subsidiary of Kemper
Corporation ("Kemper"). On January 4, 1996, an investor group comprised of
Zurich Insurance Company ("Zurich"), Insurance Partners, L.P. ("IP") and
Insurance Partners Offshore (Bermuda), L.P. (together with IP, "Insurance
Partners") acquired all of the issued and outstanding common stock of Kemper. As
a result of that change in control, Zurich and Insurance Partners owned 80
percent and 20 percent, respectively, of Kemper and therefore the Company. On
February 27, 1998, Zurich acquired Insurance Partner's remaining 20 percent
interest for cash. As a result of this transaction, Kemper and the Company
became wholly-owned subsidiaries of Zurich.
The financial statements include the accounts of the Company on a
consolidated basis. All significant intercompany balances and transactions have
been eliminated. Certain reclassifications have been made to the 1996 and 1995
consolidated financial statements in order for them to conform to the 1997
presentation.
PURCHASE ACCOUNTING METHOD
The acquisition of the Company on January 4, 1996, was accounted for using
the purchase method of accounting. The consolidated financial statements of the
Company prior to January 4, 1996, were prepared on a historical cost basis in
accordance with generally accepted accounting principles. The accompanying
financial statements and notes thereto prepared prior to January 4, 1996 have
been labeled "preacquisition". The accompanying consolidated financial
statements of the Company as of January 4, 1996 (the acquisition date) and as of
and for the years ended December 31, 1996 and 1997, have been prepared in
conformity with the purchase method of accounting. The Company has presented
January 4, 1996 (the acquisition date), as the opening purchase accounting
balance sheet where appropriate for comparative purposes throughout the
accompanying financial statements and notes thereto.
Under purchase accounting, the Company's assets and liabilities have been
marked to their relative fair values as of the acquisition date. The difference
between the cost of acquiring the Company and the net fair values of the
Company's assets and liabilities as of the acquisition date has been recorded as
goodwill. The allocated cost of acquiring the Company was $745.6 million and the
acquisition resulted in goodwill of $254.9 million as of January 4, 1996. The
Company began to amortize goodwill during 1996 on a straight-line basis over
twenty-five years. In December of 1997, the Company changed its amortization
period to twenty years in order to conform to Zurich's accounting practices and
policies. As a result of the change in amortization periods, the Company
recorded an increase in goodwill amortization expense of $5.1 million during
1997.
The Company reviews goodwill to determine if events or changes in
circumstances may have affected the recoverability of the outstanding goodwill
as of each reporting period. In the event that the Company determines that
goodwill is not recoverable, it would amortize such amounts as additional
goodwill expense in the accompanying financial statements. As of December 31,
1997, the Company believes that no such adjustment is necessary.
Purchase accounting adjustments primarily affected the recorded historical
values of fixed maturities, mortgage loans, other invested assets, deferred
insurance acquisition costs, future policy benefits and deferred income taxes.
Deferred insurance acquisition costs, and the related amortization thereof,
for policies sold prior to January 4, 1996, have been replaced by the value of
business acquired.
The value of business acquired reflects the estimated fair value of the
Company's life insurance business in force and represents the portion of the
cost to acquire the Company that is allocated to the value of the right to
receive future cash flows from insurance contracts existing at the date of
acquisition. Such value is the present value of the actuarially determined
projected cash flows for the acquired policies.
A 15 percent discount rate was used to determine such value and represents
the rate of return required by Zurich and Insurance Partners to invest in the
business being acquired. In selecting the rate of return used to value
52
<PAGE> 57
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the policies purchased, the Company considered the magnitude of the risks
associated with each of the actuarial assumptions used in determining expected
future cash flows, the cost of capital available to fund the acquisition, the
perceived likelihood of changes in insurance regulations and tax laws, the
complexity of the Company's business, and the prices paid (i.e., discount rates
used in determining other life insurance company valuations) on similar blocks
of business sold in recent periods.
The value of the business acquired is amortized over the estimated contract
life of the business acquired in relation to the present value of estimated
gross profits using current assumptions based on an interest rate equal to the
liability or contract rate on the value of business acquired. The estimated
amortization and accretion of interest for the value of business acquired for
each of the years through December 31, 2002 are as follows:
<TABLE>
<CAPTION>
PROJECTED
(IN THOUSANDS) BEGINNING ACCRETION OF ENDING
YEAR ENDED DECEMBER 31 BALANCE AMORTIZATION INTEREST BALANCE
- ---------------------------------------------------- --------- ------------ ------------ ---------
<S> <C> <C> <C> <C>
1996 (actual)....................................... $190,222 $(31,427) $ 9,897 $168,692
1997 (actual)....................................... 168,692 (34,906) 9,958 143,744
1998................................................ 143,744 (25,633) 8,933 127,044
1999................................................ 127,044 (23,701) 7,873 111,216
2000................................................ 111,216 (21,668) 6,876 96,424
2001................................................ 96,424 (19,122) 5,973 83,275
2002................................................ 83,275 (17,835) 5,134 70,574
</TABLE>
The projected ending balance of the value of business acquired will be
further adjusted to reflect the impact of unrealized gains or losses on fixed
maturities held as available for sale in the investment portfolio. Such
adjustments are not recorded in the Company's net income but rather are recorded
as a credit or charge to stockholder's equity, net of income tax. As of December
31, 1997 and 1996, this adjustment increased (decreased) the value of business
acquired by $(5.3) million and $20.9 million, respectively, and stockholder's
equity by approximately $(3.4) million and $13.6 million, respectively.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that could affect the reported amounts of assets and liabilities as
well as the disclosure of contingent assets or liabilities at the date of the
financial statements. As a result, actual results reported as revenue and
expenses could differ from the estimates reported in the accompanying financial
statements. As further discussed in the accompanying notes to the consolidated
financial statements, significant estimates and assumptions affect deferred
insurance acquisition costs, the value of business acquired, provisions for real
estate-related losses and reserves, other-than-temporary declines in values for
fixed maturities, the valuation allowance for deferred income taxes and the
calculation of fair value disclosures for certain financial instruments.
LIFE INSURANCE REVENUE AND EXPENSES
Revenue for annuities, variable life insurance and interest-sensitive life
insurance products consists of investment income, and policy charges such as
mortality, expense and surrender charges and expense loads for premium taxes on
certain contracts. Expenses consist of benefits and interest credited to
contracts, policy maintenance costs and amortization of deferred insurance
acquisition costs. Also reflected in fees and other income is a ceding
commission experience adjustment received in 1995 as a result of certain
reinsurance transactions entered into by the Company during 1992. (See note
captioned "Reinsurance".)
Premiums for term life policies are reported as earned when due. Profits
for such policies are recognized over the duration of the insurance policies by
matching benefits and expenses to premium income.
53
<PAGE> 58
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED INSURANCE ACQUISITION COSTS
The costs of acquiring new business, principally commission expense and
certain policy issuance and underwriting expenses, have been deferred to the
extent they are recoverable from estimated future gross profits on the related
contracts and policies. The deferred insurance acquisition costs for annuities,
separate account business and interest-sensitive life insurance products are
being amortized over the estimated contract life in relation to the present
value of estimated gross profits. Deferred insurance acquisition costs related
to such interest-sensitive products also reflect the estimated impact of
unrealized gains or losses on fixed maturities held as available for sale in the
investment portfolio, through a credit or charge to stockholder's equity, net of
income tax. The deferred insurance acquisition costs for term-life insurance
products are being amortized over the premium paying period of the policies.
FUTURE POLICY BENEFITS
Liabilities for future policy benefits related to annuities and
interest-sensitive life contracts reflect net premiums received plus interest
credited during the contract accumulation period and the present value of future
payments for contracts that have annuitized. Current interest rates credited
during the contract accumulation period range from 3.0 percent to 7.3 percent.
Future minimum guaranteed interest rates vary from 3.0 percent to 4.0 percent.
For contracts that have annuitized, interest rates used in determining the
present value of future payments range principally from 3.0 percent to 12.0
percent.
Liabilities for future term life policy benefits have been computed
principally by a net level premium method. Anticipated rates of mortality are
based on the 1975-1980 Select and Ultimate Table modified by Company experience,
including withdrawals. Estimated future investment yields are a level 7 percent
for reinsurance assumed and for direct business, 8 percent for three years; 7
percent for year four; and 6 percent thereafter.
INVESTED ASSETS AND RELATED INCOME
Investments in fixed maturities and equity securities are carried at fair
value. Short-term investments are carried at cost, which approximates fair
value. (See note captioned "Fair Value of Financial Instruments".)
The amortized cost of fixed maturities is adjusted for amortization of
premiums and accretion of discounts to maturity, or in the case of
mortgage-backed and asset-backed securities, over the estimated life of the
security. Such amortization is included in net investment income. Amortization
of the discount or premium from mortgage-backed and asset-backed securities is
recognized using a level effective yield method which considers the estimated
timing and amount of prepayments of the underlying loans and is adjusted to
reflect differences which arise between the prepayments originally anticipated
and the actual prepayments received and currently anticipated. To the extent
that the estimated lives of such securities change as a result of changes in
prepayment rates, the adjustment is also included in net investment income. The
Company does not accrue interest income on fixed maturities deemed to be
impaired on an other-than-temporary basis, or on mortgage loans and other real
estate loans where the likelihood of collection of interest is doubtful.
Mortgage loans are carried at their unpaid balance, net of unamortized
discount and any applicable reserves or write-downs. Other real estate-related
investments net of any applicable reserve and write-downs include notes
receivable from real estate ventures; investments in real estate ventures,
adjusted for the equity in the operating income or loss of such ventures; and
real estate owned carried at fair value.
Real estate reserves are established when declines in collateral values,
estimated in light of current economic conditions and calculated in conformity
with Statement of Financial Accounting Standards ("SFAS") 114, ACCOUNTING BY
CREDITORS FOR IMPAIRMENT OF A LOAN, indicate a likelihood of loss. At year-end
1995, reflecting the Company's change in strategy with respect to its real
estate portfolio, and the disposition thereof, and on January 4, 1996,
reflecting the acquisition of the Company, real estate-related investments were
valued using an estimate of the investments observable market price, net of
estimated costs to sell.
Under purchase accounting, the market value of the Company's policy loans
and other invested assets consisting primarily of venture capital investments
and a leveraged lease, became the Company's new cost basis in such investments.
Investments in policy loans and other invested assets after January 4, 1996 are
carried at cost.
54
<PAGE> 59
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Realized gains or losses on sales of investments, determined on the basis
of identifiable cost on the disposition of the respective investment,
recognition of other-than-temporary declines in value and changes in real
estate-related reserves and write-downs are included in revenue. Net unrealized
gains or losses on revaluation of investments are credited or charged to
stockholder's equity. Such unrealized gains are recorded net of deferred income
tax expense, while unrealized losses are not tax benefitted.
SEPARATE ACCOUNT BUSINESS
The assets and liabilities of the separate accounts represent segregated
funds administered and invested by the Company for purposes of funding variable
annuity and variable life insurance contracts for the exclusive benefit of
variable annuity and variable life insurance contract holders. The Company
receives administrative fees from the separate account and retains varying
amounts of withdrawal charges to cover expenses in the event of early
withdrawals by contract holders. The assets and liabilities of the separate
accounts are carried at fair value.
INCOME TAX
The operations of the Company prior to January 4, 1996 have been included
in the consolidated Federal income tax return of Kemper. Income taxes receivable
or payable have been determined on a separate return basis, and payments have
been received from or remitted to Kemper pursuant to a tax allocation
arrangement between Kemper and its subsidiaries, including the Company. The
Company generally had received a tax benefit for losses to the extent such
losses can be utilized in Kemper's consolidated Federal tax return. Subsequent
to January 4, 1996, the Company and its subsidiaries file separate Federal
income tax returns.
Deferred taxes are provided on the temporary differences between the tax
and financial statement basis of assets and liabilities.
(2) CASH FLOW INFORMATION
The Company defines cash as cash in banks and money market accounts.
Federal income tax refunded by Kemper under the tax allocation arrangement for
the period from January 1, 1996 to January 4, 1996 and for the years ended
December 31, 1995 amounted to $108.8 million and $25.2 million, respectively.
The Company paid Federal income taxes of $29.0 million and $28.1 million
directly to the United States Treasury Department during 1997 and 1996,
respectively.
55
<PAGE> 60
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) INVESTED ASSETS AND RELATED INCOME
The Company is carrying its fixed maturity investment portfolio at
estimated fair value as fixed maturities are considered available for sale. The
carrying value (estimated fair value) of fixed maturities compared with
amortized cost, adjusted for other-than-temporary declines in value, were as
follows:
<TABLE>
<CAPTION>
ESTIMATED UNREALIZED
CARRYING AMORTIZED --------------------
VALUE COST GAINS LOSSES
(in thousands) -------- --------- ----- ------
<S> <C> <C> <C> <C>
DECEMBER 31, 1997
U.S. treasury securities and obligations of U.S.
government agencies and authorities................. $ 6,258 $ 6,298 $ 4 $ (44)
Obligations of states and political subdivisions,
special revenue and nonguaranteed................... 29,330 29,308 160 (138)
Debt securities issued by foreign governments......... 92,563 92,722 188 (347)
Corporate securities.................................. 1,861,655 1,846,588 24,733 (9,666)
Mortgage and asset-backed securities.................. 1,678,837 1,669,159 10,035 (357)
---------- ---------- ------- --------
Total fixed maturities......................... $3,668,643 $3,644,075 $35,120 $(10,552)
========== ========== ======= ========
DECEMBER 31, 1996
U.S. treasury securities and obligations of U.S.
government agencies and authorities................. $ 92,238 $ 93,202 $ -- $ (964)
Obligations of states and political subdivisions,
special revenue and nonguaranteed................... 30,853 31,519 -- (666)
Debt securities issued by foreign governments......... 105,394 108,456 504 (3,566)
Corporate securities.................................. 1,896,615 1,935,511 5,918 (44,814)
Mortgage and asset-backed securities.................. 1,741,331 1,760,962 1,990 (21,621)
---------- ---------- ------- --------
Total fixed maturities......................... $3,866,431 $3,929,650 $ 8,412 $(71,631)
========== ========== ======= ========
</TABLE>
Upon default or indication of potential default by an issuer of fixed
maturity securities, the Company-owned issue(s) of such issuer would be placed
on nonaccrual status and, since declines in fair value would no longer be
considered by the Company to be temporary, would be analyzed for possible
write-down. Any such issue would be written down to its net realizable value
during the fiscal quarter in which the impairment was determined to have become
other than temporary. Thereafter, each issue on nonaccrual status is regularly
reviewed, and additional write-downs may be taken in light of later
developments.
The Company's computation of net realizable value involves judgments and
estimates, so such value should be used with care. Such value determination
considers such factors as the existence and value of any collateral security;
the capital structure of the issuer; the level of actual and expected market
interest rates; where the issue ranks in comparison with other debt of the
issuer; the economic and competitive environment of the issuer and its business;
the Company's view on the likelihood of success of any proposed issuer
restructuring plan; and the timing, type and amount of any restructured
securities that the Company anticipates it will receive.
The Company's $220.0 million real estate portfolio at December 31, 1997
consists of joint venture and third-party mortgage loans and other real
estate-related investments. At December 31, 1997 and 1996, total impaired real
estate-related loans were as follows:
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31
1997 1996
(in millions) ----------- -----------
<S> <C> <C>
Impaired loans without reserves--gross...................... $39.3 $39.8
Impaired loans with reserves--gross......................... 2.2 7.6
----- -----
Total gross impaired loans........................... 41.5 47.4
Reserves related to impaired loans.......................... (2.1) (4.4)
----- -----
Net impaired loans................................... $39.4 $43.0
===== =====
</TABLE>
Impaired loans without reserves include loans in which the deficit in
equity investments in real estate-related investments is considered in
determining reserves and write-downs. At December 31, 1997 and 1996, the
56
<PAGE> 61
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) INVESTED ASSETS AND RELATED INCOME (CONTINUED)
Company's deficit in equity investments considered in determining reserves and
write-downs amounted to $0 and $5.9 million, respectively. The Company had an
average balance of $45.2 million and $30.8 million in impaired loans for 1997
and 1996, respectively. Cash payments received on impaired loans are generally
applied to reduce the outstanding loan balance.
At December 31, 1997 and December 31, 1996, loans on nonaccrual status,
before reserves and write-downs, amounted to $47.4 million and $43.5 million,
respectively. The Company's nonaccrual loans are generally included in impaired
loans.
At December 31, 1997, securities carried at approximately $6.3 million were
on deposit with governmental agencies as required by law.
Proceeds from sales of investments in fixed maturities prior to maturity
were $633.9 million, $892.0 million and $297.6 million during 1997, 1996 and
1995, respectively. Gross gains of $3.1 million, $9.9 million and $21.2 million
and gross losses of $13.7 million, $16.2 million and $11.9 million were realized
on sales and write-downs of fixed maturities in 1997, 1996 and 1995,
respectively.
The carrying value and amortized cost of fixed maturity investments, by
contractual maturity at December 31, 1997, are shown below. Actual maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties and
because mortgage-backed and asset-backed securities provide for periodic
payments throughout their life.
<TABLE>
<CAPTION>
CARRYING AMORTIZED
VALUE COST VALUE
(in thousands) -------- ----------
<S> <C> <C>
One year or less............................................ $ 47,724 $ 47,797
Over one year through five.................................. 649,279 648,291
Over five years through ten................................. 988,849 984,495
Over ten years.............................................. 303,954 294,333
Securities not due at a single maturity date, primarily
mortgage and asset-backed securities(1)................... 1,678,837 1,669,159
---------- ----------
Total fixed maturities............................... $3,668,643 $3,644,075
========== ==========
</TABLE>
- ---------------
(1) Weighted average maturity of 3.8 years.
The sources of net investment income were as follows:
<TABLE>
<CAPTION>
PREACQUISITION
--------------
1997 1996 1995
(in thousands) -------- -------- --------------
<S> <C> <C> <C>
Interest and dividends on fixed maturities................. $250,170 $250,683 $269,934
Dividends on equity securities............................. 2,123 646 681
Income from short-term investments......................... 4,128 9,130 13,159
Income from mortgage loans................................. 16,283 20,257 40,494
Income from policy loans................................... 20,549 20,700 19,658
Income from other real estate-related investments.......... 6,631 4,917 15,565
Income from other loans and investments.................... 2,045 2,480 1,555
-------- -------- --------
Total investment income............................. 301,929 308,813 361,046
Investment expense......................................... (5,734) (9,125) (12,598)
-------- -------- --------
Net investment income............................... $296,195 $299,688 $348,448
======== ======== ========
</TABLE>
57
<PAGE> 62
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) INVESTED ASSETS AND RELATED INCOME (CONTINUED)
Realized gains (losses) for the years ended December 31, 1997, 1996 and
1995, were as follows:
<TABLE>
<CAPTION>
REALIZED GAINS (LOSSES)
-----------------------------------------------
PREACQUISITION
--------------
1997 1996 1995
(in thousands) -------- ------- --------------
<S> <C> <C> <C>
Real estate-related...................................... $ 19,758 $17,462 $(325,611)
Fixed maturities......................................... (10,656) (6,344) 9,336
Equity securities........................................ 914 -- (346)
Other.................................................... 530 2,484 (2,079)
-------- ------- ---------
Realized investment gains (losses) before income tax
expense (benefit)................................... 10,546 13,602 (318,700)
Income tax expense (benefit) 3,691 4,761 (111,545)
-------- ------- ---------
Net realized investment gains (losses)................. $ 6,855 $ 8,841 $(207,155)
======== ======= =========
</TABLE>
Unrealized gains (losses) are computed below as follows: fixed
maturities--the difference between fair value and amortized cost, adjusted for
other-than-temporary declines in value; equity securities and other--the
difference between fair value and cost. The change in unrealized investment
gains (losses) by class of investment for the years ended December 31, 1997,
1996 and 1995 were as follows:
<TABLE>
<CAPTION>
CHANGE IN UNREALIZED GAINS (LOSSES)
---------------------------------------------------------
PREACQUISITION
--------------
DECEMBER 31 DECEMBER 31 JANUARY 4 DECEMBER 31
1997 1996 1996 1995
(in thousands) ------------ ------------ ---------- --------------
<S> <C> <C> <C> <C>
Fixed maturities..................................... $ 87,787 $(63,219) $ $351,964
Equity and other securities.......................... (103) 1,256 -- 180
Adjustment to deferred insurance acquisition costs... (2,325) 1,307 -- (14,277)
Adjustment to value of business acquired............. (26,209) 20,947 -- --
-------- -------- -- --------
Unrealized gain (loss) before income tax expense... 59,150 (39,709) -- 337,867
Income tax expense (benefit)......................... (985) 7,789 -- 32,922
-------- -------- -- --------
Net unrealized gain (loss) on investments..... $ 60,135 $(47,498) $-- $304,945
======== ======== == ========
</TABLE>
(4) UNCONSOLIDATED INVESTEES
At December 31, 1997 and 1996 the Company, along with other Kemper
subsidiaries, directly held partnership interests in a number of real estate
joint ventures. The Company's direct and indirect real estate joint venture
investments are accounted for utilizing the equity method, with the Company
recording its share of the operating results of the respective partnerships. The
Company, as an equity owner, has the ability to fund, and historically has
elected to fund, operating requirements of certain of the joint ventures.
Consolidation accounting methods are not utilized as the Company, in most
instances, does not own more than 50 percent in the aggregate, and in any event,
major decisions of the partnership must be made jointly by all partners.
As of December 31, 1997 and December 31, 1996, the Company's net equity
investment in unconsolidated investees amounted to $19.3 million and $11.7
million, respectively. The Company's share of net income related to such
unconsolidated investees amounted to $835 thousand and $223 thousand in 1997 and
1996, respectively, and a net loss of $453 thousand in 1995.
(5) CONCENTRATION OF CREDIT RISK
The Company generally strives to maintain a diversified invested asset
portfolio; however, certain concentrations of credit risk exist in mortgage and
asset-backed securities and real estate.
Approximately 35.1 percent of the Company's investment-grade fixed
maturities at December 31, 1997 were mortgage-backed securities, down from 36.4
percent at December 31, 1996, due to sales and paydowns during
58
<PAGE> 63
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) CONCENTRATION OF CREDIT RISK (CONTINUED)
1997. These investments consist primarily of marketable mortgage pass-through
securities issued by the Government National Mortgage Association, the Federal
National Mortgage Association or the Federal Home Loan Mortgage Corporation and
other investment-grade securities collateralized by mortgage pass-through
securities issued by these entities. The Company has not made any investments in
interest-only or other similarly volatile tranches of mortgage-backed
securities. The Company's mortgage-backed investments are generally AAA credit
quality.
Approximately 10.8 percent and 8.8 percent of the Company's
investment-grade fixed maturities at December 31, 1997 and 1996, respectively,
consisted of corporate asset-backed securities. The majority of the Company's
investments in asset-backed securities were backed by home equity loans (27.7%),
auto loans (22.3%), manufactured housing loans (17.2%), equipment loans (13.7%),
and commercial mortgage backed securities (10.7%).
The Company's real estate portfolio is distributed by geographic location
and property type, as shown in the following two tables:
GEOGRAPHIC DISTRIBUTION AS OF DECEMBER 31, 1997
<TABLE>
<S> <C>
California....................... 38.2%
Hawaii........................... 14.2
Colorado......................... 9.8
Oregon........................... 9.2
Washington....................... 9.1
Florida.......................... 6.4
Texas............................ 5.1
Michigan......................... 3.7
Ohio............................. 3.3
Illinois......................... 1.0
-----
Total.................. 100.0%
=====
</TABLE>
DISTRIBUTION BY PROPERTY TYPE AS OF DECEMBER 31, 1997
<TABLE>
<S> <C>
Hotel............................ 41.3%
Land............................. 28.2
Residential...................... 13.1
Retail........................... 3.3
Office........................... 3.1
Industrial....................... .9
Other............................ 10.1
-----
Total.................. 100.0%
=====
</TABLE>
Undeveloped land represented approximately 28.2 percent of the Company's
real estate portfolio at December 31, 1997. To maximize the value of certain
land and other projects, additional development has been proceeding or has been
planned. Such development of existing projects would continue to require
funding, either from the Company or third parties. In the present real estate
markets, third-party financing can require credit enhancing arrangements (e.g.,
standby financing arrangements and loan commitments) from the Company. The
values of development projects are dependent on a number of factors, including
Kemper's and the Company's plans with respect thereto, obtaining necessary
construction and zoning permits and market demand for the permitted use of the
property. The values of certain development projects have been written down as
of December 31, 1995, reflecting changes in plans in connection with the
Zurich-led acquisition of Kemper. There can be no assurance that such permits
will be obtained as planned or at all, nor that such expenditures will occur as
scheduled, nor that Kemper's and the Company's plans with respect to such
projects may not change substantially.
Approximately half of the Company's real estate mortgage loans are on
properties or projects where the Company, Kemper, or their affiliates have taken
ownership positions in joint ventures with a small number of partners. (See note
captioned "Unconsolidated Investees".)
At December 31, 1997, loans to and investments in joint ventures in which
Patrick M. Nesbitt or his affiliates ("Nesbitt"), a third-party real estate
developer, have ownership interests constituted approximately $88.2 million, or
40.1 percent, of the Company's real estate portfolio. The Nesbitt ventures
consist of nine hotel properties and two office buildings. At December 31, 1997,
the Company did not have any Nesbitt-related off-balance-sheet legal funding
commitments outstanding.
At December 31, 1997, loans to a master limited partnership (the "MLP")
between subsidiaries of Kemper and subsidiaries of Lumbermens Mutual Casualty
Company ("Lumbermens"), a former affiliate, constituted approximately $60.5
million, or 27.5 percent, of the Company's real estate portfolio. Kemper's
interest is
59
<PAGE> 64
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
75 percent at December 31, 1997. At December 31, 1997, MLP-related commitments
accounted for approximately $7.4 million of the Company's off-balance-sheet
legal commitments, which the Company expects to fund.
At December 31, 1997, the Company no longer had any outstanding loans or
investments in projects with the Prime Group, Inc. or its affiliates, as all
such investments have been sold or written-down to zero. However, the Company
continues to have Prime Group-related commitments, which accounted for $25.7
million of the Company's off-balance-sheet legal commitments at December 31,
1997. The Company does not expect to fund any of these commitments.
(6) INCOME TAXES
Income tax expense (benefit) was as follows for the years ended December
31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
PREACQUISITION
--------------
1997 1996 1995
(in thousands) -------- ------- --------------
<S> <C> <C> <C>
Current.................................................. $130,662 $26,300 $(113,087)
Deferred................................................. (99,370) (897) 38,423
-------- ------- ---------
Total.......................................... $ 31,292 $25,403 $ (74,664)
======== ======= =========
</TABLE>
Included in the 1995 current tax benefit is the recognition of a net
operating loss carryover at December 31, 1995 which was utilized against taxable
income on Kemper's consolidated short-period Federal income tax return for the
January 1 through January 4, 1996 tax year. Beginning January 5, 1996, the
Company and its subsidiaries each filed a stand alone Federal income tax return.
Previously, the Company had filed a consolidated Federal income tax return with
Kemper. In 1996, the Company and Kemper settled all outstanding balances under
the tax allocation agreement.
The actual income tax expense (benefit) for 1997, 1996 and 1995 differed
from the "expected" tax expense (benefit) for those years as displayed below.
"Expected" tax expense (benefit) was computed by applying the U.S. Federal
corporate tax rate of 35 percent in 1997, 1996, and 1995 to income (loss) before
income tax expense (benefit).
<TABLE>
<CAPTION>
PREACQUISITION
--------------
1997 1996 1995
(in thousands) ------- ------- --------------
<S> <C> <C> <C>
Computed expected tax expense (benefit)................... $24,503 $20,938 $(72,700)
Difference between "expected" and actual tax expense
(benefit):
State taxes............................................. 1,801 913 (1,370)
Amortization of goodwill................................ 5,353 3,568 --
Foreign tax credit...................................... (278) -- (183)
Other, net.............................................. (87) (16) (411)
------- ------- --------
Total actual tax expense (benefit).............. $31,292 $25,403 $(74,664)
======= ======= ========
</TABLE>
Deferred tax assets and liabilities are generally determined based on the
difference between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. The Company only records deferred tax
assets if future realization of the tax benefit is more likely than not, with a
valuation allowance recorded for the portion that is not likely to be realized.
The valuation allowance is subject to future adjustments based upon, among other
items, the Company's estimates of future operating earnings and capital gains.
The Company has established a valuation allowance to reduce the deferred
Federal tax asset related to real estate and other investments to the amount
that, based upon available evidence, is, in management's judgment, more likely
than not to be realized. Any reversals of the valuation allowance are contingent
upon the recognition of future capital gains in the Company's Federal income tax
return or a change in circumstances which causes the recognition of the benefits
to become more likely than not. The change in the valuation allowance is related
solely to the change in the net deferred Federal tax asset or liability from
unrealized gains or losses on investments.
60
<PAGE> 65
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 asset or liability were as
follows:
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31 JANUARY 4
1997 1996 1996
(in thousands) ----------- ------------ ---------
<S> <C> <C> <C>
Deferred Federal tax assets:
Deferred insurance acquisition costs.................. $ 75,522 $ 4,520 $ --
Unrealized losses on investments...................... -- 16,624 --
Life policy reserves.................................. 43,337 46,452 46,654
Unearned revenue...................................... 37,243 -- --
Real estate-related................................... 13,400 20,642 27,736
Other investment-related.............................. 3,298 5,409 1,773
Other................................................. 4,371 3,639 9,750
-------- -------- --------
Total deferred Federal tax assets.................. 177,171 97,286 85,913
Valuation allowance................................... (15,201) (31,825) (15,201)
-------- -------- --------
Total deferred Federal tax assets after valuation
allowance........................................ 161,970 65,461 70,712
-------- -------- --------
Deferred Federal tax liabilities:
Value of business acquired............................ 48,469 66,373 66,578
Deferred insurance acquisition costs.................. 20,811 9,384 --
Depreciation and amortization......................... 20,201 15,473 15,490
Other investment-related.............................. 18,774 28,855 37,919
Unrealized gains on investments....................... 9,002 -- --
Other................................................. 4,720 5,738 4,197
-------- -------- --------
Total deferred Federal tax liabilities............. 121,977 125,823 124,184
-------- -------- --------
Net deferred Federal tax assets (liabilities)........... $ 39,993 $(60,362) $(53,472)
======== ======== ========
</TABLE>
The net deferred tax assets relate primarily to unearned revenue and the
tax on deferred insurance acquisition costs ("DAC Tax") associated with $2.7
billion of new 1997 sales from a non-registered individual and group variable
bank-owned life insurance contract ("BOLI"). As a result of proposed tax law
changes, as more fully discussed below, the level of DAC Tax experienced in 1997
is not anticipated to occur in future periods and it is expected that the
Company will return to its normalized earnings patterns in 1998. Management
believes that it is more likely, than not, that the results of future operations
will generate sufficient taxable income over the ten year amortization period of
the unearned revenue and DAC Tax to realize such deferred tax assets.
In early 1998, the Clinton Administration's Fiscal Year 1998 Budget
("Budget") was released and contained certain proposals to change the taxation
of non-qualified fixed and variable annuities and variable life insurance
contracts, including BOLI. It is currently unknown whether or not such proposals
will be accepted, amended or omitted in the final 1999 Budget approved by
Congress. If the current Budget proposals are accepted, certain of the Company's
non-qualified fixed and variable annuities and certain of its variable life
insurance products, including BOLI and the non-registered individual variable
universal life insurance contracts introduced during 1997, may no longer be tax
advantaged products and therefore no longer attractive to those customers who
purchase them because of their favorable tax attributes. Additionally, sales of
such products during 1998 may also be negatively impacted until the likelihood
of the current proposals being enacted into law has been determined.
The tax returns through the year 1986 have been examined by the Internal
Revenue Service ("IRS"). Changes proposed are not material to the Company's
financial position. The tax returns for the years 1987 through 1993 are
currently under examination by the IRS.
(7) RELATED-PARTY TRANSACTIONS
The Company received cash capital contributions of $45.0 million and $18.4
million during 1997 and 1996, respectively. The Company paid cash dividends of
$29.3 million to Kemper during 1997.
61
<PAGE> 66
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(7) RELATED-PARTY TRANSACTIONS (CONTINUED)
The Company has loans to joint ventures, consisting primarily of mortgage
loans on real estate, in which the Company and/or one of its affiliates has an
ownership interest. At December 31, 1997 and December 31, 1996, joint venture
mortgage loans totaled $72.7 million and $111.0 million, respectively, and
during 1997, 1996 and 1995, the Company earned interest income on these joint
venture loans of $7.5 million, $9.5 million and $19.6 million, respectively.
All of the Company's personnel are employees of Federal Kemper Life
Assurance Company ("FKLA"), an affiliated company. The Company is allocated
expenses for the utilization of FKLA employees and facilities, the investment
management services of Scudder Kemper Investments, Inc. ("SKI"), formerly Zurich
Kemper Investments, Inc., an affiliated company, and the information systems of
Kemper Service Company ("KSvC"), an SKI subsidiary, based on the Company's share
of administrative, legal, marketing, investment management, information systems
and operation and support services. During 1997, 1996 and 1995, expenses
allocated to the Company from SKI and KSvC amounted to $114 thousand, $1.7
million and $4.4 million, respectively. The Company also paid to SKI investment
management fees of $3.5 million, $3.6 million and $3.4 million during 1997, 1996
and 1995, respectively. In addition, expenses allocated to the Company from FKLA
during 1997, 1996 and 1995 amounted to $30.0 million, $10.5 million and $14.3
million, respectively.
During 1995, the Company sold certain mortgages and real estate-related
investments, net of reserves, amounting to approximately $3.5 million to an
affiliated non-life realty company, in exchange for cash. No gain or loss was
recognized on these sales. During 1996, the Company purchased approximately
$24.5 million of real estate-related investments from an affiliated non-life
realty subsidiary for cash. The Company also paid to Kemper real estate
subsidiaries $2.2 million, $1.8 million and $1.8 million in 1997, 1996 and 1995,
respectively, related to the management of the Company's real estate portfolio.
(8) REINSURANCE
In the ordinary course of business, the Company enters into reinsurance
agreements to diversify risk and limit its overall financial exposure to certain
blocks of fixed-rate annuities and to individual death claims. The Company
generally cedes 100 percent of the related annuity liabilities under the terms
of the reinsurance agreements. Although these reinsurance agreements
contractually obligate the reinsurers to reimburse the Company, they do not
discharge the Company from its primary liabilities and obligations to
policyholders. As such, these amounts paid or deemed to have been paid are
recorded on the Company's consolidated balance sheet as reinsurance recoverables
and ceded future policy benefits.
In 1992 and 1991, the Company entered into 100 percent indemnity
reinsurance agreements ceding $515.7 million and $416.3 million, respectively,
of its fixed-rate annuity liabilities to Fidelity Life Association, a Mutual
Legal Reserve Company ("FLA"). FLA is a mutual insurance company that shares
common management and common board members with the Company, FKLA and Kemper. As
of December 31, 1997 and 1996, the reinsurance recoverable related to the
fixed-rate annuity liabilities ceded to FLA amounted to $382.6 million and
$427.2 million, respectively. During 1995, the Company recorded income of $4.4
million related to a ceding commission experience adjustment from the 1992
reinsurance agreement.
In December 1996, the Company assumed on a yearly renewable term basis
approximately $14.4 billion (face amount) of term life insurance from FKLA. As a
result of this transaction, the Company recorded premiums and reserves of
approximately $7.3 million. The difference between the cash transferred, which
represents the statutory reserves of the business assumed, and the reserves
recorded under generally accepted accounting principles, of approximately $18.4
million, was deemed to be a capital contribution from Kemper and was recorded as
additional paid-in-capital during 1996. Premiums assumed during 1997 under the
terms of the treaty amounted to $21.1 million and the face amount which remained
outstanding at December 31, 1997 amounted to $12.6 billion.
The Company's retention limit on term life insurance prior to 1997 was $300
thousand (face amount) on the life of any one individual with the excess amounts
ceded to outside reinsurers. The term life insurance business assumed from FKLA
during 1996 did not have any individual contracts greater than $300 thousand in
face amount. Effective January 1, 1997, the Company ceded 90 percent of all new
term life insurance premiums to outside reinsurers. Term life reserves ceded to
outside reinsurers on the Company's direct business amounted to approximately
$139 thousand and $102 thousand as of December 31, 1997 and 1996, respectively.
62
<PAGE> 67
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During December 1997, the Company entered into a funds held reinsurance
agreement with a Zurich affiliated company, EPICENTRE Reinsurance (Bermuda)
Limited ("EPICENTRE"). Under the terms of this agreement, the Company ceded, on
a yearly renewable term basis, ninety percent of the net amount at risk (death
benefit payable to the insured less the insured's separate account cash
surrender value) related to a new product developed in 1997, a non-registered
variable bank-owned life insurance contract ("BOLI"), which is held in the
Company's separate accounts. During 1997, the Company issued $59.3 billion (face
amount) of new BOLI business and ceded $51.1 billion (face amount) to EPICENTRE
under the terms of the treaty. During 1997, the Company also ceded $24.3 million
of separate account fees (cost of insurance charges) to EPICENTRE. The Company
has also withheld approximately $23.4 million of such funds due to EPICENTRE
under the terms of the reinsurance agreement as a component of benefits and
funds payable in the accompanying consolidated balance sheet as of December 31,
1997.
(9) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
FKLA sponsors a welfare plan that provides medical and life insurance
benefits to its retired and active employees and the Company is allocated a
portion of the costs of providing such benefits. The Company is self insured
with respect to medical benefits, and the plan is not funded except with respect
to certain disability-related medical claims. The medical plan provides for
medical insurance benefits at retirement, with eligibility based upon age and
the participant's number of years of participation attained at retirement. The
plan is contributory for pre-Medicare retirees, and will be contributory for all
retiree coverage for most current employees, with contributions generally
adjusted annually. Postretirement life insurance benefits are noncontributory
and are limited to $10,000 per participant.
The allocated accumulated postretirement benefit obligation accrued by the
Company amounted to $1.9 million and $1.7 million at December 31, 1997 and 1996,
respectively.
The discount rate used in determining the allocated postretirement benefit
obligation was 7.25 percent and 7.75 percent for 1997 and 1996, respectively.
The assumed health care trend rate used was based on projected experience for
1997 and 1998, 8 percent in 1999, gradually declining to 5.0 percent by the year
2002 and remaining at that level thereafter.
A one percentage point increase in the assumed health care cost trend rate
for each year would increase the accumulated postretirement benefit obligation
as of December 31, 1997 and 1996 by $242 thousand and $191 thousand,
respectively.
The Company also provides certain severance-related policies to provide
benefits, generally limited in time, to former or inactive employees after
employment but before retirement.
(10) COMMITMENTS AND CONTINGENT LIABILITIES
The Company is involved in various legal actions for which it establishes
liabilities where appropriate. In the opinion of the Company's management, based
upon the advice of legal counsel, the resolution of such litigation is not
expected to have a material adverse effect on the consolidated financial
statements.
Although neither the Company or its joint venture projects have been
identified as a "potentially responsible party" under Federal environmental
guidelines, inherent in the ownership of or lending to real estate projects is
the possibility that environmental pollution conditions may exist on or near or
relate to properties owned or previously owned on properties securing loans.
Where the Company has presently identified remediation costs, they have been
taken into account in determining the cash flows and resulting valuations of the
related real estate assets. Based on the Company's receipt and review of
environmental reports on most of the projects in which it is involved, the
Company believes its environmental exposure would be immaterial to its
consolidated results of operations. However, the Company may be required in the
future to take actions to remedy environmental exposures, and there can be no
assurance that material environmental exposures will not develop or be
identified in the future. The amount of future environmental costs is impossible
to estimate due to, among other factors, the unknown magnitude of possible
exposures, the unknown timing and extent of corrective actions that may be
required, the determination of the Company's liability in proportion to others
and the extent such costs may be covered by insurance or various environmental
indemnification agreements.
See the note captioned "Financial Instruments--Off-Balance-Sheet Risk"
below for the discussion regarding the Company's loan commitments and standby
financing agreements.
63
<PAGE> 68
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(10) COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
The Company is liable for guaranty fund assessments related to certain
unaffiliated insurance companies that have become insolvent during the years
1997 and prior. The Company's financial statements include provisions for all
known assessments that are expected to be levied against the Company as well as
an estimate of amounts (net of estimated future premium tax recoveries) that the
Company believes it will be assessed in the future for which the life insurance
industry has estimated the cost to cover losses to policyholders. The Company is
also contingently liable for any future guaranty fund assessments related to
insolvencies of unaffiliated insurance companies, for which the life insurance
industry has been unable to estimate the cost to cover losses to policyholders.
No specific amount can be reasonably estimated for such insolvencies as of
December 31, 1997.
(11) FINANCIAL INSTRUMENTS--OFF-BALANCE-SHEET RISK
At December 31, 1997, the Company had future legal loan commitments and
stand-by financing agreements totaling $75.3 million to support the financing
needs of various real estate investments. To the extent these arrangements are
called upon, amounts loaned would be secured by assets of the joint ventures,
including first mortgage liens on the real estate. The Company's criteria in
making these arrangements are the same as for its mortgage loans and other real
estate investments. The Company presently expects to fund approximately $21.2
million of these arrangements. These commitments are included in the Company's
analysis of real estate-related reserves and write-downs. The fair values of
loan commitments and standby financing agreements are estimated in conjunction
with and using the same methodology as the fair value estimates of mortgage
loans and other real estate-related investments.
(12) FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates are made at specific points in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from offering
for sale at one time the Company's entire holdings of a particular financial
instrument. A significant portion of the Company's financial instruments are
carried at fair value. (See note captioned "Invested Assets and Related
Income".) Fair value estimates for financial instruments not carried at fair
value are generally determined using discounted cash flow models and assumptions
that are based on judgments regarding current and future economic conditions and
the risk characteristics of the investments. Although fair value estimates are
calculated using assumptions that management believes are appropriate, changes
in assumptions could significantly affect the estimates and such estimates
should be used with care.
Fair value estimates are determined for existing on- and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and certain liabilities that are not
considered financial instruments. Accordingly, the aggregate fair value
estimates presented do not represent the underlying value of the Company. For
example, the Company's subsidiaries are not considered financial instruments,
and their value has not been incorporated into the fair value estimates. In
addition, tax ramifications related to the realization of unrealized gains and
losses can have a significant effect on fair value estimates and have not been
considered in any of the estimates.
The following methods and assumptions were used by the Company in
estimating the fair value of its financial instruments:
Fixed maturities and equity securities: Fair values were determined by
using market quotations, or independent pricing services that use prices
provided by market makers or estimates of fair values obtained from yield data
relating to instruments or securities with similar characteristics, or fair
value as determined in good faith by the Company's portfolio manager, SKI.
Cash and short-term investments: The carrying amounts reported in the
consolidated balance sheet for these instruments approximate fair values.
Mortgage loans and other real estate-related investments: Fair values were
estimated based upon the investments observable market price, net of estimated
costs to sell. The estimates of fair value should be used with care given the
inherent difficulty of estimating the fair value of real estate due to the lack
of a liquid quotable market.
64
<PAGE> 69
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(12) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Other loans and investments: The carrying amounts reported in the
consolidated balance sheet for these instruments approximate fair values. The
fair values of policy loans were estimated by discounting the expected future
cash flows using an interest rate charged on policy loans for similar policies
currently being issued.
Life policy benefits: Fair values of the life policy benefits regarding
investment contracts (primarily deferred annuities) and universal life contracts
were estimated by discounting gross benefit payments, net of contractual
premiums, using the average crediting rate currently being offered in the
marketplace for similar contracts with maturities consistent with those
remaining for the contracts being valued. The Company had projected its future
average crediting rate in 1997 and 1996 to be 5.25 percent and 4.75 percent,
respectively, while the assumed average market crediting rate was 6.0 percent
and 5.8 percent in 1997 and 1996, respectively.
The carrying values and estimated fair values of the Company's financial
instruments at December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------ ------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
(in thousands) -------- ----- -------- -----
<S> <C> <C> <C> <C>
Financial instruments recorded as assets:
Fixed maturities.............................. $3,668,643 $3,668,643 $3,866,431 $3,866,431
Cash and short-term investments............... 259,925 259,925 74,472 74,472
Mortgage loans and other real estate-related
assets..................................... 220,046 220,046 267,713 267,713
Policy loans.................................. 282,439 282,439 288,302 288,302
Equity securities............................. 24,839 24,839 9,910 9,910
Other invested assets......................... 20,820 24,404 13,597 13,597
Financial instruments recorded as liabilities:
Life policy benefits, excluding term life
reserves................................... 3,846,023 4,050,852 4,249,264 4,101,588
</TABLE>
(13) STOCKHOLDER'S EQUITY--RETAINED EARNINGS
The maximum amount of dividends which can be paid by insurance companies
domiciled in the State of Illinois to shareholders without prior approval of
regulatory authorities is restricted. The maximum amount of dividends which can
be paid by the Company without prior approval in 1998 is $58.4 million. The
Company paid cash dividends of $29.3 million to Kemper during 1997. The Company
paid no cash dividends in 1996 or 1995.
The Company's net income (loss) and capital and surplus as determined in
accordance with statutory accounting principles were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
(in thousands) ---- ---- ----
<S> <C> <C> <C>
Net income (loss)........................................... $ 58,372 $ 37,287 $(64,707)
======== ======== ========
Statutory capital and surplus............................... $476,924 $411,837 $383,374
======== ======== ========
</TABLE>
65
<PAGE> 70
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(14) UNAUDITED INTERIM FINANCIAL INFORMATION
The following table sets forth the Company's unaudited quarterly financial
information:
(in thousands)
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------------- -------- ------- ------------ -----------
<S> <C> <C> <C> <C>
1997 OPERATING SUMMARY
Net investment income.............................. $74,249 $74,050 $72,950 $ 74,946
Realized investment gains (losses)................. 889 8,161 (3,032) 4,528
Premium income..................................... 5,008 4,121 3,938 9,172
Separate account fees and other income............. 8,909 12,961 12,215 62,415(1)
------- ------- ------- --------
Total revenue.............................. 89,055 99,293 86,071 151,061
------- ------- ------- --------
Interest credited and benefits to policyholders.... 57,859 56,643 57,965 55,687
Commissions, taxes, licenses and fees.............. 8,023 9,475 8,389 59,323(1)
Operating expenses................................. 7,175 8,780 10,014 10,868
Net deferral of insurance acquisition costs........ (7,216) (6,877) (7,471) (13,409)
Amortization of value of business acquired......... 4,821 6,991 6,743 6,393
Amortization of goodwill........................... 2,547 2,552 2,549 7,647(2)
------- ------- ------- --------
Total benefits and expenses................ 73,209 77,564 78,189 126,509
------- ------- ------- --------
Income before income tax expense................... 15,846 21,729 7,882 24,552
Income tax expense................................. 5,678 8,723 3,778 13,113
------- ------- ------- --------
Net income................................. $10,168 $13,006 $ 4,104 $ 11,439
======= ======= ======= ========
1996 OPERATING SUMMARY
Net investment income.............................. $72,302 $74,647 $76,070 $ 76,669
Realized investment gains (losses)................. (1,248) (2,439) 13,518 3,771
Premium income..................................... 130 109 150 7,433(3)
Separate account fees and other income............. 8,028 9,419 8,478 9,170
------- ------- ------- --------
Total revenue.............................. 79,212 81,736 98,216 97,043
------- ------- ------- --------
Interest credited and benefits to policyholders.... 58,296 57,335 57,512 64,206
Commissions, taxes, licenses and fees.............. 6,868 6,486 6,819 7,962
Operating expenses................................. 5,440 4,920 6,974 7,344
Net deferral of insurance acquisition costs........ (5,032) (7,302) (5,434) (7,736)
Amortization of value of business acquired......... 4,234 2,787 11,582 2,927
Amortization of goodwill........................... 2,547 2,552 2,549 2,547
------- ------- ------- --------
Total benefits and expenses................ 72,353 66,778 80,002 77,250
------- ------- ------- --------
Income before income tax expense................... 6,859 14,958 18,214 19,793
Income tax expense................................. 3,513 6,402 7,391 8,097
------- ------- ------- --------
Net income................................. $ 3,346 $ 8,556 $10,823 $ 11,696
======= ======= ======= ========
</TABLE>
- ---------------
Notes:
(1) Reflects premium tax expense loads received and premium taxes incurred of
$49.1 million related to new BOLI sales of $2.6 billion in the fourth
quarter of 1997.
(2) Reflects the effect of the change in amortization of goodwill from 25 to 20
years.
(3) Reflects the assumption of term life insurance business from FKLA.
66
<PAGE> 71
APPENDIX A
ILLUSTRATIONS OF CASH VALUES,
CASH SURRENDER VALUES AND
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%. This charge
is guaranteed not to exceed an effective annual rate of 0.90%. In addition, the
net investment returns also reflect the deduction of the Fund investment
advisory fees and other Fund expenses, (.83%, the average of the fees and
expenses). The tables also reflect applicable charges and deductions including a
3.5% deduction against premiums, a monthly administrative charge of $5 and
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 -1.73%, 4.27% and 10.27%, on a current basis. On a guaranteed
basis, these rates of return would be -1.73%, 4.27% and 10.27%, respectively.
Cost of insurance rates vary by issue age, sex, rating class and Policy Year
and, therefore, are not reflected in the approximate net annual investment rate
of return above.
Values are shown for Policies which are issued to a male standard nonsmoker
and a male preferred nonsmoker. Values for Policies issued on a basis involving
a higher mortality risk would result in lower Cash Values, Surrender Values and
Death Benefits than those illustrated. Females generally have a more favorable
rate structure than males.
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.
67
<PAGE> 72
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
MALE STANDARD NON-SMOKER $1,000.00 ANNUAL PREMIUM ISSUE AGE 35
$100,000 INITIAL DEATH BENEFIT:
VALUES--CURRENT COST OF INSURANCE
<TABLE>
<CAPTION>
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL
PREMIUM GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
PAID 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 1,050 724 18 100,000 775 68 100,000 826 119 100,000
2 2,153 1,431 650 100,000 1,578 797 100,000 1,731 950 100,000
3 3,310 2,116 1,259 100,000 2,405 1,549 100,000 2,720 1,863 100,000
4 4,526 2,778 1,847 100,000 3,258 2,326 100,000 3,799 2,868 100,000
5 5,802 3,419 2,412 100,000 4,136 3,130 100,000 4,980 3,973 100,000
6 7,142 4,033 3,060 100,000 5,037 4,063 100,000 6,267 5,294 100,000
7 8,549 4,621 3,695 100,000 5,961 5,035 100,000 7,672 6,747 100,000
8 10,027 5,183 4,321 100,000 6,909 6,047 100,000 9,208 8,345 100,000
9 11,578 5,720 4,936 100,000 7,884 7,100 100,000 10,889 10,105 100,000
10 13,207 6,248 5,558 100,000 8,902 8,212 100,000 12,746 12,055 100,000
11 14,917 6,769 6,186 100,000 9,967 9,384 100,000 14,800 14,218 100,000
12 16,713 7,282 6,822 100,000 11,080 10,621 100,000 17,072 16,613 100,000
13 18,599 7,788 7,466 100,000 12,244 11,923 100,000 19,584 19,263 100,000
14 20,579 8,286 8,118 100,000 13,462 13,294 100,000 22,362 22,194 100,000
15 22,657 8,777 8,777 100,000 14,735 14,735 100,000 25,434 25,434 100,000
16 24,840 9,261 9,261 100,000 16,065 16,065 100,000 28,831 28,831 100,000
17 27,132 9,738 9,738 100,000 17,457 17,457 100,000 32,587 32,587 100,000
18 29,539 10,207 10,207 100,000 18,912 18,912 100,000 36,741 36,741 100,000
19 32,066 10,671 10,671 100,000 20,434 20,434 100,000 41,335 41,335 100,000
20 34,719 11,127 11,127 100,000 22,025 22,025 100,000 46,415 46,415 100,000
25 50,113 11,077 11,077 100,000 29,003 29,003 100,000 79,852 79,852 107,001
30 69,761 8,797 8,797 100,000 36,042 36,042 100,000 134,111 134,111 163,616
35 94,836 2,506 2,506 100,000 42,304 42,304 100,000 220,552 220,552 255,840
40 126,840 0 0 0 46,297 46,297 100,000 358,956 358,956 384,083
45 167,685 0 0 0 44,406 44,406 100,000 582,976 582,976 612,124
</TABLE>
ASSUMPTIONS:
(1) BASED ON DEATH BENEFIT OPTION A AND ASSUMES 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.
(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.
68
<PAGE> 73
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
MALE STANDARD NON-SMOKER $1,000.00 ANNUAL PREMIUM ISSUE AGE 35
$100,000 INITIAL DEATH BENEFIT:
VALUES--GUARANTEED COST OF INSURANCE
<TABLE>
<CAPTION>
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL
PREMIUM GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
PAID 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 1,050 723 17 100,000 774 67 100,000 825 118 100,000
2 2,153 1,428 646 100,000 1,574 793 100,000 1,727 946 100,000
3 3,310 2,110 1,253 100,000 2,399 1,542 100,000 2,713 1,856 100,000
4 4,526 2,771 1,839 100,000 3,249 2,317 100,000 3,790 2,858 100,000
5 5,802 3,408 2,401 100,000 4,123 3,117 100,000 4,966 3,959 100,000
6 7,142 4,021 3,047 100,000 5,022 4,049 100,000 6,250 5,277 100,000
7 8,549 4,608 3,683 100,000 5,945 5,019 100,000 7,652 6,727 100,000
8 10,027 5,169 4,307 100,000 6,892 6,030 100,000 9,185 8,323 100,000
9 11,578 5,703 4,919 100,000 7,862 7,078 100,000 10,860 10,076 100,000
10 13,207 6,209 5,519 100,000 8,857 8,166 100,000 12,692 12,001 100,000
11 14,917 6,686 6,103 100,000 9,875 9,292 100,000 14,697 14,114 100,000
12 16,713 7,130 6,671 100,000 10,915 10,455 100,000 16,890 16,431 100,000
13 18,599 7,543 7,221 100,000 11,977 11,656 100,000 19,293 18,972 100,000
14 20,579 7,921 7,753 100,000 13,061 12,893 100,000 21,927 21,759 100,000
15 22,657 8,263 8,263 100,000 14,166 14,166 100,000 24,816 24,816 100,000
16 24,840 8,567 8,567 100,000 15,291 15,291 100,000 27,987 27,987 100,000
17 27,132 8,828 8,828 100,000 16,432 16,432 100,000 31,469 31,469 100,000
18 29,539 9,040 9,040 100,000 17,586 17,586 100,000 35,294 35,294 100,000
19 32,066 9,198 9,198 100,000 18,748 18,748 100,000 39,498 39,498 100,000
20 34,719 9,296 9,296 100,000 19,913 19,913 100,000 44,124 44,124 100,000
25 50,113 8,675 8,675 100,000 25,652 25,652 100,000 75,587 75,587 101,287
30 69,761 5,335 5,335 100,000 30,644 30,644 100,000 126,888 126,888 154,804
35 94,836 0 0 0 33,276 33,276 100,000 208,259 208,259 241,580
40 126,840 0 0 0 30,182 30,182 100,000 338,103 338,103 361,770
45 167,685 0 0 0 11,940 11,940 100,000 547,985 547,985 575,384
</TABLE>
ASSUMPTIONS:
(1) BASED ON DEATH BENEFIT OPTION A AND ASSUMES 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.
(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.
69
<PAGE> 74
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
MALE STANDARD NON-SMOKER $3,000.00 ANNUAL PREMIUM ISSUE AGE 55
$100,000 INITIAL DEATH BENEFIT:
VALUES--CURRENT COST OF INSURANCE
<TABLE>
<CAPTION>
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL
PREMIUM GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
PAID 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 3,150 2,034 789 100,000 2,182 937 100,000 2,330 1,085 100,000
2 6,457 3,975 2,505 100,000 4,399 2,929 100,000 4,841 3,372 100,000
3 9,930 5,815 4,120 100,000 6,644 4,949 100,000 7,547 5,852 100,000
4 13,577 7,558 5,638 100,000 8,924 7,004 100,000 10,473 8,553 100,000
5 17,406 9,192 7,047 100,000 11,228 9,084 100,000 13,635 11,490 100,000
6 21,426 10,759 8,626 100,000 13,600 11,468 100,000 17,103 14,971 100,000
7 25,647 12,317 10,241 100,000 16,104 14,028 100,000 20,975 18,899 100,000
8 30,080 13,867 11,893 100,000 18,746 16,772 100,000 25,296 23,322 100,000
9 34,734 15,409 13,582 100,000 21,535 19,708 100,000 30,119 28,292 100,000
10 39,620 16,942 15,307 100,000 24,478 22,843 100,000 35,502 33,867 100,000
11 44,751 18,467 17,070 100,000 27,584 26,186 100,000 41,510 40,112 100,000
12 50,139 19,985 18,869 100,000 30,863 29,747 100,000 48,216 47,100 100,000
13 55,796 21,494 20,705 100,000 34,322 33,534 100,000 55,701 54,912 100,000
14 61,736 22,995 22,578 100,000 37,974 37,557 100,000 64,055 63,638 100,000
15 67,972 24,488 24,488 100,000 41,828 41,828 100,000 73,380 73,380 100,000
16 74,521 25,973 25,973 100,000 45,896 45,896 100,000 83,787 83,787 100,000
17 81,397 27,450 27,450 100,000 50,189 50,189 100,000 95,369 95,369 107,767
18 88,617 28,920 28,920 100,000 54,719 54,719 100,000 108,152 108,152 120,049
19 96,198 30,381 30,381 100,000 59,501 59,501 100,000 122,259 122,259 133,262
20 104,158 31,835 31,835 100,000 64,548 64,548 100,000 137,831 137,831 147,479
25 150,340 22,121 22,121 100,000 88,219 88,219 100,000 240,534 240,534 252,561
30 209,282 0 0 0 121,897 121,897 127,992 402,274 402,274 422,388
35 284,509 0 0 0 160,765 160,765 168,803 651,846 651,846 684,438
40 380,519 0 0 0 208,570 208,570 210,656 1,052,401 1,052,401 1,062,925
45 503,055 0 0 0 273,173 273,173 273,173 1,735,012 1,735,012 1,735,012
</TABLE>
ASSUMPTIONS:
(1) BASED ON DEATH BENEFIT OPTION A AND ASSUMES 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.
(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.
70
<PAGE> 75
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
MALE STANDARD NON-SMOKER $3,000.00 ANNUAL PREMIUM ISSUE AGE 55
$100,000 INITIAL DEATH BENEFIT:
VALUES--GUARANTEED COST OF INSURANCE
<TABLE>
<CAPTION>
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL
PREMIUM GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
PAID 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 3,150 2,032 787 100,000 2,180 935 100,000 2,328 1,083 100,000
2 6,457 3,968 2,498 100,000 4,392 2,922 100,000 4,834 3,364 100,000
3 9,930 5,807 4,112 100,000 6,636 4,941 100,000 7,538 5,843 100,000
4 13,577 7,547 5,627 100,000 8,912 6,992 100,000 10,459 8,539 100,000
5 17,406 9,180 7,035 100,000 11,214 9,070 100,000 13,618 11,474 100,000
6 21,426 10,701 8,568 100,000 13,540 11,407 100,000 17,039 14,906 100,000
7 25,647 12,102 10,026 100,000 15,883 13,808 100,000 20,750 18,674 100,000
8 30,080 13,372 11,398 100,000 18,238 16,264 100,000 24,780 22,806 100,000
9 34,734 14,498 12,671 100,000 20,593 18,766 100,000 29,165 27,338 100,000
10 39,620 15,464 13,829 100,000 22,941 21,306 100,000 33,948 32,313 100,000
11 44,751 16,258 14,860 100,000 25,275 23,877 100,000 39,184 37,786 100,000
12 50,139 16,869 15,753 100,000 27,591 26,476 100,000 44,945 43,829 100,000
13 55,796 17,285 16,496 100,000 29,887 29,098 100,000 51,316 50,527 100,000
14 61,736 17,490 17,073 100,000 32,160 31,743 100,000 58,401 57,984 100,000
15 67,972 17,464 17,464 100,000 34,404 34,404 100,000 66,328 66,328 100,000
16 74,521 17,173 17,173 100,000 36,607 36,607 100,000 75,251 75,251 100,000
17 81,397 16,528 16,528 100,000 38,715 38,715 100,000 85,351 85,351 100,000
18 88,617 15,566 15,566 100,000 40,778 40,778 100,000 96,787 96,787 107,434
19 96,198 14,170 14,170 100,000 42,734 42,734 100,000 109,402 109,402 119,248
20 104,158 12,260 12,260 100,000 44,560 44,560 100,000 123,326 123,326 131,959
25 150,340 0 0 0 51,219 51,219 100,000 216,653 216,653 227,486
30 209,282 0 0 0 50,019 50,019 100,000 362,686 362,686 380,820
35 284,509 0 0 0 19,973 19,973 100,000 585,679 585,679 614,963
40 380,519 0 0 0 0 0 0 942,572 942,572 951,998
45 503,055 0 0 0 0 0 0 1,555,949 1,555,949 1,555,949
</TABLE>
ASSUMPTIONS:
(1) BASED ON DEATH BENEFIT OPTION A AND ASSUMES 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.
(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.
71
<PAGE> 76
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
MALE PREFERRED NON-SMOKER $1,500.00 ANNUAL PREMIUM ISSUE AGE 35
$150,000 INITIAL DEATH BENEFIT:
VALUES--CURRENT COST OF INSURANCE
<TABLE>
<CAPTION>
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL
PREMIUM GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
PAID 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 1,575 1,116 63 150,000 1,193 140 150,000 1,270 217 150,000
2 3,229 2,206 1,040 150,000 2,430 1,264 150,000 2,664 1,498 150,000
3 4,965 3,262 1,983 150,000 3,704 2,426 150,000 4,185 2,907 150,000
4 6,788 4,297 2,907 150,000 5,032 3,641 150,000 5,861 4,471 150,000
5 8,703 5,317 3,814 150,000 6,419 4,916 150,000 7,714 6,211 150,000
6 10,713 6,321 4,867 150,000 7,868 6,413 150,000 9,760 8,306 150,000
7 12,824 7,310 5,927 150,000 9,381 7,998 150,000 12,021 10,639 150,000
8 15,040 8,283 6,994 150,000 10,962 9,674 150,000 14,519 13,230 150,000
9 17,367 9,241 8,069 150,000 12,614 11,442 150,000 17,278 16,107 150,000
10 19,810 10,185 9,152 150,000 14,339 13,306 150,000 20,327 19,294 150,000
11 22,376 11,113 10,242 150,000 16,142 15,271 150,000 23,695 22,824 150,000
12 25,069 12,028 11,341 150,000 18,025 17,338 150,000 27,416 26,729 150,000
13 27,898 12,928 12,448 150,000 19,992 19,512 150,000 31,527 31,046 150,000
14 30,868 13,815 13,563 150,000 22,047 21,796 150,000 36,069 35,817 150,000
15 33,986 14,687 14,687 150,000 24,194 24,194 150,000 41,086 41,086 150,000
16 37,261 15,547 15,547 150,000 26,437 26,437 150,000 46,629 46,629 150,000
17 40,699 16,393 16,393 150,000 28,780 28,780 150,000 52,753 52,753 150,000
18 44,309 17,226 17,226 150,000 31,227 31,227 150,000 59,519 59,519 150,000
19 48,099 18,046 18,046 150,000 33,784 33,784 150,000 66,993 66,993 150,000
20 52,079 18,853 18,853 150,000 36,455 36,455 150,000 75,251 75,251 150,000
25 75,170 20,535 20,535 150,000 49,677 49,677 150,000 130,294 130,294 174,594
30 104,641 19,990 19,990 150,000 64,673 64,673 150,000 219,425 219,425 267,698
35 142,254 15,713 15,713 150,000 81,476 81,476 150,000 362,518 362,518 420,521
40 190,260 4,856 4,856 150,000 100,560 100,560 150,000 593,019 593,019 634,531
45 251,528 0 0 0 123,575 123,575 150,000 966,984 966,984 1,015,333
</TABLE>
ASSUMPTIONS:
(1) BASED ON DEATH BENEFIT OPTION A AND ASSUMES 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.
(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.
72
<PAGE> 77
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
MALE PREFERRED NON-SMOKER $1,500.00 ANNUAL PREMIUM ISSUE AGE 35
$150,000 INITIAL DEATH BENEFIT:
VALUES--GUARANTEED COST OF INSURANCE
<TABLE>
<CAPTION>
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL
PREMIUM GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
PAID 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 1,575 1,115 62 150,000 1,192 138 150,000 1,269 215 150,000
2 3,229 2,200 1,035 150,000 2,424 1,258 150,000 2,657 1,492 150,000
3 4,965 3,253 1,975 150,000 3,695 2,417 150,000 4,175 2,896 150,000
4 6,788 4,272 2,882 150,000 5,005 3,614 150,000 5,833 4,442 150,000
5 8,703 5,256 3,753 150,000 6,353 4,850 150,000 7,644 6,140 150,000
6 10,713 6,203 4,749 150,000 7,740 6,286 150,000 9,623 8,168 150,000
7 12,824 7,111 5,728 150,000 9,163 7,781 150,000 11,783 10,401 150,000
8 15,040 7,980 6,691 150,000 10,626 9,337 150,000 14,146 12,858 150,000
9 17,367 8,807 7,635 150,000 12,125 10,953 150,000 16,729 15,557 150,000
10 19,810 9,593 8,560 150,000 13,664 12,631 150,000 19,557 18,524 150,000
11 22,376 10,333 9,462 150,000 15,238 14,367 150,000 22,650 21,779 150,000
12 25,069 11,026 10,338 150,000 16,849 16,162 150,000 26,037 25,350 150,000
13 27,898 11,669 11,189 150,000 18,495 18,015 150,000 29,748 29,267 150,000
14 30,868 12,262 12,011 150,000 20,178 19,926 150,000 33,818 33,566 150,000
15 33,986 12,800 12,800 150,000 21,893 21,893 150,000 38,282 38,282 150,000
16 37,261 13,281 13,281 150,000 23,642 23,642 150,000 43,185 43,185 150,000
17 40,699 13,697 13,697 150,000 25,419 25,419 150,000 48,571 48,571 150,000
18 44,309 14,039 14,039 150,000 27,217 27,217 150,000 54,488 54,488 150,000
19 48,099 14,301 14,301 150,000 29,033 29,033 150,000 60,997 60,997 150,000
20 52,079 14,473 14,473 150,000 30,858 30,858 150,000 68,161 68,161 150,000
25 75,170 13,667 13,667 150,000 39,927 39,927 150,000 116,943 116,943 156,704
30 104,641 8,801 8,801 150,000 48,070 48,070 150,000 196,219 196,219 239,388
35 142,254 0 0 0 53,048 53,048 150,000 321,962 321,962 373,476
40 190,260 0 0 0 50,256 50,256 150,000 522,611 522,611 559,194
45 251,528 0 0 0 26,905 26,905 150,000 846,942 846,942 889,290
</TABLE>
ASSUMPTIONS:
(1) BASED ON DEATH BENEFIT OPTION A AND ASSUMES 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.
(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.
73
<PAGE> 78
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
MALE PREFERRED NON-SMOKER $4,500.00 ANNUAL PREMIUM ISSUE AGE 55
$150,000 INITIAL DEATH BENEFIT:
VALUES--CURRENT COST OF INSURANCE
<TABLE>
<CAPTION>
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL
PREMIUM GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
PAID 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 4,725 3,081 1,220 150,000 3,304 1,443 150,000 3,527 1,666 150,000
2 9,686 6,093 3,895 150,000 6,735 4,537 150,000 7,405 5,207 150,000
3 14,896 9,077 6,541 150,000 10,341 7,806 150,000 11,716 9,181 150,000
4 20,365 12,033 9,160 150,000 14,133 11,260 150,000 16,508 13,635 150,000
5 26,109 14,961 11,751 150,000 18,118 14,907 150,000 21,835 18,625 150,000
6 32,139 17,863 14,670 150,000 22,307 19,114 150,000 27,757 24,564 150,000
7 38,471 20,737 17,628 150,000 26,710 23,602 150,000 34,341 31,232 150,000
8 45,120 23,584 20,628 150,000 31,338 28,382 150,000 41,659 38,703 150,000
9 52,101 26,405 23,668 150,000 36,204 33,467 150,000 49,794 47,057 150,000
10 59,431 29,199 26,750 150,000 41,318 38,869 150,000 58,837 56,388 150,000
11 67,127 31,967 29,873 150,000 46,693 44,599 150,000 68,889 66,795 150,000
12 75,208 34,710 33,038 150,000 52,344 50,672 150,000 80,065 78,393 150,000
13 83,694 37,426 36,244 150,000 58,284 57,102 150,000 92,487 91,305 150,000
14 92,604 40,118 39,493 150,000 64,527 63,903 150,000 106,297 105,672 150,000
15 101,959 42,784 42,784 150,000 71,090 71,090 150,000 121,648 121,648 150,000
16 111,782 45,426 45,426 150,000 77,989 77,989 150,000 138,691 138,691 159,495
17 122,096 48,043 48,043 150,000 85,240 85,240 150,000 157,498 157,498 177,972
18 132,926 50,635 50,635 150,000 92,863 92,863 150,000 178,243 178,243 197,850
19 144,297 53,203 53,203 150,000 100,875 100,875 150,000 201,132 201,132 219,234
20 156,237 55,747 55,747 150,000 109,297 109,297 150,000 226,390 226,390 242,238
25 225,511 53,599 53,599 150,000 155,044 155,044 162,796 394,402 394,402 414,123
30 313,924 38,775 38,775 150,000 212,310 212,310 222,925 662,076 662,076 695,180
35 426,763 0 0 0 279,543 279,543 293,520 1,082,860 1,082,860 1,137,003
40 570,779 0 0 0 362,287 362,287 365,910 1,761,618 1,761,618 1,779,234
45 754,583 0 0 0 470,852 470,852 470,852 2,901,097 2,901,097 2,901,097
</TABLE>
ASSUMPTIONS:
(1) BASED ON DEATH BENEFIT OPTION A AND ASSUMES 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.
(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.
74
<PAGE> 79
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
MALE PREFERRED NON-SMOKER $4,500.00 ANNUAL PREMIUM ISSUE AGE 55
$150,000 INITIAL DEATH BENEFIT:
VALUES--GUARANTEED COST OF INSURANCE
<TABLE>
<CAPTION>
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL
PREMIUM GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
PAID 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 4,725 3,078 1,218 150,000 3,301 1,440 150,000 3,524 1,663 150,000
2 9,686 6,011 3,813 150,000 6,651 4,453 150,000 7,318 5,120 150,000
3 14,896 8,799 6,264 150,000 10,051 7,516 150,000 11,413 8,877 150,000
4 20,365 11,438 8,565 150,000 13,501 10,628 150,000 15,839 12,966 150,000
5 26,109 13,917 10,707 150,000 16,993 13,783 150,000 20,627 17,417 150,000
6 32,139 16,228 13,035 150,000 20,522 17,329 150,000 25,814 22,621 150,000
7 38,471 18,359 15,251 150,000 24,080 20,972 150,000 31,441 28,333 150,000
8 45,120 20,294 17,337 150,000 27,658 24,701 150,000 37,557 34,601 150,000
9 52,101 22,011 19,275 150,000 31,240 28,504 150,000 44,213 41,477 150,000
10 59,431 23,491 21,042 150,000 34,815 32,366 150,000 51,477 49,028 150,000
11 67,127 24,713 22,619 150,000 38,372 36,278 150,000 59,433 57,339 150,000
12 75,208 25,662 23,991 150,000 41,909 40,238 150,000 68,191 66,519 150,000
13 83,694 26,319 25,137 150,000 45,421 44,239 150,000 77,881 76,699 150,000
14 92,604 26,661 26,036 150,000 48,904 48,279 150,000 88,663 88,038 150,000
15 101,959 26,658 26,658 150,000 52,352 52,352 150,000 100,732 100,732 150,000
16 111,782 26,260 26,260 150,000 55,746 55,746 150,000 114,324 114,324 150,000
17 122,096 25,333 25,333 150,000 59,010 59,010 150,000 129,718 129,718 150,000
18 132,926 23,935 23,935 150,000 62,218 62,218 150,000 147,087 147,087 163,267
19 144,297 21,888 21,888 150,000 65,282 65,282 150,000 166,228 166,228 181,188
20 156,237 19,077 19,077 150,000 68,169 68,169 150,000 187,355 187,355 200,470
25 225,511 0 0 0 79,377 79,377 150,000 328,965 328,965 345,413
30 313,924 0 0 0 80,791 80,791 150,000 550,545 550,545 578,072
35 426,763 0 0 0 47,336 47,336 150,000 888,895 888,895 933,340
40 570,779 0 0 0 0 0 0 1,430,415 1,430,415 1,444,719
45 754,583 0 0 0 0 0 0 2,361,113 2,361,113 2,361,113
</TABLE>
ASSUMPTIONS:
(1) BASED ON DEATH BENEFIT OPTION A AND ASSUMES 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.
(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.
75
<PAGE> 80
APPENDIX B
TABLE OF DEATH BENEFIT FACTORS
<TABLE>
<CAPTION>
ATTAINED ATTAINED ATTAINED ATTAINED
AGE* PERCENT AGE* PERCENT AGE* PERCENT AGE* PERCENT
- -------- ------- -------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
0-40 250 50 185 60 130 70 115
41 243 51 178 61 128 71 113
42 236 52 171 62 126 72 111
43 229 53 164 63 124 73 109
44 222 54 157 64 122 74 107
45 215 55 150 65 120 75-90 105
46 209 56 146 66 119 91 104
47 203 57 142 67 118 92 103
48 197 58 138 68 117 93 102
49 191 59 134 69 116 94 101
95-99 100
</TABLE>
* ATTAINED AGE AS OF THE BEGINNING OF THE POLICY YEAR
76
<PAGE> 81
(This page intentionally left blank)
77
<PAGE> 82
PART II
UNDERTAKING TO FILE REPORTS
Subject to the terms and conditions of Section 15(d) of the Securities and
Exchange Act of 1934, the undersigned registrant hereby undertakes to file with
the Securities and Exchange Commission such supplementary and periodic
information, documents, and reports as may be prescribed by any rule or
regulation of the Commission heretofore or hereafter duly adopted pursuant to
authority conferred in that section.
UNDERTAKING PURSUANT TO RULE 484(B)(1)
UNDER THE SECURITIES ACT OF 1933
Pursuant to the Distribution Agreement filed as Exhibit 1-A(3)(a) to this
Registration Statement, Kemper Investors Life Insurance Company (KILICO) and the
Separate Account will agree to indemnify Investors Brokerage Services, Inc.
(IBS) against any claims, liabilities and expenses which IBS may incur under the
Securities Act of 1933, common law or otherwise, arising out of or based upon
any alleged untrue statements of material fact contained in any registration
statement or prospectus of the Separate Account, or any omission to state a
material fact therein, the omission of which makes any statement contained
therein misleading. IBS will agree to indemnify KILICO and the Separate Account
against any and all claims, demands, liabilities and expenses which KILICO or
the Separate Account may incur, arising out of or based upon any act or deed of
IBS or of any registered representative of an NASD member investment dealer
which has an agreement with IBS and is acting in accordance with KILICO's
instructions.
Insofar as indemnification for liability arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of
KILICO or the Separate Account (by virtue of the fact that they may also be
agents, employees or controlling persons of IBS) pursuant to the foregoing
provisions, or otherwise KILICO and the Separate Account have been advised that
in the opinion of the Securities and Exchange Commission such indemnification
may be against public policy as expressed in the Act and may be, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by KILICO or the Separate Account of
expenses incurred or paid by a director, officer or controlling person of KILICO
or the Separate Account in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, KILICO and the Separate Account
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
REPRESENTATION REGARDING FEES AND CHARGES PURSUANT TO
SECTION 26 OF THE INVESTMENT COMPANY ACT OF 1940
Kemper Investors Life Insurance Company (KILICO) represents that the fees
and charges deducted under the Policy, in the aggregate, are reasonable in
relation to the services rendered, the expenses expected to be incurred, and the
risks assumed by KILICO.
II-1
<PAGE> 83
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement comprises the following Papers and Documents:
The Facing sheet.
(1) Reconciliation and tie between items in N-8B-2 and Prospectus.
The prospectus consisting of 77 pages.
The undertaking to file reports.
Undertaking pursuant to Rule 484(b)(1) under the Securities Act of
1933.
Representation Regarding Fees and Charges Pursuant to Section 26
of the Investment Company Act of 1940.
The signatures.
Written consents of the following persons:
(2) A. Frank J. Julian, Esq. (Included in Opinion filed as Exhibit
3(a)).
B. Coopers & Lybrand L.L.P., independent accountants (Filed as
Exhibit 6(a)).
C. KPMG Peat Marwick LLP, Independent Auditors (Filed as Exhibit
6(b)).
D. Christopher J. Nickele, FSA (Included in Opinion filed as Exhibit
3(b)).
The following exhibits:
<TABLE>
<S> <C>
(1) 1-A(1) KILICO Resolution establishing the Separate Account
(1) 1-A(3)(a) Distribution Agreement between KILICO and Investors Brokerage
Services, Inc. (IBS)
(3) 1-A(3)(b) Specimen Selling Group Agreement of IBS
(2) 1-A(3)(c) Schedules of commissions
(3) 1-A(3)(d) General Agent Agreement
(2) 1-A(5) Form of Policy
(1) 1-A(6)(a) KILICO Articles of Incorporation
(3) 1-A(6)(b) By-Laws of KILICO
(4) 1-A(8)(a) Participation Agreement among KILICO, American Skandia Trust and
American Skandia Investment Services, Incorporated
(4) 1-A(8)(b) Service Agreement between KILICO and American Skandia Investment
Services, Incorporated
1-A(8)(c) Form of Participation Agreement between Kemper Investors Life
Insurance Company and Scudder Variable Life Investment Fund
1-A(8)(d) Form of Participating Contract and Policy Agreement between Kemper
Investors Life Insurance Company and Scudder Kemper Investments, Inc.
1-A(8)(e) Form of Indemnification Agreement between Kemper Investors Life
Insurance Company and Scudder Kemper Investment, Inc.
(5) 1-A(8)(f) Fund Participation Agreement among Kemper Investors Life Insurance
Company, Fidelity Variable Insurance Products Fund and Fidelity
Distributors Corporation
(5) 1-A(8)(g) Fund Participation Agreement among Kemper Investors Life Insurance
Company, Fidelity Variable Insurance Products Fund II and Fidelity
Distributors Corporation
1-A(8)(h) Form of Fund Participation Agreement among Kemper Investors Life
Insurance Company, Fidelity Variable Insurance Products Fund III and
Fidelity Distributors Corporation
1-A(8)(i) Form of Amendment to Fund Participation Agreement among Kemper
Investors Life Insurance Company, Fidelity Variable Insurance Products
Fund and Fidelity Distributors Corporation
</TABLE>
II-2
<PAGE> 84
<TABLE>
<S> <C>
1-A(8)(j) Form of Amendment to Fund Participation Agreement among Kemper
Investors Life Insurance Company, Fidelity Variable Insurance Products
Fund II and Fidelity Distributors Corporation
(2) 1-A(10) Application for Policy
(2) 2 Specimen Notice of Withdrawal Right
(2) 3(a) Opinion and consent of legal officer of KILICO as to legality of
policies being registered
3(b) Opinion and consent of actuarial officer of KILICO regarding
prospectus illustrations and actuarial matters
6(a) Consents of Coopers & Lybrand L.L.P., independent accountants
6(b) Consent of KPMG Peat Marwick LLP, independent auditors
(2) 8 Procedures Memorandum, pursuant to Rule 6e-3(T)(b)(12)(iii)
(1) 11 Representation, description and undertakings regarding mortality and
expense risk charge pursuant to Rule 6e-3(T)(b)(13)(iii)(F)
</TABLE>
- -------------------------
(1) Filed with the Registration Statement of the Registrant on Form S-6 filed on
or about December 26, 1995 (File No. 33-65399).
(2) Filed with Pre-Effective Amendment No. 1 to the Registration Statement of
the Registrant on Form S-6 filed on or about June 5, 1996 (File No.
33-65399).
(3) Filed with Amendment No. 2 to the Registration Statement on Form S-1 (File
No. 333-02491) filed on or about April 23, 1997.
(4) Filed with Post-Effective Amendment No. 1 to the Registration Statement of
the Registrant on Form S-6 filed on or about April 28, 1997 (File No.
33-65399).
(5) Incorporated by reference to Post-Effective Amendment No. 24 to the
Registration Statement on Form N-4 filed on or about April 26, 1996 (File
No. 2-72671).
II-3
<PAGE> 85
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant,
KILICO Variable Separate Account, certifies that it meets the requirements of
effectiveness of this Amendment to the Registration Statement pursuant to Rule
485(b) under the Securities Act of 1933 and has duly caused this Amendment to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Long Grove and State of Illinois on
the 23rd day of April, 1998.
KILICO VARIABLE SEPARATE ACCOUNT
(Registrant)
By: Kemper Investors Life Insurance
Company
(Depositor)
By:
/s/ JOHN B. SCOTT
------------------------------------
John B. Scott, Chief Executive
Officer
and President
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the Registration Statement has been signed below by the following directors
and principal officers of Kemper Investors Life Insurance Company in the
capacities indicated on the 23rd day of April, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ JOHN B. SCOTT Chief Executive Officer, President and Director
- ----------------------------------------------- (Principal Executive Officer)
John B. Scott
/s/ W. H. BOLINDER Chairman of the Board and Director
- -----------------------------------------------
William H. Bolinder
/s/ FREDERICK L. BLACKMON Senior Vice President and Chief Financial
- ----------------------------------------------- Officer (Principal Financial Officer and
Frederick L. Blackmon Principal Accounting Officer)
/s/ LOREN J. ALTER Director
- -----------------------------------------------
Loren J. Alter
/s/ DAVID A. BOWERS Director
- -----------------------------------------------
David A. Bowers
- ----------------------------------------------- Director
Markus Rohrbasser
</TABLE>
II-4
<PAGE> 86
EXHIBIT INDEX
<TABLE>
<S> <C>
1-A(8)(c) Form of Participation Agreement between Kemper Investors
Life Insurance Company and Scudder Variable Life Investment
Fund
1-A(8)(d) Form of Participating Contract and Policy Agreement between
Kemper Investors Life Insurance Company and Scudder Kemper
Investments, Inc.
1-A(8)(e) Form of Indemnification Agreement between Kemper Investors
Life Insurance Company and Scudder Kemper Investments, Inc.
1-A(8)(h) Form of Fund Participation Agreement among Kemper Investors
Life Insurance Company, Fidelity Variable Insurance Products
Fund III and Fidelity Distributors Corporation
1-A(8)(i) Form of Amendment to Fund Participation Agreement among
Kemper Investors Life Insurance Company, Fidelity Variable
Insurance Products Fund and Fidelity Distributors
Corporation
1-A(8)(j) Form of Amendment to Fund Participation Agreement among
Kemper Investors Life Insurance Company, Fidelity Variable
Insurance Products Fund II and Fidelity Distributors
Corporation.
3(b) Opinion and consent of actuarial officer of KILICO regarding
prospectus illustrations and actuarial matters
6(a) Consents of Coopers & Lybrand L.L.P., independent
accountants
6(b) Consent of KPMG Peat Marwick LLP, independent auditors
</TABLE>
<PAGE> 1
Exhibit 1-A(8)(c)
FORM OF
PARTICIPATION AGREEMENT
PARTICIPATION AGREEMENT (the "Agreement") made by and between SCUDDER
VARIABLE LIFE INVESTMENT FUND (the "Fund"), a Massachusetts business trust
created under a Declaration of Trust dated March 15, 1985, as amended, with a
principal place of business in Boston, Massachusetts and KEMPER INVESTORS LIFE
INSURANCE COMPANY, an Illinois corporation (the "Company"), with a principal
place of business One Kemper Drive, Long Grove, Illinois, on behalf of one or
more separate accounts of the Company, as set forth on Schedule A hereto, as it
may be amended from time to time upon written notice to the Fund in accordance
with Paragraph 10 herein (each, an "Account").
WHEREAS, the Fund acts as the investment vehicle for the separate
accounts established for variable life insurance policies and variable annuity
contracts (collectively referred to herein as "Variable Insurance Products") to
be offered by insurance companies which have entered into participation
agreements substantially identical to this Agreement ("Participating Insurance
Companies") and their affiliated insurance companies; and
WHEREAS, the beneficial interest in the Fund is divided into several
series of shares of beneficial interest without par value ("Shares"), and
additional series of Shares may be established, each designated a "Portfolio"
and representing the interest in a particular managed portfolio of securities;
and
WHEREAS, each Portfolio of the Fund, except the Money Market Portfolio,
is divided into two classes of Shares, and additional classes of Shares may be
established; and
WHEREAS, the Parties desire to evidence their agreement as to certain
other matters,
NOW THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements hereinafter contained, the parties hereto agree as
follows:
1. Duty of Fund to Sell.
The Fund shall make its Shares available for purchase at the applicable
net asset value per Share by Participating Insurance Companies and their
affiliates and separate accounts on those days on which the Fund calculates its
net asset value pursuant to rules of the Securities and Exchange Commission (the
"SEC"); provided, however, that the Trustees of the Fund may refuse to sell
Shares of any Portfolio to any person, or suspend or terminate the offering of
Shares of
<PAGE> 2
any Portfolio, if such action is required by law or by regulatory authorities
having jurisdiction or is, in the sole discretion of the Trustees, acting in
good faith and in light of their duties under federal and any applicable state
laws, necessary in the best interest of the shareholders of any Portfolio.
The Company's orders for such Shares of the Portfolios and one or more
classes thereof which are available for purchase under this Agreement, as set
forth on Schedule B hereto, as it may be amended from time to time, shall be
executed on a daily basis at the net asset value per Share next computed after
receipt by the Fund of the order for the Shares. The Company's order may net the
purchase orders and redemption requests for each Portfolio or class thereof. For
purposes of this Paragraph 1, the Company shall be the designee of the Fund for
receipt of such orders from the Account(s), and receipt by such designee shall
constitute receipt by the Fund; provided that the Fund receives notice of such
order by [10:00] a.m., [New York] time on the next following Business Day.
"Business Day" shall mean any day on which the New York Stock Exchange is open
for trading and on which the Fund calculates its net asset value per Share
pursuant to the rules of the SEC.
The Company shall pay for Shares on the next Business Day after an
order to purchase Shares is made in accordance with the provisions hereof.
Payment shall be made by wiring federal funds to the Fund or to its designated
custodial account by [2:00] p.m., [New York] time. For purposes of Paragraph 1,
upon receipt by the Fund of the federal funds so wired, such funds shall cease
to be the responsibility of the Company and shall become the responsibility of
the Fund. If payment in federal funds for any purchase is not received by the
Fund or its designated custodian or is received after [2:00] p.m., [New York]
time, the Company shall promptly upon the Fund's written request, reimburse the
Fund for any charges, costs, fees, interest, or other expenses incurred by the
Fund in connection with any advances to, or borrowings or overdrafts by, the
Fund, or any similar expenses incurred by the Fund as a result of transactions
effected by the Fund based upon such purchase order.
The Fund agrees to redeem for cash, at the Company's request, any full
or fractional Shares held by the Company, executing such requests on a daily
basis at the net asset value per Share next computed after receipt by the Fund
of the request for redemption. The
2
<PAGE> 3
Company's request may net any purchase orders and redemption requests for each
Portfolio or class thereof. For purposes of this Paragraph 1, the Company shall
be the designee of the Fund for receipt of requests for redemption from the
Account(s), and receipt by such designee shall constitute receipt by the Fund;
provided that the Fund receives notice of such request for redemption by [10:00]
a.m., [New York] time on the next following Business Day.
Payment for Shares redeemed shall be made by wiring federal funds to
the Company by [2:00] p.m., [New York] time, on the next Business Day after the
Fund receives the request for redemption. If payment in federal funds for any
redemption request is received by the Company after [2:00] p.m., [New York]
time, the Fund shall promptly upon the Company's written request, reimburse the
Company for any charges, costs, fees, interest, or other expenses incurred by
the Company as a result of such failure to provide redemption proceeds within
the specified time. Notwithstanding the foregoing, the Trustees of the Fund may
suspend the right of redemption or postpone the date of payment or satisfaction
upon redemption: (a) for any period during which the New York Stock Exchange is
closed, other than customary week-end and holiday closings, and during which
trading on the New York Stock Exchange is restricted; (b) for any period during
which an emergency, as determined by the SEC, exists as a result of which
disposal by the Fund of securities owned by it is not reasonably practicable or
it is not reasonably practicable for the Fund fairly to determine the value of
its net assets; and (c) for such other periods as the SEC may by order permit
for the protection of holders of the Shares.
Issuance and transfer of the Shares will be by book entry only. Stock
certificates will not be issued to the Company or any Account. Shares ordered
from the Fund will be recorded in an appropriate title for each Account or the
appropriate subaccount thereof.
The Fund shall furnish same day notice (by wire or telephone, followed
by written confirmation) to the Company of any income dividends or capital gain
distributions payable on the Shares. The Company hereby elects to receive all
such income dividends and capital gain distributions as are payable on the
Shares of the Portfolios and classes thereof in additional Shares of that
Portfolio or class thereof. The Company reserves the right to revoke this
election and to receive all such income dividends and capital gain distributions
in
3
<PAGE> 4
cash. The Fund shall notify the Company of the number of Shares so issued as
payment of such dividends and distributions. The Fund shall to the extent
practicable provide advance notice to Company of any date on which the Fund
reasonably expects to make a dividend distribution.
4
<PAGE> 5
2. Fund Materials.
The Fund, at its expense, shall provide the Company or its designee
with camera-ready copy or, at the Company's request, computer diskette versions
of all prospectuses, statements of additional information, annual and
semi-annual reports and proxy materials (collectively, "Fund Materials") to be
printed and distributed by the Company or its broker/dealer to the Company's
existing or prospective contract owners, as appropriate. The Company agrees to
bear the cost of printing and distributing such Fund Materials.
The Fund shall provide such other assistance as is reasonably necessary
in order for the Company once each year (or more frequently if the prospectus
and/or statement of additional information ("SAI") for the Fund is amended
during the year) to have the prospectus for the Account(s), with respect to the
Variable Insurance Products, and the Fund's prospectus printed together in one
document, and to have the SAI for the Fund and the SAI for the Account(s), with
respect to the Variable Insurance Products, printed together in one document.
Alternatively, the Company may print the Fund's prospectus and/or its SAI in
combination with other investment companies' prospectuses and statements of
additional information. The Fund will cooperate with the Company in preparing
and filing with the SEC, pursuant to Rule 497 under the 1933 Act, appropriate
versions of the Fund's prospectus and/or SAI.
3. Requirement to Execute Participation Agreement; Requests.
Each Participating Insurance Company shall, prior to purchasing Shares
in the Fund, execute and deliver a participation agreement in a form
substantially identical to this Agreement.
The Fund shall make available, upon written request from the
Participating Insurance Company given in accordance with Paragraph 9, to each
Participating Insurance Company which has executed an Agreement and which
Agreement has not been terminated pursuant to Paragraph 8 (i) a list of all
other Participating Insurance Companies, and (ii) a copy of the Agreement as
executed by any other Participating Insurance Company.
The Fund shall also make available upon request to each Participating
Insurance Company which has executed an Agreement and Agreement has not been
terminated pursuant to Paragraph 8, the net asset value of any Portfolio of the
Fund as of any date upon which the Fund
5
<PAGE> 6
calculates the net asset value of its Portfolios for the purpose of purchase and
redemption of Shares.
The Fund shall make the net asset value per Share for each Portfolio
and class thereof available to the Company on a daily basis as soon as
reasonably practical after the net asset value per Share is calculated (normally
by [6:00] p.m., [New York] time) and shall use its best efforts to make such net
asset value per Share available by [6:30] p.m., [New York] time.
Each party to this Agreement shall have the right to rely on
information or confirmations provided by any other party (or by any affiliate of
any other party), and shall not be liable in the event that an error results
from any incorrect information or confirmations supplied by any other party. If
an error is made in reliance upon incorrect information or confirmations, any
amount required to make an account of a Variable Insurance Product owner whole
shall be borne by the party who provided the incorrect information or
confirmation.
4. Indemnification.
(a) The Company agrees to indemnify and hold harmless the Fund and each
of its Trustees and officers and each person, if any, who controls the Fund
within the meaning of Section 15 of the Securities Act of 1933 (the "Act")
against any and all losses, claims, damages, liabilities or litigation
(including legal and other expenses), arising out of the acquisition of any
Shares by any person, to which the Fund or such Trustees, officers or
controlling person may become subject under the Act, under any other statute, at
common law or otherwise, which (i) may be based upon any wrongful act by the
Company, any of its employees or representatives, any affiliate of or any person
acting on behalf of the Company or a principal underwriter of its insurance
products, or (ii) may be based upon any untrue statement or alleged untrue
statement of a material fact contained in a registration statement or prospectus
covering Shares or any amendment thereof or supplement thereto or the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading if such a
statement or omission was made in reliance upon information furnished to the
Fund by the Company, or (iii) may be based on any untrue statement or alleged
untrue statement of a material fact contained in a registration statement or
prospectus covering insurance products sold by the Company or any insurance
company which is an affiliate thereof,
6
<PAGE> 7
or any amendments or supplement thereto, or the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statement or statements therein not misleading, unless such statement or
omission was made in reliance upon information furnished to the Company or such
affiliate by or on behalf of the Fund; provided, however, that in no case (i) is
the Company's indemnity in favor of a Trustee or officer or any other person
deemed to protect such Trustee or officer or other person against any liability
to which any such person would otherwise be subject by reason of willful
misfeasance, bad faith, or gross negligence in the performance of his duties or
by reason of his reckless disregard of obligations and duties under this
Agreement or (ii) is the Company to be liable under its indemnity agreement
contained in this Paragraph 4 with respect to any claim made against the Fund or
any person indemnified unless the Fund or such person, as the case may be, shall
have notified the Company in writing pursuant to Paragraph 10 within a
reasonable time after the summons or other first legal process giving
information of the nature of the claims shall have been served upon the Fund or
upon such person (or after the Fund or such person shall have received notice of
such service on any designated agent), but failure to notify the Company of any
such claim shall not relieve the Company from any liability which it may have to
the Fund or any person against whom such action is brought otherwise than on
account of its indemnity agreement contained in this Paragraph 4. The Company
shall be entitled to participate, at its own expense, in the defense, or, if it
so elects, to assume the defense of any suit brought to enforce any such
liability, but, if it elects to assume the defense, such defense shall be
conducted by counsel chosen by it and satisfactory to the Fund, to its officers
and Trustees, or to any controlling person or persons, defendant or defendants
in the suit. In the event that the Company elects to assume the defense of any
such suit and retain such counsel, the Fund, such officers and Trustees or
controlling person or persons, defendant or defendants in the suit, shall bear
the fees and expenses of any additional counsel retained by them, but, in case
the Company does not elect to assume the defense of any such suit, the Company
will reimburse the Fund, such officers and Trustees or controlling person or
persons, defendant or defendants in such suit, for the reasonable fees and
expenses of any counsel retained by them. The Company agrees promptly to notify
the Fund pursuant to Paragraph 10 of the commencement of any litigation or
proceedings against it or any of its directors or officers in connection with
the issue and sale of any Shares.
7
<PAGE> 8
(b) The Fund agrees to indemnify and hold harmless the Company and each
of its directors and officers and each person, if any, who controls the Company
within the meaning of Section 15 of the Act against any and all losses, claims,
damages, liabilities or litigation (including legal and other expenses), to
which it or such directors, officers or controlling person may become subject
under the Act, under any other statute, at common law or otherwise, arising out
of the acquisition of any Shares by any person which (i) may be based upon any
wrongful act by the Fund, any of its employees or representatives, any affiliate
of or any person acting on behalf of the Fund or a principal underwriter of the
Fund, or (ii) may be based upon any untrue statement or alleged untrue statement
of a material fact contained in a registration statement or prospectus covering
Shares or any amendment thereof or supplement thereto or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading unless such statement or
omission was made in reliance upon information furnished to the Fund by the
Company or (iii) may be based on any untrue statement or alleged untrue
statement of a material fact contained in a registration statement or prospectus
covering insurance products sold by the Company or any insurance company which
is an affiliate thereof, or any amendment or supplement thereto, or the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statement or statements therein not misleading,
if such statement or omission was made in reliance upon information furnished to
the Company or such affiliate by or on behalf of the Fund; provided, however,
that in no case (i) is the Fund's indemnity in favor of a director or officer or
any other person deemed to protect such director or officer or other person
against any liability to which any such person would otherwise be subject by
reason of willful misfeasance, bad faith, or gross negligence in the performance
of his duties or by reason of his reckless disregard of obligations and duties
under this Agreement or (ii) is the Fund to be liable under its indemnity
agreement contained in this Paragraph 4 with respect to any claims made against
the Company or any such director, officer or controlling person unless it or
such director, officer or controlling person, as the case may be, shall have
notified the Fund in writing pursuant to Paragraph 10 within a reasonable time
after the summons or other first legal process giving information of the nature
of the claim shall have been served upon it or upon such director, officer or
controlling person (or after the Company or such director, officer or
controlling person
8
<PAGE> 9
shall have received notice of such service on any designated agent), but failure
to notify the Fund of any claim shall not relieve it from any liability which it
may have to the Company or any person against whom such action is brought
otherwise than on account of its indemnity agreement contained in this
Paragraph. The Fund will be entitled to participate at its own expense, in the
defense, or, if it so elects, to assume the defense of any suit brought to
enforce any such liability, but if the Fund elects to assume the defense, such
defense shall be conducted by counsel chosen by it and satisfactory to the
Company, its directors, officers or controlling person or persons, defendant or
defendants, in the suit. In the event the Fund elects to assume the defense of
any such suit and retain such counsel, the Company, its directors, officers or
controlling person or persons, defendant or defendants in the suit, shall bear
the fees and expenses of any additional counsel retained by them, but, in case
the Fund does not elect to assume the defense of any such suit, it will
reimburse the Company or such directors, officers or controlling person or
persons, defendant or defendants in the suit, for the reasonable fees and
expenses of any counsel retained by them. The Fund agrees promptly to notify the
Company pursuant to Paragraph 10 of the commencement of any litigation or
proceedings against it or any of its officers or Trustees in connection with the
issuance or sale of any Shares.
The provisions of this Section 4 shall survive the termination of the
Agreement.
5. Procedure for Resolving Irreconcilable Conflicts.
(a) The Trustees of the Fund will monitor the operations of the Fund
for the existence of any material irreconcilable conflict among the interests of
all the contract holders and policy owners of variable Insurance Products (the
"Participants") of all separate accounts investing in the Fund. An
irreconcilable material conflict may arise, among other things, from: (a) an
action by any state insurance regulatory authority; (b) a change in applicable
insurance laws or regulations; (c) a tax ruling or provision of the Internal
Revenue Code or the regulations thereunder; (d) any other development relating
to the tax treatment of insurers, contract holders or policy owners or
beneficiaries of Variable Insurance Products; (e) the manner in which the
investments of any Portfolio are being managed; (f) a difference in voting
instructions given by variable annuity contract holders, on the one hand, and
variable life insurance policy owners, on the other hand, or by the contract
holders or policy owners of different participating insurance companies; or (g)
a decision by an insurer to override the voting instructions of Participants.
9
<PAGE> 10
(b) The Company will be responsible for reporting any potential or
existing conflicts to the Trustees of the Fund. The Company will be responsible
for assisting the Trustees in carrying out their responsibilities under this
Paragraph 5(b) and Paragraph 5(a), by providing the Trustees with all
information reasonably necessary for the Trustees to consider the issues raised.
The Fund will also request its investment adviser to report to the Trustees any
such conflict which comes to the attention of the adviser.
(c) If it is determined by a majority of the Trustees of the Fund, or a
majority of its disinterested Trustees, that a material irreconcilable conflict
exists involving the Company, the Company shall, at its expense, and to the
extent reasonably practicable (as determined by a majority of the disinterested
Trustees), take whatever steps are necessary to eliminate the irreconcilable
material conflict, including withdrawing the assets allocable to some or all of
the separate accounts from the Fund or any Portfolio or class thereof and
reinvesting such assets in a different investment medium, including another
Portfolio of the Fund or class thereof, offering to the affected Participants
the option of making such a change or establishing a new funding medium
including a registered investment company.
For purposes of this Paragraph 5(c), the Trustees, or the disinterested
Trustees, shall determine whether or not any proposed action adequately remedies
any irreconcilable material conflict. In the event of a determination of the
existence of an irreconcilable material conflict, the Trustees shall cause the
Fund to take such action, such as the establishment of one or more additional
Portfolios or classes, as they in their sole discretion determine to be in the
interest of all shareholders and Participants in view of all applicable factors,
such as cost, feasibility, tax, regulatory and other considerations. In no event
will the Fund be required by this Paragraph 5(c) to establish a new funding
medium for any variable contract or policy.
The Company shall not be required by this Paragraph 5(c) to establish a
new funding medium for any variable contract or policy if an offer to do so has
been declined by a vote of a majority of the Participants materially adversely
affected by the material irreconcilable conflict. The Company will recommend to
its Participants that they decline an offer to establish a new funding medium
only if the Company believes it is in the best interest of the Participants.
10
<PAGE> 11
(d) The Trustees' determination of the existence of an irreconcilable
material conflict and its implications promptly shall be communicated to all
Participating Insurance Companies by written notice thereof delivered or mailed,
first class postage prepaid.
6. Unregistered Separate Accounts.
For its unregistered Account(s) which are exempt from registration in
reliance upon Sections 3(c)(1) or 3(c)(7) under the Investment Company Act of
1940, as amended (the "1940 Act"), the Company represents and warrants that:
(a) Investors Brokerage Services, Inc. is the principal
underwriter for each such unregistered Account and any
subaccount thereof and is registered as a broker- dealer
under the Securities Exchange Act of 1934, as amended;
(b) Shares are and will continue to be the only investment
securities held by the corresponding Account subaccounts;
and
(c) with regard to each Portfolio, the Company, on behalf of the
corresponding Account subaccount, will:
(1) seek instructions from all owners of Variable
Insurance Products with regard to the voting of all
proxies with respect to Shares and vote such proxies
only in accordance with such instructions; and
(2) refrain from substituting shares of another security
for such Shares unless the SEC has approved such
substitution in the manner provided in Section 26 of
the 1940 Act.
11
<PAGE> 12
7. Voting Privileges.
The Company shall be responsible for assuring that its separate account
or accounts participating in the Fund shall use a calculation method of voting
procedures substantially the same as the following: those Participants permitted
to give instructions and the number of Shares for which instructions may be
given will be determined as of the record date for the Fund shareholders'
meeting, which shall not be more than 60 days before the date of the meeting.
Whether or not voting instructions are actually given by a particular
Participant, all Fund shares held in any separate account or sub-account thereof
and attributable to policies or contracts will be voted for, against, or
withheld from voting on any proposition in the same proportion as (i) the
aggregate record date cash value held in such sub-account for policies or
contracts giving instructions, respectively, to vote for, against, or withhold
votes on such proposition, bears to (ii) the aggregate record date cash value
held in the sub-account for all policies or contracts for which voting
instructions are received. Owners of policies or contracts continued in effect
under lapse options will not be permitted to give voting instructions. Shares
held in any other insurance company general or separate account or sub-account
thereof will be voted in the proportion specified in the second preceding
sentence for shares attributable to policies or contracts.
The Company will provide pass-through voting privileges as required by
Paragraph 6 of this Agreement and to all owners of Variable Insurance Products
which are registered under the Act and/or the 1940 Act so long as the SEC
continues to interpret the 1940 Act as requiring pass-through voting privileges.
The owners of Variable Insurance Products to whom the Company will provide
pass-through voting privileges pursuant to this Agreement are hereinafter
referred to as "Pass-through Voters". Accordingly, the Company, when applicable,
will distribute to Pass- through Voters all proxy material furnished and will
vote Shares of the Portfolios held in its Account(s) in a manner consistent with
voting instructions timely received from Pass-through Voters. The Company will
vote Shares for which it has not received timely voting instructions, as well as
Shares it owns, in the same proportion as it votes those Shares for which it has
received voting instructions. The Company reserves the right to disregard the
voting instructions of Pass-through Voters to the extent such action is
permitted by Rules 6e-2 or 6e-3(T) under the 1940 Act and is permitted under
applicable state insurance laws affecting Fund.
12
<PAGE> 13
8. Duration and Termination.
This Agreement shall continue in force until terminated in
accordance with the provisions herein.
This Agreement shall terminate in accordance with the following
provisions:
(a) At the option of the Company or the Fund at any time
upon 180 days' notice, unless a shorter time is
agreed to by the parties;
(b) At the option of the Company, if Shares are not
reasonably available to meet the requirements of the
Variable Insurance Products as determined by the
Company. Prompt notice of election to terminate shall
be furnished by the Company, said termination to be
effective ten (10) days after receipt of notice
unless the Fund makes available a sufficient number
of Shares to reasonably meet the requirements of the
Variable Insurance Products within said ten-day
period;
(c) At the option of the Company, upon the institution
of formal proceedings against the Fund or the
principal underwriter for the Shares by the SEC, the
National Association of Securities Dealers, Inc. (the
"NASD"), or any other regulatory body, the expected
or anticipated ruling, judgment or outcome of which
would, in the Company's reasonable judgment,
materially impair Fund's ability to meet and perform
Fund's obligations and duties hereunder. Prompt
notice of election to terminate shall be furnished by
the Company with said termination to be effective
upon receipt of notice;
(d) At the option of the Fund, upon the institution of
formal proceedings against the Company or the
principal underwriter for the Variable Insurance
Products by the SEC, the NASD, or any other
regulatory body, the expected or anticipated ruling,
judgment or outcome of which would, in the Fund's
reasonable judgment, materially impair the Company's
ability to meet and perform its obligations and
duties hereunder. Prompt notice of election to
terminate shall be furnished by the Fund with said
termination to be effective upon receipt of notice;
13
<PAGE> 14
(e) In the event Shares are not registered, issued or
sold in accordance with applicable federal and/or
state law and any applicable rules and regulations
thereunder, or such law precludes the use of such
Shares as the underlying investment media for
Variable Insurance Products issued or to be issued by
the Company. Termination shall be effective upon such
occurrence without notice;
(f) Upon the receipt of any necessary regulatory
approvals, or requisite vote of Pass-through Voters
having an interest in the Portfolios, to substitute
for Shares of the Portfolios the shares of another
investment company in accordance with the terms of
the applicable Variable Insurance Products. The
Company shall give sixty (60) days' written notice to
the Fund of any proposed request for regulatory
approvals or vote to replace the Portfolios' Shares;
(g) At the option of the Company, upon the Fund's breach
of any material provision of this Agreement, which
breach has not been cured to the Company's
satisfaction within thirty (30) days after written
notice of such breach is delivered to the Fund;
(h) At the option of the Fund, upon the Company's breach
of any material provision of this Agreement, which
breach has not been cured to the Fund's satisfaction
within thirty (30) days after written notice of such
breach is delivered to the Company;
(i) In the event this Agreement is assigned without the
prior written consent of the Company and the Fund.
Termination shall be effective immediately upon such
occurrence without notice.
In addition, this Agreement may be terminated at any time, at the
option of either of the Company or the Fund, when neither the Company, any
insurance company nor the separate account or accounts of such insurance company
which is an affiliate thereof which is not a Participating Insurance Company own
any Shares of the Fund or may be terminated by either party to the Agreement
upon a determination by a majority of the Trustees of the Fund, or a
14
<PAGE> 15
majority of its disinterested Trustees, following certification thereof by a
Participating Insurance Company given in accordance with Paragraph 10 that an
irreconcilable conflict exists among the interests of (i) all contract holders
and policy holders of Variable Insurance Products of all separate accounts or
(ii) the interests of the Participating Insurance Companies investing in the
Fund.
Notwithstanding any termination of this Agreement and unless the
further sale of Shares of the Portfolios is proscribed by applicable law or the
SEC or other regulatory body, the Fund shall, at the Company's option, continue
to make available additional Shares, as provided below, pursuant to the terms
and conditions of this Agreement, for all Variable Insurance Products in effect
on the effective date of termination of this Agreement (hereinafter referred to
as "Existing Contracts"). Specifically, without limitation, the owners of the
Existing Contracts shall be permitted to reallocate investments in the Fund,
redeem investments in the Fund and/or invest in the Fund upon the payment of
additional premiums under the Existing Contracts.
9. Compliance.
The Fund will comply with the provisions of Section 4240(a) of the
New York Insurance Law.
Each Portfolio of the Fund will comply with the provisions of Section
817(h) of the Internal Revenue Code of 1986, as amended (the "Code"), relating
to diversification requirements for variable annuity, endowment and life
insurance contracts. Specifically, each Portfolio will comply with either (i)
the requirement of Section 817(h)(1) of the Code that its assets be adequately
diversified, or (ii) the "Safe Harbor for Diversification" specified in Section
817(h)(2) of the Code, or (iii) in the case of variable life insurance contracts
only, the diversification requirement of Section 817(h)(1) of the Code by having
all or part of its assets invested in U. S. Treasury securities which qualify
for the "Special Rule for Investments in United States Obligations" specified in
Section 817(h)(3) of the Code. The Fund will notify the Company immediately upon
having a reasonable basis for believing that a Portfolio has ceased to comply
with the requirements of Section 817(h) of the Code or that the Portfolio might
not so comply in the future and will immediately take all steps necessary to
adequately diversify the Portfolio to achieve compliance.
15
<PAGE> 16
The provisions of Paragraphs 5 and 7 of this Agreement shall be
interpreted in a manner consistent with any Rule or order of the Securities and
Exchange Commission under the Investment Company Act of 1940, as amended,
applicable to the parties hereto.
No Shares of any Portfolio of the Fund may be sold to the general
public.
10. Notices.
Any notice shall be sufficiently given when sent by registered or
certified mail to the other party at the address of such party set forth below
or at such other address as such party may from time to time specify in writing
to the other party.
If to the Fund:
Scudder Variable Life Investment Fund
Two International Place
Boston, Massachusetts 02110
(617) 295-2275
Attn: David B. Watts
If to the Company:
Kemper Investors Life Insurance Company
One Kemper Drive
Long Grove, Illinois 60049
Attn: General Counsel
11. Massachusetts Law to Apply.
This Agreement shall be construed and the provisions hereof interpreted
under and in accordance with the laws of The Commonwealth of Massachusetts.
12. Miscellaneous.
The name "Scudder Variable Life Investment Fund" is the designation of
the Trustees for the time being under a Declaration of Trust dated March 15,
1985, as amended, and all persons dealing with the Fund must look solely to the
property of the Fund for the enforcement of any claims against the Fund as
neither the Trustees, officers, agents or shareholders assume any personal
liability for obligations entered into on behalf of the Fund. No Portfolio shall
be liable for any obligations properly attributable to any other Portfolio.
16
<PAGE> 17
The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect. This Agreement may be executed
simultaneously in two or more counterparts, each of which taken together shall
constitute one and the same instrument.
13. Entire Agreement.
This Agreement incorporates the entire understanding and agreement
among the parties hereto, and supersedes any and all prior understandings and
agreements between the parties hereto with respect to the subject matter hereof.
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed in its name and behalf by its duly authorized
representative and its seal to be hereunder affixed hereto as of the _________
day of _______________, 1998.
SEAL SCUDDER VARIABLE LIFE
INVESTMENT FUND
By: __________________________________________
David B. Watts
President
SEAL KEMPER INVESTORS LIFE
INSURANCE COMPANY
By:___________________________________________
Its:__________________________________________
17
<PAGE> 18
SCHEDULE A
TO PARTICIPATION AGREEMENT
Separate Account(s) of the Company
KILICO Variable Separate Account - 2
18
<PAGE> 19
SCHEDULE B
TO PARTICIPATION AGREEMENT
Portfolios and Classes Available for Purchase
Portfolios of Scudder Variable Life Investment Fund
Portfolio:
Class:
Class:
19
<PAGE> 1
Exhibit I-A(8)(d)
Scudder Investor Services, Inc.
Two International Place
Boston, Massachusetts 02110
FORM OF
PARTICIPATING CONTRACT AND POLICY AGREEMENT
Ladies and Gentlemen:
We (sometimes hereinafter referred to as "Investor Services") are the
Principal Underwriter of shares of Scudder Variable Life Investment Fund (the
"Fund"), a no-load, open-end, diversified registered management investment
company established in 1985 as a Massachusetts business trust. The Fund is a
series fund consisting of the Balanced Portfolio, Bond Portfolio, Capital Growth
Portfolio, Global Discovery Portfolio, International Portfolio, Money Market
Portfolio, and Growth and Income Portfolio (individually or collectively
hereinafter referred to as the "Portfolio" or the "Portfolios"). In addition,
each Portfolio, except the Money Market Portfolio, is divided into two classes
of shares of beneficial interest ("Shares"). Additional Portfolios and classes
may be created from time to time. The Fund is the funding vehicle for variable
annuity contracts and variable life insurance policies ("Participating Contracts
and Policies") to be offered to the separate accounts (the "Accounts") of
certain life insurance companies ("Participating Insurance Companies"). Owners
of Participating Contracts and Policies will designate a portion of their
premium to be invested in insurance company separate accounts or sub-accounts
which invest in, or represent an investment in, directly or indirectly, Shares
of the Portfolios of the Fund. All Shares of the Portfolios will be sold only to
Participating Insurance Companies which have agreed to participate in the Fund
to fund their separate accounts and/or to qualified plans, all in accordance
with the requirements of Section 817(h) of the Internal Revenue Code of 1986, as
amended ("Code") and Treasury Regulation 1.817-5. Shares of the Portfolios will
not be sold directly to the general public.
You are a registered broker-dealer which intends to offer and sell
Participating Contracts and Policies. In connection with such offer and sale you
will be obligated to deliver the prospectuses of such Participating Contracts
and Policies and, contemporaneously therewith, the prospectus of the Fund. Sales
of Shares to Participating Insurance Companies or their affiliates or the
separate accounts of either shall be effected solely by us as principal
underwriter of the Fund, and not by you. The relationship between us shall be
further governed by the following terms and conditions:
<PAGE> 2
1. To the extent, if any, that your activities or the activities of
the Participating Insurance Companies in connection with the sale
of Participating Contracts and Policies may constitute the sale of
Shares, you and we agree that (i) we are the sole "principal
underwriter" of the Fund and the sole "underwriter" of the Shares
as those terms are defined in the Investment Company Act of 1940
(the "1940 Act") and the Securities Act of 1933 (the "1933 Act"),
respectively, and (ii) neither you nor the Participating Insurance
Companies or the Accounts shall be deemed to be "principal
underwriters" of the Fund or "underwriters" of the Fund within the
meaning of the 1940 Act and the 1933 Act, respectively.
2. You hereby represent and warrant to us as follows:
(a) You are a corporation duly organized and validly
existing in good standing under the laws of the State
of Delaware and have full power and authority to enter into
this Agreement.
(b) This Agreement has been duly authorized, executed and
delivered by you and is a valid and binding obligation
enforceable against you in accordance with its terms.
(c) Your compliance with the provisions of this Agreement will
not conflict with or result in a violation of the provisions
of your charter or by-laws, or any statute or any judgment,
decree, order, rule or regulation of any court or
governmental agency or body having jurisdiction.
3. We hereby represent and warrant to you as follows:
(a) A registration statement (File No. 2-96461) on Form N-IA
with respect to the Shares (w) has been prepared by the Fund
in conformity with the requirements of the 1940 Act and the
1933 Act and all applicable published instructions, rules and
regulations (the "Rules and Regulations") of the Securities
and Exchange Commission (the "Commission"), (x) has been
filed with the Commission, (y) is currently effective, and
(z) will be amended under the 1933 Act and the 1940 Act from
time to time as required in order to effect the continuous
offering of the Shares. The registration statement, including
financial statements and exhibits, and the final prospectus,
including the statement of additional information, as
subsequently amended and supplemented, are herein
respectively referred to as the "Registration Statement" and
the "Prospectus".
(b) The Registration Statement and the Prospectus and any
amendment or supplement thereto will contain all statements
required to be stated therein and will comply in all material
respects with the requirements of the 1940 Act, the 1933 Act
and the Rules and Regulations, and the Registration Statement
and any post-effective amendment thereto will not contain or
incorporate by reference any untrue statement of a material
fact or omit to
2
<PAGE> 3
state any material fact required to be stated therein or
necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, and
the Prospectus and any amendment or supplement thereto will
not contain or incorporate by reference any untrue statement
of a material fact or omit to state a material fact required
to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which
they were made, not misleading.
(c) We are a corporation duly organized and validly existing in
good standing under the laws of The Commonwealth of
Massachusetts and have full power and authority to enter into
this Agreement.
(d) This Agreement has been duly authorized, executed and
delivered by us and is a valid and binding obligation
enforceable against us in accordance with its terms.
(e) Our compliance with all of the provisions of this Agreement
will not conflict with or result in a violation of the
provisions of our charter or by-laws, or any statute or any
judgment, decree, order, rule or regulation of any court or
governmental agency or body having jurisdiction over us.
4. You hereby covenant and agree with us as follows:
(a) You shall be an independent contractor and neither you nor
any of your directors, partners, officers or employees as
such, is or shall be an employee of us or of the Fund. You
are responsible for your own conduct and the employment,
control and conduct of your agents and employees and for
injury to such agents or employees or to others through your
agents or employees.
(b) You or one or more Participating Insurance Companies will be
responsible for insuring compliance with all applicable laws
and regulations of any regulatory body having jurisdiction
over you or Participating Contracts and Policies.
(c) No person is authorized to make any representations
concerning Shares except those contained in the Registration
Statement or Prospectus relating thereto and in such printed
information as issued by us for use as information
supplemental to the Prospectus. In offering Participating
Contracts and Policies you shall, with respect to the Fund
and the Shares, rely solely on the representations contained
in the Registration Statement, Prospectus and in the
above-mentioned supplemental information.
(d) You are not entitled to any compensation whatsoever from us
or the Fund with respect to offers of Participating Contracts
and Policies.
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<PAGE> 4
(e) With respect to payments to be made to us pursuant to a Rule
12b-1 Plan for the Fund, you will not seek reimbursement for
administrative and recordkeeping services under the Fund's
Rule 12b-1 Plan that have been or will be paid for by any
fees or charges imposed on owners of Participating Contracts
and Policies by a Participating Insurance Company for such
services. This provision does not restrict you from receiving
sales charges on purchases and redemptions, consistent with
applicable law, made under or redemption proceeds from a
Participating Contract or Policy at the same time that you
are seeking reimbursement for expenses under the Fund's Rule
12b-1 Plan.
5. We hereby covenant and agree with you as follows:
(a) If, at any time when a Prospectus relating to the Shares is
required to be delivered under the 1940 Act, the 1933 Act or
the Rules and Regulations, we become aware of the occurrence
of any event as a result of which the Prospectus as then
amended or supplemented would include any untrue statement of
a material fact, or omit to state a material fact necessary
to make the statements therein, in light of the circumstances
under which made, not misleading, or if we become aware that
it has become necessary at any time to amend or supplement
the Prospectus to comply with the 1940 Act, the 1933 Act or
the Rules and Regulations, we will promptly notify you and
promptly request the Fund to prepare and to file with the
Commission an amendment to the Registration Statement or
supplement to the Prospectus which will correct such
statement or omission or an amendment or supplement which
will effect such compliance, and deliver to you copies of any
such amendment or supplement.
(b) We will cooperate with you in taking such action as may be
necessary to qualify the Shares for offering and sale under
the securities or Blue Sky laws of any state or jurisdiction
as you may request and will continue such qualification in
effect so long as is required by applicable law in connection
with the distribution of Shares.
(c) We shall reimburse you, subject to the minimum amounts set
forth in the attached schedule, for those distribution and
shareholder servicing-related expenses that are permitted to
be paid for by the Fund under the Fund's Rule 12b-1 Plan and
for which (i) you submit documentation, as may be requested
by us or by the Fund's Board of Trustees, and (ii) we receive
payment for such expenses from the Fund under the Fund's Rule
12b-1 Plan. We shall remit to you as promptly as reasonably
practicable all payments received by us from the Fund for
remittance to you pursuant to the Fund's Rule 12b-1 Plan.
6. Sales of Shares may be suspended or the offering of Shares
withdrawn without notice (i) if the continued offering or sale of
Shares would violate any applicable
4
<PAGE> 5
statute or regulation, order or decree of any court, governmental
agency or self-regulatory organization having jurisdiction, or
(ii) if in the sole discretion of the Trustees of the Fund,
including a majority of those Trustees who are not "interested
persons" (as defined in the 1940 Act) of the Fund acting in good
faith and in light of their duties under federal and any
applicable state laws, such action is determined to be necessary
in the best interests of the Shareholders of any Portfolio.
7. If we elect to provide to you for the purpose of your offering
Participating Contracts and Policies copies of any Prospectus
relating to the Shares and printed information supplemental
thereto, we shall furnish you with such copies as you reasonably
request upon the payment of reasonable charges therefor by you or
one or more Participating Insurance Companies. If we elect not to
provide such copies of such documents, you or one or more
Participating Insurance Companies shall bear the entire cost of
printing copies for your use. You shall not use such copies of
such documents printed by you or one or more Participating
Insurance Companies until you shall have furnished us with a copy
thereof and we either have given you written approval for use or
twenty days shall have elapsed following our receipt thereof and
we have not objected thereto in writing.
8. (a) You will indemnify and hold harmless Investor Services and
each of its directors and officers and each person, if any,
who controls Investor Services within the meaning of Section
15 of the 1933 Act, against any loss, liability, damages,
claim or expense (including the reasonable cost of
investigating or defending any alleged loss, liability,
damages, claim or expense and reasonable counsel fees
incurred in connection therewith), arising by reason of any
person's acquiring any Shares, which may be based upon the
1933 Act or any other statute or common law, and which (i)
may be based upon any wrongful act by you, any of your
employees or representatives, any affiliate of or any person
acting on behalf of you, or (ii) may be based upon any untrue
statement or alleged untrue statement of a material fact
contained in a Registration Statement or Prospectus covering
Shares or any amendment thereof or supplement thereto or the
omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the
statements therein not misleading if such a statement or
omission was made in reliance upon information furnished to
us or the Fund by you, or (iii) may be based on any untrue
statement or alleged untrue statement of a material fact
contained in a registration statement or prospectus covering
insurance products sold by you, or any amendments or
supplement thereto, or the omission or alleged omission to
state therein a material fact required to be stated therein
or necessary to make the statement or statements therein not
misleading, unless such statement or omission was made in
reliance upon information furnished to you or a Participating
Insurance Company by or on behalf of Investor Services or the
Fund; provided, however, that in no case (i) is the indemnity
by you in favor of any person indemnified to be deemed to
5
<PAGE> 6
protect Investor Services or any such person against any
liability to which Investor Services or any such person would
otherwise be subject by reason of willful misfeasance, bad
faith or gross negligence in the performance of its or his
duties or by reason of its or his reckless disregard of its
obligations and duties under this Agreement, or (ii) are you
to be liable under your indemnity agreement contained in this
paragraph with respect to any claim made against Investor
Services or any person indemnified unless Investor Services
or such person, as the case may be, shall have notified you
in writing within a reasonable time after the summons or
other first legal process giving information of the nature of
the claim shall have been served upon Investor Services or
upon such person (or after Investor Services or such person
shall have received notice of such service on any designated
agent), but failure to notify you of any such claim shall not
relieve you from any liability which you may have to Investor
Services or any person against whom such action is brought
otherwise than on account of your indemnity agreement
contained in this paragraph. You shall be entitled to
participate, at your own expense, in the defense, or, if you
so elect, to assume the defense of any suit brought to
enforce any such liability, but, if you elect to assume the
defense, such defense shall be conducted by counsel chosen by
you and satisfactory to Investor Services, or to its officers
or directors, or to any controlling person or persons,
defendant or defendants in the suit. In the event that you
assume the defense of any such suit and retain such counsel,
Investor Services or such officers or directors or
controlling person or persons, defendant or defendants in the
suit, shall bear the fees and expenses of any additional
counsel retained by them, but, in case you do not elect to
assume the defense of any such suit, you shall reimburse
Investor Services and such officers, directors or controlling
person or persons, defendant or defendants in such suit, for
the reasonable fees and expenses of any counsel retained by
them. You agree promptly to notify Investor Services of the
commencement of any litigation or proceedings against it in
connection with the offer, issue and sale of any Shares.
(b) Investor Services will indemnify and hold harmless you and
each of your directors and officers and each person, if any,
who controls you within the meaning of Section 15 of the 1933
Act, against any loss, liability, damages, claim or expense
(including the reasonable cost of investigating or defending
any alleged loss, liability, damages, claim or expense and
reasonable counsel fees incurred in connection therewith),
arising by reason of any person's acquiring any Shares, which
may be based upon the 1933 Act or any other statute or common
law, and which (i) may be based upon any wrongful act by
Investor Services, any of its employees or representatives,
any affiliate of or any person acting on its behalf, or (ii)
may be based upon any untrue statement or alleged untrue
statement of a material fact contained in a Registration
Statement or Prospectus covering Shares or any amendment
thereof or supplement thereto or the omission or
6
<PAGE> 7
alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein
not misleading unless such statement or omission was made in
reliance upon information furnished to Investor Services or
the Fund by you or (iii) may be based on any untrue statement
or alleged untrue statement of a material fact contained in a
registration statement or prospectus covering insurance
products sold by you, or any amendment or supplement thereto,
or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to
make the statement or statements therein not misleading, if
such statement or omission was made in reliance upon
information furnished to you by or on behalf of Investor
Services or the Fund; provided, however, that in no case (i)
is the indemnity by Investor Services in favor of any person
indemnified to be deemed to protect you or any such person
against any liability to which you or any such person would
otherwise be subject by reason of willful misfeasance, bad
faith or gross negligence in the performance of your or his
duties or by reason of your or his reckless disregard of your
or his obligations and duties under this Agreement, or (ii)
is Investor Services to be liable under its indemnity
agreement contained in this paragraph with respect to any
claim made against you or any person indemnified unless you
or such person, as the case may be, shall have notified
Investor Services in writing within a reasonable time after
the summons or other first legal process giving information
of the nature of the claim shall have been served upon you or
upon such person (or after you or such person shall have
received notice of such service on any designated agent), but
failure to notify Investor Services of any such claim shall
not relieve Investor Services from any liability which
Investor Services may have to you or any person against whom
such action is brought otherwise than on account of its
indemnity agreement contained in this paragraph. Investor
Services shall be entitled to participate, at its own
expense, in the defense, or, if it so elects, to assume the
defense of any suit brought to enforce any such liability,
but, if it elects to assume the defense, such defense shall
be conducted by counsel chosen by Investor Services and
satisfactory to you, or to your officers or directors, or to
any controlling person or persons, defendant or defendants in
the suit. In the event that Investor Services assumes the
defense of any such suit and retains such counsel, you or
such officers or directors or controlling person or persons,
defendant or defendants in the suit, shall bear the fees and
expenses of any additional counsel retained by you, but, in
case Investor Services does not elect to assume the defense
of any such suit, Investor Services shall reimburse you and
such officers, directors or controlling person or persons,
defendant or defendants in such suit, for the reasonable fees
and expenses of any counsel retained by you. Investor
Services agrees promptly to notify you of the commencement of
any litigation or proceedings against it in connection with
the offer, issue and sale of any Shares.
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<PAGE> 8
9. The indemnities, representations, warranties, covenants and
agreements of each party to this Agreement as set forth in this
Agreement will remain in full force and effect regardless of any
investigation made by or on behalf of either of such parties or
any of their respective officers, directors, partners or any
controlling person, and will survive delivery of and payment for
the Shares.
10. Any provision of this Agreement which may be determined by
competent authority to be prohibited or unenforceable in any
jurisdiction shall, as to such jurisdiction, be ineffective to the
extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such
prohibition or unenforceability in any jurisdiction shall not
invalidate or render unenforceable such provision in any other
jurisdiction. To the extent permitted by applicable law, each
party hereto waives any provision of law which renders any
provision hereof prohibited or unenforceable in any respect.
11. This Agreement constitutes the entire agreement among the parties
concerning the subject matter hereof, and supersedes any and all
prior understandings.
12. This Agreement shall automatically terminate in the event of its
assignment. This Agreement may be terminated at any time by either
party by 30 days' written notice given to the other party, except
that the Agreement may be terminated by Investor Services without
notice (i) if the continued offering or sale of Shares would
violate any applicable statute or regulation, order or decree of
any court, governmental agency or self-regulatory organization
having jurisdiction, or (ii) if in the sole discretion of the
Trustees of the Fund, including a majority of those Trustees who
are not "interested persons" (as defined in the 1940 Act) of the
Fund, acting in good faith and in light of their duties under
federal and any applicable state laws, such action is determined
to be necessary in the best interests of the Shareholders of any
Portfolio. The obligation of each party to indemnify the other
party pursuant to paragraph 8 hereof shall apply with respect to
any Shares sold before or after such termination. To the extent we
receive payments under any provision of this Agreement pursuant to
a Rule 12b-1 Plan for the Fund, both you and we understand and
agree that this Agreement will be subject to the applicable
approval, reporting and termination requirements as set forth in
Rule 12b-1.
13. Any notice hereunder shall be duly given if mailed or telegraphed
to the other party hereto at the address specified below or at
such other address as such party may from time to time specify in
writing to the other party. This Agreement shall be governed by
and construed in accordance with the laws of The Commonwealth of
Massachusetts.
14. This Agreement may be executed in any number of counterparts
which, taken together shall constitute one and the same
instrument. This Agreement shall become effective upon receipt by
us of your acceptance hereof.
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<PAGE> 9
15. This Agreement may not be modified or amended except by a written
instrument duly executed by the parties hereto.
SCUDDER INVESTOR SERVICES, INC.
By:
-----------------------------------
David S. Lee
President
Two International Place
Boston, Massachusetts 02110
The undersigned hereby accepts the offer set
forth in the above letter.
INVESTORS BROKERAGE SERVICES, INC.
Dated: By:
----------- -----------------------------------
Otis R. Heldman, Jr.
President
One Kemper Drive
Long Grove, Illinois 60049
9
<PAGE> 1
Exhibit 1-A(8)(e)
FORM OF
INDEMNIFICATION AGREEMENT
INDEMNIFICATION AGREEMENT (the "Agreement") made by and between
SCUDDER KEMPER INVESTMENTS, INC., a Delaware corporation ("SKI"), with a
principal place of business in Boston, Massachusetts and KEMPER INVESTORS LIFE
INSURANCE COMPANY, an Illinois corporation (the "Company"), with a principal
place of business in One Kemper Drive, Long Grove, Illinois, on behalf of one or
more separate accounts of the Company, as set forth on Schedule A hereto, as it
may be amended from time to time upon written notice to the Fund in accordance
with Paragraph 9 herein (the "Account").
WHEREAS, SKI has caused to be organized Scudder Variable Life
Investment Fund (the "Fund"), a Massachusetts business trust created under a
Declaration of Trust dated March 15, 1985, as amended, the beneficial interest
in which is divided into several series, each designated a "Portfolio" and
representing the interest in a particular managed portfolio of securities, each
of which series (except Money Market Portfolio) is divided into two classes of
shares of beneficial interest; and
WHEREAS, the purpose of the Fund is to act as the investment vehicle
for the separate accounts established for variable life insurance policies and
variable annuity contracts to be offered by insurance companies which have
entered into indemnification agreements substantially identical to this
Agreement; and
WHEREAS, the parties desire to express their agreement as to certain
other matters;
NOW THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements hereinafter contained, the parties hereto agree as
follows:
1. Additional Definitions.
For purposes of this Agreement, the following definitions shall apply:
(a) "Shares" means shares of beneficial interest, without par
value, of any class of any Portfolio, now or hereafter
created, of the Fund.
2. Access to Other Products.
SKI shall permit an Account to participate in any registered investment
company other than the Fund which is intended as the funding vehicle for
insurance products and for which SKI or an affiliate of SKI acts as investment
adviser, on the same basis as other insurance companies are permitted to
participate in such a registered investment company. This provision shall not
<PAGE> 2
require SKI to make available to the Company shares of any investment company
which is organized solely as the funding vehicle for insurance products offered
by a single insurance company or a group of affiliated insurance companies.
3. Right to Review and Approve Sales Materials.
The Company shall furnish, or shall cause to be furnished, to SKI or
its designee, at least 10 days prior to its intended use, each piece of
promotional material in which SKI or the Fund is named. No such material shall
be used unless SKI or its designee shall have approved such use in writing, or
10 days shall have elapsed without approval, rejection or objection since
receipt by SKI or its designee of such material.
SKI shall furnish, or shall cause to be furnished, to the Company or
its designee, at least 10 days prior to its intended use, each piece of
promotional material in which the Company or its separate account(s) is named.
No such material shall be used unless the Company or its designee shall have
approved such use in writing, or 10 days shall have elapsed without approval,
rejection or objection since receipt by the Company or its designee of such
material.
4. Sales Organization Meetings.
Representatives of SKI or its designee shall meet with the sales
organizations of the Company at such reasonable times and places as may be
agreed upon by the Company and SKI or its designee for the purpose of educating
sales personnel about the Fund.
5. Administration of Separate Accounts
(a) Administrative services to owners of variable life insurance
policies and/or variable annuity contracts issued by the Company shall be the
responsibility of the Company and shall not be the responsibility of SKI. SKI
recognizes the Company as the sole shareholder of Fund Shares issued under the
Participation Agreement, dated as of the _____ day of _______, 1998, by and
between the Company on behalf of its separate accounts and the Fund (the
"Participation Agreement"). From time to time, SKI may pay amounts from its past
profits to the Company for providing certain administrative services for the
Fund or its Portfolios, or for providing owners of variable life insurance
policies and/or variable annuity contracts with other services that relate to
the Fund. These services may include, among other things, aggregating
allocation, transfer, and liquidation orders of the Accounts, printing and
mailing to owners of variable life insurance policies and/or variable annuity
contracts copies of the Portfolios'
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<PAGE> 3
prospectuses and other materials that the Fund is required by law or otherwise
to provide to its shareholders, but that the Company is not otherwise required
to provide to owners of variable life insurance policies and/or variable annuity
contracts, providing financial consultants with advice with respect to inquiries
related to the Portfolios (not including information about performance or
related to sales), and such other related services as the Fund and the Company
may from time to time agree. In consideration of the savings resulting from such
arrangement, and to compensate the Company for its costs, SKI agrees to pay the
Company an amount equal to ____ basis points (___%) per annum of the average
aggregate amount invested by the Company in the Portfolios under the
Participation Agreement. Payment of such amounts by SKI will not increase the
fees paid by the Fund, the Portfolios or their shareholders.
(b) The parties agree that SKI's payments to the Company are for
administrative services only and do not constitute payment in any manner for
investment advisory services or for costs of distribution.
(c) For the purposes of computing the administrative fee reimbursement
contemplated hereby, the average aggregate amount invested by the Company over a
one-month period shall be computed by totaling the Company's aggregate
investment (Share net asset value multiplied by total number of Shares held by
the Company) on each business day during the month and dividing by the total
number of business days during each month.
(d) SKI will calculate the reimbursement of administrative expenses at
the end of each calendar quarter and will make such reimbursement to the Company
within thirty (30) days thereafter. The reimbursement check will be accompanied
by a statement showing the calculation of the monthly amounts payable to SKI and
such other supporting data as may be reasonably requested by the Company.
6. Duration.
This Agreement shall continue in force until terminated in
accordance with the following provisions:
(a) At the option of the Company or SKI at any time upon 180 days'
notice, unless a shorter time is agreed to by the parties;
(b) Contemporaneously with the termination of the Participation
Agreement;
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<PAGE> 4
(c) In the event this Agreement is assigned without the prior
written consent of the Company and SKI. Termination shall be
effective immediately upon such occurrence without notice.
Provided, however, the obligation of each party hereto to
indemnify the other party hereto shall continue with respect to all losses,
claims, damages, liabilities or litigation based upon the acquisition of Shares
purchased as the funding vehicle for any variable life insurance policy or
variable annuity contract issued by the Company or any affiliated insurance
company.
7. Indemnification.
(a) The Company agrees to indemnity and hold harmless SKI and each of
its directors and officers and each person, if any, who control SKI within the
meaning of Section 15 of the Securities Act of 1933 (the "Act") or any person
controlled by or under common control with SKI ("affiliate") against any and all
losses, claims, damages, liabilities or litigation (including legal and other
expenses) to which SKI or such directors, officers or affiliate may become
subject under the Act, under any other statute, at common law or otherwise,
arising out of the acquisition of any Shares by any person which (i) may be
based upon any wrongful act by the Company, any of its employees or
representatives, any affiliate of or any person acting on behalf of the Company
or a principal underwriter of its insurance products, or (ii) may be based upon
any untrue statement or alleged untrue statement of a material fact contained in
a registration statement or prospectus covering Shares or any amendment thereof
or supplement thereto or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading if such statement or omission was made in reliance upon
information furnished to SKI or the Fund by the Company; provided, however, that
in no case (i) is the Company's indemnity in favor of a director or officer or
any other person deemed to protect such director or officer or other person
against any liability to which any such person would otherwise be subject by
reason of willful misfeasance, bad faith, or gross negligence in the performance
of his duties or by reason of his reckless disregard of obligations and duties
under this Agreement or (ii) is the Company to be liable under its indemnity
agreement contained in this Paragraph 7 with respect to any claim made against
SKI
4
<PAGE> 5
or any person indemnified unless SKI or such person, as the case may be, shall
have notified the Company in writing pursuant to Paragraph 9 within a reasonable
time after the summons or other first legal process giving information of the
nature of the claims shall have been served upon SKI or upon such person (or
after SKI or such person shall have received notice of such service on any
designated agent), but failure to notify the Company of any such claim shall not
relieve the Company from any liability which it may have to SKI or any person
against whom such action is brought otherwise than on account of the indemnity
agreement contained in this Paragraph 7. The Company shall be entitled to
participate, at its own expense, in the defense, or, if it so elects, to assume
the defense of any suit brought to enforce any such liability, but, if it elects
to assume the defense, such defense shall be conducted by counsel chosen by it
and satisfactory to SKI, its officers and directors, or to any affiliates,
defendant or defendants in the suit. In the event that the Company elects to
assume the defense of any such suit and retain such counsel, SKI, such officers
and directors or affiliates, defendant or defendants in the suit, shall bear the
fees and expenses of any additional counsel retained by them, but, in case the
Company does not elect to assume the defense of any such suit, the Company will
reimburse SKI, such officers and directors or affiliates, defendant or
defendants in such suit, for the reasonable fees and expenses of any counsel
retained by them. The Company agrees promptly to notify SKI pursuant to
Paragraph 9 of the commencement of any litigation or proceedings against it or
any of its directors or officers in connection with the issue and sale of any
Shares.
(b) SKI agrees to indemnify and hold harmless the Company and each of
its directors and officers and each person, if any, who controls the Company
within the meaning of Section 15 of the Act or any person controlled by or under
common control with the Company ("affiliate") against any and all losses,
claims, damages, liabilities or litigation (including legal and other expenses)
to which it or such directors, officers or affiliate may become subject under
the Act, under any other statute, at common law or otherwise, arising out of the
acquisition of any Shares by any person which (i) may be based upon any wrongful
act by SKI, any of its employees or representatives, any affiliate of or any
person acting on behalf of SKI or a principal underwriter of the Fund, or (ii)
may be based upon any untrue statement or alleged untrue statement of a material
fact contained in a registration statement or prospectus covering Shares or any
amendment thereof or supplement thereto or the omission or alleged omission to
state
5
<PAGE> 6
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading if such statement or omission was made in
reliance upon information furnished to the Fund or the Company by SKI; provided,
however, that in no case (i) is SKI's indemnity in favor of a director or
officer or any other person deemed to protect such director or officer or other
person against any liability to which any such person would otherwise be subject
by reason of willful misfeasance, bad faith, or gross negligence in the
performance of his duties or by reason of his reckless disregard of obligations
and duties under this Agreement or (ii) is SKI to be liable under its indemnity
agreement contained in this Paragraph 7 with respect to any claims made against
the Company or any person indemnified unless the Company or such person, as the
case may be, shall have notified SKI in writing pursuant to Paragraph 9 within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon it or upon
such director, officer, or controlling person (or after the Company or such
director, officer or controlling person shall have received notice of such
service on any designated agent), but failure to notify SKI of any claim shall
not relieve it from any liability which it may have to the Company or any person
against whom such action is brought otherwise than on account of its indemnity
agreement contained in this Paragraph 7. SKI will be entitled to participate, at
its own expense, in the defense, or, if it so elects, to assume the defense of
any suit brought to enforce any such liability, but if SKI elects to assume the
defense, such defense shall be conducted by counsel chosen by it and
satisfactory to the Company, its directors, officers or affiliates, defendant or
defendants, in the suit. In the event SKI elects to assume the defense of any
such suit and retain such counsel, the Company, its directors, officers or
affiliates, defendant or defendants in the suit, shall bear the fees and
expenses of any additional counsel retained by them, but, in case SKI does not
elect to assume the defense of any such suit, it will reimburse the Company or
such directors, officers or affiliates, defendant or defendants in the suit, for
the reasonable fees and expenses of any counsel retained by them. SKI agrees
promptly to notify the Company pursuant to Paragraph 8 of the commencement of
any litigation or proceedings against it or any of its officers or directors in
connection with the issuance or sale of any Shares.
(c) SKI agrees to indemnify and hold harmless the Company and each of
its directors and officers against any and all losses, claims, damages,
liabilities or litigation arising from the
6
<PAGE> 7
imposition of additional federal income taxes on the Company or any policyholder
and/or contract holder solely as a result of a Final Determination that any
Portfolio has failed (x) to comply with the diversification requirements of
section 817(h) of the Internal Revenue Code of 1986, as amended (the "Code"),
relating to the diversification requirements for variable annuity, endowment and
life insurance contracts, or (y) to qualify as a regulated investment company
within the meaning of section 851 of the Code; provided, however, that (i) SKI
shall have no liability under this Paragraph 7(c) if such failure is caused by a
third party who is not an employee or agent of SKI (e.g., the Fund's custodian
or another service provider), and (ii) in no case is SKI's indemnity under this
Paragraph 7(c) deemed to protect any person against any liability to which that
person would otherwise be subject by reason of willful misfeasance, bad faith or
gross negligence in the performance of that person's duties or by reason of
reckless disregard by that person of obligations under this Agreement.
The Company agrees that if the Internal Revenue Service asserts in
writing in connection with any governmental audit or review of the Company or,
to the Company's knowledge, of any policyholder and/or contract holder, that any
Portfolio has failed to comply with the diversification requirements of section
817(h) of the Code or the Company otherwise becomes aware of any facts that
could give rise to any claim against SKI as a result of such a failure or
alleged failure, (i) the Company shall promptly notify SKI pursuant to Paragraph
9 of such assertion or potential claim; (ii) the Company shall consult with SKI
as to how to minimize any liability that may arise as a result of such failure
or alleged failure; (iii) the Company shall use its best efforts to minimize any
liability of SKI for indemnification resulting from such failure, including,
without limitation, demonstrating, pursuant to Treasury Regulations Section
1.817- 5(a)(2), to the Commissioner of the Internal Revenue Service that such
failure was inadvertent; provided, however, this Paragraph 7(c) shall not be
construed to require the Company to jeopardize its or any policyholder's and/or
contract holder's standing or position with respect any such failure or alleged
failure; (iv) the Company shall permit SKI and its legal and accounting advisors
to participate in any conferences, settlement discussions or other
administrative or judicial proceedings or contests (including judicial appeals
thereof) with the Internal Revenue Service, any policyholder and/or contract
holder or any other claimant regarding any claims that could give rise to
indemnification by SKI as a result of such a failure or alleged failure; (v) any
7
<PAGE> 8
written materials to be submitted by the Company to the Internal Revenue
Service, any policyholder and/or contract holder or any other claimant in
connection with any of the foregoing proceedings or contests (including, without
limitation, any such materials to be submitted to the Internal Revenue Service
pursuant to Treasury Regulations Section 1.817-5(a)(2)), shall be provided by
the Company to SKI (together with any supporting information or analysis, but
excluding any privileged materials) at least 10 business days prior to the day
on which such proposed materials are to be submitted; (vi) the Company shall
provide SKI and its advisors with such cooperation as SKI shall reasonably
request (including, without limitation, by permitting SKI and its accounting and
legal advisors to review the relevant books and records of the Company) in order
to facilitate SKI's review of any written submissions provided to it pursuant to
the preceding clause or its assessment of the validity or amount of any claim
against it arising from such a failure or alleged failure; (vii) the Company
shall not with respect to any claim of the IRS or any policyholder and/or
contract holder that would give rise to a claim for indemnification against SKI
(a) compromise or settle any claim, (b) accept any adjustment on audit, or (c)
forego any allowable judicial appeals, without the express written consent of
SKI, which shall not be unreasonably withheld, provided that the Company shall
not be required to appeal any adverse judicial decision unless SKI shall have
provided an opinion of independent counsel to the effect that a reasonable basis
(consistent with Formal Opinion 85-352 of the American Bar Association) exists
for taking such appeal; and (viii) SKI shall have no liability as a result of
such failure or alleged failure if the Company fails to comply with any of the
foregoing clauses (i) through (vii). Should SKI refuse to give its written
consent to any compromise or settlement of any claim or liability hereunder, the
Company may, in its discretion, authorize SKI to act in the name of the Company
in, and to control the conduct of, such conferences, discussions, proceedings,
contests or appeals and all administrative or judicial appeals thereof, and in
that event SKI shall bear the fees and expenses associated with the conduct of
the proceedings that it is so authorized to control.
For purposes of this Paragraph 7(c), "Final Determination" shall mean,
with respect to any claim, a settlement of such claim (including the acceptance
of an adjustment proposed by the Internal Revenue Service) or a decision of a
court of competent jurisdiction with respect to such
8
<PAGE> 9
claim that has become final after either the (i) exhaustion of allowable appeals
or (2) expiration of the time to take any such appeal with respect to the claim.
8. Massachusetts Law to Apply.
This Agreement shall be construed and the provisions hereof interpreted
under and in accordance with the laws of The Commonwealth of Massachusetts.
9. Notices.
Any notice shall be sufficiently given when sent by registered or
certified mail to the other party at the address of such party set forth below
or at such other address as such party may from time to time specify in writing
to the other party.
If to SKI:
Scudder Kemper Investments, Inc.
Two International Place
Boston, Massachusetts 02110
(617) 295-2275
Attn: David B. Watts
If to the Company:
Kemper Investors Life Insurance Company
One Kemper Drive
Long Grove, Illinois 60049
Attn: General Counsel
10. Miscellaneous.
The captions in the Agreement are included for convenience of reference
only and in no way define or delineate any of the provisions hereof or otherwise
affect their construction or effect. This Agreement may be executed
simultaneously in two or more counterparts, each of which taken together shall
constitute one and the same instrument.
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<PAGE> 10
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed in its name and behalf by its duly authorized
representative and its seal to be hereunder affixed hereto as of the __________
day of __________, 1998.
SEAL SCUDDER KEMPER INVESTMENTS, INC.
By:___________________________________________
David S. Lee
Authorized Officer
SEAL KEMPER INVESTORS LIFE
INSURANCE COMPANY
By:___________________________________________
Name:
Title:
10
<PAGE> 11
SCHEDULE A
TO INDEMNIFICATION AGREEMENT
Separate Account(s) of the Company
KILICO Variable Separate Account - 2
11
<PAGE> 1
Exhibit 1-A(8)(h)
FORM OF
PARTICIPATION AGREEMENT
Among
VARIABLE INSURANCE PRODUCTS FUND III,
FIDELITY DISTRIBUTORS CORPORATION
and
KEMPER INVESTORS LIFE INSURANCE COMPANY
THIS AGREEMENT, made and entered into as of the 1st day of May, 1998 by
and among KEMPER INVESTORS LIFE INSURANCE COMPANY, (hereinafter the "Company"),
an Illinois corporation, on its own behalf and on behalf of each segregated
asset account of the Company set forth on Schedule A hereto as may be amended
from time to time (each such account hereinafter referred to as the "Account"),
and the VARIABLE INSURANCE PRODUCTS FUND III, an unincorporated business trust
organized under the laws of the Commonwealth of Massachusetts (hereinafter the
"Fund") and FIDELITY DISTRIBUTORS CORPORATION (hereinafter the "Underwriter"), a
Massachusetts corporation.
WHEREAS, the Fund engages in business as an open-end management
investment company and is available to act as the investment vehicle for
separate accounts established for variable life insurance policies and variable
annuity contracts (collectively, the "Variable Insurance Products") to be
offered by insurance companies which have entered into participation agreements
with the Fund and the Underwriter (hereinafter "Participating Insurance
Companies"); and
WHEREAS, the beneficial interest in the Fund is divided into several
series of shares, each representing the interest in a particular managed
portfolio of securities and other assets, any one or more of which may be made
available under this Agreement, as may be amended from time to time by mutual
agreement of the parties hereto (each such series hereinafter referred to as a
"Portfolio"); and
WHEREAS, the Fund has obtained an order from the Securities and
Exchange Commission, dated September 17, 1986 (File No. 812-6422), granting
Participating Insurance Companies and variable annuity and variable life
insurance separate accounts exemptions from the provisions of sections 9(a),
13(a), 15(a), and 15(b) of the Investment Company Act of 1940, as amended,
(hereinafter the "1940 Act") and Rules 6e-2(b) (15) and 6e-3(T) (b) (15)
thereunder, to the extent necessary to permit
<PAGE> 2
shares of the Fund to be sold to and held by variable annuity and variable life
insurance separate accounts of both affiliated and unaffiliated life insurance
companies (hereinafter the "Shared Funding Exemptive Order"); and
WHEREAS, the Fund is registered as an open-end management investment
company under the 1940 Act and its shares are registered under the Securities
Act of 1933, as amended (hereinafter the "1933 Act"); and
WHEREAS, Fidelity Management & Research Company (the "Adviser") is duly
registered as an investment adviser under the federal Investment Advisers Act of
1940 and any applicable state securities law; and
WHEREAS, the Company has registered or will register certain variable
life insurance and variable annuity contracts under the 1933 Act; and
WHEREAS, each Account is a duly organized, validly existing segregated
asset account, established by resolution of the Board of Directors of the
Company, on the date shown for such Account on Schedule A hereto, and divided
into subaccounts, to set aside and invest assets attributable to the aforesaid
variable annuity contracts; and
WHEREAS, the Company has registered or will register each Account as a
unit investment trust under the 1940 Act; and
WHEREAS, the Underwriter is registered as a broker dealer with the
Securities and Exchange Commission ("SEC") under the Securities Exchange Act of
1934, as amended, (hereinafter the "1934 Act"), and is a member in good standing
of the National Association of Securities Dealers, Inc. (hereinafter "NASD");
and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase shares in the Portfolios on behalf
of each Account to fund certain of the aforesaid variable life and variable
annuity contracts and the Underwriter is authorized to sell such shares to unit
investment trusts such as each Account at net asset value;
NOW, THEREFORE, in consideration of their mutual promises, the Company,
the Fund and the Underwriter agree as follows:
ARTICLE I. Sale of Fund Shares
1.1. The Underwriter agrees to sell to the Company those shares of the
Fund which each Account orders, executing such orders on a daily basis at the
net asset value next computed after receipt by the Fund or its designee of the
order for the shares of the Fund. For purposes of this Section 1.1, the Company
shall be the designee of the Fund for receipt of such orders from each Account
and receipt by such designee shall
2
<PAGE> 3
constitute receipt by the Fund; provided that the Fund receives notice of such
order by 11:00 a.m. Boston time on the next following Business Day. "Business
Day" shall mean any day on which the New York Stock Exchange is open for trading
and on which the Fund calculates its net asset value pursuant to the rules of
the Securities and Exchange Commission.
1.2. The Fund agrees to make its shares available indefinitely for
purchase at the applicable net asset value per share by the Company and its
Accounts on those days on which the Fund calculates its net asset value pursuant
to rules of the Securities and Exchange Commission and the Fund shall use
reasonable efforts to calculate such net asset value on each day which the New
York Stock Exchange is open for trading. Notwithstanding the foregoing, the
Board of Trustees of the Fund (hereinafter the "Board") may refuse to sell
shares of any Portfolio to any person, or suspend or terminate the offering of
shares of any Portfolio if such action is required by law or by regulatory
authorities having jurisdiction or is, in the sole discretion of the Board
acting in good faith and in light of their fiduciary duties under federal and
any applicable state laws, necessary in the best interests of the shareholders
of such Portfolio.
1.3. The Fund and the Underwriter agree that shares of the Fund will be
sold only to Participating Insurance Companies and their separate accounts. No
shares of any Portfolio will be sold to the general public.
1.4. The Fund and the Underwriter will not sell Fund shares to any
insurance company or separate account unless an agreement containing provisions
substantially the same as Articles I, III, V, VII and Section 2.5 of Article II
of this Agreement is in effect to govern such sales.
1.5. The Fund agrees to redeem for cash, on the Company's request, any
full or fractional shares of the Fund held by the Company, executing such
requests on a daily basis at the net asset value next computed after receipt by
the Fund or its designee of the request for redemption. For purposes of this
Section 1.5, the Company shall be the designee of the Fund for receipt of
requests for redemption from each Account and receipt by such designee shall
constitute receipt by the Fund; provided that the Fund receives notice of such
request for redemption on the next following Business Day.
1.6. The Company agrees that purchases and redemptions of Portfolio
shares offered by the then current prospectus of the Fund shall be made in
accordance with the provisions of such prospectus. The Company agrees that all
net amounts available under the variable life and variable annuity contracts
with the form number(s) which are listed on Schedule A attached hereto and
incorporated herein by this reference, as such Schedule A may be amended from
time to time hereafter by mutual written agreement of all the parties hereto,
(the "Contracts") shall be invested in the Fund, in such other Funds advised by
the Adviser as may be mutually agreed to in writing by the parties hereto, or in
the Company's general account, provided that such amounts may also be invested
in an investment company other than the Fund if (a) such other investment
3
<PAGE> 4
company, or series thereof, has investment objectives or policies that are
substantially different from the investment objectives and policies of all the
Portfolios of the Fund in which the subaccounts invest; or (b) the Company gives
the Fund and the Underwriter 45 days written notice of its intention to make
such other investment company available as a funding vehicle for the Contracts;
or (c) such other investment company was available as a funding vehicle for the
Contracts prior to the date of this Agreement and the Company so informs the
Fund and Underwriter prior to their signing this Agreement (a list of such funds
appearing on Schedule C to this Agreement); or (d) the Fund or Underwriter
consents to the use of such other investment company.
1.7. The Company shall pay for Fund shares on the next Business Day
after an order to purchase Fund shares is made in accordance with the provisions
of Section 1.1 hereof. Payment shall be in federal funds transmitted by wire.
For purpose of Section 2.10 and 2.11, upon receipt by the Fund of the federal
funds so wired, such funds shall cease to be the responsibility of the Company
and shall become the responsibility of the Fund.
1.8. Issuance and transfer of the Fund's shares will be by book entry
only. Stock certificates will not be issued to the Company or any Account.
Shares ordered from the Fund will be recorded in an appropriate title for each
Account or the appropriate subaccount of each Account.
1.9. The Fund shall furnish same day notice (by wire or telephone,
followed by written confirmation) to the Company of any income, dividends or
capital gain distributions payable on the Fund's shares. The Company hereby
elects to receive all such income dividends and capital gain distributions as
are payable on the Portfolio shares in additional shares of that Portfolio. The
Company reserves the right to revoke this election and to receive all such
income dividends and capital gain distributions in cash. The Fund shall notify
the Company of the number of shares so issued as payment of such dividends and
distributions. The Fund shall provide advance notice to Company of any date on
which the Fund reasonably expects to make a dividend distribution; normally this
notice will be given at least ten days in advance of the ex-dividend date.
1.10. The Fund shall make the net asset value per share for each
Portfolio available to the Company on a daily basis as soon as reasonably
practical after the net asset value per share is calculated (normally by 6:30
p.m. Boston time) and shall use its best efforts to make such net asset value
per share available by 7 p.m. Boston time.
ARTICLE II. Representations and Warranties
2.1. The Company represents and warrants that the Contracts are or will
be registered under the 1933 Act; that the Contracts will be issued and sold in
compliance in all material respects with all applicable Federal and State laws
and that the sale of the Contracts shall comply in all material respects with
state insurance suitability requirements.
4
<PAGE> 5
The Company further represents and warrants that it is an insurance company duly
organized and in good standing under applicable law and that it has legally and
validly established each Account prior to any issuance or sale thereof as a
segregated asset account under Section 245.21 of the Illinois Insurance Code and
has registered or, prior to any issuance or sale of the Contracts, will register
each Account as a unit investment trust in accordance with the provisions of the
1940 Act to serve as a segregated investment account for the Contracts.
2.2. The Fund represents and warrants that Fund shares sold pursuant to
this Agreement shall be registered under the 1933 Act, duly authorized for
issuance and sold in compliance with the laws of the State of Illinois and all
applicable federal and state securities laws and that the Fund is and shall
remain registered under the 1940 Act. The Fund shall amend the Registration
Statement for its shares under the 1933 Act and the 1940 Act from time to time
as required in order to effect the continuous offering of its shares. The Fund
shall register and qualify the shares for sale in accordance with the laws of
the various states only if and to the extent deemed advisable by the Fund or the
Underwriter.
2.3. The Fund represents that it is currently qualified as a Regulated
Investment Company under Subchapter M of the Internal Revenue Code of 1986, as
amended, (the "Code") and that it will make every effort to maintain such
qualification (under Subchapter M or any successor or similar provision) and
that it will notify the Company immediately upon having a reasonable basis for
believing that it has ceased to so qualify or that it might not so qualify in
the future. The Fund acknowledges that any failure to qualify as a Regulated
Investment Company will eliminate the ability of the subaccounts to avail
themselves of the "look through" provisions of section 817(h) of the Code, and
that as a result the Contracts will almost certainly fail to qualify as annuity
contracts under section 817(h) of the Code.
2.4. The Company represents that the Contracts are currently treated as
annuity, endowment or life insurance contracts, under applicable provisions of
the Code and that it will make every effort to maintain such treatment and that
it will notify the Fund and the Underwriter immediately upon having a reasonable
basis for believing that the Contracts have ceased to be so treated or that they
might not be so treated in the future.
2.5. (a) With respect to Initial Class shares, the Fund currently does
not intend to make any payments to finance distribution expenses pursuant to
Rule 12b-1 under the 1940 Act or otherwise, although it may make such payments
in the future. The Fund has adopted a "no fee" or "defensive" Rule 12b-1 Plan
under which it makes no payments for distribution expenses. To the extent that
it decides to finance distribution expenses pursuant to Rule 12b-1, the Fund
undertakes to have a board of trustees, a majority of whom are not interested
persons of the Fund, formulate and approve any plan under Rule 12b-1 to finance
distribution expenses.
5
<PAGE> 6
(b) With respect to Service Class shares, the Fund has adopted a Rule
12b-1 Plan under which it makes payments to finance distribution expenses. The
Fund represents and warrants that it has a board of trustees, a majority of whom
are not interested persons of the Fund, which has formulated and approved the
Fund's Rule 12b-1 Plan to finance distribution expenses of the Fund and that any
changes to the Fund's Rule 12b-1 Plan will be approved by a similarly
constituted board of trustees.
2.6. The Fund makes no representation as to whether any aspect of its
operations (including, but not limited to, fees and expenses and investment
policies) complies with the insurance laws or regulations of the various states
except that the Fund represents that the Fund's investment policies, fees and
expenses are and shall at all times remain in compliance with the laws of the
State of Illinois and the Fund and the Underwriter represent that their
respective operations are and shall at all times remain in material compliance
with the laws of the State of Illinois to the extent required to perform this
Agreement.
2.7. The Underwriter represents and warrants that it is a member in
good standing of the NASD and is registered as a broker-dealer with the SEC. The
Underwriter further represents that it will sell and distribute the Fund shares
in accordance with the laws of the State of Illinois and all applicable state
and federal securities laws, including without limitation the 1933 Act, the 1934
Act, and the 1940 Act.
2.8. The Fund represents that it is lawfully organized and validly
existing under the laws of the Commonwealth of Massachusetts and that it does
and will comply in all material respects with the 1940 Act.
2.9. The Underwriter represents and warrants that the Adviser is and
shall remain duly registered under all applicable federal and state securities
laws and that the Adviser shall perform its obligations for the Fund in
compliance in all material respects with the laws of the State of Illinois and
any applicable state and federal securities laws.
2.10. The Fund and Underwriter represent and warrant that all of their
directors, officers, employees, investment advisers, and other
individuals/entities dealing with the money and/or securities of the Fund are
and shall continue to be at all times covered by a blanket fidelity bond or
similar coverage for the benefit of the Fund in an amount not less than the
minimal coverage as required currently by Rule 17g-(1) of the 1940 Act or
related provisions as may be promulgated from time to time. The aforesaid Bond
shall include coverage for larceny and embezzlement and shall be issued by a
reputable bonding company.
2.11. The Company represents and warrants that all of its directors,
officers, employees, investment advisers, and other individuals/entities dealing
with the money and/or securities of the Fund are covered by a blanket fidelity
bond or similar coverage for the benefit of the Fund, and that said bond is
issued by a reputable bonding company, includes coverage for larceny and
embezzlement, and is in an amount not less than $5
6
<PAGE> 7
million. The Company agrees to make all reasonable efforts to see that this bond
or another bond containing these provisions is always in effect, and agrees to
notify the Fund and the Underwriter in the event that such coverage no longer
applies.
ARTICLE III. Prospectuses and Proxy Statements; Voting
3.1. The Underwriter shall provide the Company with as many printed
copies of the Fund's current prospectus and Statement of Additional Information
as the Company may reasonably request. If requested by the Company in lieu
thereof, the Fund shall provide camera-ready film containing the Fund's
prospectus and Statement of Additional Information, and such other assistance as
is reasonably necessary in order for the Company once each year (or more
frequently if the prospectus and/or Statement of Additional Information for the
Fund is amended during the year) to have the prospectus for the Contracts and
the Fund's prospectus printed together in one document, and to have the
Statement of Additional Information for the Fund and the Statement of Additional
Information for the Contracts printed together in one document. Alternatively,
the Company may print the Fund's prospectus and/or its Statement of Additional
Information in combination with other fund companies' prospectuses and
statements of additional information. Except as provided in the following three
sentences, all expenses of printing and distributing Fund prospectuses and
Statements of Additional Information shall be the expense of the Company. For
prospectuses and Statements of Additional Information provided by the Company to
its existing owners of Contracts in order to update disclosure as required by
the 1933 Act and/or the 1940 Act, the cost of printing shall be borne by the
Fund. If the Company chooses to receive camera-ready film in lieu of receiving
printed copies of the Fund's prospectus, the Fund will reimburse the Company in
an amount equal to the product of A and B where A is the number of such
prospectuses distributed to owners of the Contracts, and B is the Fund's per
unit cost of typesetting and printing the Fund's prospectus. The same procedures
shall be followed with respect to the Fund's Statement of Additional
Information.
The Company agrees to provide the Fund or its designee with such
information as may be reasonably requested by the Fund to assure that the Fund's
expenses do not include the cost of printing any prospectuses or Statements of
Additional Information other than those actually distributed to existing owners
of the Contracts.
3.2. The Fund's prospectus shall state that the Statement of Additional
Information for the Fund is available from the Underwriter or the Company (or in
the Fund's discretion, the Prospectus shall state that such Statement is
available from the Fund).
3.3. The Fund, at its expense, shall provide the Company with copies of
its proxy statements, reports to shareholders, and other communications (except
for prospectuses and Statements of Additional Information, which are covered in
Section 3.1)
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<PAGE> 8
to shareholders in such quantity as the Company shall reasonably require for
distributing to Contract owners.
3.4. If and to the extent required by law the Company shall:
(i) solicit voting instructions from Contract owners;
(ii) vote the Fund shares in accordance with instructions
received from Contract owners; and
(iii) vote Fund shares for which no instructions have been
received in a particular separate account in the same
proportion as Fund shares of such portfolio for which
instructions have been received in that separate account,
so long as and to the extent that the Securities and Exchange Commission
continues to interpret the 1940 Act to require pass-through voting privileges
for variable contract owners. The Company reserves the right to vote Fund shares
held in any segregated asset account in its own right, to the extent permitted
by law. Participating Insurance Companies shall be responsible for assuring that
each of their separate accounts participating in the Fund calculates voting
privileges in a manner consistent with the standards set forth on Schedule B
attached hereto and incorporated herein by this reference, which standards will
also be provided to the other Participating Insurance Companies.
3.5. The Fund will comply with all provisions of the 1940 Act requiring
voting by shareholders, and in particular the Fund will either provide for
annual meetings or comply with Section 16(c) of the 1940 Act (although the Fund
is not one of the trusts described in Section 16(c) of that Act) as well as with
Sections 16(a) and, if and when applicable, 16(b). Further, the Fund will act in
accordance with the Securities and Exchange Commission's interpretation of the
requirements of Section 16(a) with respect to periodic elections of trustees and
with whatever rules the Commission may promulgate with respect thereto.
ARTICLE IV. Sales Material and Information
4.1. The Company shall furnish, or shall cause to be furnished, to the
Fund or its designee, the form of each piece of sales literature or other
promotional material in which the Fund or its investment adviser or the
Underwriter is named, at least eight Business Days prior to its use. The Fund
will review such material within five Business Days. No such material shall be
used if the Fund or its designee reasonably objects to such use within five
Business Days after receipt of such material.
4.2. The Company shall not give any information or make any
representations or statements on behalf of the Fund or concerning the Fund in
connection with the sale of the Contracts other than the information or
representations contained in or
8
<PAGE> 9
accurately derived from the registration statement or prospectus for the Fund
shares, as such registration statement and prospectus may be amended or
supplemented from time to time, or in reports or proxy statements for the Fund,
or in sales literature or other promotional material approved by the Fund or its
designee or by the Underwriter, except with the permission of the Fund or the
Underwriter or the designee of either.
4.3. The Fund, Underwriter, or its designee shall furnish, or shall
cause to be furnished, to the Company or its designee, each piece of sales
literature or other promotional material in which the Company and/or its
separate account(s), is named at least eight Business Days prior to its use. No
such material shall be used if the Company or its designee reasonably objects to
such use within five Business Days after receipt of such material.
4.4. The Fund and the Underwriter shall not give any information or
make any representations on behalf of the Company or concerning the Company,
each Account, or the Contracts other than the information or representations
contained in or accurately derived from a registration statement or prospectus
for the Contracts, as such registration statement and prospectus may be amended
or supplemented from time to time, or in published reports for each Account
which are in the public domain or approved by the Company for distribution to
Contract owners, or in sales literature or other promotional material approved
by the Company or its designee, except with the permission of the Company.
4.5. The Fund will provide to the Company at least one complete copy of
all registration statements, prospectuses, Statements of Additional Information,
reports, proxy statements, sales literature and other promotional materials,
applications for exemptions, requests for no-action letters, and all amendments
to any of the above, that relate to the Fund or its shares, contemporaneously
with the filing of such document with the Securities and Exchange Commission or
other regulatory authorities.
4.6. The Company will provide to the Fund at least one complete copy of
all registration statements, prospectuses, Statements of Additional Information,
reports, solicitations for voting instructions, sales literature and other
promotional materials, applications for exemptions, requests for no action
letters, and all amendments to any of the above, that relate to the Contracts or
each Account, contemporaneously with the filing of such document with the SEC or
other regulatory authorities.
4.7. For purposes of this Article IV, the phrase "sales literature or
other promotional material" includes, but is not limited to, any of the
following that refer to the Fund or any affiliate of the Fund: advertisements
(such as material published, or designed for use in, a newspaper, magazine, or
other periodical, radio, television, telephone or tape recording, videotape
display, signs or billboards, motion pictures, or other public media), sales
literature (i.e., any written communication distributed or made generally
available to customers or the public, including brochures, circulars, research
reports, market letters, form letters, seminar texts, reprints or excerpts of
any other advertisement, sales literature,
9
<PAGE> 10
or published article), educational or training materials or other communications
distributed or made generally available to some or all agents or employees, and
registration statements, prospectuses, Statements of Additional Information,
shareholder reports, and proxy materials.
ARTICLE V. Fees and Expenses
5.1. The Fund and Underwriter shall pay no fee or other compensation to
the Company under this agreement (except for items covered in Article III),
except that if the Fund or any Portfolio adopts and implements a plan pursuant
to Rule 12b-1 to finance distribution expenses, then the Underwriter may make
payments to the Company or to the underwriter for the Contracts if and in
amounts agreed to by the Underwriter in writing and such payments will be made
out of existing fees otherwise payable to the Underwriter, past profits of the
Underwriter or other resources available to the Underwriter. No such payments
shall be made directly by the Fund. Currently, no such payments are
contemplated.
5.2. All expenses incident to performance by the Fund under this
Agreement shall be paid by the Fund. The Fund shall see to it that all its
shares are registered and authorized for issuance in accordance with applicable
federal law and, if and to the extent deemed advisable by the Fund, in
accordance with applicable state laws prior to their sale. The Fund shall bear
the expenses for the cost of registration and qualification of the Fund's
shares, preparation and filing of the Fund's prospectus and registration
statement, proxy materials and reports, setting the prospectus in type, setting
in type and printing the proxy materials and reports to shareholders (including
the costs of printing a prospectus that constitutes an annual report), the
preparation of all statements and notices required by any federal or state law,
and all taxes on the issuance or transfer of the Fund's shares.
5.3. The Company shall bear the expenses of distributing the Fund's
prospectus, proxy materials and reports to owners of Contracts issued by the
Company.
ARTICLE VI. Diversification
6.1. The Fund will at all times invest money from the Contracts in such
a manner as to ensure that the Contracts will be treated as variable contracts
under the Code and the regulations issued thereunder. Without limiting the scope
of the foregoing, the Fund will at all times comply with Section 817(h) of the
Code and Treasury Regulation 1.817-5, relating to the diversification
requirements for variable annuity, endowment, or life insurance contracts and
any amendments or other modifications to such Section or Regulations. In the
event of a breach of this Article VI by the Fund, it will take all reasonable
steps (a) to notify Company of such breach and (b) to adequately diversify the
Fund so as to achieve compliance with the grace period afforded by Regulation
1.817-5.
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<PAGE> 11
ARTICLE VII. Potential Conflicts
7.1. The Board will monitor the Fund for the existence of any material
irreconcilable conflict between the interests of the contract owners of all
separate accounts investing in the Fund. An irreconcilable material conflict may
arise for a variety of reasons, including: (a) an action by any state insurance
regulatory authority; (b) a change in applicable federal or state insurance,
tax, or securities laws or regulations, or a public ruling, private letter
ruling, no-action or interpretative letter, or any similar action by insurance,
tax, or securities regulatory authorities; (c) an administrative or judicial
decision in any relevant proceeding; (d) the manner in which the investments of
any Portfolio are being managed; (e) a difference in voting instructions given
by variable annuity contract and variable life insurance contract owners; or (f)
a decision by an insurer to disregard the voting instructions of contract
owners. The Board shall promptly inform the Company if it determines that an
irreconcilable material conflict exists and the implications thereof.
7.2. The Company will report any potential or existing conflicts of
which it is aware to the Board. The Company will assist the Board in carrying
out its responsibilities under the Shared Funding Exemptive Order, by providing
the Board with all information reasonably necessary for the Board to consider
any issues raised. This includes, but is not limited to, an obligation by the
Company to inform the Board whenever contract owner voting instructions are
disregarded.
7.3. If it is determined by a majority of the Board, or a majority of
its disinterested trustees, that a material irreconcilable conflict exists, the
Company and other Participating Insurance Companies shall, at their expense and
to the extent reasonably practicable (as determined by a majority of the
disinterested trustees), take whatever steps are necessary to remedy or
eliminate the irreconcilable material conflict, up to and including: (1),
withdrawing the assets allocable to some or all of the separate accounts from
the Fund or any Portfolio and reinvesting such assets in a different investment
medium, including (but not limited to) another Portfolio of the Fund, or
submitting the question whether such segregation should be implemented to a vote
of all affected Contract owners and, as appropriate, segregating the assets of
any appropriate group (i.e., annuity contract owners, life insurance contract
owners, or variable contract owners of one or more Participating Insurance
Companies) that votes in favor of such segregation, or offering to the affected
contract owners the option of making such a change; and (2), establishing a new
registered management investment company or managed separate account.
7.4. If a material irreconcilable conflict arises because of a decision
by the Company to disregard contract owner voting instructions and that decision
represents a minority position or would preclude a majority vote, the Company
may be required, at the Fund's election, to withdraw the affected Account's (or
subaccount's) investment in the Fund and terminate this Agreement with respect
to such Account (or subaccount); provided, however that such withdrawal and
termination shall be limited to the extent
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required by the foregoing material irreconcilable conflict as determined by a
majority of the disinterested members of the Board. Any such withdrawal and
termination must take place within six (6) months after the Fund gives written
notice that this provision is being implemented, and until the end of that six
month period the Underwriter and Fund shall continue to accept and implement
orders by the Company for the purchase (and redemption) of shares of the Fund.
7.5. If a material irreconcilable conflict arises because a particular
state insurance regulator's decision applicable to the Company conflicts with
the majority of other state regulators, then the Company will withdraw the
affected Account's investment in the Fund and terminate this Agreement with
respect to such Account within six months after the Board informs the Company in
writing that it has determined that such decision has created an irreconcilable
material conflict; provided, however, that such withdrawal and termination shall
be limited to the extent required by the foregoing material irreconcilable
conflict as determined by a majority of the disinterested members of the Board.
Until the end of the foregoing six month period, the Underwriter and Fund shall
continue to accept and implement orders by the Company for the purchase (and
redemption) of shares of the Fund.
7.6. For purposes of Sections 7.3 through 7.6 of this Agreement, a
majority of the disinterested members of the Board shall determine whether any
proposed action adequately remedies any irreconcilable material conflict, but in
no event will the Fund be required to establish a new funding medium for the
Contracts. The Company shall not be required by Section 7.3 to establish a new
funding medium for the Contracts if an offer to do so has been declined by vote
of a majority of Contract owners materially adversely affected by the
irreconcilable material conflict. In the event that the Board determines that
any proposed action does not adequately remedy any irreconcilable material
conflict, then the Company will withdraw the Account's investment in the Fund
and terminate this Agreement within six (6) months after the Board informs the
Company in writing of the foregoing determination, provided, however, that such
withdrawal and termination shall be limited to the extent required by any such
material irreconcilable conflict as determined by a majority of the
disinterested members of the Board.
7.7. If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended,
or Rule 6e-3 is adopted, to provide exemptive relief from any provision of the
Act or the rules promulgated thereunder with respect to mixed or shared funding
(as defined in the Shared Funding Exemptive Order) on terms and conditions
materially different from those contained in the Shared Funding Exemptive Order,
then (a) the Fund and/or the Participating Insurance Companies, as appropriate,
shall take such steps as may be necessary to comply with Rules 6e-2 and 6e-3(T),
as amended, and Rule 6e-3, as adopted, to the extent such rules are applicable;
and (b) Sections 3.4, 3.5, 7.1, 7.2, 7.3, 7.4, and 7.5 of this Agreement shall
continue in effect only to the extent that terms and conditions substantially
identical to such Sections are contained in such Rule(s) as so amended or
adopted.
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ARTICLE VIII. Indemnification
8.1. Indemnification By The Company
8.1(a). The Company agrees to indemnify and hold harmless the Fund and
each trustee of the Board and officers and each person, if any, who controls the
Fund within the meaning of Section 15 of the 1933 Act (collectively, the
"Indemnified Parties" for purposes of this Section 8.1) against any and all
losses, claims, damages, liabilities (including amounts paid in settlement with
the written consent of the Company) or litigation (including legal and other
expenses), to which the Indemnified Parties may become subject under any
statute, regulation, at common law or otherwise, insofar as such losses, claims,
damages, liabilities or expenses (or actions in respect thereof) or settlements
are related to the sale or acquisition of the Fund's shares or the Contracts
and:
(i) arise out of or are based upon any untrue statements or alleged
untrue statements of any material fact contained in the Registration
Statement or prospectus for the Contracts or contained in the Contracts
or sales literature for the Contracts (or any amendment or supplement
to any of the foregoing), or arise out of or are based upon the
omission or the alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements
therein not misleading, provided that this agreement to indemnify shall
not apply as to any Indemnified Party if such statement or omission or
such alleged statement or omission was made in reliance upon and in
conformity with information furnished to the Company by or on behalf of
the Fund for use in the Registration Statement or prospectus for the
Contracts or in the Contracts or sales literature (or any amendment or
supplement) or otherwise for use in connection with the sale of the
Contracts or Fund shares; or
(ii) arise out of or as a result of statements or representations
(other than statements or representations contained in the Registration
Statement, prospectus or sales literature of the Fund not supplied by
the Company, or persons under its control) or wrongful conduct of the
Company or persons under its control, with respect to the sale or
distribution of the Contracts or Fund Shares; or
(iii) arise out of any untrue statement or alleged untrue statement
of a material fact contained in a Registration Statement, prospectus,
or sales literature of the Fund or any amendment thereof or supplement
thereto or the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements
therein not misleading if such a statement or omission was made in
reliance upon information furnished to the Fund by or on behalf of the
Company; or
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<PAGE> 14
(iv) arise as a result of any failure by the Company to provide the
services and furnish the materials under the terms of this Agreement;
or
(v) arise out of or result from any material breach of any
representation and/or warranty made by the Company in this Agreement or
arise out of or result from any other material breach of this Agreement
by the Company, as limited by and in accordance with the provisions of
Sections 8.1(b) and 8.1(c) hereof.
8.1(b). The Company shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or
litigation incurred or assessed against an Indemnified Party as such
may arise from such Indemnified Party's willful misfeasance, bad faith,
or gross negligence in the performance of such Indemnified Party's
duties or by reason of such Indemnified Party's reckless disregard of
obligations or duties under this Agreement or to the Fund, whichever is
applicable.
8.1(c). The Company shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party
unless such Indemnified Party shall have notified the Company in
writing within a reasonable time after the summons or other first legal
process giving information of the nature of the claim shall have been
served upon such Indemnified Party (or after such Indemnified Party
shall have received notice of such service on any designated agent),
but failure to notify the Company of any such claim shall not relieve
the Company from any liability which it may have to the Indemnified
Party against whom such action is brought otherwise than on account of
this indemnification provision. In case any such action is brought
against the Indemnified Parties, the Company shall be entitled to
participate, at its own expense, in the defense of such action. The
Company also shall be entitled to assume the defense thereof, with
counsel satisfactory to the party named in the action. After notice
from the Company to such party of the Company's election to assume the
defense thereof, the Indemnified Party shall bear the fees and expenses
of any additional counsel retained by it, and the Company will not be
liable to such party under this Agreement for any legal or other
expenses subsequently incurred by such party independently in
connection with the defense thereof other than reasonable costs of
investigation.
8.1(d). The Indemnified Parties will promptly notify the Company of
the commencement of any litigation or proceedings against them in
connection with the issuance or sale of the Fund Shares or the
Contracts or the operation of the Fund.
8.2. Indemnification by the Underwriter
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<PAGE> 15
8.2(a). The Underwriter agrees to indemnify and hold harmless the
Company and each of its directors and officers and each person, if any, who
controls the Company within the meaning of Section 15 of the 1933 Act
(collectively, the "Indemnified Parties" for purposes of this Section 8.2)
against any and all losses, claims, damages, liabilities (including amounts paid
in settlement with the written consent of the Underwriter) or litigation
(including legal and other expenses) to which the Indemnified Parties may become
subject under any statute, at common law or otherwise, insofar as such losses,
claims, damages, liabilities or expenses (or actions in respect thereof) or
settlements are related to the sale or acquisition of the Fund's shares or the
Contracts and:
(i) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in the
Registration Statement or prospectus or sales literature of the
Fund (or any amendment or supplement to any of the foregoing),
or arise out of or are based upon the omission or the alleged
omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not
misleading, provided that this agreement to indemnify shall not
apply as to any Indemnified Party if such statement or omission
or such alleged statement or omission was made in reliance upon
and in conformity with information furnished to the Underwriter
or Fund by or on behalf of the Company for use in the
Registration Statement or prospectus for the Fund or in sales
literature (or any amendment or supplement) or otherwise for
use in connection with the sale of the Contracts or Fund
shares; or
(ii) arise out of or as a result of statements or representations
(other than statements or representations contained in the
Registration Statement, prospectus or sales literature for the
Contracts not supplied by the Underwriter or persons under its
control) or wrongful conduct of the Fund, Adviser or
Underwriter or persons under their control, with respect to the
sale or distribution of the Contracts or Fund shares; or
(iii)arise out of any untrue statement or alleged untrue statement
of a material fact contained in a Registration Statement,
prospectus, or sales literature covering the Contracts, or any
amendment thereof or supplement thereto, or the omission or
alleged omission to state therein a material fact required to
be stated therein or necessary to make the statement or
statements therein not misleading, if such statement or
omission was made in reliance upon information furnished to the
Company by or on behalf of the Fund; or
(iv) arise as a result of any failure by the Fund to provide the
services and furnish the materials under the terms of this
Agreement
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<PAGE> 16
(including a failure, whether unintentional or in good faith or
otherwise, to comply with the diversification requirements
specified in Article VI of this Agreement); or
(v) arise out of or result from any material breach of any
representation and/or warranty made by the Underwriter in this
Agreement or arise out of or result from any other material
breach of this Agreement by the Underwriter; as limited by and
in accordance with the provisions of Sections 8.2(b) and 8.2(c)
hereof.
8.2(b). The Underwriter shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
to which an Indemnified Party would otherwise be subject by reason of such
Indemnified Party's willful misfeasance, bad faith, or gross negligence in the
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations and duties under this Agreement or to
each Company or the Account, whichever is applicable.
8.2(c). The Underwriter shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Underwriter in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Underwriter of
any such claim shall not relieve the Underwriter from any liability which it may
have to the Indemnified Party against whom such action is brought otherwise than
on account of this indemnification provision. In case any such action is brought
against the Indemnified Parties, the Underwriter will be entitled to
participate, at its own expense, in the defense thereof. The Underwriter also
shall be entitled to assume the defense thereof, with counsel satisfactory to
the party named in the action. After notice from the Underwriter to such party
of the Underwriter's election to assume the defense thereof, the Indemnified
Party shall bear the fees and expenses of any additional counsel retained by it,
and the Underwriter will not be liable to such party under this Agreement for
any legal or other expenses subsequently incurred by such party independently in
connection with the defense thereof other than reasonable costs of
investigation.
8.2(d). The Company agrees promptly to notify the Underwriter of the
commencement of any litigation or proceedings against it or any of its officers
or directors in connection with the issuance or sale of the Contracts or the
operation of each Account.
8.3. Indemnification By the Fund
8.3(a). The Fund agrees to indemnify and hold harmless the Company, and
each of its directors and officers and each person, if any, who controls the
Company within the meaning of Section 15 of the 1933 Act (collectively, the
"Indemnified Parties" for purposes of this Section 8.3) against any and all
losses, claims, damages, liabilities
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<PAGE> 17
(including amounts paid in settlement with the written consent of the Fund) or
litigation (including legal and other expenses) to which the Indemnified Parties
may become subject under any statute, at common law or otherwise, insofar as
such losses, claims, damages, liabilities or expenses (or actions in respect
thereof) or settlements result from the gross negligence, bad faith or willful
misconduct of the Board or any member thereof, are related to the operations of
the Fund and:
(i) arise as a result of any failure by the Fund to provide the
services and furnish the materials under the terms of this
Agreement (including a failure to comply with the
diversification requirements specified in Article VI of this
Agreement);or
(ii) arise out of or result from any material breach of any
representation and/or warranty made by the Fund in this
Agreement or arise out of or result from any other material
breach of this Agreement by the Fund;
as limited by and in accordance with the provisions of Sections 8.3(b) and
8.3(c) hereof.
8.3(b). The Fund shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
incurred or assessed against an Indemnified Party as such may arise from such
Indemnified Party's willful misfeasance, bad faith, or gross negligence in the
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations and duties under this Agreement or to
the Company, the Fund, the Underwriter or each Account, whichever is applicable.
8.3(c). The Fund shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Fund in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Fund of any
such claim shall not relieve the Fund from any liability which it may have to
the Indemnified Party against whom such action is brought otherwise than on
account of this indemnification provision. In case any such action is brought
against the Indemnified Parties, the Fund will be entitled to participate, at
its own expense, in the defense thereof. The Fund also shall be entitled to
assume the defense thereof, with counsel satisfactory to the party named in the
action. After notice from the Fund to such party of the Fund's election to
assume the defense thereof, the Indemnified Party shall bear the fees and
expenses of any additional counsel retained by it, and the Fund will not be
liable to such party under this Agreement for any legal or other expenses
subsequently incurred by such party independently in connection with the defense
thereof other than reasonable costs of investigation.
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<PAGE> 18
8.3(d). The Company and the Underwriter agree promptly to notify the
Fund of the commencement of any litigation or proceedings against it or any of
its respective officers or directors in connection with this Agreement, the
issuance or sale of the Contracts, with respect to the operation of either
Account, or the sale or acquisition of shares of the Fund.
ARTICLE IX. Applicable Law
9.1. This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the Commonwealth of
Massachusetts.
9.2. This Agreement shall be subject to the provisions of the 1933,
1934 and 1940 acts, and the rules and regulations and rulings thereunder,
including such exemptions from those statutes, rules and regulations as the
Securities and Exchange Commission may grant (including, but not limited to, the
Shared Funding Exemptive Order) and the terms hereof shall be interpreted and
construed in accordance therewith.
ARTICLE X. Termination
10.1. This Agreement shall continue in full force and effect until the
first to occur of:
(a) termination by any party for any reason by six months' advance
written notice delivered to the other parties; or
(b) termination by the Company by written notice to the Fund and the
Underwriter with respect to any Portfolio based upon the Company's
determination that shares of such Portfolio are not reasonably
available to meet the requirements of the Contracts or not
consistent with the Company's obligations to Contract owners; or
(c) termination by the Company by written notice to the Fund and the
Underwriter with respect to any Portfolio in the event any of the
Portfolio's shares are not registered, issued or sold in
accordance with applicable state and/or federal law or such law
precludes the use of such shares as the underlying investment
media of the Contracts issued or to be issued by the Company; or
(d) termination by the Company by written notice to the Fund and the
Underwriter with respect to any Portfolio in the event that such
Portfolio ceases to qualify as a Regulated Investment Company
under Subchapter M of the Code or any independent or resulting
failure under
18
<PAGE> 19
Section 817 of the Code, or under any successor or similar
provision of either, or if the Company reasonably believes that
the Fund may fail to so qualify; or
(e) termination by either the Fund or the Underwriter by written
notice to the Company, if either one or both of the Fund or the
Underwriter respectively, shall determine, in their sole judgment
exercised in good faith, that the Company and/or its affiliated
companies has suffered a material adverse change in its business,
operations, financial condition or prospects since the date of
this Agreement or is the subject of material adverse publicity; or
(f) termination by the Company by written notice to the Fund and the
Underwriter, if the Company shall determine, in its sole judgment
exercised in good faith, that either the Fund or the Underwriter
has suffered a material adverse change in its business,
operations, financial condition or prospects since the date of
this Agreement or is the subject of material adverse publicity;
but no termination shall be effective under this subsection (f)
until the Company has been afforded a reasonable opportunity to
respond to a statement by the Fund or the Underwriter concerning
the reason for notice of termination hereunder; or
(g) termination by the Fund or the Underwriter by written notice to
the Company, if the Company gives the Fund and the Underwriter the
written notice specified in Section 1.6(b) hereof and at the time
such notice was given there was no notice of termination
outstanding under any other provision of this Agreement; provided,
however any termination under this Section 10.1(h) shall be
effective ninety (90) days after the notice specified in Section
1.6(b) was given. Company may, at its option, withdraw its notice
of the addition of other mutual funds, and such withdrawal shall
operate to cancel any termination under this subsection (g) by the
Fund or the Underwriter.
10.2. Effect of Termination. Notwithstanding any termination of this
Agreement, the Fund and the Underwriter shall at the option of the Company,
continue to make available additional shares of the Fund pursuant to the terms
and conditions of this Agreement, for all Contracts in effect on the effective
date of termination of this Agreement (hereinafter referred to as "Existing
Contracts"). Specifically, without limitation, the owners of the Existing
Contracts shall be permitted to reallocate investments in the Fund, redeem
investments in the Fund and/or invest in the Fund upon the making of additional
purchase payments under the Existing Contracts. The parties agree that this
Section 10.2 shall not apply to any terminations under Article VII and the
effect of such Article VII terminations shall be governed by Article VII of this
Agreement.
10.3 The Company shall not redeem Fund shares attributable to the
Contracts (as opposed to Fund shares attributable to the Company's assets held
in the Account) except (i) as
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<PAGE> 20
necessary to implement Contract Owner initiated or approved transactions, or
(ii) as required by state and/or federal laws or regulations or judicial or
other legal precedent of general application (hereinafter referred to as a
"Legally Required Redemption") or (iii) as permitted by an order of the SEC
pursuant to Section 26(b) of the 1940 Act. Upon request, the Company will
promptly furnish to the Fund and the Underwriter the opinion of counsel for the
Company (which counsel shall be reasonably satisfactory to the Fund and the
Underwriter) to the effect that any redemption pursuant to clause (ii) above is
a Legally Required Redemption. Furthermore, except in cases where permitted
under the terms of the Contracts, and as may be in the best interests of
Contract owners, as determined by the Company, the Company shall not prevent
Contract Owners from allocating payments to a Portfolio that was otherwise
available under the Contracts without first giving the Fund or the Underwriter
90 days notice of its intention to do so.
10.4 Notwithstanding any termination of this Agreement for any reason,
the terms and conditions of the following provisions of this Agreement shall
remain in effect with respect to any Existing Contract, for so long as such
Existing Contract has assets invested in the Fund: Sections 1.3 to 1.10 of
Article I (governing the pricing and redemption of shares); Article II
(Representations and Warranties); Sections 3.1 through 3.3 and 3.5 of Article
III (Prospectuses and Proxy Statements, and Voting); Articles IV through IX
(Sales Material and Information; Fees and Expenses, Diversification; Potential
Conflicts; Indemnification; and Applicable Law); Article XI (Notices); and
Sections 12.1, 12.2, and 12.5 through 12.8 of Article XII (Miscellaneous).
Further, notwithstanding any termination of this Agreement for any reason, the
terms and conditions of the following provisions of this Agreement shall remain
in effect with regard to Contracts previously invested in the Fund: Article II
(Representations and Warranties); and Article VIII (Indemnification).
ARTICLE XI. Notices
Any notice shall be sufficiently given when sent by registered or
certified mail to the other party at the address of such party set forth below
or at such other address as such party may from time to time specify in writing
to the other party.
If to the Fund:
82 Devonshire Street
Boston, Massachusetts 02109
Attention: Treasurer
If to the Company:
Kemper Investors Life Insurance Company
1 Kemper Drive
Long Grove, Illinois 60049
Attention: General Counsel
If to the Underwriter:
82 Devonshire Street
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<PAGE> 21
Boston, Massachusetts 02109
Attention: Treasurer
ARTICLE XII. Miscellaneous
12.1 All persons dealing with the Fund must look solely to the property
of the Fund for the enforcement of any claims against the Fund as neither the
Board, officers, agents or shareholders assume any personal liability for
obligations entered into on behalf of the Fund.
12.2 Subject to the requirements of legal process and regulatory
authority, each party hereto shall treat as confidential the names and addresses
of the owners of the Contracts and all information reasonably identified as
confidential in writing by any other party hereto and, except as permitted by
this Agreement, shall not disclose, disseminate or utilize such names and
addresses and other confidential information until such time as it may come into
the public domain without the express written consent of the affected party.
12.3 The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.
12.4 This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
12.5 If any provision of this Agreement shall be held or made invalid
by a court decision, statute, rule or otherwise, the remainder of the Agreement
shall not be affected thereby.
12.6 Each party hereto shall cooperate with each other party and all
appropriate governmental authorities (including without limitation the SEC, the
NASD and state insurance regulators) and shall permit such authorities
reasonable access to its books and records in connection with any investigation
or inquiry relating to this Agreement or the transactions contemplated hereby.
Notwithstanding the generality of the foregoing, each party hereto further
agrees to furnish the California Insurance Commissioner with any information or
reports in connection with services provided under this Agreement which such
Commissioner may request in order to ascertain whether the insurance operations
of the Company are being conducted in a manner consistent with the California
Insurance Regulations and any other applicable law or regulations.
12.7 The rights, remedies and obligations contained in this Agreement
are cumulative and are in addition to any and all rights, remedies and
obligations, at law or in equity, which the parties hereto are entitled to under
state and federal laws.
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<PAGE> 22
12.8. This Agreement or any of the rights and obligations hereunder may
not be assigned by any party without the prior written consent of all parties
hereto; provided, however, that the Underwriter may assign this Agreement or any
rights or obligations hereunder to any affiliate of or company under common
control with the Underwriter (but in such event the Underwriter shall continue
to be liable under Article VIII of this Agreement for any indemnification due to
the Company, and the assignee shall also be liable), if such assignee is duly
licensed and registered to perform the obligations of the Underwriter under this
Agreement.
12.9. The Company shall furnish, or shall cause to be furnished, to the
Fund or its designee copies of the following reports:
(a) the Company's annual statement (prepared under statutory
accounting principles) and annual report (prepared under
generally accepted accounting principles ("GAAP"), if any),
as soon as practical and in any event within 90 days after
the end of each fiscal year;
(b) the Company's quarterly statements (statutory) (and GAAP, if
any), as soon as practical and in any event within 45 days
after the end of each quarterly period:
(c) any material financial statement, proxy statement, notice or
report of the Company sent to policyholders, as soon as
practical after the delivery thereof to stockholders;
(d) any registration statement (without exhibits) and financial
reports of the Company filed with the Securities and Exchange
Commission or any state insurance regulator, as soon as
practical after the filing thereof;
(e) any other report submitted to the Company by independent
accountants in connection with any annual, interim or special
audit made by them of the books of the Company, as soon as
practical after the receipt thereof; but nothing in this
subsection shall require the Company to disclose any
information that is privileged, or which if disclosed would
put the Company at a competitive disadvantage and is both (i)
confidential and (ii) not material to the Company's financial
condition.
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed in its name and on its behalf by its duly authorized
representative and its seal to be hereunder affixed hereto as of the date
specified below.
22
<PAGE> 23
KEMPER INVESTORS LIFE INSURANCE COMPANY
By: ___________________________
Name: _________________________
Title: _________________________
VARIABLE INSURANCE PRODUCTS FUND III
By: ________________________
Robert C. Pozen
Senior Vice President
FIDELITY DISTRIBUTORS CORPORATION
By: _______________________
Kevin J. Kelly
Vice President
23
<PAGE> 24
Schedule A
Separate Accounts and Associated Contracts
Name of Separate Account and Policy Form Numbers of Contracts
Funded
Date Established by Board of Directors By Separate Account
KILICO Variable Separate Account Kemper Power V (Policy Form
(January 22, 1987) 5-6003)
24
<PAGE> 25
SCHEDULE B
PROXY VOTING PROCEDURE
The following is a list of procedures and corresponding responsibilities for the
handling of proxies relating to the Fund by the Underwriter, the Fund and the
Company. The defined terms herein shall have the meanings assigned in the
Participation Agreement except that the term "Company" shall also include the
department or third party assigned by the Insurance Company to perform the steps
delineated below.
1. The number of proxy proposals is given to the Company by the Underwriter
as early as possible before the date set by the Fund for the shareholder
meeting to facilitate the establishment of tabulation procedures. At this
time the Underwriter will inform the Company of the Record, Mailing and
Meeting dates. This will be done verbally approximately two months before
meeting.
2. Promptly after the Record Date, the Company will perform a "tape run",
or other activity, which will generate the names, addresses and number of
units which are attributed to each contractowner/policyholder (the
"Customer") as of the Record Date. Allowance should be made for account
adjustments made after this date that could affect the status of the
Customers' accounts as of the Record Date.
Note: The number of proxy statements is determined by the activities
described in Step #2. The Company will use its best efforts to call in the
number of Customers to Fidelity, as soon as possible, but no later than two
weeks after the Record Date.
3. The Fund's Annual Report no longer needs to be sent to each Customer by
the Company either before or together with the Customers' receipt of a
proxy statement. Underwriter will provide the last Annual Report to the
Company pursuant to the terms of Section 3.3 of the Agreement to which this
Schedule relates.
4. The text and format for the Voting Instruction Cards ("Cards" or "Card")
is provided to the Company by the Fund. The Company, at its expense,
shall produce and personalize the Voting Instruction Cards. The Legal
Department of the Underwriter or its affiliate ("Fidelity Legal") must
approve the Card before it is printed. Allow approximately 2-4 business
days for printing information on the Cards. Information commonly found
on the Cards includes:
a. name (legal name as found on account registration)
b. address
c. Fund or account number
d. coding to state number of units
e. individual Card number for use in tracking and verification
of votes (already on Cards as printed by the Fund)
(This and related steps may occur later in the chronological process due to
possible uncertainties relating to the proposals.)
25
<PAGE> 26
5. During this time, Fidelity Legal will develop, produce, and the Fund
will pay for the Notice of Proxy and the Proxy Statement (one document).
Printed and folded notices and statements will be sent to Company for
insertion into envelopes (envelopes and return envelopes are provided and
paid for by the Insurance Company). Contents of envelope sent to Customers
by Company will include:
a. Voting Instruction Card(s)
b. One proxy notice and statement (one document)
c. return envelope (postage pre-paid by Company) addressed to the
Company or its tabulation agent
d. "urge buckslip" - optional, but recommended. (This is a small,
single sheet of paper that requests Customers to vote as quickly
as possible and that their vote is important. One copy will be
supplied by the Fund.)
e. cover letter - optional, supplied by Company and reviewed and
approved in advance by Fidelity Legal.
6. The above contents should be received by the Company approximately 3-5
business days before mail date. Individual in charge at Company reviews and
approves the contents of the mailing package to ensure correctness and
completeness. Copy of this approval sent to Fidelity Legal.
7. Package mailed by the Company.
* The Fund must allow at least a 15-day solicitation time to the
Company as the shareowner. (A 5-week period is recommended.)
Solicitation time is calculated as calendar days from (but not
including) the meeting, counting backwards.
8. Collection and tabulation of Cards begins. Tabulation usually takes
place in another department or another vendor depending on process used.
An often used procedure is to sort Cards on arrival by proposal into
vote categories of all yes, no, or mixed replies, and to begin data
entry.
Note: Postmarks are not generally needed. A need for postmark information
would be due to an insurance company's internal procedure and has not been
required by Fidelity in the past.
9. Signatures on Card checked against legal name on account registration which
was printed on the Card.
Note: For Example, If the account registration is under "Bertram C. Jones,
Trustee," then that is the exact legal name to be printed on the Card and
is the signature needed on the Card.
26
<PAGE> 27
10. If Cards are mutilated, or for any reason are illegible or are not
signed properly, they are sent back to Customer with an explanatory letter,
a new Card and return envelope. The mutilated or illegible Card is
disregarded and considered to be not received for purposes of vote
tabulation. Any Cards that have "kicked out" (e.g. mutilated, illegible) of
the procedure are "hand verified," i.e., examined as to why they did not
complete the system. Any questions on those Cards are usually remedied
individually.
11. There are various control procedures used to ensure proper tabulation of
votes and accuracy of that tabulation. The most prevalent is to sort the
Cards as they first arrive into categories depending upon their vote; an
estimate of how the vote is progressing may then be calculated. If the
initial estimates and the actual vote do not coincide, then an internal
audit of that vote should occur. This may entail a recount.
12. The actual tabulation of votes is done in units which is then converted
to shares. (It is very important that the Fund receives the tabulations
stated in terms of a percentage and the number of shares.) Fidelity Legal
must review and approve tabulation format.
13. Final tabulation in shares is verbally given by the Company to Fidelity
Legal on the morning of the meeting not later than 10:00 a.m. Boston time.
Fidelity Legal may request an earlier deadline if required to calculate the
vote in time for the meeting.
14. A Certification of Mailing and Authorization to Vote Shares will be
required from the Company as well as an original copy of the final vote.
Fidelity Legal will provide a standard form for each Certification.
15. The Company will be required to box and archive the Cards received from
the Customers. In the event that any vote is challenged or if otherwise
necessary for legal, regulatory, or accounting purposes, Fidelity Legal
will be permitted reasonable access to such Cards.
16. All approvals and "signing-off" may be done orally, but must always be
followed up in writing.
27
<PAGE> 28
SCHEDULE C
Other investment companies currently available under variable annuities or
variable life insurance issued by the Company:
Investors Fund Series (formerly Kemper Investors Fund)
Kemper Money Market Portfolio
Kemper Total Return Portfolio
Kemper High Yield Portfolio
Kemper Growth Portfolio
Kemper Government Securities Portfolio
Kemper International Portfolio
Kemper Small Cap Growth Portfolio
American Skandia Trust
Lord Abbett Growth and Income Portfolio
JanCap Growth Portfolio
T. Rowe Price International Equity Portfolio
T. Rowe Price Asset Allocation Portfolio
Founders Capital Appreciation Portfolio
INVESCO Equity Income Portfolio
PIMCO Total Return Bond Portfolio
PIMCO Limited Maturity Bond Portfolio
Neuberger & Berman Mid-Cap Growth Portfolio
Fidelity Variable Insurance Products Fund
Equity-Income Portfolio
High Income Portfolio
Fidelity Variable Insurance Products Fund II
Contrafund Portfolio
Index 500 Portfolio
Scudder Variable Life Investment Fund
International (B-Shares) Portfolio
Growth and Income (B-Shares) Portfolio
28
<PAGE> 1
Exhibit 1-A(8)(i)
FORM OF
AMENDMENT TO
PARTICIPATION AGREEMENT
Among
VARIABLE INSURANCE PRODUCTS FUND,
FIDELITY DISTRIBUTORS CORPORATION
and
KEMPER INVESTORS LIFE INSURANCE COMPANY
THIS AMENDMENT, made and entered into as of the 1st day of
May, 1998, is made a part of the PARTICIPATION AGREEMENT (hereinafter the
"Agreement"), made and entered into as of the 1st day of May, 1996 by and among
KEMPER INVESTORS LIFE INSURANCE COMPANY (hereinafter the "Company), an Illinois
corporation, on its own behalf and on behalf of each segregated asset account of
the Company set forth on Schedule A hereto as may be amended from time to time
(each such account hereinafter referred to as the "Account"), and the VARIABLE
INSURANCE PRODUCTS FUND, an unincorporated business trust organized under the
laws of the Commonwealth of Massachusetts (hereinafter the "Fund") and FIDELITY
DISTRIBUTORS CORPORATION (hereinafter the "Underwriter"), a Massachusetts
corporation.
WHEREAS, the Fund is registered as an open-end management
investment company under the Investment Company Act of 1940, as amended
(hereinafter the "1940 Act") and its shares are registered under the Securities
Act of 1933, as amended (hereinafter the "1933 Act"); and
WHEREAS, the beneficial interest in the Fund is divided into
several series of shares, each representing the interest in a particular managed
portfolio of securities and other assets, any one or more of which may be made
available under the Agreement (each such series hereinafter referred to as a
"Portfolio"); and
WHEREAS, the Company has registered certain variable life
contracts under the 1933 Act; and
WHEREAS, the Company has organized a segregated asset account,
established by resolution of the Board of Directors of the Company, to set aside
and invest assets attributable to the aforesaid variable life contracts, and has
registered such Account as a unit investment trust under the 1940 Act; and
<PAGE> 2
WHEREAS, to the extent permitted by applicable insurance laws
and regulations, the Company intends to purchase shares in the Portfolios on
behalf of the Account to fund certain of the aforesaid variable life contracts
and the Underwriter is authorized to sell such shares to unit investment trusts
such as the Account at net asset value; and
WHEREAS, the Company, the Fund and the Underwriter thereby
desire to amend the AGREEMENT to effect such changes;
NOW, THEREFORE, in consideration of their mutual promises, the
Company, the Fund and the Underwriter hereby agree as follows:
1. Schedule A Separate Accounts and Associated Contracts to
the AGREEMENT is hereby deleted in its entirety and replaced with the attached
new Schedule A (As amended May 1, 1998) Separate Accounts and Associated
Contracts.
2. SCHEDULE C to the AGREEMENT is hereby deleted in its
entirety and replaced with the attached new SCHEDULE C (As amended May 1, 1998).
3. Except as amended hereby by this AMENDMENT, all other
provisions, conditions and terms of the AGREEMENT shall continue in full force
and effect.
IN WITNESS WHEREOF, each of the parties hereto has caused this
Amendment to be executed in its name and on its behalf by its duly authorized
representative and its seal to be hereunder affixed hereto as of the date first
specified above.
KEMPER INVESTORS LIFE INSURANCE COMPANY
By:______________________________________________
Otis R. Heldman, Jr., Marketing Officer
[Signatures Continued on Next Page]
2
<PAGE> 3
VARIABLE INSURANCE PRODUCTS FUND
By:______________________________________________
Robert C. Pozen, Senior Vice President
FIDELITY DISTRIBUTORS CORPORATION
By:______________________________________________
Kevin J. Kelly, Vice President
3
<PAGE> 4
Schedule A
(As amended May 1, 1998)
Separate Accounts and Associated Contracts
Name of Separate Account and Policy Form Numbers of Contracts Funded
Date Established by Board of Directors by Separate Account
KILICO Variable Annuity Separate Kemper Advantage III (Policy Form Series
Account (May 29, 1981) L-1000)
KILICO Variable Separate Account Kemper Power V (Policy Form Series
(January 22, 1987) S-6003)
4
<PAGE> 5
SCHEDULE C
(As amended May 1, 1998)
Other investment companies currently available under variable annuities or
variable life insurance issued by the Company:
Kemper Advantage III
Investors Fund Series (formerly Kemper Investors Fund)
Kemper Money Market Portfolio
Kemper Total Return Portfolio
Kemper High Yield Portfolio
Kemper Growth Portfolio (formerly Equity Portfolio)
Kemper Government Securities Portfolio
Kemper International Portfolio
Kemper Small Cap Growth Portfolio (formerly Small Capitalization Equity
Portfolio)
Kemper Investment Grade Bond Portfolio
Kemper Small Cap Value Portfolio
Kemper Contrarian Value Portfolio (formerly Value
Portfolio)
Kemper Horizon 5 Portfolio
Kemper Horizon 10+ Portfolio
Kemper Horizon 20 + Portfolio
Kemper Value & Growth Portfolio
Janus Aspen Series
Aggressive Growth Portfolio
Growth Portfolio
Worldwide Growth Portfolio
Balanced Portfolio
Short-Term Bond Portfolio
Lexington Natural Resources Trust
Lexington Emerging Markets Fund
Fidelity Insurance Products Fund II
Asset Manager Portfolio
Index 500 Portfolio
Contrafund Portfolio
5
<PAGE> 6
SCHEDULE C
(As amended May 1, 1998)
(Continued)
Kemper Power V
Investors Fund Series (formerly Kemper Investors Fund)
Kemper Money Market Portfolio
Kemper Total Return Portfolio
Kemper High Yield Portfolio
Kemper Growth Portfolio
Kemper Government Securities Portfolio
Kemper International Portfolio
Kemper Small Cap Growth Portfolio
American Skandia Trust
Lord Abbett Growth and Income Portfolio
JanCap Growth Portfolio
T. Rowe Price International Equity Portfolio
T. Rowe Price Asset Allocation Portfolio
Founders Capital Appreciation Portfolio
INVESCO Equity Income Portfolio
PIMCO Total Return Bond Portfolio
PIMCO Limited Maturity Bond Portfolio
Neuberger & Berman Mid-Cap Growth Portfolio
Fidelity Variable Insurance Products Fund II
Contrafund Portfolio
Index 500 Portfolio
Fidelity Variable Insurance Products Fund III
Growth Opportunities Portfolio
Scudder Variable Life Investment Fund
International (B-Shares) Portfolio
Growth and Income (B-Shares) Portfolio
6
<PAGE> 1
Exhibit 1-A(8)(j)
FORM OF
AMENDMENT TO
PARTICIPATION AGREEMENT
Among
VARIABLE INSURANCE PRODUCTS FUND II,
FIDELITY DISTRIBUTORS CORPORATION
and
KEMPER INVESTORS LIFE INSURANCE COMPANY
THIS AMENDMENT, made and entered into as of the 1st day of
May, 1998, is made a part of the PARTICIPATION AGREEMENT (hereinafter the
"Agreement"), made and entered into as of the 1st day of May, 1996 by and among
KEMPER INVESTORS LIFE INSURANCE COMPANY (hereinafter the "Company"), an Illinois
corporation, on its own behalf and on behalf of each segregated asset account of
the Company set forth on Schedule A hereto as may be amended from time to time
(each such account hereinafter referred to as the "Account"), and the VARIABLE
INSURANCE PRODUCTS FUND II, an unincorporated business trust organized under the
laws of the Commonwealth of Massachusetts (hereinafter the "Fund") and FIDELITY
DISTRIBUTORS CORPORATION (hereinafter the "Underwriter"), a Massachusetts
corporation.
WHEREAS, the Fund is registered as an open-end management
investment company under the Investment Company Act of 1940, as amended
(hereinafter the "1940 Act") and its shares are registered under the Securities
Act of 1933, as amended (hereinafter the "1933 Act"); and
WHEREAS, the beneficial interest in the Fund is divided into
several series of shares, each representing the interest in a particular managed
portfolio of securities and other assets, any one or more of which may be made
available under the Agreement (each such series hereinafter referred to as a
"Portfolio"); and
WHEREAS, the Company has registered certain variable life
contracts under the 1933 Act; and
WHEREAS, the Company has organized a segregated asset account,
established by resolution of the Board of Directors of the Company, to set aside
and invest assets attributable to the aforesaid variable life contracts, and has
registered such Account as a unit investment trust under the 1940 Act; and
<PAGE> 2
WHEREAS, to the extent permitted by applicable insurance laws
and regulations, the Company intends to purchase shares in the Portfolios on
behalf of the Account to fund certain of the aforesaid variable life contracts
and the Underwriter is authorized to sell such shares to unit investment trusts
such as the Account at net asset value; and
WHEREAS, the Company, the Fund and the Underwriter thereby
desire to amend the AGREEMENT to effect such changes;
NOW, THEREFORE, in consideration of their mutual promises, the
Company, the Fund and the Underwriter hereby agree as follows:
1. Schedule A Separate Accounts and Associated Contracts to
the AGREEMENT is hereby deleted in its entirety and replaced with the attached
new Schedule A (As amended May 1, 1998) Separate Accounts and Associated
Contracts.
2. SCHEDULE C to the AGREEMENT is hereby deleted in its
entirety and replaced with the attached new SCHEDULE C (As amended May 1, 1998).
3. Except as amended hereby by this AMENDMENT, all other
provisions, conditions and terms of the AGREEMENT shall continue in full force
and effect.
IN WITNESS WHEREOF, each of the parties hereto has caused this
Amendment to be executed in its name and on its behalf by its duly authorized
representative and its seal to be hereunder affixed hereto as of the date first
specified above.
KEMPER INVESTORS LIFE INSURANCE COMPANY
By:________________________________________________
Otis R. Heldman, Jr., Marketing Officer
[Signatures Continued on Next Page]
2
<PAGE> 3
VARIABLE INSURANCE PRODUCTS FUND II
By:________________________________________________
Robert C. Pozen, Senior Vice President
FIDELITY DISTRIBUTORS CORPORATION
By:________________________________________________
Kevin J. Kelly, Vice President
3
<PAGE> 4
Schedule A
(As amended May 1, 1998)
Separate Accounts and Associated Contracts
Name of Separate Account and Policy Form Numbers of Contracts Funded
Date Established by Board of Directors by Separate Account
KILICO Variable Annuity Separate Kemper Advantage III (Policy Form Series
Account (May 29, 1981) L-1000)
KILICO Variable Separate Account Kemper Power V (Policy Form Series
(January 22, 1987) S-6003)
4
<PAGE> 5
SCHEDULE C
(As amended May 1, 1998)
Other investment companies currently available under variable annuities or
variable life insurance issued by the Company:
Kemper Advantage III
Investors Fund Series (formerly Kemper Investors Fund)
Kemper Money Market Portfolio
Kemper Total Return Portfolio
Kemper High Yield Portfolio
Kemper Growth Portfolio (formerly Equity Portfolio)
Kemper Government Securities Portfolio Kemper International Portfolio
Kemper Small Cap Growth Portfolio (formerly Small Capitalization
Equity Portfolio)
Kemper Investment Grade Bond Portfolio
Kemper Small Cap Value Portfolio
Kemper Contrarian Value Portfolio (formerly Value Portfolio)
Kemper Horizon 5 Portfolio
Kemper Horizon 10+ Portfolio
Kemper Horizon 20 + Portfolio
Kemper Value & Growth Portfolio
Janus Aspen Series
Aggressive Growth Portfolio
Growth Portfolio
Worldwide Growth Portfolio
Balanced Portfolio
Short-Term Bond Portfolio
Lexington Natural Resources Trust
Lexington Emerging Markets Fund
Fidelity Insurance Products Fund
Equity-Income Portfolio
Growth Portfolio
5
<PAGE> 6
SCHEDULE C
(As amended May 1, 1998)
(Continued)
Kemper Power V
Investors Fund Series (formerly Kemper Investors Fund)
Kemper Money Market Portfolio
Kemper Total Return Portfolio
Kemper High Yield Portfolio
Kemper Growth Portfolio
Kemper Government Securities Portfolio
Kemper International Portfolio
Kemper Small Cap Growth Portfolio
American Skandia Trust
Lord Abbett Growth and Income Portfolio
JanCap Growth Portfolio
T. Rowe Price International Equity Portfolio
T. Rowe Price Asset Allocation Portfolio
Founders Capital Appreciation Portfolio
INVESCO Equity Income Portfolio
PIMCO Total Return Bond Portfolio
PIMCO Limited Maturity Bond Portfolio
Neuberger & Berman Mid-Cap Growth Portfolio
Fidelity Variable Insurance Products Fund
Equity-Income Portfolio
High Income Portfolio
Fidelity Variable Insurance Products Fund III
Growth Opportunities Portfolio
Scudder Variable Life Investment Fund
International (B-Shares) Portfolio
Growth and Income (B-Shares) Portfolio
6
<PAGE> 1
Exhibit 3(b)
ACTUARIAL OPINION
This opinion is supplied with the filing of Post-Effective Amendment No. 2 to
the Registration Statement on Form S-6, File No. 33-65399, by the KILICO
Separate Account (the "Separate Account") and Kemper Investors Life Insurance
Company ("KILICO") covering an indefinite number of units of interest in the
Separate Account. Premiums received under KILICO's Variable Life Policies may
be allocated by KILICO to the Separate Account as described in the Prospectus
included in the Registration Statement.
I am familiar with the Policy provisions and the description in the Prospectus
and it is my opinion that the illustrations of death benefits, accumulated
values, cash values, and accumulated premiums included in Appendix A of the
Prospectus, based on the assumptions in the illustrations, are consistent with
the Policy provisions. The Policy rate structure has not been designed
to make the relationship between planned premiums and benefits, as shown in the
illustrations, appear more favorable in to prospective nonsmoker males ages 35
and 60, than to nonsmoker males at other ages. The nonsmoker risk class
generally has a more favorable rate structure than the smoker risk classes.
Female risk classes generally have a more favorable rate structure than male
risk classes.
The current and guaranteed monthly mortality rates used in the illustrations
have not been designed so as to make the relationship between current and
guaranteed rates more favorable for the ages and sexes illustrated than for a
nonsmoker male at other ages. The nonsmoker risk classes generally
have lower monthly mortality rates than the smoker risk classes. The female
risk classes generally have lower monthly mortality rates than the male risk
classes.
I consent to the use of this opinion as an Exhibit to Post-Effective Amendment
No. 2 to the Registration Statement and to the reference to me under the
heading "Experts" in the Prospectus.
/s/ Christopher J. Nickele
----------------------------
Christopher J. Nickele, FSA MAAA
Actuarial Officer - Agency
<PAGE> 1
Exhibit 6(a)
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors of
Kemper Investors Life Insurance Company and
Policy Owners of KILICO Flexible Premium Variable Life Insurance Policies
We consent to the inclusion in this registration statement on Form S-6 (File
No. 33-65399) of our report dated February 20, 1998, on our audit of the
financial statements of KILICO Variable Separate Account and to the
reference to our firm under the caption "Experts".
Coopers & Lybrand L.L.P.
Chicago, Illinois
April 24, 1998
<PAGE> 2
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors of
Kemper Investors Life Insurance Company and
Policy Owners of KILICO Flexible Premium Variable Life Insurance Policies
We consent to the inclusion in this registration statement on Form S-6 (File
No. 33-65399) of our report dated March 18, 1998, on our audit of the
consolidated financial statements of Kemper Investors Life Insurance Company
and to the reference to our firm under the caption "Experts".
Coopers & Lybrand L.L.P.
Chicago, Illinois
April 24, 1998
<PAGE> 1
EXHIBIT 6(b)
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Kemper Investors Life Insurance Company
We consent to the use of our reports included herein on the consolidated
financial statements of Kemper Investors Life Insurance Company (KILICO) and on
the financial statement of the subaccounts of KILICO Variable Separate Account
and to the references to our firm under the heading "Experts" in the
prospectus. Our report on KILICO's financial statements dated March 21, 1997,
contains an explanatory paragraph that states as a result of the acquisition of
its parent, Kemper Corporation, the consolidated financial information for the
periods after the acquisition is presented on a different cost basis than that
for the periods before the acquisition and, therefore, is not comparable.
KPMG PEAT MARWICK LLP
Chicago, Illinois
April 24, 1998
