KILICO VARIABLE SEPARATE ACCOUNT/IL, 497, 1999-11-15

KILICO VARIABLE SEPARATE ACCOUNT/IL
497, 1999-11-15

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November 9, 1999
Prospectus

KEMPER DESTINATIONS(sm) LIFE
Modified Single Premium Variable
Universal Life Insurance
Issued by Kemper Investors
Life Insurance Company

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PROSPECTUS
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MODIFIED SINGLE PREMIUM
VARIABLE UNIVERSAL LIFE INSURANCE POLICIES
(SINGLE LIFE AND SURVIVORSHIP)
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ISSUED BY

KEMPER INVESTORS LIFE INSURANCE COMPANY
THROUGH ITS KILICO VARIABLE SEPARATE ACCOUNT

1 KEMPER DRIVE, LONG GROVE, ILLINOIS 60049 (800) 621-5001

This prospectus describes Modified Single Premium Variable Universal Life
Insurance Policies (the "Policies") offered by Kemper Investors Life Insurance
Company ("we" or "KILICO") for prospective insured persons ages 0-90. This
prospectus describes Policies which provide insurance coverage on the life of
one Insured ("Single Life Policies") and Policies which provide insurance on the
lives of two Insureds ("Survivorship Policies"). You may pay a significant
initial Premium and, subject to certain restrictions, additional Premiums.

Under the Single Life Policies, when the Insured dies, we will pay a Death
Benefit to a Beneficiary specified by you. Under the Survivorship Policies, the
Death Benefit is payable upon the second death, as long as the Policy is in
force. While the Policy is in force, the Death Benefit is at least the amount
shown in the Policy specifications, unless you have loans or the Net Surrender
Value is insufficient to pay the monthly expense charges. The Policy does not
have a guaranteed minimum Cash Value.

If you choose a Policy with our No Lapse Guarantee, while this guarantee is
in effect your Policy will never lapse, regardless of changes in Net Surrender
Value. Instead, if the Net Surrender Value becomes insufficient to pay the
monthly charges, the Death Benefit payable will at least equal your total
Premiums paid (less any prior withdrawals of Premium). This guarantee is in
effect while you have no outstanding Policy Debt. If you choose a Policy without
this guarantee or if this guarantee is not in effect under your Policy, your
coverage under the Policy may end if the Net Surrender Value of your Policy
becomes insufficient to cover the monthly expense charges.

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THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED OF
THESE SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

THE DATE OF THIS PROSPECTUS IS NOVEMBER 9, 1999.
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You may allocate and reallocate your Policy's Cash Value among the
Subaccounts of the KILICO Variable Separate Account (the "Separate Account").
Each Subaccount invests exclusively in shares of one of the following Portfolios
or Funds:

KEMPER VARIABLE SERIES:
Kemper Aggressive Growth Portfolio
Kemper Technology Growth Portfolio
Kemper-Dreman Financial Services Portfolio
Kemper Small Cap Growth Portfolio
Kemper Small Cap Value Portfolio
Kemper-Dreman High Return Equity Portfolio
Kemper International Portfolio
Kemper International Growth and Income Portfolio
Kemper Global Blue Chip Portfolio
Kemper Growth Portfolio
Kemper Contrarian Value Portfolio
Kemper Blue Chip Portfolio
Kemper Value+Growth Portfolio
Kemper Index 500 Portfolio
Kemper Horizon 20+ Portfolio
Kemper Total Return Portfolio
Kemper Horizon 10+ Portfolio
Kemper High Yield Portfolio
Kemper Horizon 5 Portfolio
Kemper Global Income Portfolio
Kemper Investment Grade Bond Portfolio
Kemper Government Securities Portfolio
Kemper Money Market Portfolio
KVS Focused Large Cap Growth Portfolio
KVS Growth Opportunities Portfolio
KVS Growth And Income Portfolio

SCUDDER VARIABLE LIFE INVESTMENT FUND
(CLASS A SHARES):
Scudder VLIF Global Discovery Portfolio
Scudder VLIF Growth and Income Portfolio
Scudder VLIF International Portfolio
Scudder VLIF Capital Growth Portfolio

THE ALGER AMERICAN FUND:
Alger American Leveraged AllCap Portfolio
Alger American Balanced Portfolio

THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC.

DREYFUS INVESTMENT PORTFOLIOS:
MidCap Stock Portfolio ("Dreyfus MidCap Stock Portfolio")

WARBURG PINCUS TRUST:
Warburg Pincus Emerging Markets Portfolio
Warburg Pincus Post-Venture Capital Portfolio

You may obtain more information about these Portfolios by reading the
accompanying Prospectuses for the Portfolios. Not all of the Subaccounts may be
available under your Policy.

You generally may cancel the Policy and receive a refund by returning it to
us within ten days after you receive it. In some states, however, this free look
period may be longer.

The Policies are modified endowment contracts for Federal income tax
purposes, except in certain cases as described in "Federal Tax Considerations"
beginning on page 35. Accordingly, the death benefit under your Policy generally
is not subject to federal income tax, and federal income tax on any growth in
your Policy's Cash Value generally is deferred until you withdraw it by taking a
loan, partial withdrawal, or other distribution from your Policy during the life
of the Insured. In addition, any taxable withdrawal taken before age 59 1/2 will
also be subject to an additional ten percent federal penalty tax, with certain
exceptions.

In certain states the Policies may be offered as group policies with
individual ownership represented by Certificates. The discussion of Policies in
this Prospectus applies equally to Certificates under group policies, unless the
context specifies otherwise.

THE POLICIES AND THE INVESTMENTS IN THE SEPARATE ACCOUNT ARE NOT
DEPOSITS, OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY ANY BANK.
THE POLICIES ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF THE PRINCIPAL AMOUNT INVESTED. THE POLICIES ARE NOT INSURED BY
THE FDIC, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY.

IF YOU ALREADY OWN A VARIABLE LIFE INSURANCE POLICY, IT MAY NOT BE
ADVANTAGEOUS FOR YOU TO BUY ADDITIONAL COVERAGE OR REPLACE YOUR
EXISTING POLICY WITH THE POLICY DESCRIBED IN THIS PROSPECTUS.

THIS PROSPECTUS IS VALID ONLY IF ACCOMPANIED BY THE CURRENT
PROSPECTUSES FOR THE PORTFOLIOS LISTED ABOVE. IF ANY OF THOSE
PROSPECTUSES ARE MISSING OR OUTDATED, PLEASE CONTACT US AND WE WILL
SEND YOU THE PROSPECTUS YOU NEED.

YOU CAN FIND THIS PROSPECTUS AND OTHER INFORMATION ABOUT THE SEPARATE
ACCOUNT REQUIRED TO BE FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION ("SEC") AT THE SEC'S WEBSITE AT http://www.sec.gov.

PLEASE READ THIS PROSPECTUS CAREFULLY AND RETAIN IT FOR YOUR FUTURE
REFERENCE.

The Policies may not be available in all states.

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TABLE OF CONTENTS
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<TABLE>
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PAGE
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DEFINITIONS................................................. 4
SUMMARY..................................................... 6
FEES AND EXPENSES........................................... 10
PURCHASE OF POLICY AND ALLOCATION OF PREMIUMS............... 13
Application for a Policy.................................. 13
Simplified Underwriting................................ 14
Standard Underwriting.................................. 14
Premiums.................................................. 14
Allocation of Premiums.................................... 14
Cash Value................................................ 15
Accumulation Unit Value................................... 15
Transfer of Cash Value.................................... 16
Transfers Authorized by Telephone......................... 16
Automatic Dollar Cost Averaging........................... 16
Automatic Asset Rebalancing............................... 17
INVESTMENT OPTIONS.......................................... 17
Separate Account Investments: the Portfolios.............. 17
Voting Rights............................................. 20
Additions, Deletions, and Substitutions of Securities..... 21
The DCA Fixed Account..................................... 21
POLICY BENEFITS AND RIGHTS.................................. 22
Death Benefit............................................. 22
Accelerated Death Benefit Rider........................... 23
Policy Loans.............................................. 23
Amount Payable on Surrender of the Policy................. 24
Partial Withdrawals....................................... 24
Systematic Withdrawals.................................... 25
Settlement Option Payments................................ 25
No Lapse Guarantee and Grace Period....................... 27
Termination............................................... 28
Maturity Benefit and Extended Maturity.................... 28
Reinstatement............................................. 28
Cancellation (Free Look Period)........................... 28
Postponement of Payments.................................. 29
CHARGES AND DEDUCTIONS...................................... 30
Separate Account Charges.................................. 30
Mortality and Expense Risk Charge...................... 30
Reserve for Taxes...................................... 30
Monthly Deduction......................................... 30
Cost of Insurance Charge............................... 30
Tax Charge............................................. 31
Administration Charge.................................. 31
Records Maintenance Charge............................. 31
Portfolio Expenses........................................ 31
Withdrawal Charge......................................... 32
Free Withdrawal Amount and Waiver of Withdrawal Charge.... 32
Transfer Fee.............................................. 33
Reduction of Charges...................................... 33
</TABLE>

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<TABLE>
<CAPTION>
PAGE
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<S> <C>
GENERAL POLICY PROVISIONS................................... 33
Reports to Owners......................................... 33
Limit on Right to Contest................................. 33
Suicide................................................... 33
Misstatement as to Age and Sex............................ 34
Beneficiary............................................... 34
Assignment................................................ 34
Creditors' Claims......................................... 34
Dividends................................................. 34
Notice and Elections...................................... 34
Modification.............................................. 34
Survivorship Policies..................................... 35
FEDERAL TAX CONSIDERATIONS.................................. 35
Taxation of KILICO and the Separate Account............... 35
Tax Status of the Policy.................................. 35
Diversification Requirements........................... 36
Owner Control.......................................... 36
Tax Treatment of Life Insurance Death Benefit Proceeds.... 36
Accelerated Death Benefit.............................. 37
Tax Deferral During Accumulation Period................... 37
Policies Which Are MECs................................... 37
Characterization of a Policy as a MEC.................. 37
Tax Treatment of Withdrawals, Loans, Assignments and
Pledges Under MECs.................................... 37
Penalty Tax............................................ 37
Aggregation of Policies................................ 37
Policies Which are not MECs............................... 37
Tax Treatment of Withdrawals Generally................. 37
Tax Treatment of Loans................................. 37
Survivorship Policies..................................... 38
Treatment of Maturity Benefits and Extension of Maturity
Date................................................... 38
Actions to Ensure Compliance with the Tax Law............. 38
Federal Income Tax Withholding............................ 38
Tax Advice................................................ 38
DESCRIPTION OF KILICO AND THE SEPARATE ACCOUNT.............. 38
KILICO.................................................... 38
Officers and Directors of KILICO.......................... 39
Separate Account.......................................... 41
Safekeeping of the Separate Account's Assets.............. 41
State Regulation of KILICO................................ 42
YEAR 2000 MATTERS........................................... 42
DISTRIBUTION OF POLICIES.................................... 43
LEGAL PROCEEDINGS........................................... 43
LEGAL MATTERS............................................... 43
REGISTRATION STATEMENT...................................... 43
EXPERTS..................................................... 43
FINANCIAL STATEMENTS........................................ 44
CHANGE OF ACCOUNTANTS....................................... 44
</TABLE>

THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN
WHICH SUCH OFFERING MAY NOT BE LAWFULLY MADE. WE DO NOT AUTHORIZE ANY
INFORMATION OR REPRESENTATIONS REGARDING THE OFFERING DESCRIBED IN THIS
PROSPECTUS OTHER THAN AS BASED IN THIS PROSPECTUS.

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DEFINITIONS

Please refer to this list for the meaning of the following terms:

ACCUMULATION UNIT--An accounting unit of measurement which we use to
calculate the value of a Subaccount.

ACCUMULATION UNIT VALUE--The value of an Accumulation Unit determined for a
Valuation Period according to the formula stated in your Policy.

ANNUITY UNIT--An accounting unit of measurement which we use to calculate
the amount of variable payments under a settlement option.

ANNUITY UNIT VALUE--The value of an Annuity Unit determined for a Valuation
Period according to the formula stated in your Policy.

BENEFICIARY(IES)--The person(s) named by you to receive the Death Benefit
under the Policy.

CASH VALUE--The sum of the Separate Account Value plus the Fixed Account
Value plus the Loan Account Value.

DCA FIXED ACCOUNT--The portion of the Cash Value allocated to our general
account for purposes of participating in our Dollar Cost Averaging program.

DEATH BENEFIT--The amount payable to the Beneficiary under the Policy upon
the death of the Insured(s), before payment of any unpaid Policy Debt or Policy
charges.

DEDUCTION DAY--The same day in each month as the Effective Date. The day of
the month on which the Monthly Deduction is taken from your Cash Value.

EFFECTIVE DATE--The effective date of insurance coverage under the Policy,
as stated in the Policy specifications. It is used to determine Policy
Anniversaries, Policy Years and the Deduction Day. If the Effective Date
otherwise would be the 29th, 30th or 31st of a month, the Effective Date will be
the 28th day of that month.

FIXED ACCOUNT--The portion of the Cash Value allocated to our general
account.

FIXED ACCOUNT VALUE--The value of the Fixed Account, including the DCA
Fixed Account and any initial Premium (plus interest) paid prior to the Issue
Date.

GUIDELINE SINGLE PREMIUM--The "Guideline Single Premium" as defined in
Section 7702 of the Code.

INSURED--A person whose life is insured under the Policy. Under a
Survivorship Policy, there initially are two Insureds.

INVESTMENT EXPERIENCE FACTOR--The factor we use to determine the change in
value of an Accumulation Unit in any Valuation Period. We determine the
Investment Experience Factor separately for each Subaccount.

ISSUE AGE--An Insured's age on his or her most recent birthday before the
Effective Date.

ISSUE DATE--The issue date stated in the Policy specifications. It is the
date all requirements for coverage and Premium have been received, and the
Policy is approved.

LOAN ACCOUNT--An account established for amounts transferred from the
Subaccounts as security for outstanding Policy Debt.

LOAN ACCOUNT VALUE--The value of the Loan Account.

MATURITY DATE--For Single Life Policies, the Policy Anniversary nearest the
Insured's 100th birthday. For Survivorship Policies, the Policy Anniversary
nearest the younger Insured's 100th birthday.

MONTHLY DEDUCTION--The amount deducted from the Cash Value on each
Deduction Day for the cost of insurance charge, the Administration Charge, the
Tax Charge, the Records Maintenance Charge (when due), and the cost of any
benefit rider.

NET SURRENDER VALUE--The Surrender Value minus all outstanding Policy Debt.

NO LAPSE GUARANTEE--Our guarantee that, if you have no outstanding Policy
Debt, your Policy will never lapse regardless of changes in the Net Surrender
Value. If the Net Surrender Value becomes insufficient to

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cover the monthly charges, however, Your Death Benefit may be reduced to equal
your total Premiums (less any prior withdrawals of Premium). The No Lapse
Guarantee is not available under all Policies.

OWNER ("YOU, YOUR, YOURS")--The person(s) having the privileges of
ownership defined in the Policy. The Owner(s) may or may not be the same
person(s) as the Insured(s). If your Policy is issued pursuant to a retirement
plan, your ownership privileges may be modified by the plan.

POLICY ANNIVERSARY--The same day and month as the Effective Date for each
subsequent year the Policy remains in force.

POLICY DEBT--The sum of all unpaid Policy Loans and accrued loan interest.

POLICY YEAR--Each twelve-month period beginning on the Effective Date and
each Policy Anniversary.

PORTFOLIO(S)--The underlying portfolios in which the Subaccounts invest.
Each Portfolio is an investment company registered with the SEC or a separate
investment series of a registered investment company.

PREMIUM--An amount paid to us as payment for the Policy by you or on your
behalf.

SEC--The United States Securities and Exchange Commission.

SEPARATE ACCOUNT--KILICO Variable Separate Account, a unit investment trust
registered with the SEC under the Investment Company Act of 1940.

SEPARATE ACCOUNT VALUE--The sum of the Subaccount Values of the Policy on
the Valuation Date.

SPECIFIED AMOUNT--The amount of insurance under your Policy. As of the
Effective Date, the Specified Amount is the amount shown on your Policy's
specifications page. Thereafter, the Specified Amount is reduced to reflect
partial withdrawals.

SUBACCOUNT--A division of the Separate Account, which invests wholly in
shares of one of the Portfolios.

SUBACCOUNT VALUE--The value of the assets held in a Subaccount.

SURRENDER VALUE--The Cash Value less any applicable Withdrawal Charge.

TAX CODE--The Internal Revenue Code of 1986, as amended.

TRADE DATE--On the Trade Date, we allocate your initial Premium plus any
interest to the Subaccounts and/or the DCA Fixed Account according to your
instructions. In some states, the Trade Date is the same as the Issue Date. If
your state requires us to return your Premium if you cancel Your Policy during
the free look period, the Trade Date will be after the end of the free look
period, as explained at page 14 below.

VALUATION DATE--Each business day that applicable law requires us to value
the assets of the Separate Account. Currently this 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.

WE, OUR, US, KILICO--Kemper Investors Life Insurance Company.

WITHDRAWAL CHARGE--The surrender charge plus the unamortized state premium
tax charge.

YOU, YOUR, YOURS--The party(s) named as Owner in the application, unless
later changed as provided in the Policy.

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SUMMARY

This section summarizes some of the more important features of your Policy.
The Policy is described more fully in the remainder of this Prospectus. Please
read this Prospectus carefully. Unless otherwise indicated, the description of
the Policy contained in this Prospectus assumes that the Policy is in force,
that there is no Policy Debt, and that current federal tax laws apply.

This Policy is a modified single premium variable universal life insurance
policy. The Policy has a Death Benefit, a Cash Value, and other features similar
to life insurance policies providing fixed benefits. The Policy permits the
Owner to pay a single significant initial Premium and, subject to restrictions,
additional Premiums. It is a "variable" Policy because the Cash Value and, in
some circumstances, the Death Benefit vary according to the investment
performance of the Subaccounts to which you have allocated your Premium. The
Cash Value is not guaranteed. This Policy provides you with the opportunity to
take advantage of any increase in your Cash Value, but you also bear the risk of
any decrease.

We will issue Policies on the lives of prospective Insureds age 0-90 who
meet our underwriting standards. You may purchase a Policy to provide insurance
coverage on the life of one Insured ("Single Life Policy") or a Policy to
provide insurance coverage on the lives of two Insureds ("Survivorship Policy").

PAYMENT OF PREMIUM

Your initial Premium must equal at least $10,000. You may choose a minimum
initial Premium of 90% or 100% of the Guideline Single Premium, based on the
initial Specified Amount. If you choose to pay 90% of the Guideline Single
Premium, your current cost of insurance charge will be higher and your Policy
will not include our No Lapse Guarantee. You may pay additional Premiums,
subject to the restrictions described in this Prospectus. We may refuse to
accept any Premium that would cause an increase in the Death Benefit, other than
a reinstatement Premium. We will accept any Premium at such time as it would not
cause your Policy to lose its status as a life insurance contract under the Tax
Code.

POLICY EFFECTIVE DATE

In general, your Policy will be effective and your life insurance coverage
under the Policy will begin as of the date we receive your initial Premium,
after satisfaction of the applicable underwriting requirements. While your
application is in underwriting, if You have paid your initial Premium, we may
provide you with temporary life insurance coverage in accordance with the terms
of our temporary insurance agreement. This temporary coverage will not exceed
$500,000 plus the amount of Your initial Premium. We may decline for any lawful
reason to accept your initial Premium until the Issue Date.

You may be eligible to purchase a Policy through simplified underwriting
without a medical examination if you meet our simplified underwriting criteria.
Simplified underwriting will only be available for Individual Policies and
Survivorship Policies involving spouses. Other survivorship cases will be
considered on a fully underwritten basis. You are not eligible for simplified
underwriting if the Insured is under 35 years old or over 80 years old at the
time of application.

If we approve your application, and you paid all or a portion of your
initial Premium prior to the Issue Date, we will credit interest to your Initial
Premium at our then current declared rate for the period from the Effective Date
to the Issue Date. On the Trade Date, we will allocate your initial Premium to
the Subaccounts you have selected or to the DCA Fixed Account (if you have
selected it for Dollar Cost Averaging). In some states, the Trade Date will be
the same as the Issue Date. In other states, however, which require us to return
your Premium upon cancellation of your Policy during the free look period, on
the Issue Date we will initially allocate your initial Premium (plus any
interest) to the Kemper Money Market Subaccount, and the Trade Date will depend
on the length of the free look period in your state. If the free look period is
ten days, the Trade Date will occur twenty days after the Issue Date. If the
free look period is longer, the Trade Date will occur a corresponding number of
days later. We will begin to deduct the Policy charges as of the Effective Date.

If we reject your application, we will not issue you a Policy. We will
return any Premium you have paid, adding interest as and at the rate required in
your state. We will not subtract any Policy charges from the amount we refund to
you.

POLICY BENEFITS

CASH VALUE. The Cash Value of your Policy on any Valuation Date is equal to
the sum of the Separate Account Value, the Fixed Account Value (if any), and the
Loan Account Value (if applicable). Your Cash Value

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will depend on the investment performance of the Subaccounts to which you have
allocated your Premiums, the amount of interest we credit to the DCA Fixed
Account and the Loan Account (if you have any Cash Value in those Accounts), as
well as the Premiums paid, partial withdrawals, and charges assessed. We do not
guarantee a minimum Cash Value.

SURRENDER OR PARTIAL WITHDRAWALS. While your Policy is in force, you may
surrender it for the Net Surrender Value. We also will deduct the Records
Maintenance Charge from your surrender proceeds, if your Cash Value on the last
Policy Anniversary was less than $50,000. Upon surrender, life insurance
coverage under your Policy will end. You may also withdraw part of your Cash
Value through a partial withdrawal, subject to the restrictions described in
"Partial Withdrawals" on page 24 below. If you take a partial withdrawal, we
will reduce the Specified Amount as described in this Prospectus on pages 22-23.

WITHDRAWAL CHARGE. If you surrender your Policy, the Withdrawal Charge will
equal a percentage of your initial Premium net of all previous withdrawal
amounts on which you paid a Withdrawal Charge. You pay a proportionate amount of
Withdrawal Charge on partial withdrawals in excess of the free withdrawal amount
described below.

The Withdrawal Charge has two parts: (1) a surrender charge, which is
intended to cover our distribution expenses; and (2) an unamortized state
premium tax charge, which is intended to cover state premium tax expenses that
are not recovered through the Tax Charge. The rate used to determine the
Withdrawal Charge depends on the year the surrender or partial withdrawal is
made. The maximum Withdrawal Charge is 10% of the initial Premium. It declines
to zero percent after the ninth Policy Year, at the rates shown in the table on
page 32.

FREE WITHDRAWALS. In each Policy Year, we will waive the Withdrawal Charge
for partial withdrawals equal to the greater of:

1. Ten percent of the Cash Value; or

2. Earnings not previously withdrawn.

We will also waive the Withdrawal Charge for qualified medical stays and
disability. For more detail see "Amount Payable on Surrender of the Policy" and
"Partial Withdrawals" on page 24.

POLICY LOANS. You may borrow money from us using your Policy as security
for the loan. Each Policy Loan must equal at least $1,000. Your total Policy
Loans may not exceed 90% of the Surrender Value of your Policy. In most
instances Policy Loans are treated as distributions for Federal tax purposes.
Therefore, you may incur tax liabilities if you borrow a Policy Loan. For more
detail, see "Policy Loans", on pages 23-24, and "Policies Which Are MECs", on
page 37.

DEATH BENEFITS. Under a Single Life Policy, while the Policy is in force,
we will pay a Death Benefit to the Beneficiary upon the death of the Insured.
Under a Survivorship Policy, we will pay the Death Benefit to the Beneficiary
upon the death of the second Insured. While your Policy is in force, the Death
Benefit will equal the greater of your Policy's then current Specified Amount
and the Cash Value multiplied by a specified percentage, except as provided
under "No Lapse Guarantee" below. Before we pay the Death Benefit, we will
subtract an amount sufficient to repay any outstanding Policy Debt and to pay
any due and unpaid charges.

NO LAPSE GUARANTEE

Under our No Lapse Guarantee, if you do not have any outstanding Policy
Debt, your Policy will never lapse, regardless of changes in the Net Surrender
Value. Your Policy will remain in force until payment of the Death Benefit or
the Maturity Date, unless you voluntarily surrender your Policy at an earlier
date. If your Net Surrender Value is insufficient to cover a Monthly Deduction
when due, we will give you a 61-day Grace Period to pay additional Premium. If
you do not pay sufficient additional Premium, at the end of the Grace Period
your Policy will stay in force but the Death Benefit will be reduced to equal
your total Premium payments (less any prior partial withdrawals of Premium). The
No Lapse Guarantee applies to your Policy unless: (a) you paid 90% of the
Guideline Single Premium at issue for your Policy or (b) your Policy has
outstanding Policy Debt.

DURATION OF COVERAGE

If the No Lapse Guarantee does not apply to your Policy and your Net
Surrender Value is insufficient to cover a Monthly Deduction when due, we will
give you a 61-day Grace Period to pay additional Premium. If you do not pay
sufficient additional Premium, your Policy will terminate at the end of the
Grace Period.

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ALLOCATION OF PREMIUMS

When you apply for the Policy, you specify in your application how to
allocate your initial Premium among the Subaccounts and/or the DCA Fixed
Account. Total allocations must equal 100%. You may allocate all or a portion of
your initial Premium to the DCA Fixed Account solely for the purpose of
subsequent transfers to the Subaccounts under our Automatic Dollar Cost
Averaging Program, as described on pages 16-17.

We allocate any subsequent Premiums to the Subaccounts in the proportions
you specified in your application, until you give us new instructions. Your
initial allocation to a Subaccount must equal at least $500. You may not
allocate your Cash Value to more than 30 Subaccounts at one time. In the future,
we may change these limits. As a general rule, any subsequent Premium will be
allocated to the Subaccounts as of the date your Premium is received in our Home
Office. You may not allocate subsequent Premiums or make transfers to the DCA
Fixed Account.

TRANSFERS

You may transfer Cash Value among the Subaccounts while the Policy is in
force, by writing to us or calling us at (800) 621-5001. We currently do not
charge a transfer fee. We reserve the right to charge a fee of $25 per transfer
on each transfer after the first twelve transfers in each Policy Year, excluding
transfers under our Automatic Dollar Cost Averaging or Automatic Asset
Rebalancing Programs.

The minimum amount that may be transferred is $100 or the remaining value
in the Subaccount, if the value that would remain in the Subaccount after the
transfer would be less than $500. For more detail, see "Transfer of Cash Value"
and "Transfers Authorized by Telephone", on page 16.

You may also use our Automatic Dollar Cost Averaging program or our
Automatic Asset Rebalancing program. You may not use both programs at the same
time. Under the Automatic Dollar Cost Averaging program, amounts are
automatically transferred to the Subaccounts of your choice on a monthly,
quarterly, semiannual, or annual basis. For more detail, see "Automatic Dollar
Cost Averaging", on pages 16-17.

Under the Automatic Asset Rebalancing program, you periodically can
readjust the percentage of your Cash Value allocated to each Subaccount to
maintain a pre-set level. Investment results will shift the balance of your Cash
Value allocations. If you elect Automatic Asset Rebalancing, we periodically
transfer your Cash Value back to the specified percentages annually,
semiannually, quarterly, or at your request. For more detail, see "Automatic
Asset Rebalancing", on page 17.

THE SEPARATE ACCOUNT

You can allocate and reallocate your Cash Value among the Subaccounts, each
of which in turn invests in a single Portfolio. Under the Policy, the Separate
Account currently invests in the following Portfolios:

THE ALGER AMERICAN FUND:
Alger American Leveraged AllCap Portfolio
Alger American Balanced Portfolio

THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC.

DREYFUS INVESTMENT PORTFOLIOS:
Dreyfus MidCap Stock Portfolio

WARBURG PINCUS TRUST:
Warburg Pincus Emerging Markets Portfolio
Warburg Pincus Post-Venture Capital Portfolio

Each Portfolio holds its assets separate from the assets of the other
Portfolios. Each Portfolio has distinct investment objectives and policies,
which are described in the accompanying Prospectuses for the Portfolios.

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CHARGES

CHARGES ASSESSED ON THE SUBACCOUNTS. On each Valuation Date, we deduct a
Mortality and Expense Risk Charge from the Separate Account. The Mortality and
Expense Charge equals an annual rate of .90% of average daily net assets, and is
intended to compensate us for expenses incurred and certain mortality and
expense risks assumed under the Policies. See "Mortality and Expense Risk
Charge" on page 30 below.

MONTHLY DEDUCTION. We also deduct a Monthly Deduction from your Cash Value.
The Monthly Deduction consists of the cost of insurance charge, the
Administration Charge, the Tax Charge, and the cost of any benefit rider. We
also deduct the Records Maintenance Charge on each Policy Anniversary, if your
Policy's Cash Value was less than $50,000 on the previous Policy Anniversary.
The cost of insurance charge covers our anticipated mortality costs. If your
Initial Premium exceeds $500,000, your cost of insurance charges may be lower.
The Administration Charge is intended to compensate us for some of our
administrative costs under the Policy. The Tax Charge covers state premium tax
expenses under the Policies and certain federal tax liabilities resulting from
our receipt of Premiums under the Policies, as required by law. The Records
Maintenance Charge reimburses us for certain administrative costs associated
with the Policies. See "Monthly Deduction", on pages 30-31 below.

WITHDRAWAL CHARGE. We impose a Withdrawal Charge to cover a portion of our
premium tax expenses and a portion of the sales expenses we incur in
distributing the Policies. These sales expenses include agents' commissions,
advertising, and the printing of Prospectuses. See "Withdrawal Charge" on page 7
above and in "Withdrawal Charge" on page 32 below.

TRANSFER FEE. We currently do not charge a transfer fee. Under the Policy,
however, we reserve the right to charge a fee of $25 per transfer on each
transfer in excess of twelve transfers in a single Policy Year, excluding
Portfolio Rebalancing and Automatic Dollar Cost Averaging transfers. See
"Transfer Fee" on page 33 below.

The charges assessed under the Policy are summarized in the table entitled
"Policy Charges and Deductions" on pages 10-11 below, and described in more
detail in "Charges and Deductions", beginning on page 30.

In addition to our charges under the Policy, each Portfolio deducts amounts
from its assets to pay its investment advisory fee and other expenses. The
Prospectuses for the Portfolios describe their respective charges and expenses
in more detail. We may receive compensation from the investment advisers or
administrators of the Portfolios. Such compensation will be consistent with the
services we provide or the cost savings resulting from the arrangement and
therefore may differ between Portfolios. We also may receive fees from the
Portfolios to assist us in distributing the Policies.

TAX TREATMENT UNDER CURRENT FEDERAL TAX LAW

Your Policy is structured to meet the definition of a life insurance
contract under the Tax Code. We may need to limit the amount of Premiums you pay
under the Policy to ensure that your Policy continues to meet that definition.

In most circumstances, your Policy will be considered a "modified endowment
contract", which is a form of life insurance contract under the Tax Code.
Special rules govern the tax treatment of modified endowment contracts. Under
current tax law, death benefit payments under modified endowment contracts, like
death benefit payments under other life insurance contracts, generally are
excluded from the gross income of the beneficiary. Withdrawals and Policy Loans,
however, are treated differently. Amounts withdrawn and Policy Loans are treated
first as income, to the extent of any gain, and then as a return of Premium. The
income portion of the distribution is includable in your taxable income. Also,
an additional ten percent federal penalty tax is generally imposed on the
taxable portion of amounts received before age 59 1/2. For more information on
the tax treatment of the Policy, see "Federal Tax Considerations", beginning on
page 35, and consult your tax adviser.

FREE-LOOK PERIOD

In most states, you may cancel your Policy by returning it to us no later
than ten days after you receive it. In other states, however, this free look
period may be longer, as provided by state law. If you return your Policy, the
Policy terminates and, in some states, we will pay you an amount equal to your
Premium (less any Policy Debt). In some other states, however, we will return
your Cash Value. Since state laws differ as to the consequences of returning a
Policy, You should refer to your Policy for specific information about your
circumstances.

ILLUSTRATION OF HOW POLICY VALUES CHANGE WITH EXPERIENCE

At your request we will furnish you with a free, personalized illustration
of Cash Value, Surrender Value and Death Benefit. The illustration will be
personalized to reflect the proposed Insureds' age, sex, underwriting
classification, proposed initial Premium, and any available riders requested.
The illustrated Cash Value, Surrender

9
<PAGE> 12

Value and Death Benefit will be based on certain hypothetical assumed rates of
return for the Separate Account. Your actual investment experience probably will
differ, and as a result the actual values under the Policy at any time may be
higher or lower than those illustrated. The personalized illustrations will
follow the methodology and format of the hypothetical illustrations that we
filed with the SEC in the registration statement.

FEES AND EXPENSES

The following tables are designed to help you understand the fees and
expenses that you bear, directly or indirectly, as a Policy Owner. The first
table describes the Policy Charges and deductions you directly bear under the
Policy. The second table describes the fees and expenses of the Portfolios that
you bear indirectly when you purchase a Policy. (See "Charges and Deductions",
beginning on page 30).

POLICY CHARGES AND DEDUCTIONS

CHARGES DEDUCTED FROM THE SEPARATE ACCOUNT:

Mortality and Expense Risk
Charge: 0.90% of average daily net assets(1)

Federal Income Tax Charge:Currently none.(2)

CHARGES DEDUCTED FROM CASH VALUE:(3)

Monthly Cost of Insurance Charge:

CURRENT: The lower of: (i) the product of the
applicable current asset-based cost of insurance
charge times the Cash Value on the Deduction Day;(4)
and (ii) the product of the applicable guaranteed cost
of insurance rate times the net amount at risk.

If your initial Premium is no more than $500,000 and
you pay 100% of the Guideline Single Premium, the
current asset-based rate for Single Life Policies for
the Standard (NT)(5) rate class is 0.55% annually of
Cash Value for the first ten Policy Years and 0.25%
thereafter and the rate for Survivorship Policies for
the Standard (NT) rate class is 0.45% for the first
ten Policy Years and 0.20% thereafter.

If your initial Premium is more than $500,000 and you
pay 100% of the Guideline Single Premium, the current
asset-based rate for Single Life Policies for the
Standard (NT) rate class is 0.25% for the first ten
Policy Years and 0.10% thereafter and the rate for
Survivorship Policies for the Standard (NT) rate class
is 0.20% for the first ten Policy Years and 0.10%
thereafter.

GUARANTEED: Ranges from $.06 per $1,000 of net amount
at risk to $83.33 per $1,000 of net amount at risk.(6)

Administration Charge(7) 0.35% annually of average monthly Cash Value for
Policy Years 1-10

0.25% annually of average monthly Cash Value for
Policy Years 11 and later

Tax Charge(7) 0.40% annually of the average monthly Cash Value for
Policy Years 1-10

0.00% for Policy Years 11 and later

Records Maintenance
Charge(8) $30.00 per year, deducted annually, if your Cash Value
is less than $50,000 on the most recent Policy
Anniversary.

TRANSACTION CHARGES:

Transfer Fee:(9) Currently none.

MAXIMUM WITHDRAWAL
CHARGE:(10) 10% of the initial Premium
- ---------------

(1) Deducted each Valuation Period at a rate equivalent to the effective annual
rate shown, multiplied by the Separate Account Value on the relevant
Valuation Date, times the number of days in the relevant Valuation

10
<PAGE> 13

Period. No mortality and expense risk charge is deducted from the Kemper
Money Market II Subaccount, which is only available for Automatic Dollar
Cost Averaging that will deplete the owner's Subaccount Value by the end of
the first Policy Year.

(2) We currently do not assess a charge for federal income taxes that may be
attributed to the operations of the Separate Account. We reserve the right
to do so in the future. See "Charges and Deductions", beginning on page 30.

(3) Assessed monthly, allocated pro rata among all active Subaccounts and the
DCA Fixed Account.

(4) The asset-based cost of insurance rate differs depending on Policy type and
history of tobacco use of the Insured(s). The current-asset based cost of
insurance rates also reflect whether you pay 90% or 100% of the Guideline
Single Premium at issue (based on the initial Specified Amount). The
asset-based rates that we set will reflect our expectations as to mortality
experience under the Policies and other relevant factors, such that the
aggregate actual cost of insurance charges paid under the Policies will
compensate us for our aggregate mortality risks under the Policies. In our
discretion, we may change the asset-based rate used in the current cost of
insurance formula. Even if we change the asset-based rate, however, you
will never be charged more than the amount determined using the guaranteed
cost of insurance tables in your Policy. For further explanation, see
"Charges and Deductions--Monthly Deduction--Cost of Insurance Charge", on
page 30.

(5) The Standard (NT) rate class is our best rate class for Insureds who have
not used tobacco of any kind within the past 36 months.

(6) The guaranteed cost of insurance charges are based on attained age, sex,
and history of tobacco use of the Insured. The net amount at risk is the
difference between the Death Benefit and the Cash Value. See "Charges and
Deductions--Monthly Deduction--Cost of Insurance Charge", on page 30.

(7) Deducted monthly in an amount equal to 1/12 the annual rate shown,
multiplied by the total Cash Value, including the Loan Account Value, on
the relevant Deduction Day. The Administration Charge covers certain of our
administrative expenses in connection with the Policies. The Tax Charge
covers a portion of our state premium tax expense and certain federal
income tax liability associated with the receipt of Premium.

(8) The Records Maintenance Charge is deducted annually on each Policy
Anniversary. If you surrender your Policy during a Policy Year, we will
deduct the Records Maintenance Charge from your surrender proceeds.

(9) We currently do not charge a transfer fee. Under the Policy, we reserve the
right in the future to charge a transfer fee of $25 on each transfer after
the first twelve transfers each Policy Year, excluding transfers under our
Automatic Dollar Cost Averaging and Automatic Asset Rebalancing Programs.

(10) This charge only applies upon withdrawals of the initial Premium. It does
not apply to withdrawals of any additional Premiums paid under a Policy.
The Withdrawal Charge declines to zero percent after the ninth Policy
Anniversary. It is imposed to cover a portion of our premium tax expenses
and the sales expenses incurred by us in distributing the Policies. In any
Policy Year, we will not charge any Withdrawal Charge on that portion of
your withdrawals equal to the greater of (a) ten percent of the Cash Value,
less any prior free partial withdrawal since the most recent Policy
Anniversary, or (b) earnings not previously withdrawn. See Charges and
Deductions--Withdrawal Charge, page 32.

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<PAGE> 14

PORTFOLIO EXPENSES
(As a percentage of average net assets for the period ended December 31, 1998)
(total expense figures shown in column titled "Total Fund Annual Expenses (Net)"
are after fee waivers or reductions and expense reimbursements,
as indicated in the notes)

<TABLE>
<CAPTION>
TOTAL FUND TOTAL FUND
MANAGEMENT TOTAL FUND ANNUAL EXPENSES ANNUAL EXPENSES
PORTFOLIO FEES OTHER EXPENSES (GROSS) (NET)
- --------- ---------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
Kemper Aggressive Growth Portfolio(2)(4)...... 0.75% 0.28% 1.03% 0.95%
Kemper Technology Growth Portfolio(2)(4)...... 0.75% 0.29% 1.04% 0.95%
Kemper-Dreman Financial Services
Portfolio(2)(5)............................. 0.75% 0.97% 1.72% 0.99%
Kemper Small Cap Growth Portfolio............. 0.65% 0.05% 0.70% 0.70%
Kemper Small Cap Value Portfolio(1)........... 0.75% 0.05% 0.80% 0.80%
Kemper-Dreman High Return Equity
Portfolio(2)(5)............................. 0.75% 0.45% 1.20% 0.87%
Kemper International Portfolio................ 0.75% 0.18% 0.93% 0.93%
Kemper International Growth and Income
Portfolio(2)(5)............................. 1.00% 18.54% 19.54% 1.12%
Kemper Global Blue Chip Portfolio(2)(5)....... 1.00% 11.32% 12.32% 1.56%
Kemper Growth Portfolio....................... 0.60% 0.05% 0.65% 0.65%
Kemper Contrarian Value Portfolio(1).......... 0.75% 0.03% 0.78% 0.78%
Kemper Blue Chip Portfolio(1)................. 0.65% 0.11% 0.76% 0.76%
Kemper Value+Growth Portfolio(1).............. 0.75% 0.03% 0.78% 0.78%
Kemper Index 500 Portfolio(6)................. 0.45% 0.29% 0.74% 0.55%
Kemper Horizon 20+ Portfolio(1)............... 0.60% 0.07% 0.67% 0.67%
Kemper Total Return Portfolio................. 0.55% 0.05% 0.60% 0.60%
Kemper Horizon 10+ Portfolio(1)............... 0.60% 0.04% 0.64% 0.64%
Kemper High Yield Portfolio................... 0.60% 0.05% 0.65% 0.65%
Kemper Horizon 5 Portfolio(1)................. 0.60% 0.06% 0.66% 0.66%
Kemper Global Income Portfolio(2)............. 0.75% 0.33% 1.08% 1.05%
Kemper Investment Grade Bond Portfolio(1)..... 0.60% 0.07% 0.67% 0.67%
Kemper Government Securities Portfolio........ 0.55% 0.11% 0.66% 0.66%
Kemper Money Market Portfolio(3).............. 0.50% 0.04% 0.54% 0.54%
KVS Focused Large Cap Growth Portfolio(11).... 0.95% 0.57% 1.52% 1.15%
KVS Growth Opportunities Portfolio(11)........ 0.95% 0.57% 1.52% 1.15%
KVS Growth And Income Portfolio(11)........... 0.95% 0.57% 1.52% 1.15%
Scudder VLIF Global Discovery Portfolio(7).... 0.91% 0.81% 1.72% 1.72%
Scudder VLIF Growth and Income Portfolio...... 0.47% 0.09% 0.56% 0.56%
Scudder VLIF International Portfolio.......... 0.87% 0.18% 1.05% 1.05%
Scudder VLIF Capital Growth Portfolio......... 0.47% 0.04% 0.51% 0.51%
Alger American Leveraged AllCap
Portfolio(9)................................ 0.85% 0.11% 0.96% 0.96%
Alger American Balanced Portfolio............. 0.75% 0.17% 0.92% 0.92%
The Dreyfus Socially Responsible Growth Fund,
Inc......................................... 0.75% 0.05% 0.80% 0.80%
Dreyfus MidCap Stock Portfolio(10)............ 0.75% 1.14% 1.89% 1.00%
Warburg Pincus Emerging Markets
Portfolio(8)................................ 1.25% 6.96% 8.21% 1.40%
Warburg Pincus Post-Venture Capital
Portfolio(8)................................ 1.25% 0.45% 1.70% 1.40%
</TABLE>

- ---------------

(1) Pursuant to their respective agreements with Kemper Variable Series, the
investment manager and the accounting agent have agreed, for the one year
period commencing on approximately May 1, 1999, to limit their respective
fees and to reimburse other operating expenses to the extent necessary to
limit total operating expenses of the following described Portfolios to the
amounts set forth after the Portfolio names: Kemper Value+Growth Portfolio
(.84%), Kemper Contrarian Value Portfolio (.80%), Kemper Small Cap Value
Portfolio (.84%), Kemper Horizon 5 Portfolio (.97%), Kemper Horizon 10+
Portfolio (.83%), Kemper Horizon 20+ Portfolio (.93%), Kemper Investment
Grade Bond Portfolio (.80%), and Kemper Blue Chip Portfolio (.95%). The
amounts set forth in the table above reflect actual expenses for the past
fiscal year, which were lower than these expense limits.

(2) Pursuant to their respective agreements with Kemper Variable Series, the
investment manager and the accounting agent have agreed, for the one year
period commencing on approximately May 1, 1999, to limit

12
<PAGE> 15

their respective fees and to reimburse other operating expenses of the Kemper
Aggressive Growth, Kemper Technology Growth, Kemper-Dreman Financial Services,
Kemper-Dreman High Return Equity, Kemper International Growth and Income, Kemper
Global Blue Chip and Kemper Global Income Portfolios of Kemper Variable
Series to the levels set forth in the table above in parentheses. Taking
into effect these expense caps, for the Aggressive Growth, Technology
Growth, Financial Services, High Return Equity, International Growth and
Income, Global Blue Chip and Global Income Portfolios of Kemper Variable
Series: management fees were .67%, .66%, .02%, .42%, .00%, .00% and .72%,
respectively. Other Expenses were .28%, .29%, .97%, .45%, 1.12%, 1.56%, and
.33%, respectively, and total operating expenses were .95%, .95%, .99%,
.87%, 1.12%, 1.56%, and 1.05%, respectively. In addition, for Kemper
International Growth and Income and Kemper Global Blue Chip, the investment
manager has agreed to limit its management fee to .70% and .85%,
respectively, of such portfolios for one year from the date of this
Prospectus. The amounts set forth without parentheses in the table above
reflect actual expenses for the past fiscal year. The Total Fund Annual
Expense figures set forth in parentheses reflect the effect of the fee
reductions and expense reimbursement arrangements described above.

(3) This Portfolio is the underlying investment for the Kemper Money Market
Subaccount and the Kemper Money Market II Subaccount. The Kemper Money
Market II Subaccount is only available to allocate all or a portion of your
initial Premium for Automatic Dollar Cost Averaging that will deplete your
Subaccount Value by the end of the first Policy Year.

(4) Portfolios commenced operations on 5/1/99. "Other Expenses" have been
estimated.

(5) Portfolios commenced operations on or after 5/1/98. "Other Expenses" have
been annualized.

(6) Portfolio commenced operations after 9/1/99. "Other Expenses" have been
estimated. Pursuant to their respective agreements with Kemper Variable
Series, the investment manager and the accounting agent have agreed, for
the period from commencement of operations to April 30, 2000, to limit
their respective fees and to reimburse other operating expenses of the
Kemper Index 500 Portfolio to the level set forth in the table above in
parentheses. Taking into effect this cap for the Kemper Index 500
Portfolio, Management Fees would be 0.26%, Other Expenses would be 0.29%
and Total Operating Expenses would be 0.55%.

(7) Until April 30, 1998, the Adviser waived a portion of its management fee to
limit the expenses of this Portfolio to 1.50% of the average daily net
assets.

(8) The expense figures shown without parentheses are for fiscal year ended
December 31, 1998. They do not reflect certain fee waivers or reductions
from the Portfolios' investment adviser and its affiliates. With such
waivers and reductions, Management Fees, Other Expenses, and Total
Portfolio Annual Expenses for the Portfolios for the fiscal year ended
December 31, 1998 were: 0.20%, 1.20%, and 1.40%, respectively, for the
Emerging Markets Portfolio; and 1.08%, 0.32%, and 1.40%, respectively, for
the Post-Venture Capital Portfolio. Fee waivers and expense reimbursements
may be discontinued at any time. The Total Fund Annual Expense figures set
forth in parentheses reflect the effect of the fee waiver and expense
reduction arrangements described above.

(9) Included in Other Expenses is 0.03% of interest expense.

(10) The Dreyfus Corporation has agreed, until December 31, 1999, to waive
receipt of its fees and/or assume the expenses of the portfolio so that
expenses (excluding taxes, brokerage commissions, extraordinary expenses,
interest expenses and commitment fees on borrowings) do not exceed 1.00%.

(11) Portfolios commenced operations on or after 10/29/99. "Other Expenses" have
been estimated. Pursuant to its agreement with Kemper Variable Series, the
investment manager has agreed, for the period from commencement of
operations to April 30, 2000, to limit its fees and to reimburse other
operating expenses of the KVS Focused Large Cap Growth Portfolio, the KVS
Growth Opportunities Portfolio and the KVS Growth And Income Portfolio to
the level set forth in the table above in parentheses. Taking into effect
this cap for each of the KVS Focused Large Cap Growth Portfolio, the KVS
Growth Opportunities Portfolio and the KVS Growth And Income Portfolio,
Management Fees would be 0.58%, Other Expenses would be 0.57% and Total
Operating Expenses would be 1.15%.

PURCHASE OF POLICY AND ALLOCATION OF PREMIUMS

APPLICATION FOR A POLICY

You may apply to purchase a Policy by submitting a written application to
us through one of our authorized agents. We will issue Policies to insure people
who are 90 years of age or younger. When you apply for a Policy, we will require
you to submit evidence of insurability satisfactory to us. If we do not issue a
Policy to you, we will return your Premium to you.

13
<PAGE> 16

In general, we will deliver your Policy only when (1) we have received your
initial Premium and (2) we have determined that your application meets our
underwriting requirements. If you are paying Premium from more than one source,
we will not issue your Policy until all Premium has been received. The Effective
Date will be the effective date of insurance coverage under your Policy. We use
the Effective Date to determine Policy Anniversaries, Policy Years, and
Deduction Days. The Effective Date usually will be the date when we have
received your initial Premium, after satisfaction of the applicable underwriting
requirements.

We will not accept your initial Premium with your application if it exceeds
our then-current limit. In other cases, you may choose to pay the initial
Premium with your application. If you did not submit your initial Premium with
your application, we will require you to pay your entire Premium before we place
your insurance in force.

Acceptance of your application is subject to our underwriting rules. We
reserve the right to reject your application for any lawful reason. We reserve
the right to change the terms or conditions of your Policy to comply with
differences in applicable state law. 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.

SIMPLIFIED UNDERWRITING. Under our current underwriting rules, which we may
change when and as we decide, proposed Insureds are eligible for simplified
underwriting without a medical examination, if the application responses and
requested initial Premium meet our simplified underwriting standards. Simplified
underwriting is not available if the initial Premium exceeds the limits set in
our simplified underwriting standards. For Survivorship Policies, both Insureds
must meet our simplified underwriting requirements. Simplified underwriting
limits may vary by state.

STANDARD UNDERWRITING. If you are not eligible for simplified underwriting,
we will process your application in accordance with our customary underwriting
requirements. While your application is in underwriting, if you have paid your
initial Premium we may provide you with temporary life insurance coverage in
accordance with the terms of our temporary insurance agreement. Any temporary
coverage may not exceed $500,000 plus the amount of your initial Premium. If you
did not pay your Premium with your application, we will require you to pay your
entire Premium before we place your insurance in force. If you pay Premium
through more than one source, e.g., through the rollover of another policy, we
will not place your Policy in force until all Premium has been received.

If we approve your application, you will earn interest and/or investment
return on your Premium from the Effective Date. We will also begin to deduct the
Policy charges as of the Effective Date.

If we reject your application, we will not issue you a Policy. We will
return any Premium you have made, adding interest as and at the rate required in
your state. We will not subtract any Policy charges from the amount we refund to
You.

PREMIUMS

You must pay an initial Premium to purchase a Policy. You may choose a
minimum initial Premium of 90% or 100% of the Guideline Single Premium for your
Policy's initial Specified Amount. Your choice will affect your current cost of
insurance charge. In addition, if you choose to pay 90%, your Policy will not
include our No Lapse Guarantee. Under either option, the minimum initial Premium
is $10,000. We may waive or change this minimum.

You may pay additional Premiums at any time and in any amount necessary to
avoid termination of your Policy. In addition, we will accept any additional
Premium at such time as it would not disqualify your Policy as a life insurance
contract under the Tax Code. If you wish to repay Policy Debt (if any), you must
send written instructions with your payment; otherwise, we will treat any
payment received from you as additional Premium.

ALLOCATION OF PREMIUMS

If you pay all or a portion of your initial Premium prior to the Issue
Date, we will initially allocate your payment to our Fixed Account. If we
approve your application, we will credit interest to that amount at an effective
rate of not less than 3% annually for the period from the Effective Date to the
Issue Date.

On the Issue Date, if your state requires us to return your Premium if you
cancel your Policy during the free look period, we will initially allocate your
initial Premium (and any interest) to the Kemper Money Market Subaccount.
Subsequently, on the Trade Date, we will allocate your Cash Value to the
Subaccounts and/or the DCA Fixed Account (if you have selected it for Dollar
Cost Averaging) in accordance with your instructions. The Trade Date will depend
on the length of the free look period. If the free look period is ten days, the
Trade Date

14
<PAGE> 17

will occur twenty days after the Issue Date. If the free look period is longer,
the Trade Date will occur a corresponding number of days later.

In other states, on the Issue Date we will allocate your initial Premium
according to your instructions, because the Trade Date will be the same as the
Issue Date.

You must specify your allocation percentages in your Policy application.
The total allocation must equal 100%. We will allocate your subsequent Premiums
in those proportions, until you give us new allocation instructions. You may
change your allocation instructions orally or in writing. Your initial
allocation to a Subaccount must equal at least $500. You may not allocate your
Cash Value to more than 30 Subaccounts at one time. You may not allocate
Premiums to the DCA Fixed Account after the initial Premium.

We generally will allocate your additional Premiums to the Subaccounts as
of the date your Premium is received in our Home Office. We may refuse to accept
any Premium that would cause an increase in the Death Benefit, other than a
reinstatement Premium. We will make all valuations in connection with the
Policy, other than the initial Premium and other Premium payments requiring an
underwriting, on the date a Premium is received or your request for other action
is received at our Home Office, if that date is a Valuation Date, or on the next
succeeding Valuation Date.

CASH VALUE

Your Cash Value on any Valuation Date is the sum of the value of your
interest in the Subaccounts you have chosen, your Fixed Account Value (if any),
plus your Loan Account Value (if any). Your Cash Value may increase or decrease
daily to reflect the performance of the Subaccounts you have chosen, the
addition of interest credited to the Loan Account and the Fixed Account, the
addition of Premiums, and the subtraction of partial withdrawals and charges
assessed. There is no minimum guaranteed Cash Value.

On the Effective Date, your Cash Value will equal the initial Premium less
the Monthly Deduction for the first Policy Month.

The Separate Account Value equals the sum of the Subaccount Values, each of
which equals:

a. The total value of your Accumulation Units in the Subaccount; plus

b. Any Premium received and allocated to the Subaccount during the
current Valuation Period; plus

c. Any amount transferred to the Subaccount during the current
Valuation Period; minus

d. The pro-rata portion of any Monthly Deduction charged to the
Subaccount when the Valuation Period includes a Deduction Day;
minus

e. Any amount transferred from the Subaccount during the current
Valuation Period; minus

f. Any amount withdrawn from the Subaccount during the current
Valuation Period; minus

g. Any amount loaned from the Subaccount during the current Valuation
Period.

ACCUMULATION UNIT VALUE

The Accumulation Unit Value for each Subaccount will vary to reflect the
investment experience of the corresponding Portfolio and the deduction of
certain expenses. We will determine the Accumulation Unit Value for each
Subaccount on each Valuation Date. A Subaccount's Accumulation Unit Value for a
particular Valuation Date will equal the Subaccount's Accumulation Unit Value on
the preceding Valuation Date multiplied by the Investment Experience Factor for
that Subaccount for the Valuation Period then ended.

The Investment Experience Factor for each Subaccount is (1) divided by (2)
minus (3), where:

(1) is the sum of (a) the net asset value per share of the corresponding
Portfolio at the end of the current Valuation Period plus (b) the per
share amount of any dividend or capital gains distribution by that
Portfolio, if the "ex-dividend" date occurs in that Valuation Period;
plus or minus (c) a credit or charge 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 corresponding Portfolio at the
end of the last prior Valuation Period; and

(3) is the factor representing the Mortality and Expense Risk Charge.

15
<PAGE> 18

You should refer to the Prospectuses for the Portfolios which accompany
this Prospectus for a description of how the assets of each Portfolio are
valued, since that determination directly affects the investment experience of
the corresponding Subaccount and, therefore, your Cash Value.

TRANSFER OF CASH VALUE

While the Policy is in force before the Maturity Date, you may transfer
Cash Value among the Subaccounts in writing or by telephone. We currently do not
charge a transfer fee. However, under the Policy we reserve the right to charge
a fee of $25 for each transfer in excess of twelve per Policy Year, excluding
transfers under our Automatic Dollar Cost Averaging and Automatic Asset
Rebalancing Programs. You may not transfer Cash Value to the DCA Fixed Account.

The minimum amount that may be transferred from a single Subaccount is
$100, or the remaining value in the Subaccount, if the value that would remain
in the Subaccount after the transfer would be less than $500. We reserve the
right to waive or change these minimums.

As a general rule, we only make transfers on days when the New York Stock
Exchange is open for business. If we receive your request on one of those days,
we will make the transfer that day. Otherwise, we will make the transfer on the
first subsequent day on which the NYSE is open. Transfers pursuant to a
Automatic Dollar Cost Averaging or Automatic Asset Rebalancing program will be
made at the intervals you have selected in accordance with the procedures and
requirements we establish. We may suspend, modify, or terminate the transfer
provisions.

TRANSFERS AUTHORIZED BY TELEPHONE

You may make transfers by telephone, if you so advise us in writing on our
authorized forms. The cut off time for telephone transfer requests is 3:00 p.m.
Central time. Timely requests will be processed on that day at that day's price.
If we receive your request after 3:00 p.m. Central time, we will process your
request at the next day's price.

We use procedures that we believe provide reasonable assurance that
telephone authorized transfers are genuine. For example, we tape telephone
conversations with persons purporting to authorize transfers and request
identifying information. Accordingly, we disclaim any liability for losses
resulting from allegedly unauthorized telephone transfers. We may suspend,
modify or terminate the telephone transfer privilege at any time without notice.

AUTOMATIC DOLLAR COST AVERAGING

Under our Automatic Dollar Cost Averaging program, while the Policy is in
force you may authorize us to transfer a fixed dollar amount monthly, quarterly,
semiannually, or annually to the Subaccounts of your choice in accordance with
the procedures and requirements that we establish. The transfers will continue
until you instruct us to stop, or until your chosen source of transfer payments
is exhausted. The minimum Automatic Dollar Cost Averaging transfer is $100 per
transfer. Upon early termination of your Automatic Dollar Cost Averaging
program, we will allocate the remaining amount from your source account to the
Subaccounts in accordance with your instructions in our files. If you do not
give us new instructions, we will follow the allocation instructions in our
files.

You may make Dollar Cost Averaging transfers from any Subaccount. At issue,
you may choose to allocate some or all of your initial Premium to the Kemper
Money Market II Subaccount or to the DCA Fixed Account, for purposes of
participating in the Dollar Cost Averaging Program. Amounts allocated to the
Kemper Money Market II Subaccount or the DCA Fixed Account must be transferred
to other Subaccounts by the first Policy Anniversary.

The Kemper Money Market II Subaccount invests in the Kemper Money Market
Portfolio. However, the Mortality and Expense Risk Charge is not charged to this
Subaccount.

We offer two DCA Fixed Account options in connection with the Automatic
Dollar Cost Averaging Program: a six-month option and a twelve-month option.
Amounts designated for one of these options will be transferred to the
Subaccounts within six months or twelve months of the Effective Date, as
appropriate. Until they are transferred, they will accrue interest at the rate
we declare. We may declare different rates for the six-month and the
twelve-month options. In our discretion, we may change the DCA Fixed Account
options that we offer under the Policy. For more information, see "The DCA Fixed
Account" on pages 21-22.

Your request to participate in this program will be effective when we
receive your completed application at our Home Office at the address given on
the first page of this Prospectus. Call or write us for a copy of the

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<PAGE> 19

application and additional information concerning the program. You may not use
Automatic Dollar Cost Averaging and Automatic Asset Rebalancing at the same
time. We may change, terminate, limit or suspend Automatic Dollar Cost Averaging
at any time.

The theory of automatic dollar cost averaging is that by spreading your
investment over time, you may be able to reduce the effect of transitory market
conditions on your investment. In addition, because a given dollar amount will
purchase more units when the unit prices are relatively low rather than when the
prices are higher, in a fluctuating market, the average cost per unit may be
less than the average of the unit prices on the purchase dates. However,
participation in this program does not assure you of a greater profit from your
purchases under the program; nor will it prevent or necessarily reduce losses in
a declining market. Moreover, other investment programs may not work in concert
with Automatic Dollar Cost Averaging. Therefore, you should monitor your use of
these programs, as well as other transfers or withdrawals, while Automatic
Dollar Cost Averaging is being used.

AUTOMATIC ASSET REBALANCING

Automatic Asset Rebalancing allows you to readjust the percentage of your
Cash Value allocated to each Subaccount to maintain a pre-set level. Over time,
the variations in each Subaccount's investment results will shift the balance of
your Cash Value allocations. Under the Automatic Asset Rebalancing feature, we
periodically will transfer your Cash Value, including new Premiums (unless you
specify otherwise), back to the percentages you specify in accordance with
procedures and requirements that we establish. you may select the Subaccounts to
include in an Automatic Asset Rebalancing program.

You may request Automatic Asset Rebalancing when you apply for your Policy
or by submitting a completed written request to us at our Home Office at the
address given on the first page of this Prospectus. You may not use Automatic
Asset Rebalancing and Automatic Dollar Cost Averaging at the same time. We may
change, terminate, limit or suspend Automatic Asset Rebalancing at any time.
Please call or write us for a copy of the request form and additional
information concerning Asset Automatic Rebalancing.

Automatic Asset Rebalancing is consistent with maintaining your allocation
of investments among market segments, although it is accomplished by reducing
your Cash Value allocated to the better performing segments. Other investment
programs may not work in concert with Automatic Asset Rebalancing. Therefore,
you should monitor your use of these programs, as well as other transfers or
withdrawals, while Automatic Asset Rebalancing is being used. We may change,
terminate, limit, or suspend Automatic Asset Rebalancing at any time.

INVESTMENT OPTIONS

SEPARATE ACCOUNT INVESTMENTS: THE PORTFOLIOS.

Each of the Subaccounts invests in the shares of one of the Portfolios.
Each Portfolio is an open-end management investment company or a separate
investment series of an open-end management investment company registered under
the Investment Company Act of 1940. We briefly describe the Portfolios below.
You should read the current Prospectuses for the Portfolios for more detailed
and complete information concerning the Portfolios, their investment objectives
and strategies, and the investment risks associated with the Portfolios. If you
do not have a Prospectus for a Portfolio, contact us and we will send you a
copy.

Each Portfolio holds its assets 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, and losses of one Portfolio have no effect on the investment performance
of any other Portfolio.

The Portfolios which currently are the permissible investments of the
Separate Account under this Policy are the following registered investment
companies or separate series thereof:

- Kemper Variable Series;

- Scudder Variable Life Investment Fund (Class A Shares);

- The Alger American Fund;

- The Dreyfus Socially Responsible Growth Fund, Inc.;

- Dreyfus Investment Portfolios;

- Warburg Pincus Trust.

The investment objectives of the Portfolios are briefly described below.

17
<PAGE> 20

PORTFOLIOS OF KEMPER VARIABLE SERIES (FORMERLY INVESTORS FUND SERIES)

KEMPER AGGRESSIVE GROWTH PORTFOLIO seeks capital appreciation.

KEMPER TECHNOLOGY GROWTH PORTFOLIO seeks growth of capital.

KEMPER-DREMAN FINANCIAL SERVICES PORTFOLIO seeks long-term capital
appreciation.

KEMPER SMALL CAP GROWTH PORTFOLIO seeks maximum appreciation of investors'
capital.

KEMPER SMALL CAP VALUE PORTFOLIO seeks long-term capital appreciation.

KEMPER-DREMAN HIGH RETURN EQUITY PORTFOLIO seeks to achieve a high rate of
total return.

KEMPER INTERNATIONAL PORTFOLIO seeks total return, a combination of capital
growth and income.

KEMPER INTERNATIONAL GROWTH AND INCOME PORTFOLIO seeks long-term growth of
capital and current income.

KEMPER GLOBAL BLUE CHIP PORTFOLIO seeks long-term growth of capital.

KEMPER GROWTH PORTFOLIO seeks maximum appreciation of capital.

KEMPER CONTRARIAN VALUE PORTFOLIO seeks to achieve a high rate of total
return.

KEMPER BLUE CHIP PORTFOLIO seeks growth of capital and of income.

KEMPER VALUE+GROWTH PORTFOLIO seeks growth of capital. A secondary
objective of the Portfolio is the reduction of risk over a full market cycle
compared to a portfolio of only growth stocks or only value stocks.

KEMPER INDEX 500 PORTFOLIO seeks to match, as closely as possible, before
expenses, the performance of the Standard & Poor's 500 Composite Stock Price
Index, which emphasizes stocks of large U.S. companies.*

KEMPER HORIZON 20+ PORTFOLIO, designed for investors with approximately a
20+ year investment horizon, seeks growth of capital, with income as a secondary
objective.

KEMPER TOTAL RETURN PORTFOLIO seeks high total return, a combination of
income and capital appreciation.

KEMPER HORIZON 10+ PORTFOLIO, designed for investors with approximately a
10+ year investment horizon, seeks a balance between growth of capital and
income, consistent with moderate risk.

KEMPER HIGH YIELD PORTFOLIO seeks to provide a high level of current
income.

KEMPER HORIZON 5 PORTFOLIO, designed for investors with approximately a
5-year investment horizon, seeks income consistent with preservation of capital,
with growth of capital as a secondary objective.

KEMPER GLOBAL INCOME PORTFOLIO seeks to provide high current income
consistent with prudent total return asset management.

KEMPER INVESTMENT GRADE BOND PORTFOLIO seeks high current income.

KEMPER GOVERNMENT SECURITIES PORTFOLIO seeks high current return consistent
with preservation of capital.

KEMPER MONEY MARKET PORTFOLIO seeks maximum current income to the extent
consistent with stability of principal. The Portfolio seeks to maintain a net
asset value of $1.00 per share.

KVS FOCUSED LARGE CAP GROWTH PORTFOLIO seeks growth through long-term
capital appreciation.

KVS GROWTH OPPORTUNITIES PORTFOLIO seeks long-term growth of capital in a
manner consistent with the preservation of capital.

KVS GROWTH AND INCOME PORTFOLIO seeks long-term capital growth and current
income.

- ---------------
* "Standard & Poor's(R)," "S&P(R)," "S&P500(R)," "Standard & Poor's 500," and
"500" are trademarks of The McGraw-Hill Companies, Inc., and have been licensed
for use by Scudder Kemper Investments, Inc. The Kemper Index 500 Portfolio is
not sponsored, endorsed, sold or promoted by Standard & Poor's, and Standard &
Poor's makes no representation regarding the advisability of investing in the
fund. Additional information may be found in the fund's Statement of Additional
Information.
18
<PAGE> 21

PORTFOLIOS OF SCUDDER VARIABLE LIFE INVESTMENT FUND (CLASS A SHARES)

SCUDDER VLIF GLOBAL DISCOVERY PORTFOLIO seeks above-average capital
appreciation over the long term by investing primarily in the equity securities
of small companies located throughout the world.

SCUDDER VLIF GROWTH AND INCOME PORTFOLIO seeks long-term growth of capital,
current income and growth of income from a portfolio consisting primarily of
common stocks and securities convertible into common stocks.

SCUDDER VLIF INTERNATIONAL PORTFOLIO seeks long-term growth of capital
principally from a diversified portfolio of foreign equity securities.

SCUDDER VLIF CAPITAL GROWTH PORTFOLIO seeks to maximize long-term capital
growth from a portfolio consisting primarily of equity securities.

THE ALGER AMERICAN FUND

ALGER AMERICAN LEVERAGED ALLCAP PORTFOLIO seeks long-term capital
appreciation.

ALGER AMERICAN BALANCED PORTFOLIO seeks current income and long-term
capital appreciation.

THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC.

The Fund seeks to provide capital growth, with current income as a
secondary goal. To pursue these goals, the Fund invests primarily in the common
stock of companies that, in the opinion of the Fund's management, meet
traditional investment standards and conduct their business in a manner that
contributes to the enhancement of the quality of life in America.

DREYFUS INVESTMENT PORTFOLIOS

DREYFUS MIDCAP STOCK PORTFOLIO seeks investment results that are greater
than the total return performance of publicly traded common stocks of
medium-size domestic companies in the aggregate, as represented by the Standard
& Poor's MidCap 400(R) Index.

PORTFOLIOS OF WARBURG PINCUS TRUST

WARBURG PINCUS EMERGING MARKETS PORTFOLIO seeks long-term growth of capital
by investing in equity securities of emerging markets.

WARBURG PINCUS POST-VENTURE CAPITAL PORTFOLIO seeks long-term growth of
capital by investing primarily in equity securities of U.S. companies considered
to be in their post-venture-capital stage of development.

Not all Subaccounts may be available under your Policy. You should contact
your representative for further information on the availability of the
Subaccounts.

Scudder Kemper Investments, Inc. ("Scudder Kemper") is the investment
manager for the twenty-six available Portfolios of Kemper Variable Series and
the four available Portfolios of Scudder Variable Life Investment Fund.

Scudder Investments (U.K.) Limited ("Scudder U.K."), an affiliate of
Scudder Kemper, is the sub-adviser for the Kemper International Portfolio and
the Kemper Global Income Portfolio. Under the terms of the Sub-Advisory
Agreement with Scudder Kemper, Scudder U.K. renders investment advisory and
management services for that portion of these Portfolios' assets that Scudder
Kemper from time to time allocates to Scudder U.K. for management, including
services related to foreign securities, foreign currency transactions, and
related investments.

Dreman Value Management L.L.C. ("DVM") serves as sub-adviser for the
Kemper-Dreman High Return Equity and Kemper-Dreman Financial Services
Portfolios. Under the terms of the Sub-Advisory Agreement between Scudder Kemper
and DVM for each Portfolio, DVM manages the investment and reinvestment of each
Portfolio's assets in accordance with its investment objectives, policies and
limitations and subject to the supervision of Scudder Kemper and the Board of
Trustees.

Bankers Trust Company ("Bankers") serves as sub-adviser for the Kemper
Index 500 Portfolio. Under the terms of the Sub-Advisory Agreement between
Scudder Kemper and Bankers, Bankers will handle day-to-day investment and
trading functions for the Portfolio under the guidance of Scudder Kemper.

Eagle Asset Management, Inc. ("Eagle") is the sub-adviser for the KVS
Focused Large Cap Growth Portfolio. Under the terms of a Sub-Advisory Agreement
with Scudder Kemper, Eagle will handle day-to-day

19
<PAGE> 22

investment and trading functions for the KVS Focused Large Cap Growth Portfolio
under the guidance of Scudder Kemper.

Janus Capital Corporation ("Janus") serves as the sub-adviser for the KVS
Growth And Income Portfolio and the KVS Growth Opportunities Portfolio. Under
the terms of Sub-Advisory Agreements with Scudder Kemper, Janus will handle
day-to-day investment and trading functions for the KVS Growth And Income
Portfolio and the KVS Growth Opportunities Portfolio under the guidance of
Scudder Kemper.

Fred Alger Management, Inc. serves as the investment adviser for the Alger
American Leveraged AllCap Portfolio and the Alger American Balanced Portfolio.

The Dreyfus Corporation is the investment adviser for The Dreyfus Socially
Responsible Growth Fund, Inc. and the Dreyfus Midcap Stock Portfolio. NCM
Capital Management Group, Inc. serves as the sub-adviser for The Dreyfus
Socially Responsible Growth Fund, Inc.

Credit Suisse Asset Management, LLC (successor to Warburg Pincus Asset
Management, Inc.) is the investment adviser for the two available Portfolios of
the Warburg Pincus Trust. Abbott Capital Management LLC serves as sub-adviser
for the private-equity portfolio portion of the Warburg Pincus Post-Venture
Capital Portfolio.

We do not promise that the Portfolios will meet their investment
objectives. Amounts you have allocated to Subaccounts may grow in value, decline
in value, or grow less than you expect, depending on the investment performance
of the Portfolios in which those Subaccounts invest. You bear the investment
risk that those Portfolios possibly will not meet their investment objectives.
YOU SHOULD CAREFULLY REVIEW THE PORTFOLIOS' PROSPECTUSES BEFORE ALLOCATING
AMOUNTS TO THE SUBACCOUNTS.

Each Portfolio is subject to certain investment restrictions and policies
which may not be changed without the approval of a majority of the shareholders
of the Portfolio. See the accompanying Prospectuses of the Portfolios for
further information.

We automatically reinvest all dividends and capital gains distributions
from the Portfolios in shares of the distributing Portfolio at their net asset
value. The income and realized and unrealized gains or losses on the assets of
each Subaccount are separate and are credited to or charged against the
particular Subaccount without regard to income, gains or losses from any other
Subaccount or from any other part of our business. We will use the Premiums you
allocate to a Subaccount to purchase shares in the corresponding Portfolio and
will redeem shares in the Portfolios to meet Policy obligations or make
adjustments in reserves. The Portfolios are required to redeem their shares at
net asset value and to make payment within seven days.

Some of the Portfolios have been established by investment advisers which
manage publicly traded mutual funds having similar names and investment
objectives. While some of the Portfolios may be similar to, and may in fact be
modeled after publicly traded mutual funds, you should understand that the
Portfolios are not otherwise directly related to any publicly traded mutual
fund. Consequently, the investment performance of publicly traded mutual funds
and any similarly named Portfolio may differ substantially.

Certain of the Portfolios sell their shares to separate accounts underlying
both variable life insurance and variable annuity policies. It is conceivable
that in the future it may be unfavorable for variable life insurance separate
accounts and variable annuity separate accounts to invest in the same Portfolio.
Although neither we nor any of the Portfolios currently foresees any such
disadvantages either to variable life insurance or variable annuity owners, each
Portfolio's Board of Directors intends to monitor events in order to identify
any material conflicts between variable life and variable annuity owners and to
determine what action, if any, should be taken in response thereto. If a Board
of Directors were to conclude that separate investment funds should be
established for variable life and variable annuity separate accounts, Owners
will not bear the attendant expenses.

VOTING RIGHTS

As a general matter, you do not have a direct right to vote the shares of
the Portfolios held by the Subaccounts to which you have allocated your Cash
Value. Under current interpretations, however, you are entitled to give us
instructions on how to vote those shares on certain matters. We will notify you
when your instructions are needed and will provide proxy materials or other
information to assist you in understanding the matter at issue. We will
determine the number of votes for which you may give voting instructions as of
the record date set by the relevant Portfolio for the shareholder meeting at
which the vote will occur.

As a general rule, you are the person entitled to give voting instructions.
However, if you assign your Policy, the assignee may be entitled to give voting
instructions. Retirement plans may have different rules for voting by plan
participants.

20
<PAGE> 23

If you send us written voting instructions, we will follow your
instructions in voting the Portfolio shares attributable to your Policy. If you
do not send us written instructions, we will vote the shares attributable to
your Policy in the same proportions as we vote the shares for which we have
received instructions from other Owners. We will vote shares that we hold in the
same proportions as we vote the shares for which we have received instructions
from other Owners.

We may, when required by state insurance regulatory authorities, disregard
Owner voting instructions if the instructions require that the shares be voted
so as to cause a change in the subclassification or investment objective of one
or more of the Portfolios or to approve or disapprove an investment advisory
contract for one or more of the Portfolios.

In addition, we may disregard voting instructions given by Owners in the
investment objectives or the investment adviser of the Portfolios if we
reasonably disapprove of the proposed change. We would disapprove a proposed
change only if the proposed change is contrary to state law or prohibited by
state regulatory authorities or we reasonably conclude that the proposed change
would not be consistent with the investment objectives of the Portfolio or would
result in the purchase of securities for the Portfolio which vary from the
general quality and nature of investments and investment techniques utilized by
the Portfolio. If we disregard voting instructions, we will include a summary of
that action and our reasons for that action in the next semi-annual financial
report to You.

This description reflects our view of currently applicable law. If the law
changes or our interpretation of the law changes, we may decide that we are
permitted to vote the Portfolio shares without obtaining instructions from our
Owners, and we may choose to do so.

ADDITIONS, DELETIONS, AND SUBSTITUTIONS OF SECURITIES

If the shares of any of the Portfolios are no longer available for
investment by the Separate Account or if, in our judgment, further investment in
the shares of a Portfolio is no longer appropriate in view of the purposes of
the Policy, we may add or substitute shares of another Portfolio or mutual fund
for Portfolio shares already purchased or to be purchased in the future by
Premiums under the Policy. Any substitution will comply with the requirements of
the 1940 Act.

We also reserve the right to make the following changes in the operation of
the Separate Account and the Subaccounts:

(a) to operate the Separate Account in any form permitted by law;

(b) to take any action necessary to comply with applicable law or
obtain and continue any exemption from applicable laws;

(d) to add, combine, or remove Subaccounts in the Separate Account;

(e) to assess a charge for taxes attributable to the operation of the
Separate Account or for other taxes, as described in "Charges and
Deductions--Separate Account Charges" on page 30 below; and

(f) to change the way in which we assess other charges, as long as the
total other charges do not exceed the maximum guaranteed charges under the
Policies.

If we deem it to be in the best interests of persons having voting interest
under the Policies, the Separate Account may be (a) operated as a management
company under the 1940 Act, (b) deregistered under the 1940 Act if such
registration is no longer required; or (c) combined with our other separate
accounts. To the extent permitted by law, we may also transfer assets of the
Separate Account to another separate account, or to our General Account.

If we take any of these actions, we will comply with the then applicable
legal requirements.

THE DCA FIXED ACCOUNT

THE PORTION OF THE POLICY RELATING TO THE FIXED ACCOUNT IS NOT REGISTERED
UNDER THE SECURITIES ACT OF 1933 AND THE FIXED ACCOUNT IS NOT REGISTERED AS AN
INVESTMENT COMPANY UNDER THE INVESTMENT COMPANY ACT OF 1940. ACCORDINGLY,
NEITHER THE FIXED ACCOUNT NOR ANY INTEREST IN THE FIXED ACCOUNT IS SUBJECT TO
THE PROVISIONS OR RESTRICTIONS OF THE 1933 ACT OR THE 1940 ACT, AND THE
DISCLOSURE REGARDING THE FIXED ACCOUNT HAS NOT BEEN REVIEWED BY THE STAFF OF THE
SECURITIES AND EXCHANGE COMMISSION. THE STATEMENTS ABOUT THE FIXED ACCOUNT IN

21
<PAGE> 24

THIS PROSPECTUS MAY BE SUBJECT TO GENERALLY APPLICABLE PROVISIONS OF THE FEDERAL
SECURITIES LAWS REGARDING ACCURACY AND COMPLETENESS.

You may allocate part or all of your initial Premium to the DCA Fixed
Account, to be transferred subsequently to the Subaccounts under our Dollar Cost
Averaging Program. In addition, we allocate your initial Premium to our Fixed
Account for the period prior to the Issue Date, if you pay all or a portion of
your initial Premium prior to the Issue Date. No other Fixed Account option
currently is available under this Contract. We reserve the right to discontinue
offering or to offer additional Fixed Account options under the Contract, in
accordance with applicable law.

The interest rate credited to amounts allocated to the Fixed Account,
including the DCA Fixed Account will be shown in your Policy. We may change the
rate credited to new Policies at any time in our discretion. We set interest
rates in accordance with then current market conditions and other factors.

Amounts allocated to the Fixed Account become part of the general account
of KILICO. KILICO invests the assets of the general account in accordance with
applicable laws governing the investments of insurance company general accounts.

POLICY BENEFITS AND RIGHTS

DEATH BENEFIT

While your Policy is in force, we will pay the Death Benefit proceeds upon
the death of the Insured or, if your Policy is a Survivorship Policy, upon the
death of the second Insured to die. We will pay the Death Benefit proceeds to
the named Beneficiary(ies) or, if none survives, to contingent Beneficiary(ies).
We will pay the Death Benefit proceeds in a lump sum or apply them under the
Policy's settlement options, which are described in "Settlement Option Payments"
on pages 25-27.

The Death Benefit proceeds payable to the Beneficiary equal the Death
Benefit, less any Policy Debt and less any due and unpaid charges. We will
determine the amount of the Death Benefit proceeds as of the end of the
Valuation Period following the date of death of the Insured (or second Insured).
We must receive due proof of death within 60 days after the death of an Insured,
or as soon thereafter as reasonably possible. We usually will pay the Death
Benefit proceeds within seven days after we have received all required
documentation. Payment may be postponed in certain circumstances. See
"Postponement of Payments", at page 29.

The Death Benefit generally is the greater of: (1) the Specified Amount; or
(2) the Cash Value at the date of death multiplied by a factor from the table of
death benefit factors. The death benefit factors in the table reflect the
"corridor percentages" for the guideline premium test under the Tax Code.

We set the death benefit factors so as to ensure that Policies will qualify
for favorable tax treatment. The death benefit factors vary according to the age
of the Insured. Under this formula, an increase in Cash Value due to favorable
investment experience may increase the Death Benefit above the Specified Amount,
and a decrease in Cash Value due to unfavorable investment experience may reduce
the Death Benefit (but not below the Specified Amount). However, as explained in
"No Lapse Guarantee and Grace Period" and "Termination" at pages 27-28 below, if
your Policy's Net Surrender Value is insufficient to cover a Monthly Deduction
when due, the Death Benefit may be reduced to equal your total Premium payments
(less any prior withdrawals of Premium) or, if you have any outstanding Policy
Debt, your Policy may lapse.

EXAMPLES:

<TABLE>
<CAPTION>
EXAMPLE A EXAMPLE B
--------- ---------
<S> <C> <C>
Specified Amount............................................ $100,000 $100,000
Insured's Age............................................... 60 60
Cash Value on Date of Death................................. $ 80,000 $ 50,000
Applicable Death Benefit Factors............................ 130% 130%
Death Benefit............................................... $104,000 $100,000
</TABLE>

In Example A, the Death Benefit equals $104,000, i.e., the greater of
$100,000 (the Specified Amount) and $104,000 (the Cash Value at the Date of
Death of $80,000, multiplied by the corridor percentage of 130%). This amount,
less any Policy Debt and unpaid charges, constitutes the Death Benefit proceeds
that we would pay to the Beneficiary.

22
<PAGE> 25

In Example B, the Death Benefit is $100,000, i.e., the greater of $100,000
(the Specified Amount) or $65,000 (the Cash Value of $50,000 multiplied by the
corridor percentage of 130%).

As explained in more detail in "Federal Tax Considerations" beginning on
page 35, we have structured the Policy to satisfy the definition of life
insurance contract under Section 7702 of the Tax Code. As a result, the Death
Benefit ordinarily will be excluded from the gross income of the Beneficiary,
and any growth in the Cash Value of the Policy will not be taxable until
distributed. However, because the Policy generally will be treated as a modified
endowment contract for tax purposes, withdrawals and Policy Debt will be treated
as coming first from any gain under your Policy, and then as a return of
Premium. The income portion of the distribution is includable in your taxable
income. In addition, a ten percent federal penalty tax may apply to the taxable
portion of the distributions received before age 59 1/2. For advice about the
tax consequences of purchasing a Policy or your specific circumstances, please
consult your tax adviser.

ACCELERATED DEATH BENEFIT RIDER

You may request payment of a portion of the Death Benefit as an Accelerated
Death Benefit if the Insured becomes terminally ill. You generally may request
an Accelerated Death Benefit of up to the lesser of 50% of the existing Death
Benefit or $250,000. Before we pay your Accelerated Death Benefit, we will
deduct a $150 administrative fee and an amount sufficient to repay any
outstanding Policy Debt. In approved states, the Accelerated Death Benefit Rider
will be issued with all Policies at no extra Premium.

If you request an Accelerated Death Benefit, the balance of the Death
Benefit is payable upon the Insured's death. We will reduce the Death Benefit
payment by the amount previously paid, increased to reflect the early payment of
a portion of the Death Benefit under this Rider. You may request an Accelerated
Death Benefit only once. Under Survivorship Policies, the Accelerated Death
Benefit may not be requested until after the death of one of the Insureds. The
total Accelerated Death Benefits available under all life insurance policies
issued to you by us or our affiliates is $250,000.

In general, the tax treatment of accelerated death benefits is the same as
the tax treatment of the Death Benefit, as described in "Federal Tax
Considerations" beginning on page 35. Please consult your tax adviser for more
information.

POLICY LOANS

While the Policy is in force, you may borrow money from us using the Policy
as the only security for your loan. Loans have priority over the claims of any
assignee or any other person. You may borrow up to 90% of the Surrender Value of
your Policy as of the end of the Valuation Period in which we receive your loan
request. Any outstanding Policy Debt will count against that limit. Thus, for
example, if the Surrender Value of your Policy was $100,000 and you already had
$50,000 in Policy Debt outstanding, you could borrow an additional $40,000
($100,000 X 90% - $50,000). The minimum loan amount is $1,000. In addition, if
you have named an irrevocable Beneficiary, you must also obtain his or her
written consent before we make a Policy Loan to You.

YOU MAY REALIZE TAXABLE INCOME WHEN YOU TAKE A POLICY LOAN. In most
instances, a Policy is treated as a "modified endowment contract" for federal
tax purposes. As a result, Policy Loans are treated as withdrawals for tax
purposes, and the amount of the loan equal to any increase in your Cash Value
may be treated as taxable income to You. In addition, you may also incur an
additional ten percent federal penalty tax. You should also be aware that
interest on Policy Loans is generally not deductible. On the other hand,
although a Policy Loan is treated as a withdrawal for tax purposes, it is
treated differently for Policy purposes. For example, under the Policy, a Policy
Loan, unlike a partial withdrawal, does not reduce the Specified Amount.
Accordingly, before you take a Policy Loan, you should consult your tax adviser
and carefully consider the potential impact of a Policy Loan on your rights and
benefits under the Policy.

While the Policy remains in force, you may repay a Policy Loan in whole or
in part without any penalty at any time while the Insured is living.

The loan interest rate on all Policy Loans will be 5.50% per year
compounded daily. Interest not paid will be charged on a daily basis and will be
added to the Policy Debt on this Policy and bear interest at the same rate.

When we make a Policy Loan to you, an amount equal to the Loan will be
transferred from the Subaccounts to the Loan Account until the Loan is repaid.
Unless you instruct us otherwise, the amount of the Loan will be deducted pro
rata from the Subaccounts and DCA Fixed Account based on their relative
Subaccount Values or DCA Fixed Account Values under your Policy. As explained in
"No Lapse Guarantee and Grace Period" at page 27 below, if the Policy Debt
outstanding under your Policy should ever equal or exceed the Net Surrender
Value, your Policy will enter the grace period and may terminate if you do not
pay sufficient additional Premium.

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We reserve the right not permit you to borrow Cash Value derived from Premium
paid in the form of a check or draft for up to 30 days after we deposit that
check or draft.

We will credit interest at an annual rate of 3.50% to your Loan Account
Value that is not attributable to "Preferred Loans." As to any Loan Account
Value attributable to "Preferred Loans", we currently credit interest at an
annual rate of 5.50%. We may change that rate, but we will never reduce it to
less than 3.5% annually. We will classify as "Preferred Loans" the portion of
your total Loan Account Value equal to the difference between your Policy's Cash
Value minus total Premiums paid (net of all prior withdrawals of Premium). If
you purchase your Policy in exchange for a policy with another insurance
company, we will accept up to 50% of the Cash Value as a rollover loan. We will
treat as a Preferred Loan the portion of the rollover loan equal to the cash
value of your old policy, minus the total premiums paid under your old policy,
plus any withdrawal of premiums under your old policy prior to the exchange.

A Policy Loan, whether or not repaid, will have a permanent effect on the
Cash Value because the investment results of each Subaccount will apply only to
the amounts remaining in those Subaccounts. The longer a loan is outstanding,
the greater the effect is likely to be. The effect could be favorable or
unfavorable. If the Subaccounts earn more than the annual interest rate for
amounts held in the Loan Account, your Cash Value will not increase as rapidly
as it would if you had not taken a Policy Loan. If the Subaccounts earn less
than that rate, then your Cash Value will be greater than it would have been if
you had not taken a Policy Loan. Also, if you do not repay a Policy Loan, your
Policy Debt will be subtracted from the Death Benefit and Surrender Value
otherwise payable.

AMOUNT PAYABLE ON SURRENDER OF THE POLICY

While your Policy is in force, you may fully surrender your Policy. Upon
surrender, we will pay you the Net Surrender Value determined as of the day we
receive your written request at our Home Office. Your Policy will terminate on
the day we receive your written request. We may require that you give us your
Policy document before we pay you the surrender proceeds. Before we pay a full
surrender, you must provide us with tax withholding information.

The Net Surrender Value equals the Cash Value less any applicable
Withdrawal Charge, less any outstanding Policy Debt. We also will deduct the $30
Records Maintenance Charge, if it would otherwise be due at the end of the
current Policy Year. We will determine the Net Surrender Value as of the end of
the Valuation Period during which we received your request for surrender. We
generally will pay you the surrender proceeds of the Policy within seven days of
our receiving your complete written request or on the effective surrender date
you have requested, whichever is later. The determination of the Withdrawal
Charge is described on page 32.

You may receive the surrender proceeds in a lump sum or under any of the
settlement options described in "Settlement Option Payments" on pages 25-27. The
tax consequences of surrendering the Policy are discussed in "Federal Tax
Considerations," beginning on page 35.

PARTIAL WITHDRAWALS

You may receive a portion of the Surrender Value of your Policy by making a
partial withdrawal from your Policy. Your request may be by telephone or in
writing. If you request a partial withdrawal by telephone, however, the amount
withdrawn may not exceed our limit, which currently is $10,000; larger requests
must be in writing. All partial withdrawals requested by telephone will be sent
only to the address of record of the Contract owner. Your request, whether
written or telephonic, will be effective on the date we receive it at our Home
Office, provided we receive it before 3:00 p.m. Central time. If we are not
provided with tax withholding information, we will withhold taxes from the
amount withdrawn at the rate required by law. We reserve the right to change the
terms of telephonic withdrawals, including our limit, at any time.

When you request a partial withdrawal, we will pay you the amount requested
and subtract the amount requested plus any applicable Withdrawal Charge from
your Cash Value. We may waive the Withdrawal Charge on some or all of your
partial withdrawal. The determination of the Withdrawal Charge is described on
page 32.

You may specify how much of your partial withdrawal you wish taken from
each Subaccount. The amount requested from a specific Subaccount may not exceed
the value of that option less any applicable Withdrawal Charge. If you do not
specify the option from which you wish to take your partial withdrawal, we will
take it pro rata from the Subaccounts and the DCA Fixed Account.

You may take an unlimited number of partial withdrawals each Policy Year.
The minimum withdrawal amount is $100 or the amount that remains in the
Subaccount if less. The minimum balance in the Subaccount after the withdrawal
is $500 unless the total Subaccount Value is withdrawn. If a partial withdrawal
would reduce your Policy's Net Surrender Value below $5,000, we will treat your
request as a request to surrender your Policy.

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<PAGE> 27

When you take a partial withdrawal, your Specified Amount will decrease in
proportion to the resulting reduction in Cash Value. We will notify you of the
new Specified Amount. We will not permit a partial withdrawal that would reduce
the Specified Amount below the minimum specified in your Policy.

Partial withdrawals generally will be subject to income tax and may be
subject to a ten percent federal penalty tax. The tax consequences of partial
withdrawals are discussed in "Federal Tax Considerations" beginning on page 35.

SYSTEMATIC WITHDRAWALS

You may enroll in our systematic withdrawal program by sending a completed
enrollment form to our Home Office at the address shown on the first page of
this Prospectus. You may choose between payout schedules of monthly, quarterly,
semiannually or annually. You may specify the amount of the withdrawal, the day
of the month for each scheduled payment, and the Subaccount(s) from which the
withdrawal will be taken. You may start, stop, increase, or decrease payment at
any time. The minimum withdrawal amount is $100.

We will treat systematic withdrawals in the same way as other partial
withdrawals in applying the Withdrawal Charge. In our discretion we may stop
paying systematic withdrawals if your Cash Value falls below our current
minimum. We reserve the right to modify or suspend the systematic withdrawal
program. In our discretion, any change may apply to existing systematic plans.
Write us at the address shown on the first page of this Prospectus or call us at
(800) 621-5001 for more information about our Systematic Withdrawal Program.

SETTLEMENT OPTION PAYMENTS

GENERAL. We will pay the Surrender Value or Death Benefit proceeds under
the Policy in a lump sum or under one of the settlement options that we then
offer. The option selected must result in a payment that is at least equal to
our minimum payment, according to our rules, at the time the settlement option
is chosen. If at any time the payments are less than the minimum payment, we
have the right to increase the period between payments to quarterly,
semi-annually, or annually so that the payment is at least equal to the minimum
payment, or to make payment in one lump sum.

The amount of the payments under a settlement option are based on:

- the settlement option table specified in the Contract;

- the selected settlement option; and

- the investment performance of the selected Subaccount(s) (if
variable payments are chosen).

Under each settlement option, you and/or the payee may choose fixed
payments or variable payments or a combination of the two, except that only
fixed payments are available under Option 1. If fixed payments are chosen, the
payee receives a fixed amount each month determined in accordance with the
settlement option you have chosen. If variable payments are chosen, the payee
receives the value of a fixed number of Annuity Units each month. An Annuity
Unit's value reflects the investment performance of the Subaccount(s) selected
by the payee. The amount of each payment varies accordingly. If you do not
provide instructions, we will initially apply your Separate Account Value to
variable payments and any Fixed Account Value to fixed payments. The payee may
change the Subaccounts or the relative weighting of the Subaccounts on which
variable payments are based, or increase the portion of each payment that is a
fixed payment, subject to certain limitations, as described below under
"Settlement Option Payments--Transfers". BEFORE CHOOSING VARIABLE PAYMENTS, YOU
SHOULD CONSIDER WHETHER THE ALLOCATION OF PROCEEDS AMONG THE SUBACCOUNTS FOR
YOUR PERIODIC PAYMENTS IS THE ALTERNATIVE BEST SUITED TO YOUR NEEDS.

You may request a settlement option by writing to us at our Home Office at
the address given on the first page of this Prospectus before the death of the
Insured. If you change the Beneficiary, the existing choice of settlement option
will become invalid and you may either notify us that you wish to continue the
pre-existing choice of settlement option or select a new one. We will issue a
supplementary contract reflecting the terms of the settlement option chosen. If
payment is made as a Death Benefit distribution, the effective date of the
supplementary agreement will be the date of death. Otherwise, you may choose the
effective date.

SETTLEMENT OPTIONS. The following settlement options are available under
the Policy:

OPTION 1--FIXED INSTALLMENT ANNUITY. We will make monthly payments for
a fixed number of installments. Payments must be made for at least 5 years,
but not more than 30 years.

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OPTION 2--LIFE ANNUITY. We will make monthly payments while the payee
is alive. It is possible for the payee to receive only one payment if the
payee dies before the second payment is due.

OPTION 3--LIFE ANNUITY WITH INSTALLMENTS GUARANTEED. We will make
monthly payments for a guaranteed period and thereafter while the payee is
alive. The guaranteed period must be selected at the time the annuity
option is chosen. The guaranteed periods available are 5, 10, 15, and 20
years.

OPTION 4--JOINT AND SURVIVOR ANNUITY. We will pay the full monthly
income while both payees are alive. Upon the death of either payee, we will
continue to pay the surviving payee a percentage of the original monthly
payment. The percentage payable to the surviving payee must be selected at
the time the annuity option is chosen. The percentages available are 50%,
66 2/3%, 75%, and 100%. It is possible for the payees to receive only one
payment if they both die before the second payment is due.

OTHER OPTIONS. We may make other settlement annuity options available.
Payments are also available on a quarterly, semi-annual or annual basis.

When the payee dies under Options 1 and 3, we will pay the commuted value
of any unpaid installments in a lump sum to the estate of the payee, unless the
supplementary agreement provides otherwise. We will determine the commuted
amount based upon an interest rate of not less than 2.5%. You may not withdraw
Cash Value once we begin making payments to you under any settlement option
involving payments to the payee for life or any combination of payments for life
and a minimum guaranteed payment period, such as options 2, 3, and 4.

AMOUNT OF PAYMENT. The amount applied to a settlement option will equal the
Cash Value on the first day preceding the date when the first annuity payment is
due, less any applicable Withdrawal Charge and Records Maintenance Charge. The
remainder will be used to determine the fixed or variable payment in accordance
with the appropriate Settlement Option Table.

The amount of each fixed payment is determined by multiplying the amount
applied to the settlement option by the appropriate settlement option rate. We
will use a rate at least as high as the rate shown in the appropriate Settlement
Option Table. These tables show the monthly payment for each $1,000 of Cash
Value allocated to fixed payments. The amount of each subsequent fixed payment
does not change regardless of investment, mortality or expense experience.

The amount of the first variable payment also is determined from the
Settlement Option Tables, based on the Cash Value allocated to variable
payments. Subsequent variable payments are determined by multiplying the number
of Annuity Units in each Subaccount chosen by the payee times the Annuity Unit
Value of each such Subaccount at the Valuation Period before each variable
payment is due. The first variable payment is divided by the Annuity Unit Value
as of the Annuity Date to establish the number of Annuity Units representing
each variable payment. We determine the number of Annuity Units separately for
each Subaccount on which variable payments are based. This number does not
change, unless the payee makes a transfer as described in "Settlement Option
Payments--Transfers" below.

The guaranteed monthly payments shown in the Settlement Option Tables are
based on an interest rate of 2.50% per year and, where mortality is involved,
the "1983 Table a", an individual mortality table developed by the Society of
Actuaries, projected using Projection Scale G. Interest under a settlement
option begins to accrue on the effective date of the supplementary agreement. If
the effective date determined as described above would be the 29th, 30th or 31st
day of a month, the 28th day of that month will be deemed the Effective Date.

TRANSFERS. While variable payments are being made under a settlement
option, the payee may request, in writing, to change the Subaccounts or the
relative weighting of the Subaccounts on which variable payments are based, or
the relative proportions of variable and fixed payments. These changes may be
effected by transferring Annuity Unit Value from one Subaccount to another or to
fixed payments, or by making transfers from fixed payments to the Subaccounts.
This type of transfer is subject to the following limitations:

- The payee may make only one transfer during each twelve month period
beginning on the date of the first settlement payment and each anniversary
of that date.

- We must receive the payee's written request at least 30 days before
the effective date of the transfer.

- Each transfer must consist of at least $1,000 of Annuity Unit Value
or annuity reserve value. After the transfer, at least $1,000 of Annuity
Unit Value or annuity reserve value must remain in the account from which
the transfer was made, unless the entire amount is transferred.

- After the transfer, the payee's variable payments may not be based
on more than three Subaccounts.

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<PAGE> 29

We will execute transfers using values as of the end of the Valuation
Period preceding the effective date of the transfer. Transfers among the
Subaccounts and transfers from fixed to variable payments will be effected at
the Annuity Unit Value of the relevant Subaccounts. Transfers from variable to
fixed payments will be based in part on the present value of the remaining
payments under the chosen option, and will reflect the differences in the
interest rates used to calculate fixed and variable payments. The method for
calculating these transfers is described in more detail in the Policy. We may
suspend, change or terminate the transfer privilege at any time.

ANNUITY UNIT VALUE. Annuity Unit Value is determined independently for each
Subaccount. Annuity Unit Value for any Valuation Period is:

- Annuity Unit Value for the immediately preceding Valuation Period;
times

- the net investment factor for the current Valuation Period; times

- an interest factor of .99993235 per calendar day of the current
Valuation Period in order to offset the effect of the assumed rate of 2.5%
per year used in the Policy's settlement option tables.

The net investment factor for a Subaccount for any Valuation Period is:

(1) the sum of (a) the net asset value per share of the corresponding
Portfolio at the end of the current Valuation Period plus (b) the per share
amount of any dividend or capital gains distribution by that Portfolio, if
the "ex-dividend" date occurs in that Valuation Period; plus or minus (c) a
credit or charge for any taxes reserved for the current Valuation Period
which we determine to have resulted from the investment operations of the
Subaccount; divided by

(2) is the net asset value per share of the corresponding Portfolio at
the end of the last prior Valuation Period.

A 2.5% per annum rate of investment earnings is assumed by the Policy's
Settlement Option tables. Under the formula for determining Annuity Unit Value,
if the actual net investment earnings rate on the selected Subaccounts exceeds
2.5% per annum, variable payments increase accordingly. Conversely, if the
actual earnings rate is less than 2.5% per annum, variable payments decrease.

ANNUITY RESERVE VALUE. Annuity reserve value is used in calculating
transfers from variable payments to fixed payments. Annuity reserve value
equals:

(1) the number of annuity units transferred from a Subaccount; times

(2) the Annuity Unit Value for that Subaccount; times

(3) the present value of $1.00 per payment period using the attained
age of the payee(s) and any remaining unpaid guaranteed payments at the
time of the transfer.

NO LAPSE GUARANTEE AND GRACE PERIOD

Under our No Lapse Guarantee, we guarantee that your Policy will remain in
force regardless of changes in the Net Surrender Value, provided you have no
outstanding Policy Debt. If the Net Surrender Value of your Policy is less than
the Monthly Deduction for the next month, your Policy will enter the Grace
Period. The Grace Period lasts 61 days. If the Insured dies during the Grace
Period, the Death Benefit will be the amount determined as described in "Death
Benefit" on pages 22-23, less any due and unpaid Monthly Deduction or other
charge.

During the Grace Period, you may pay additional Premium or loan repayment
without evidence of insurability to keep your Policy in force. Your payment must
equal at least three Monthly Deductions. No payment is required, however. This
Grace Period will begin on the day we mail notice of the Grace Period to your
last known address.

If the No Lapse Guarantee is in effect under your Policy and you do not pay
sufficient additional Premium or loan repayment, your Policy will remain in
force, but the amount paid upon death of the Insured after the Grace Period will
be limited to the return of Premium paid (less any prior withdrawals of
Premium). You may restore the Specified Amount, however, by complying with the
reinstatement provisions. The No Lapse Guarantee applies to your Contract
unless: (a) you paid 90% of the Guideline Single Premium for your Policy or (b)
your Policy has outstanding Policy Debt.

If the No Lapse Guarantee does not apply to your Policy and the Net
Surrender Value of your Policy is less than the Monthly Deduction for the next
month, your Policy also will enter the Grace Period, as described above.
However, if you do not make the required payment, your coverage will terminate
at the end of the Grace Period. You may reinstate your coverage by complying
with the reinstatement provisions.

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TERMINATION

The Policy will terminate and life insurance coverage will end when one of
the following events first occurs:

(a) you surrender your Policy;

(b) the Insured dies or, for Survivorship Policies, the Surviving
Insured dies;

(d) the Grace Period ends and there is Policy Debt outstanding.

MATURITY BENEFIT AND EXTENDED MATURITY

In certain states, if the Insured is still living and your Policy is in
force on the Maturity Date, we will pay you a Maturity Benefit. The Maturity
Benefit will equal the Net Surrender Value on the Maturity Date. The Maturity
Date is the Policy Anniversary after the Insured's 100th birthday.

In states where approved, the Extended Maturity Rider will be issued with
all Policies at no extra Premium. Under this Rider, you may choose from year to
year to extend the Maturity Date for one year intervals. During the extension
period, you may not take partial withdrawals or additional policy loans and the
Death Benefit is the Cash Value. In addition, during the extension period, we
will not charge the cost of insurance charge. We will, however, continue to
charge other charges under your Policy, including the mortality and expense risk
charge, even though there no longer will be a mortality risk under your Policy.
We will continue to impose this charge because this charge reflects our
expectations to the mortality risks and the amount of such charges expected to
be paid under all Policies, including Policies covered by Extended Maturity
Riders.

All other riders still active end at age 100. The tax treatment of the
Maturity Benefit and the Maturity Extension rider is discussed in "Treatment of
Maturity Benefits and Extension of Maturity Date" on page 38.

REINSTATEMENT

If your coverage has been reduced pursuant to our No Lapse Guarantee or has
lapsed due to insufficient Cash Value (see "No Lapse Guarantee and Grace Period"
on pages 27-28 above), you may reinstate coverage by complying with the
conditions described below. After reinstatement, your Policy will be in force
and the minimum Death Benefit will equal the Specified Amount in effect before
your coverage was reduced or lapsed. To reinstate your Policy, you must apply to
us within three years of the end of the most recent Grace Period and meet the
following conditions:

(1) Provide evidence of insurability satisfactory to us;

(2) Pay the unpaid Monthly Deductions due during the expired Grace
Period;

(3) Pay at least sufficient additional Premium to keep your Policy in
force for three months; and

(4) Pay or reinstate any Policy Debt that existed at the date of
lapse.

The effective date of reinstatement of a Policy will be the Deduction Day
that coincides with or next follows the date on which we approve your
application for reinstatement. You may not reinstate a Policy that has been
surrendered. Under Survivorship Policies, if one of the Lives Insured dies
during the lapse, upon payment of the reinstatement Premium the Policy will be
reissued as a single life permanent policy.

The suicide and incontestability provisions will apply from the effective
date of reinstatement.

CANCELLATION (FREE-LOOK PERIOD)

In many states, you may cancel your Policy by returning it to us within ten
days after you receive it. In some states, however, this free look period may be
longer, as provided by state law. If you return your Policy, the Policy
terminates and we will pay you your Cash Value or, in some states, an amount
equal to your Premium, (less any Policy Debt). We will pay the refund within
seven days of receiving your request. No Withdrawal Charge is imposed upon
return of a Policy within the free look period. This free look right may vary in
certain states in order to comply with the requirements of state insurance laws
and regulations. Accordingly, you should refer to your Policy for specific
information about your circumstances.

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<PAGE> 31

POSTPONEMENT OF PAYMENTS

We may defer for up to fifteen days the payment of any amount attributable
to a Premium paid by check to allow the check a reasonable time to clear. We
ordinarily will pay any amount attributable to Separate Account Value within
seven days, except:

(1) whenever the New York Stock Exchange ("NYSE") is closed (other
than customary weekend and holiday closings);

(2) when trading on the NYSE is restricted or an emergency exists, as
determined by the SEC, so that disposal of the Separate Account's
investments or determination of the value of its net assets is not
reasonable practicable; or

(3) at any other time permitted by the SEC for your protection.

We may delay payment of partial or full withdrawals from the Fixed Account
for up to six months from the date we receive your written withdrawal request.
We may also defer payment of any Death Benefit in excess of the Specified Amount
for up to six months from the date requested if those benefits are based upon
policy values that do not depend on the investment performance of the Separate
Account.

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<PAGE> 32

CHARGES AND DEDUCTIONS

We assess charges and deductions under the Policies against the Subaccounts
and the Cash Value. Additional deductions and expenses are paid out of the
Portfolios' assets, as described in the Prospectuses of the Portfolios.

SEPARATE ACCOUNT CHARGES

MORTALITY AND EXPENSE RISK CHARGE. On each Valuation Date, we will deduct a
charge from each Subaccount at an annual rate of 0.90% of average daily net
assets for mortality and expense risks we assume.

The mortality risk assumed in relation to the Policy includes the risk that
the cost of insurance charges specified in the Policy will be insufficient to
meet claims and the risks under the No Lapse Guarantee. We also assume a risk
that, on the Deduction Day preceding the death of an Insured, the Death Benefit
will exceed the amount on which the cost of insurance charges were based. The
expense risk assumed is that expenses incurred in issuing and administering the
Policies will exceed the Administration Charges set in the Policy.

RESERVE FOR TAXES. We currently are not maintaining a provision for taxes
attributable to the operations of the Separate Account (as opposed to the
federal tax related to the receipt of Premiums under the Policies). In the
future, however, we may make such a charge. Charges for other taxes, if any,
attributable to the Separate Account or to this class of Policies may also be
made.

MONTHLY DEDUCTION

On the Effective Date and on each monthly Deduction Day we will take a
Monthly Deduction from your Cash Value. The Monthly Deduction equals the sum of
the following:

(1) The monthly cost of insurance charge for the Policy; plus

(2) The monthly charge for any riders; plus

(3) The Administration Charge; plus

(4) The Tax Charge.

On each Policy Anniversary, we also will deduct the Records Maintenance
Charge, if your Policy's Cash Value was less than $50,000 on the previous Policy
Anniversary.

COST OF INSURANCE CHARGE. The cost of insurance charge is intended to pay
for the cost of providing life insurance coverage for the Insured(s). The
current cost of insurance charge differs based on whether you paid 90% or 100%
of the Guideline Single Premium at issue. We guarantee that this charge will not
exceed the maximum cost of insurance charge determined on the basis of the rates
shown in the mortality table guaranteed in the Policy. If your initial Premium
exceeds $500,000, your cost of insurance charge may be lower.

The current monthly cost of insurance charge is the lesser of:

(a) the applicable current asset-based cost of insurance rate times
the Cash Value on the Deduction Day; or

(b) the applicable guaranteed cost of insurance rate multiplied by the
net amount at risk on the Deduction Day.

If your initial Premium is no greater than $500,000 and you paid 100% of
the Guideline Single Premium, our current asset-based cost of insurance rate for
the Single Life Policies for the Standard Rating Class (NT) is 0.55% annually of
Cash Value for Policy Years 1-10, and 0.25% annually of Cash Value thereafter.
Our current asset-based cost of insurance rate for Second to Die Policies, when
both Insureds are in the Standard Rating Class (NT), is 0.45% annually of Cash
Value for Policy Years 1-10, and 0.20% annually of Cash Value thereafter.

If your initial Premium is greater than $500,000 and you paid 100% of the
Guideline Single Premium, our current asset-based cost of insurance rate for the
Single Life Policies for the Standard Rating Class (NT) is 0.25% annually of
Cash Value for Policy Years 1-10, and 0.10% annually of Cash Value thereafter.
Our current asset-based cost of insurance rate for Second to Die Policies, when
both Insureds are in the Standard Rating Class (NT), is 0.20% annually of Cash
Value for Policy Years 1-10, and 0.10% annually of Cash Value thereafter.

If you paid 90% of the Guideline Single Premium, your current cost of
insurance rates will be higher. In addition, rates for other classes may differ
based on the type of Policy and the history of tobacco use of the

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<PAGE> 33

Insured(s). Your guaranteed cost of insurance rates are set forth in the
mortality tables in your Policy. The net amount at risk is (a)-(b), where:

(a) is the Death Benefit on the first day of the Policy Month; and

(b) the Cash Value on that day before the deduction of the Monthly
Deduction for the Cost of Insurance.

Because your Cash Value and the net amount for which we are at risk under
your Policy may vary monthly, your cost of insurance charge is likely to differ
each month. In general, under these formulas, when your current monthly cost of
insurance charge is determined using the asset-based rate, an increase in your
Cash Value increases your current monthly cost of insurance charge, up to the
guaranteed maximum cost of insurance charge determined as described above. Since
that maximum charge is based on the net amount at risk, it declines as your Cash
Value increases, unless an increase in Cash Value also would increase the Death
Benefit under your Policy. Thus, if the asset-based charge would be higher than
the guaranteed maximum charge, further increases in your Cash Value may reduce
your current cost of insurance charge.

The cost of insurance charge covers our anticipated mortality costs for
standard and substandard risks. We determine the current cost of insurance rates
based on our expectations as to our future mortality experience and other
factors. We may change our current asset based cost of insurance charge, but we
guarantee that we will never charge you a cost of insurance charge higher than
the amount determined using the maximum guaranteed cost of insurance rates shown
in the Policy. We base our cost of insurance rates on the sex, issue age, Policy
Year, rating class, and history of tobacco use of the Insured. However, we issue
unisex policies in Montana. Our cost of insurance rates are based on the 1980
Commissioners Standard Ordinary ("1980 CSO") Mortality Table based on the
Insured's sex, age last birthday, and history of tobacco use. Our cost of
insurance rates for unisex Policies will never exceed a maximum based on the
1980 CSO Table B assuming a blend of 80% male and 20% female lives.

TAX CHARGE. For the first ten Policy Years, on each Deduction Day, we
charge a Tax Charge equal to an annual rate of 0.40% of the average monthly Cash
Value. The Tax Charge covers a portion of our state premium tax expenses and
certain Federal income tax liability incurred as a result of the receipt of
Premium.

We expect to recover total premium tax expenses over the life of the
Policies from the aggregate Tax Charges and the unamortized state premium tax
charge portion of the Withdrawal Charge. However, the amount of premium taxes
differ from state to state and some states have no premium tax. Accordingly, the
amount of these charges paid under your Policy may be more or less than the
premium taxes that we actually pay with respect to your Policy.

ADMINISTRATION CHARGE. On each Deduction Day we will deduct the
Administration Charge from Cash Value. This charge will equal an annual rate of
0.35% of average monthly Cash Value for the first ten Policy Years and 0.25%
thereafter. This charge is intended to compensate us for certain administrative
expenses related to the maintenance of the Policies, accounting and
recordkeeping, and providing reports to Policy owners.

RECORDS MAINTENANCE CHARGE. We charge a Records Maintenance Charge of
$30.00 per year on each Policy Anniversary. If you surrender your Policy during
a Policy Year, we will deduct the full Records Maintenance Charge from your
surrender proceeds. The Records Maintenance Charge is intended to compensate us
for administrative expenses such as salaries, postage, telephone, office
equipment and periodic reports. We currently waive the Records Maintenance
Charge on a Policy, if the Cash Value is at least $50,000 on the previous Policy
Anniversary.

PORTFOLIO EXPENSES

You indirectly bear the charges and expenses of the Portfolios whose shares
are held by the Subaccounts to which you allocate your Cash Value. The Separate
Account purchases shares of the Portfolios at net asset value. Each Portfolio's
net asset value reflects investment advisory fees and administrative expenses
already deducted from the Portfolio's assets. For a summary of current estimates
of these charges and expenses, see pages 12-13 above. For more information
concerning the investment advisory fees and other charges against the
Portfolios, see the Prospectuses for the Portfolios, which are available upon
request.

We may receive compensation from the investment advisers or administrators
of the Portfolios. Such compensation will be consistent with the services we
provide or the cost savings resulting from the arrangement and therefore may
differ between Portfolios.

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<PAGE> 34

WITHDRAWAL CHARGE

If you surrender your Policy during the first nine Policy Years, we may
subtract a Withdrawal Charge from the proceeds. The Withdrawal Charge will be
calculated at the rate shown below. If you surrender your Policy, the Withdrawal
Charge will equal a percentage of your initial Premium net of all previous
withdrawal amounts on which you paid a Withdrawal Charge. The Withdrawal Charge
consists of two components: a surrender charge and an unamortized state premium
tax charge.

The rate used to determine the Withdrawal Charge depends on the year the
withdrawal is made. The Withdrawal Charge declines to zero percent after the
ninth Policy Year. The Withdrawal Charge is assessed at the following rates:

<TABLE>
<CAPTION>
COMPLETE UNAMORTIZED
POLICY YEARS PREMIUM TAX TOTAL WITHDRAWAL
ELAPSED SINCE ISSUE SURRENDER CHARGE CHARGE CHARGE
------------------- ---------------- ----------- ----------------
<S> <C> <C> <C>
1 7.75% 2.25% 10.00%
2 7.75% 2.00% 9.75%
3 7.50% 1.75% 9.25%
4 6.50% 1.50% 8.00%
5 5.75% 1.25% 7.00%
6 5.00% 1.00% 6.00%
7 4.25% .75% 5.00%
8 3.50% .50% 4.00%
9 2.75% .25% 3.00%
9+ 0% 0.00% 0.00%
</TABLE>

We may also charge a Withdrawal Charge on partial withdrawals. The
Withdrawal Charge will apply to any partial withdrawal in a given Policy Year in
excess of the free withdrawal amount described below.

Additional Premiums do not increase the amount of Withdrawal Charge you may
be required to pay. Only your initial Premium is used in our formula for
calculating Withdrawal Charges.

The Withdrawal Charge is imposed to cover a portion of our actual premium
tax expenses and sales expenses, which include agents' sales commissions and
other sales and distribution expenses. The Unamortized Premium Tax Charge,
together with a portion of the monthly Tax Charge, is intended to recover our
state premium tax expenses. We also expect to recover total sales expenses of
the Policies over the life of the Policies. However, to the extent distribution
costs are not recovered by the Withdrawal Charge, we may make up any shortfall
from the assets of our General Account, which includes funds derived from the
Mortality and Expense Risk Charge and other fees and charges under the Policies.

FREE WITHDRAWAL AMOUNT AND WAIVER OF WITHDRAWAL CHARGE

The free withdrawal amount in a Policy Year equals the greater of:

(a) 100% of Policy earnings not previously withdrawn; or

(b) 10% of the Cash Value, less any prior free withdrawals since the
beginning of that Policy Year.

NURSING CARE WAIVER OF WITHDRAWAL CHARGE. We will waive the Withdrawal
Charge if the Insured is confined to a skilled health care facility for at least
30 consecutive days. We also will waive the Withdrawal Charge after you have
been released from the facility, if your request is made within 30 days of
release. This waiver is described in more detail in the Policy.

DISABILITY WAIVER. We will waive the Withdrawal Charge if the Insured
becomes disabled after the Policy is issued and before attaining age 65
according to the following Social Security Administration definition:

Inability to engage in any substantial gainful activity by reason of any
medically determinable physical or mental impairment which can be
expected to result in death or which has lasted or can be expected to
last for a continuous period of not less than 12 months.

This waiver is described in more detail in the Policy.

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<PAGE> 35

TRANSFER FEE

The Policy permits us to charge a transfer fee of $25 per transfer,
excluding transfers under our Automatic Dollar Cost Averaging and Automatic
Asset Rebalancing Programs, on each transfer after the first twelve transfers in
each Policy Year. We currently do not charge a transfer fee on any transfer. We
reserve the right to begin to charge the transfer fee in the future.

REDUCTION OF CHARGES

We may reduce certain charges and credit additional amounts 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 our Policy owners, sales to employees or
clients of members of the Kemper group of companies, or employees and registered
representatives (and their families) of broker-dealers (or their affiliated
financial institutions) that have entered into selling group agreements with
Investors Brokerage Services, Inc., the distributor of the Policies. 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 unfairly discriminate against any
person, including the affected Policy owners and owners of all other policies
funded by the Separate Account.

GENERAL POLICY PROVISIONS

REPORTS TO OWNERS

We will maintain all records relating to the Separate Account and the
Subaccounts. At least annually we will send you a report which will include
information such as Premiums received, interest credited, investment experience,
and charges made since the last report. The report will also show the current
Death Benefit and Cash Value, as well as any other information required by
statute. If you ask us, we will send you an additional report at any time. We
may charge you up to $25 for this additional report. We will tell you the
current charge before we send you the report.

In addition, we will send you the financial statements of the Portfolios
and other reports as specified in the Investment Company Act of 1940, as
amended. We also will mail you confirmation notices or other appropriate notices
of Policy transactions quarterly or more frequently within the time periods
specified by law. Please give us prompt written notice of any address change.
Please read your statements and confirmations carefully and verify their
accuracy and contact us promptly with any question.

LIMIT ON RIGHT TO CONTEST

In the absence of fraud, we may not contest the insurance coverage under
the Policy after the Policy has been in force for two years after the Issue Date
while the Insured is alive. The two year incontestability period may vary in
certain states to comply with the requirements of state insurance laws and
regulations.

If the Policy is reinstated, a new two year contestability period will
apply from the issue date of the reinstatement and will apply only to statements
made in the application for the reinstatement.

In issuing a Policy, we rely on your application. Your statements in that
application, in the absence of fraud, are considered representations and not
warranties. In the absence of fraud, we will not use any statement made in
connection with the Policy application to void the Policy or to deny a claim,
unless that statement is a part of the application or an amendment thereto.

SUICIDE

If the Insured under a Single Life Policy dies by suicide, while sane or
insane, within two years from the Issue Date, the Death Benefit proceeds will be
limited to the Premiums paid less any partial withdrawals and Policy Debt.

If the Insured dies by suicide, while sane or insane, within two years of
any reinstatement, our total liability with respect to such reinstatement will
be limited to the Premiums paid less any partial withdrawal and Policy Debt.

If the first death under a Survivorship Policy is by suicide, within two
years of the Issue Date or date of reinstatement, whether the Insured was sane
or insane, we will reissue the Policy. The new Policy on the survivor

33
<PAGE> 36

will be a single life permanent Policy which is available at the time of
reissue. The suicide provision for the new Policy will be effective as of the
original Issue Date.

If the second death is by suicide, within two years from the Issue Date,
whether the Insured is sane or insane, we will pay only the Premiums paid less
any partial withdrawals and Policy Debt. If the second death occurs within two
years after the date of reinstatement, our total liability with respect to such
reinstatement will be limited to the Premiums paid less any partial withdrawals
and Policy Debt.

MISSTATEMENT AS TO AGE AND SEX

If the age or sex of the Insured is incorrectly stated in the application,
the Death Benefit and all Policy values will be adjusted based on what the
initial Premium would have purchased using the correct age and/or sex.

BENEFICIARY

You name the original Beneficiary(ies) and Contingent Beneficiary(ies) in
the application for the Policy. You may change the Beneficiary or Contingent
Beneficiary at any time while the Insured is alive, except irrevocable
Beneficiaries and irrevocable Contingent Beneficiaries may not be changed
without their consent.

You must request a change of Beneficiary in writing. We will provide a form
to be signed and filed with us. Your request for a change in Beneficiary or
Contingent Beneficiary will take effect as of the date you signed the form after
we acknowledge receipt in writing. Until we acknowledge receipt of your change
instructions, we are entitled to rely on your most recent instructions in our
files. Accordingly, we are not liable for making a payment to the person shown
in our files as the Beneficiary or treating that person in any other respect as
the Beneficiary, even if instructions that we subsequently receive from you seek
to change your Beneficiaries effective as of a date before we made the payment
or took the action in question.

If you name more than one Beneficiary, we will divide the Death Benefit
among your Beneficiaries according to your most recent written instructions. If
you have not given us written instructions, we will pay the Death Benefit in
equal shares to the Beneficiaries. If one of the Beneficiaries dies before You,
we will divide the Death Benefit among the surviving Beneficiaries. If no
Beneficiary is living, the Contingent Beneficiary will be the Beneficiary. The
interest of any revocable Beneficiary is subject to the interest of any
assignee. If no Beneficiary or Contingent Beneficiary is living, the Beneficiary
is the Owner or the Owner's estate.

ASSIGNMENT

While the Insured is alive, you may assign your Policy as collateral
security. You must notify us in writing if you assign the Policy. Until we
receive notice from you, we are not liable for any action we may take or
payments we may make that may be contrary to the terms of your assignment. We
are not responsible for the validity of an assignment. Your rights and the
rights of the Beneficiary may be affected by an assignment. An assignment may
result in income tax and a ten percent federal penalty tax. You should consult
your tax adviser before assigning your Policy.

CREDITOR'S CLAIMS

To the extent permitted by law, no benefits payable under this Policy will
be subject to the claims of your or the Beneficiary's creditors.

DIVIDENDS

We will not pay any dividend under the Policy.

NOTICE AND ELECTIONS

To be effective, all notices and elections under the Policy must be in
writing, signed by you, and received by us at our Home Office. Certain
exceptions may apply. Unless otherwise provided in the Policy, all notices,
requests and elections will be effective when received at our Home Office
complete with all necessary information.

MODIFICATION

We reserve the right to modify the Policy without your express consent, in
the circumstances described in this Prospectus or as necessary to conform to
applicable law or regulation or any ruling issued by a governmental

34
<PAGE> 37

agency. The provisions of the Policy will be construed so as to comply with the
requirements of Section 7702 of the Tax Code.

SURVIVORSHIP POLICIES

We offer Policies on a single life and "last survivor" basis. The
Survivorship Policy operates almost identically to the Single Life Policy. The
primary difference is that the Survivorship Policy has two Insureds and the
Death Benefit is paid only upon the death of the last surviving Insured. Other
significant differences are:

(1) the cost of insurance charge differs because we base it on the
anticipated mortality of two Insureds and we do not pay the Death Benefit
until both Insureds have died;

(2) for a Survivorship Policy to qualify for simplified underwriting,
both Insureds must meet our standards;

(3) under a Survivorship Policy, provisions regarding
incontestability, suicide, and misstatements of age or sex apply to each
Insured; and

(4) the Accelerated Death Benefit is only available upon the Terminal
Illness of the surviving Insured, as this term is defined in the Policy.

FEDERAL TAX CONSIDERATIONS

NOTE: The following discussion is based upon our understanding of current
federal income tax law applicable to life insurance policies in general. We
cannot predict the probability that any changes in those laws will be made.
Also, we do not guarantee the tax status of the Policies. You bear the complete
risk that the Policies may not be treated as "life insurance policies" under
federal income tax laws.

In addition, this discussion does not include a detailed description of the
federal income tax consequences of the purchase of these Policies or any
discussion of special tax rules that may apply to certain purchase situations.
We also have not tried to consider any other possibly applicable state or other
tax laws, for example, the estate tax consequences of the Policies. You should
seek tax advice concerning the effect on your personal tax liability of the
transactions permitted under the Policy, as well as any other questions you may
have concerning the tax status of the Policy or the possibility of changes in
the tax law.

TAXATION OF KILICO AND THE SEPARATE ACCOUNT

KILICO is taxed as a life insurance company under Subchapter L of the Tax
Code. The operations of the Separate Account are taxed as part of the operations
of KILICO. Investment income and realized capital gains are not taxed to the
extent that they are applied under the Policies.

Accordingly, we do not anticipate that KILICO will incur any federal income
tax liability attributable to the operation of the Separate Account (as opposed
to the federal tax related to the receipt of Premiums under the Policies).
Therefore, we are not making any charge or provision for federal income taxes.
However, if the tax treatment of the Separate Account is changed, we may charge
the Separate Account for its share of the resulting federal income tax.

In several states we may incur state and local taxes on the operations of
the Separate Account. We currently are not making any charge or provision for
them against the Separate Account. We do, however, use part of the Policy
charges to offset these taxes. If these taxes should be increased, we may make a
charge or provision for them against the Subaccounts. If we do so, the
investment results of the Subaccounts will be reduced.

TAX STATUS OF THE POLICY

The Policy is structured to satisfy the definition of a life insurance
policy under the Tax Code. As a result, the Death Benefit ordinarily will be
fully excluded from the gross income of the Beneficiary. The Death Benefit will
be included in your gross estate for federal estate tax purposes if the proceeds
are payable to your estate. The Death Benefit will also be included in your
estate, if the Beneficiary is not your estate but you retained incidents of
ownership in the Policy. Examples of incidents of ownership include the right to
change Beneficiaries, to assign the Policy or revoke an assignment, and to
pledge the Policy or obtain a Policy Loan. If you own and are the Insured under
a Policy and if you transfer all incidents of ownership in the Policy more than
three years before your death, the Death Benefit will not be included in your
gross estate. State and local estate and inheritance tax consequences may also
apply.

35
<PAGE> 38

In addition, certain transfers of the Policy or Death Benefit, either
during life or at death, to individuals (or trusts for the benefit of
individuals) two or more generations below that of the transferor may be subject
to the federal generation-skipping transfer tax.

In addition, you may use the Policy in various arrangements, including
non-qualified deferred compensation or salary continuance plans, split dollar
insurance plans, executive bonus plans, retiree medical benefit plans and
others. The tax consequences of such plans may vary depending on the particular
facts and circumstances of each individual arrangement. Therefore, if you are
contemplating the use of a Policy in any arrangement the value of which depends
in part on its tax consequences, you should be sure to consult a qualified tax
adviser regarding the tax treatment of the proposed arrangement.

DIVERSIFICATION REQUIREMENTS. Section 817(h) of the Tax Code requires that
the underlying assets of variable life insurance policies be diversified. The
Tax Code provides that a variable life insurance policy will not be treated as a
life insurance policy for federal income tax purposes for any period and any
subsequent period for which the investments are not adequately diversified. If
the Policy were disqualified for this reason, you would lose the tax deferral
advantages of the Policy and would be subject to current federal income taxes on
all earnings allocable to the Policy.

The United States Treasury Department (the "Treasury Department") also has
issued regulations that establish diversification requirements for the
investment accounts underlying variable policies such as the Policies. These
regulations amplify the diversification requirements set forth in the Tax Code
and provide an alternative diversification test to the provision described
above.

These diversification standards are applied to each Subaccount by looking
to the investments of the Portfolio underlying the Subaccount. One of our
criteria in selecting the Portfolios is that their investment managers intend to
manage them in compliance with these diversification requirements.

OWNER CONTROL. In certain circumstances, variable life insurance owners
will be considered the Owners, for tax purposes, of separate account assets
underlying their Policies. In those circumstances, the Owners could be subject
to taxation on the income and gains from the separate account assets.

In published rulings, the Internal Revenue Service has stated that a
variable insurance Owner will be considered the owner of separate account
assets, if the Owner possesses incidents of ownership in those assets, such as
the ability to exercise investment control over the assets. When the
diversification regulations were issued, the Treasury Department announced that
in the future, it would provide guidance on the extent to which variable Owners
could direct their investments among Subaccounts without being treated as Owners
of the underlying assets of the Separate Account. As of the date of this
Prospectus, no such guidance has been issued. We cannot predict when or whether
the Treasury Department will issue that guidance or what position the Treasury
Department will take. In addition, although regulations are generally issued
with prospective effect, it is possible that regulations may be issued with
retroactive effect.

The ownership rights under the Policy are similar in many respects to those
described in IRS rulings in which the owners were not deemed to own the separate
account assets. In some respects, however, they differ. For example, under the
Policy you have many more investment options to choose from than were available
under the policies involved in the published rulings, and you may be able to
transfer Cash Value among the investment options more frequently than in the
published rulings. Because of these differences, it is possible that you could
be treated as the owner, for tax purposes, of the Portfolio shares underlying
your Policy and therefore subject to taxation on the income and gains on those
shares. Moreover, it is possible that the Treasury Department's position, when
announced, may adversely affect the tax treatment of existing Policies. We
therefore reserve the right to modify the Policy as necessary to attempt to
prevent you from being considered the owner for tax purposes of the underlying
assets. The remainder of this discussion assumes that the Policy will be treated
as a life insurance policy for federal tax purposes.

TAX TREATMENT OF LIFE INSURANCE DEATH BENEFIT PROCEEDS

In general, the amount of the Death Benefit payable under a Policy is
excludable from gross income under the Tax Code. Certain transfers of the
Policy, 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 one of the settlement options, payments generally will be prorated between
amounts attributable to the Death Benefit, which will be excludable from the
Beneficiary's income, and amounts attributable to interest (occurring after the
insured's death), which will be includable in the beneficiary's income.

36
<PAGE> 39

ACCELERATED DEATH BENEFIT. In general, the tax treatment of an Accelerated
Death Benefit is the same as the treatment of Death Benefits, as described
above.

TAX DEFERRAL DURING ACCUMULATION PERIOD

Under existing provisions of the Tax Code, except as described below, any
increase in your Cash Value is generally not taxable to you unless you receive
or are deemed to receive amounts from the Policy before the Insured dies. If you
surrender your Policy, the Cash Value (less any annual Records Maintenance
Charge paid upon surrender) will be includable in your income to the extent the
amount received exceeds the "investment in the policy." The "investment in the
policy" generally is the total Premiums and other consideration paid for the
Policy, less the aggregate amount received under the Policy previously to the
extent such amounts received were excludable from gross income. Whether partial
withdrawals (or other amounts deemed to be distributed) from the Policy
constitute income depends, in part, upon whether the Policy is considered a
"modified endowment contract" ("MEC") for federal income tax purposes.

POLICIES WHICH ARE MECS

CHARACTERIZATION OF A POLICY AS A MEC. In general, this Policy will
constitute a MEC unless (1) it was received in exchange for another life
insurance policy which was not a MEC, (2) no Premiums or other consideration
(other than the exchanged policy) are paid into the Policy during the first 7
Policy Years, and (3) there is no withdrawal or reduction in the Death Benefit
during the first 7 Policy Years. In addition, even if the Policy initially is
not a MEC, it may, in certain circumstances, become a MEC if there is a later
increase in benefits or any other "material change" of the Policy within the
meaning of the tax law.

TAX TREATMENT OF WITHDRAWALS, LOANS, ASSIGNMENTS AND PLEDGES UNDER
MECS. Because your Policy is a MEC, withdrawals from your Policy will be treated
first as withdrawals of income and then as a recovery of Premiums. Thus, you may
realize taxable income upon a withdrawal if the Cash Value exceeds the
investment in the Policy. You may also realize taxable income when you take a
Policy Loan, because any loan (including unpaid loan interest) under the Policy
will be treated as a withdrawal for tax purposes. In addition, if you assign or
pledge any portion of the value of your Policy (or agree to assign or pledge any
portion), the assigned or pledged portion of your Cash Value will be treated as
a withdrawal for tax purposes. Before assigning, pledging, or requesting a loan
under a Policy which is a MEC, you should consult a qualified tax adviser.

PENALTY TAX. Generally, withdrawals (or the amount of any deemed
withdrawals) from a MEC are subject to a federal penalty tax equal to ten
percent of the portion of the withdrawal that is includable in income, unless
the withdrawals are made: (1) after you reach age 59 1/2, (2) because you have
become disabled (as defined in the tax law), or (3) as substantially equal
periodic payments over your life or life expectancy (or the joint lives or life
expectancies of you and your beneficiary, as defined in the tax law). Certain
other exceptions to the ten percent federal penalty tax may apply.

Payments under our systematic withdrawal program possibly may not qualify
for the exception from federal penalty tax for "substantially equal periodic
payments" which is described above. Accordingly, this Policy may be
inappropriate for Owners who expect to take substantially equal periodic
payments prior to age 59 1/2. You should consult a qualified tax adviser before
entering into a systematic withdrawal plan.

AGGREGATION OF POLICIES. All life insurance policies which are MECs and
which are purchased by the same person from us or any of our affiliates within
the same calendar year will be aggregated and treated as one policy for purposes
of determining the amount of a withdrawal (including a deemed withdrawal) that
is includable in taxable income.

POLICIES WHICH ARE NOT MECS

TAX TREATMENT OF WITHDRAWALS GENERALLY. If your Policy is not a MEC, the
amount of any withdrawal from the Policy will be treated first as a non-taxable
recovery of premiums and then as income from the Policy. Thus, only the portion
of a withdrawal that exceeds the investment in the Policy immediately before the
withdrawal will be includable in taxable income.

TAX TREATMENT OF LOANS. If your Policy is not a MEC, a loan received under
the Policy generally will be treated as indebtedness for tax purposes, rather
than a withdrawal of Cash Value. As a result, you will not realize taxable
income on any part of the loan as long as the Policy remains in force. If you
surrender your Policy, however, any outstanding loan balance will be treated as
an amount received by you as part of the Surrender Value. Accordingly, you may
be subject to taxation on the loan amount at that time. Moreover, if any portion
of your Policy Loan is a Preferred Loan described in "Policy Loans" on pages
23-24, a portion of your Policy Loan

37
<PAGE> 40

may be includable in your taxable income. Generally, you may not deduct interest
paid on loans under the Policy, even if you use the loan proceeds in your trade
or business.

SURVIVORSHIP POLICIES

Although we believe that the Policy, when issued as a Survivorship Policy,
meets the definition of life insurance policy under the Tax Code, the Tax Code
does not directly address how it applies to Survivorship Policies. In the
absence of final regulations or other guidance under the Tax Code regarding this
form of Policy, there is necessarily some uncertainty whether a Survivorship
Policy will meet the Tax Code's definition of a life insurance policy. If you
are considering purchasing a Survivorship Policy, you should consult a qualified
tax adviser.

If the Owner is the last surviving Insured, the Death Benefit proceeds will
generally be includable in the Owner's estate on his or her death for purposes
of the federal estate tax. If the Owner dies and was not the last surviving
Insured, the fair market value of the Policy may be included in the Owner's
estate. In general, the Death Benefit proceeds are not included in the last
surviving Insured's estate if he or she neither retained incidents of ownership
at death nor had given up ownership within three years before death.

TREATMENT OF MATURITY BENEFITS AND EXTENSION OF MATURITY DATE

If your Policy does not have an Extended Maturity Rider, at the Maturity
Date, we pay the Net Surrender Value to you. Generally, the excess of the Cash
Value (less any applicable Records Maintenance Charge) over your investment in
the Policy will be includable in your taxable income at that time. If your
Policy has an Extended Maturity Rider, we believe the Policy will continue to
qualify as life insurance under the Tax Code. However, there is some uncertainty
regarding this treatment. It is possible, therefore, that you would be viewed as
constructively receiving the Surrender Value in the year in which the Insured
attains age 100 and would realize taxable income at that time, even if the
Policy proceeds were not distributed at that time.

ACTIONS TO ENSURE COMPLIANCE WITH THE TAX LAW

We believe that the maximum amount of Premiums we intend to permit for the
Policies will comply with the Tax Code definition of a life insurance policy. We
will monitor the amount of your Premiums, and, if your total Premiums during a
Policy Year exceed those permitted by the Tax Code, we will refund the excess
Premiums no later than 60 days after the end of the Policy Year and will pay
interest and other earnings (which will be includable in taxable income) as
required by law on the amount refunded. We reserve 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 a life insurance contract.

FEDERAL INCOME TAX WITHHOLDING

We will withhold and remit to the federal government a part of the taxable
portion of withdrawals made under a Policy, unless the Owner notifies us in
writing at or before the time of the withdrawal that he or she chooses not to
have withholding. As Owner, you will be responsible for the payment of any taxes
and early distribution penalties that may be due on the amounts received under
the Policy, whether or not you choose withholding. You may also be required to
pay penalties under the estimated tax rules, if your withholding and estimated
tax payments are insufficient to satisfy your total tax liability.

TAX ADVICE

This summary is not a complete discussion of the tax treatment of the
Policy. You should seek tax advice from an attorney or other professional who
specializes in tax issues.

DESCRIPTION OF KILICO
AND THE SEPARATE ACCOUNT

KILICO

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 majority-owned (71.67%)
subsidiary of Zurich Holding Company of America ("ZHCA"), which is a
wholly-owned subsidiary of Zurich Insurance Company ("Zurich"). Zurich is a
wholly-owned subsidiary of Zurich Financial Services ("ZFS"). ZFS was
38
<PAGE> 41

formed in the September 1998 merger of the Zurich Group with the financial
services business of B.A.T. Industries. ZFS is owned by Zurich Allied A.G. and
Allied Zurich P.L.C., fifty-seven percent and forty-three percent, respectively.
KILICO offers life insurance and annuity products and is admitted to do business
in the District of Columbia and all states except New York.

KILICO also acts as a sponsor for KILICO Variable Annuity Separate Account,
KILICO Variable Separate Account--2 and Kemper Investors Life Insurance Company
Variable Annuity Account C. The officers and employees of KILICO are covered by
a fidelity bond in the amount of $20 million.

OFFICERS AND DIRECTORS OF KILICO

Our directors and officers are listed below, together with information as
to their dates of election and principal business occupations during the past
five or more years (if other than their present occupation). Where no dates are
given, the person has held that position for at least the past five years.

<TABLE>
<CAPTION>
NAME AND AGE
POSITION WITH KILICO
YEAR OF ELECTION OTHER BUSINESS EXPERIENCE DURING PAST 5 YEARS OR MORE
-------------------- -----------------------------------------------------
<S> <C>
Gale K. Caruso (42) President and Chief Executive Officer of Federal Kemper Life
President and Chief Executive Officer Assurance Company (FKLA), Fidelity Life Association (FLA),
since June 1999. Director since July Zurich Life Insurance Company of America (ZLICA) and Zurich
1999. Direct, Incorporated (ZD) since June 1999. Director of FKLA,
FLA and ZLICA since July 1999. Chairman, President and Chief
Executive Officer of Scudder Canada Investor Services, Ltd.
from 1995 to June 1999. Managing Director of Scudder Kemper
Investments, Inc. from July 1986 to June 1999.
John B. Scott (55) Chairman of the Board of FKLA, FLA, ZLICA and ZD since June
Chairman of the Board since June 1999. Chief Executive Officer, President and Director of
1999. Director since 1992. FKLA and FLA from 1988 to June 1999. Chief Executive
Officer, President and Director of ZLICA and ZD from March
1996 to June 1999. Chairman of the Board and Director of
Investors Brokerage Services, Inc. (IBS) and Investors
Brokerage Services Insurance Agency, Inc. (IBSIA) since
1993. Chairman of the Board of FKLA and FLA from April 1988
to January 1996. Chairman of the Board of KILICO from
February 1992 to January 1996. Executive Vice President and
Director of Kemper Corporation (Kemper) since January 1994
and March 1996, respectively. Executive Vice President of
Kemper Financial Companies, Inc. from January 1994 to
January 1996 and Director from 1992 to January 1996.

Eliane C. Frye (52) Executive Vice President of FKLA and FLA since 1995.
Executive Vice President since 1995. Executive Vice President of ZLICA and ZD since March 1996.
Director since May 1998. Director of FLA since December 1997. Director of FKLA and
ZLICA since May 1998. Director of ZD from March 1996 to
March 1997. Director of IBS and IBSIA since 1995. Senior
Vice President of KILICO, FKLA and FLA from 1993 to 1995.
Vice President of FKLA and FLA from 1988 to 1993.

Frederick L. Blackmon (47) Senior Vice President and Chief Financial Officer of FKLA
Senior Vice President and Chief since December 1995. Senior Vice President and Chief
Financial Officer since December Financial Officer of FLA since January 1996. Senior Vice
1995. President and Chief Financial Officer of ZLICA since March
1996. Senior Vice President and Chief Financial Officer of
ZD since March 1996. Director of FLA since May 1998.
Director of ZD from March 1996 to March 1997. Treasurer and
Chief Financial Officer of Kemper since January 1996. Chief
Financial Officer of Alexander Hamilton Life Insurance
Company from April 1989 to November 1995.

Russell M. Bostick (42) Senior Vice President and Chief Information Officer of FKLA,
Senior Vice President and Chief FLA, ZLICA and ZD since March 1999. Vice President and Chief
Information Officer since March 1999. Information Officer of FKLA, FLA, KILICO, ZLICA and ZD from
April 1998 to March 1999. Chief Technology Officer of
Corporate Software and Technology from June 1997 to April
1998. Vice President of CNA Insurance Companies from January
1995 to June 1997. Assistant Vice President of CNA Insurance
Companies from February 1994 to January 1995.
</TABLE>

39
<PAGE> 42

<TABLE>
<CAPTION>
NAME AND AGE
POSITION WITH KILICO
YEAR OF ELECTION OTHER BUSINESS EXPERIENCE DURING PAST 5 YEARS OR MORE
-------------------- -----------------------------------------------------
<S> <C>
James C. Harkensee (41) Senior Vice President of FKLA and FLA since January 1996.
Senior Vice President since January Senior Vice President of ZLICA since 1995. Senior Vice
1996. President of ZD since 1995. Director of ZD from April 1993
to March 1997 and since March 1998. Vice President of ZLICA
from 1992 to 1995. Chief Actuary of ZLICA from 1991 to 1994.
Assistant Vice President of ZLICA from 1990 to 1992. Vice
President of ZD from 1994 to 1995.
James E. Hohmann (43) Senior Vice President of FKLA since December 1995. Chief
Senior Vice President since December Actuary of FKLA and KILICO from December 1995 to January
1995. Director since May 1998. 1999. Senior Vice President of FLA since January 1996. Chief
Actuary of FLA from January 1996 to January 1999. Senior
Vice President of ZLICA and ZD since March 1996. Chief
Actuary of ZLICA and ZD from March 1996 to January 1999.
Director of FLA since June 1997. Director of FKLA and ZLICA
since May 1998. Director of ZD from March 1996 to March
1997. Managing Principal (Partner) of Tillinghast-Towers
Perrin from January 1991 to December 1995.
Consultant/Principal (Partner) of Tillinghast-Towers Perrin
from November 1986 to January 1991.
Edward K. Loughridge (44) Senior Vice President and Corporate Development Officer of
Senior Vice President and Corporate FKLA and FLA since January 1996. Senior Vice President and
Development Officer since January Corporate Development Officer for ZLICA and ZD since March
1996. 1996. Senior Vice President of Human Resources of
Zurich-American Insurance Group from February 1992 to March
1996.
Debra P. Rezabek (43) Senior Vice President of FKLA and FLA since March 1996.
Senior Vice President since 1996. Corporate Secretary of FKLA and FLA since January 1996.
General Counsel since 1992. Corporate Director of FLA since May 1998. Vice President of KILICO,
Secretary since January 1996. FKLA and FLA since 1995. General Counsel and Director of
Government Affairs of FKLA and FLA since 1992 and of KILICO
since 1993. Senior Vice President, General Counsel and
Corporate Secretary of ZLICA since March 1996. Senior Vice
President, General Counsel and Corporate Secretary of ZD
since March 1996. Director of ZD from March 1996 to March
1997. Secretary of IBS and IBSIA since 1993. Director of IBS
and IBSIA from 1993 to 1996. Assistant General Counsel of
FKLA and FLA from 1988 to 1992. General Counsel and
Assistant Secretary of KILICO, FKLA and FLA from 1992 to
1996. Assistant Secretary of Kemper since January 1996.
Edward L. Robbins (59) Senior Vice President and Chief Actuary of FKLA, FLA, ZLICA
Senior Vice President and Chief and ZD since March 1999. Senior Actuary of FKLA, FLA,
Actuary since March 1999. KILICO, ZLICA and ZD from July 1998 to February 1999.
Principal of KPMG Peat Marwick LLP from May 1984 to July
1998.
Kenneth M. Sapp (54) Senior Vice President of FKLA, FLA and ZLICA since January
Senior Vice President since January 1998. Director of IBS since May 1998. Director of IBSIA
1998. since September 1998. Vice President--Aetna Life Brokerage
of Aetna Life & Annuity Company from February 1992 to
January 1998.
George Vlaisavljevich (56) Senior Vice President of FKLA, FLA and ZLICA since October
Senior Vice President since October 1996. Senior Vice President of ZD since March 1997. Director
1996. of IBS and IBSIA since October 1996. Executive Vice
President of The Copeland Companies from April 1983 to
September 1996.
</TABLE>

40
<PAGE> 43

<TABLE>
<CAPTION>
NAME AND AGE
POSITION WITH KILICO
YEAR OF ELECTION OTHER BUSINESS EXPERIENCE DURING PAST 5 YEARS OR MORE
-------------------- -----------------------------------------------------
<S> <C>
William H. Bolinder (56) Chairman of the Board of FKLA, FLA and KILICO from January
Director since January 1996. 1996 to June 1999. Director of FKLA and FLA since January
1996. Chairman of the Board of ZLICA and ZD from March 1995
to June 1999. Director of ZLICA and ZD since March 1995.
Chairman of the Board and Director of Kemper since January
1996. Director of SKI since January 1996. Vice Chairman of
SKI from January 1996 to 1998. Member of the Group Executive
Board of Zurich Financial Services Group since 1998. Member
of the Corporate Executive Board of Zurich Insurance Group
from October 1994 to 1998. Chairman of Zurich American
Insurance Company since 1998. Chairman of the Board of
American Guarantee and Liability Insurance Company, Zurich
American Insurance Company of Illinois, American Zurich
Insurance Company and Steadfast Insurance Company since
1995. Chief Executive Officer of American Guarantee and
Liability Insurance Company, Zurich American Insurance
Company of Illinois and American Zurich Insurance Company
from 1986 to June 1995. President of Zurich Holding Company
of America since 1986. Manager of Zurich Insurance Company,
U.S. Branch from 1986 to 1998. Underwriter for Zurich
American Lloyds since 1986.

David A. Bowers (53) Director of FKLA and ZLICA since May 1997. Director of FLA
Director since May 1997. since June 1997. Executive Vice President, Corporate
Secretary and General Counsel of Zurich U.S. since August
1985. Vice President, General Counsel and Secretary of
Kemper since January 1996.

Gunther Gose (54) Director of FKLA, FLA and ZLICA since November 1998. Chief
Director since November 1998. Financial Officer and Member of the Group Executive Board of
Zurich Financial Services since October 1998. Member of the
Corporate Executive Board of Zurich Insurance Group from
April 1990 to October 1998.
</TABLE>

The business address of each of the foregoing officers and directors is 1
Kemper Drive, Long Grove, Illinois 60049.

SEPARATE ACCOUNT

KILICO Variable Separate Account was established on January 22, 1987, as a
separate investment account under the laws of Illinois. The Separate Account
receives and invests Premiums under the Policy. The Separate Account is
registered with the SEC as a unit investment trust under the Investment Company
Act of 1940. The SEC does not supervise the management, investment practices or
policies of the Separate Account or KILICO.

Benefits provided under the Policies are our obligations. Although the
assets in the Separate Account are our property, they are held separately from
our other assets and are not chargeable with liabilities arising out of any
other business we may conduct. Income, capital gains and capital losses, whether
or not realized, from the assets allocated to the Separate Account are credited
to or charged against the Separate Account without regard to the income, capital
gains and capital losses arising out of any other business we may conduct.

Thirty-seven Subaccounts of the Separate Account are currently available.
Each Subaccount invests exclusively in shares of one of the corresponding
Portfolios. We may add or delete Subaccounts in the future.

The Separate Account purchases and redeems shares from the Portfolios at
net asset value. We redeem shares of the Portfolios as necessary to provide
benefits, to deduct Policy charges and to transfer assets from one Subaccount to
another as requested by Policy owners. All dividends and capital gains
distributions received by the Separate Account from a Portfolio are reinvested
in that Portfolio at net asset value and retained as assets of the corresponding
Subaccount.

SAFEKEEPING OF THE SEPARATE ACCOUNT'S ASSETS

We hold the assets of the Separate Account. We keep those assets physically
segregated and held separate and apart from our General Account assets. We
maintain records of all purchases and redemptions of shares of the Portfolios.

41
<PAGE> 44

STATE REGULATION OF KILICO

We are subject to the laws of Illinois and regulated by the Illinois
Department of Insurance. Every year we file an annual statement with the
Department of Insurance covering our operations for the previous year and our
financial condition as of the end of the year. We are inspected periodically by
the Department of Insurance to verify our Policy liabilities and reserves. Our
books and records are subject to review by the Department of Insurance at all
times. We are also subject to regulation under the insurance laws of every
jurisdiction in which we operate.

YEAR 2000 MATTERS
(YEAR 2000 READINESS DISCLOSURE)

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 for any transaction with a date of January 1, 2000, or
later.

Many companies must undertake major projects to address the year 2000
issue. 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.

We have taken substantial steps over the last several years to ensure that
our critical systems will be compliant for the year 2000. Such steps have
included the replacement of older systems with new systems which are already
compliant. We have also determined that new systems developed to support new
product introductions in 1997, 1998 and beyond are already year 2000 compliant.
Data processing expenses related solely to bringing our systems in compliance
with the year 2000 amounted to $550 thousand for the first nine months of 1999.
We anticipate that it will cost an additional $108 thousand to bring all
remaining systems into compliance.

Our policy administration systems have been completely renovated to be year
2000 compliant, and have been tested and have been placed back into production
as of June 30, 1999. All of our ancillary systems confirmed to be year 2000
compliant were in production at September 30, 1999. Testing procedures have
confirmed the performance, functionality, and integration of converted or
replaced platforms, applications, databases, utilities, and interfaces in an
operational environment. Our testing and verification for year 2000 compliance
has encompassed the following:

- mainframe computing systems;

- mainframe hardware and systems software;

- PC/LAN computing systems;

- PC/LAN hardware and systems software;

- end-user computing systems;

- interfaces to and from third parties; and

- other miscellaneous electronic non-information systems.

We have also taken steps to determine whether all other entities with which
we electronically interact, including suppliers and other financial services
institutions are year 2000 compliant.

If we do not successfully address our year 2000 issues, we could face
material adverse consequences from lawsuits, lost business, erroneous results
and substantial operating problems after January 1, 2000. Although we fully
expect to be year 2000 compliant by the close of 1999, we have developed
contingency plans to handle the most reasonably likely worst case scenarios. The
contingency plans were completed in the third quarter of 1999 and testing of
those plans will continue throughout the fourth quarter of 1999.

42
<PAGE> 45

DISTRIBUTION OF POLICIES

Investors Brokerage Services, Inc. ("IBS") serves as distributor of the
Policies. IBS is located at 1 Kemper Drive, Long Grove, Illinois 60010. IBS is
our wholly-owned subsidiary. It is registered as a broker-dealer under the
Securities Exchange Act of 1934 (the "1934 Act"), and is a member of the
National Association of Securities Dealers, Inc.

The Policies described in this Prospectus are sold by registered
representatives of broker-dealers or bank employees who are licensed insurance
agents appointed by the Company, either individually or through an incorporated
insurance agency. IBS enters into selling agreements with the unaffiliated
broker-dealers and banks whose personnel participate in the offer and sale of
the Policies. In some states, the Policies may be sold by representatives or
employees of banks which may be acting as broker-dealers without separate
registration under the 1934 Act, pursuant to legal and regulatory exceptions.

The maximum sales compensation payable by the Company is not more than the
equivalent of 7.5% percent of each Premium. Trail Commissions of up to 1.0% of
Cash Value may also be paid where a lower commission rate applies to Premiums.
In addition, we may pay or permit other promotional incentives, in cash, or
credit or other compensation. We also may pay asset-based expense allowances and
service fees.

The distribution agreement with IBS provides for indemnification of IBS by
KILICO and the Separate Account for liability arising out of allegedly untrue
statements in, or omissions of material fact from, the prospectus or the
Registration Statement. IBS agrees to indemnify KILICO and the Separate Account
against claims arising from the conduct of IBS or unaffiliated broker-dealers
that sell Policies.

LEGAL PROCEEDINGS

There are no pending legal proceedings affecting the Separate Account.
KILICO is engaged in routine law suits which, in our management's judgment, are
not of material importance to its total assets or material with respect to the
Separate Account.

LEGAL MATTERS

All matters of Illinois law pertaining to the Policy, including the
validity of the Policy and our right to issue the Policy under Illinois law,
have been passed upon by Frank Julian, Esq., our Associate General Counsel. The
law firm of Jorden Burt Boros Cicchetti Berenson & Johnson LLP, 1025 Thomas
Jefferson St., Suite 400, East Lobby, Washington, D.C. 20007-5201, serves as
special counsel to KILICO with regard to the federal securities laws.

REGISTRATION STATEMENT

We have filed a registration statement with the SEC, Washington, D.C.,
under the Securities Act of 1933 as amended, with respect to the Policies
offered by this Prospectus. This Prospectus does not contain all the information
set forth in the registration statement and the exhibits filed as part of the
registration statement. You should refer to the registration statement and the
exhibits for further information concerning the Separate Account, KILICO, and
the Policies. The descriptions in this Prospectus of the Policies and other
legal instruments are summaries. You should refer to those instruments as filed
for their precise terms.

EXPERTS

The consolidated balance sheets of KILICO as of December 31, 1998 and 1997
and the related consolidated statements of operations, comprehensive income,
stockholder's equity, and cash flows for the years ended December 31, 1998 and
1997 have been included herein and in the registration statement in reliance
upon the report of PricewaterhouseCoopers LLP, independent public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing. The consolidated statements of operations,
comprehensive income, stockholder's equity, and cash flows of KILICO and
subsidiaries for the period from January 4, 1996 to December 31, 1996 and the
financial statement schedules as of December 31, 1996 have been included herein
and in the registration statement in reliance upon the report of KPMG LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.

The statements of assets and liabilities and policy owners' equity of the
KILICO Variable Separate Account as of December 31, 1998 and the related
statements of operations for the year then ended and the statements of

43
<PAGE> 46

changes in policy owners' equity for the year then ended and for the periods
presented has been included herein in reliance upon the report of
PricewaterhouseCoopers LLP, independent public accountants, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing.

Actuarial matters included in this Prospectus have been examined by Steven
D. Powell, FSA, as stated in the opinion filed as an exhibit to the registration
statement.

FINANCIAL STATEMENTS

The included financial statements of the Subaccounts of the Separate
Account do not reflect any assets attributable to the Policy, because we did not
sell the Policy during the period covered by those financial statements.
Instead, those financial statements solely reflect assets and operations
attributable to sales of other variable life insurance contracts issued by the
Separate Account. The financial statements do not cover certain Subaccounts of
the Separate Account, because those Subaccounts were not created until after the
end of the periods covered. The included financial statements for KILICO only
bear on our ability to meet our obligations under the Policy. They do not relate
to the investment performance of the assets held in the Separate Account.

CHANGE OF ACCOUNTANTS

On September 12, 1997, KILICO appointed PricewaterhouseCoopers LLP
("PricewaterhouseCoopers"), formerly Coopers & Lybrand L.L.P., as independent
public accountants for the year ended December 31, 1997 to replace KPMG LLP
effective with such appointment. Our Board of Directors approved their selection
as the new independent accountants. Management had not consulted with
PricewaterhouseCoopers on any accounting, auditing or reporting matter, prior to
that time.

During the fiscal year ended December 31, 1996, there were no disagreements
with KPMG LLP on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure or any reportable events.
KPMG LLP's report on the financial statements for 1996 contained no adverse
opinion or disclaimer of opinion and was not qualified or modified as to
uncertainty, audit scope or accounting principles.

There were no disagreements with PricewaterhouseCoopers on accounting or
financial disclosures for the years ended December 31, 1998 or 1997.

44
<PAGE> 47

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

The Board of Directors of
Kemper Investors Life Insurance Company and
Contract Owners of KILICO Variable Separate Account:

In our opinion, the accompanying statement of assets and liabilities and
contract owners' equity and the related statement of operations and changes in
owner's equity present fairly, in all material respects, the financial position
of the subaccounts of KILICO Variable Separate Account, which includes the Money
Market Subaccount, Total Return Subaccount, High Yield Subaccount, Growth
Subaccount, Government Securities Subaccount, International Subaccount, Small
Cap Growth Subaccount (investment options within the Investors Fund Series),
International Subaccount, Growth & Income Subaccount (investment options within
the Scudder Variable Life Investment Fund), thereof, at December 31, 1998, and
the changes in their equity for the year then ended and for each of the periods
presented, except for the International Subaccount, Growth & Income Subaccount
as to which the period is June 15, 1998 (commencement of operations) to December
31, 1998, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of Kemper Investors Life Insurance
Company's management, our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which 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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
direct confirmation of investments owned at December 31, 1998 by correspondence
with transfer agents, provides a reasonable basis for the opinion expressed
above.

PricewaterhouseCoopers LLP

Chicago, Illinois
February 19, 1999

45
<PAGE> 48

KILICO VARIABLE SEPARATE ACCOUNT

STATEMENTS OF ASSETS AND LIABILITIES AND POLICY OWNERS' EQUITY

DECEMBER 31, 1998
(IN THOUSANDS)

<TABLE>
<CAPTION>
INVESTORS FUND SERIES
---------------------------------------------------------------------------------------------
MONEY GOVERNMENT SMALL CAP
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......................... $981 3,681 1,333 3,472 4,396 176 1,082
Dividends and other
receivables................... 3 -- -- 1 -- -- --
---- ----- ----- ----- ----- --- -----
Total assets.............. 984 3,681 1,333 3,473 4,396 176 1,082
LIABILITIES AND POLICY OWNERS'
EQUITY
Liabilities:
Mortality and expense risk
charges..................... 1 2 1 2 3 -- --
Other......................... 17 -- -- -- -- -- --
---- ----- ----- ----- ----- --- -----
Total liabilities......... 18 2 1 2 3 -- --
---- ----- ----- ----- ----- --- -----
Policy owners' equity........... $966 3,679 1,332 3,471 4,393 176 1,082
==== ===== ===== ===== ===== === =====
ANALYSIS OF POLICY OWNERS' EQUITY
Excess of proceeds from units
sold over payments for units
redeemed...................... $348 948 318 1,346 1,878 170 920
Accumulated net investment
income........................ 618 1,698 903 1,406 1,867 3 57
Accumulated net realized gain on
sales of investments.......... -- 816 66 319 578 -- 12
Unrealized appreciation of
investments................... -- 217 45 400 70 3 93
---- ----- ----- ----- ----- --- -----
Policy owners' equity........... $966 3,679 1,332 3,471 4,393 176 1,082
==== ===== ===== ===== ===== === =====
</TABLE>

See accompanying notes to financial statements.

46
<PAGE> 49

<TABLE>
<CAPTION>
SCUDDER VARIABLE LIFE
INVESTMENT FUNDS
---------------------------
GROWTH &
INTERNATIONAL INCOME
SUBACCOUNT SUBACCOUNT
------------- ----------
<S> <C> <C>
8 6
-- --
-- --
8 6
-- --
-- --
-- --
-- --
-- --
8 6
== ==
$8 6
-- --
-- --
-- --
-- --
8 6
== ==
</TABLE>

47
<PAGE> 50

KILICO VARIABLE SEPARATE ACCOUNT

STATEMENTS OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS)

<TABLE>
<CAPTION>
INVESTORS FUND SERIES
-------------------------------------------------------------------------------------------
MONEY TOTAL HIGH GOVERNMENT SMALL CAP
MARKET RETURN 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....................... $72 505 84 458 273 4 59
Mortality and expense risk
charges........................... 6 16 13 27 41 1 4
--- ---- --- ---- ---- -- ---
Net investment income............. 66 489 71 431 232 3 55
--- ---- --- ---- ---- -- ---
Net realized and unrealized gain
(loss) on investments:
Net realized gain (loss) on sales
of investments.................. -- (67) (42) (288) 284 -- 12
Change in unrealized appreciation
(depreciation) of investments... -- (1) (10) 234 (253) 4 75
--- ---- --- ---- ---- -- ---
Net realized and unrealized gain
(loss) on investments............. -- (68) (52) (54) 31 4 87
--- ---- --- ---- ---- -- ---
Net increase in policy owners'
equity resulting from
operations........................ $66 421 19 377 263 7 142
=== ==== === ==== ==== == ===
</TABLE>

(a) For the period June 15, 1998 (commencement of operations) to December 31,
1998.

See accompanying notes to financial statements.

48
<PAGE> 51

<TABLE>
<CAPTION>
SCUDDER VARIABLE LIFE
INVESTMENT FUNDS
------------------------------
GROWTH &
INTERNATIONAL INCOME
SUBACCOUNT(A) SUBACCOUNT(A)
------------- -------------
<S> <C> <C>
-- --
-- --
-- --
-- --
-- --
-- --
-- --
-- --
-- --
-- --
-- --
== ==
</TABLE>

49
<PAGE> 52

KILICO VARIABLE SEPARATE ACCOUNT

STATEMENTS OF CHANGES IN POLICY OWNERS' EQUITY

FOR THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS)

<TABLE>
<CAPTION>
INVESTORS FUND SERIES
-------------------------------------------------------------------------------------------
MONEY TOTAL HIGH GOVERNMENT SMALL CAP
MARKET RETURN YIELD GROWTH SECURITIES INTERNATIONAL GROWTH
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ---------- ---------- ---------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Operations:
Net investment income.............. $ 66 489 71 431 232 3 55
Net realized gain (loss) on sales
of investments................... -- (67) (42) (288) 284 -- 12
Change in unrealized appreciation
(depreciation) of investments.... -- (1) (10) 234 (253) 4 75
------ ------ ----- ----- ----- --- -----
Net increase in policy owners'
equity resulting from
operations..................... 66 421 19 377 263 7 142
------ ------ ----- ----- ----- --- -----
Account unit transactions:
Proceeds from units sold........... 5,791 63 86 393 32 110 590
Net transfers (to) from affiliate
and subaccounts.................. (2,163) 638 (502) 421 (399) 50 318
Payments for units redeemed........ (3,694) (479) (205) (461) (200) (39) (192)
------ ------ ----- ----- ----- --- -----
Net increase (decrease) in policy
owners' equity from account
unit transactions.............. (66) 222 (621) 353 (567) 121 716
------ ------ ----- ----- ----- --- -----
Total increase (decrease) in policy
owners' equity..................... -- 643 (602) 730 (304) 128 858
Policy owners' equity:
Beginning of period................ 966 3,036 1,934 2,741 4,697 48 224
------ ------ ----- ----- ----- --- -----
End of period...................... $ 966 3,679 1,332 3,471 4,393 176 1,082
====== ====== ===== ===== ===== === =====
</TABLE>

(a) For the period June 15, 1998 (commencement of operations) to December 31,
1998

See accompanying notes to financial statements.

50
<PAGE> 53

<TABLE>
<CAPTION>
SCUDDER VARIABLE LIFE
INVESTMENT FUNDS
------------------------------
GROWTH &
INTERNATIONAL INCOME
SUBACCOUNT(A) SUBACCOUNT(A)
------------- -------------
<S> <C>
-- --
-- --
-- --
--- --
-- --
--- --
2 4
7 4
(1) (2)
--- --
8 6
--- --
8 6
-- --
--- --
8 6
=== ==
</TABLE>

51
<PAGE> 54

KILICO VARIABLE SEPARATE ACCOUNT

STATEMENTS OF CHANGES IN POLICY OWNERS' EQUITY

FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)

<TABLE>
<CAPTION>
INVESTORS FUND SERIES
-------------------------------------------------------------------------------------------
MONEY TOTAL HIGH GOVERNMENT SMALL CAP
MARKET RETURN YIELD GROWTH SECURITIES INTERNATIONAL GROWTH
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ---------- ---------- ---------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Operations:
Net investment income.............. $ 34 390 87 496 283 -- 2
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 increase (decrease) in policy
owners' equity resulting from
operations..................... 34 535 156 465 319 (1) 20
------- ----- ----- ----- ----- -- ---
Account unit transactions:
Proceeds from units sold........... 2,965 27 22 92 32 35 137
Net transfers (to) from affiliate
and subaccounts.................. (1,059) (400) 298 (38) 492 19 93
Payments for units redeemed........ (2,011) (217) (50) (138) (131) (5) (28)
------- ----- ----- ----- ----- -- ---
Net increase (decrease) in policy
owners' equity from account
unit transactions.............. (105) (590) 270 (84) 393 49 202
------- ----- ----- ----- ----- -- ---
Total increase (decrease) in policy
owners' equity..................... (71) (55) 426 381 712 48 222
Policy owners' equity:
Beginning of period................ 1,037 3,091 1,508 2,360 3,985 -- 2
------- ----- ----- ----- ----- -- ---
End of period...................... $ 966 3,036 1,934 2,741 4,697 48 224
======= ===== ===== ===== ===== == ===
</TABLE>

See accompanying notes to financial statements.

52
<PAGE> 55

KILICO VARIABLE SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS

(1) GENERAL INFORMATION AND SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION

Kemper Investors Life Insurance Company 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 Zurich Financial
Services ("ZFS"). ZFS was formed with the September 7, 1998 merger of the Zurich
Group with the financial services business of B.A.T. Industries. ZFS is owned by
Zurich Allied AG and Allied Zurich p.l.c., fifty-seven percent and forty-three
percent, respectively. Zurich Allied AG, representing the financial interest of
the former Zurich Group, is listed on the Swiss Market Index (SMI) replacing
Zurich. Allied Zurich p.l.c., representing the financial interest of the
financial services business of B.A.T. Industries, is included in the FTSE-100
Share Index in London.

The Separate Account is used to fund policies ("Policy") for Select
variable universal life policies and Power V flexible premium variable universal
life policies. The Separate Account is divided into twenty-three 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, an open-end diversified management
investment company. The Power V policies have twenty-three 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 American Skandia
Trust, the Fidelity VIP Funds and the Scudder Variable Life Investment Funds,
all of which are open-end diversified management investment companies.

ESTIMATES

SECURITY VALUATION

The investments are stated at current value which is based on the closing
bid price, net asset value, at December 31, 1998.

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 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. (Central 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.

53
<PAGE> 56
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(1) GENERAL INFORMATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.

(2) SUMMARY OF INVESTMENTS

Investments as of December 31, 1998 do not include any amounts attributable
to Destinations Life policies because sales had not commenced prior to December
31, 1998.

Investments, at cost, at December 31, 1998, are as follows (in thousands):

<TABLE>
<CAPTION>
SHARES
OWNED COST
------ -------
<S> <C> <C>
INVESTORS FUND SERIES:
Money Market Subaccount................................... 981 $ 981
Total Return Subaccount................................... 1,347 3,464
High Yield Subaccount..................................... 1,088 1,288
Growth Subaccount......................................... 1,175 3,072
Government Securities Subaccount.......................... 3,639 4,326
International Subaccount.................................. 103 173
Small Cap Growth Subaccount............................... 549 989
SCUDDER VARIABLE LIFE INVESTMENT FUNDS:
International Subaccount.................................. 1 8
Growth & Income Subaccount................................ 1 6
-------
TOTAL INVESTMENTS AT COST............................ $14,307
=======
</TABLE>

A description of the underlying investments are summarized below.

INVESTORS FUND SERIES

MONEY MARKET SUBACCOUNT: This subaccount seeks maximum current income to
the extent consistent with stability of principal from a portfolio of high
quality money market instruments. The Portfolio seeks to maintain a net asset
value of $1.00 per share but there can be no assurance that the Portfolio will
be able to do so.

TOTAL RETURN SUBACCOUNT: This subaccount seeks a high total return, a
combination of income and capital appreciation, consistent with reasonable risk.

HIGH YIELD SUBACCOUNT: This subaccount seeks to provide a high level of
current income.

GROWTH SUBACCOUNT: This subaccount seeks maximum appreciation of capital
through diversification of investment securities having potential for capital
appreciation.

GOVERNMENT SECURITIES SUBACCOUNT: This subaccount seeks high current
return consistent with preservation of capital.

INTERNATIONAL SUBACCOUNT: This subaccount seeks a total return, a
combination of capital growth and income, principally through an internationally
diversified portfolio of equity securities.

SMALL CAP GROWTH SUBACCOUNT: This subaccount seeks maximum appreciation of
investors' capital.

SCUDDER VARIABLE LIFE INVESTMENT FUNDS

INTERNATIONAL SUBACCOUNT: This subaccount seeks long-term growth of
capital principally from a diversified portfolio of foreign equity securities.

GROWTH & INCOME SUBACCOUNT: This subaccount 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.

54
<PAGE> 57

(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 $111,539 and $1,454,886 for the Select and Power V variable
universal life products, respectively, for the year ended December 31, 1998.
Additionally, KILICO assesses a daily charge to the subaccounts for mortality
and expense risk assumed by KILICO at an annual rate of .90% of assets.

Proceeds payable on the surrender of a Policy are reduced by the amount of
any applicable contingent deferred sales charge.

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. Under Section
848 of the Internal Revenue Code (the "Code"), the receipt of premium income by
a life insurance company requires the deferral of a portion of the acquisition
cost over a maximum of a 120 month period. The effect of Section 848 for KILICO
is an acceleration of income recognition over a deferral of the associated
deductions for tax purposes; this is referred to as deferred acquisition cost
or, the "DAC tax". As compensation for this accelerated liability, a DAC tax
charge of 1.00% of each premium dollar is deducted from the premium by KILICO
before investment of a policy owner's funds into the Separate Account.

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 a policy loan under the terms of the Policy. Policy loans are carried in
KILICO's general account.

Scudder Kemper Investments, Inc., an affiliated company, is the investment
manager of the Investors Fund Series portfolios and the Scudder Variable Life
Investment Funds.

American Skandia Investment Services, Incorporated is the investment
manager for the American Skandia Trust and Fidelity Investments is the
investment manager for the Fidelity VIP Funds. Neither of these entities are
affiliated with KILICO.

Investors Brokerage Services, Inc., a wholly-owned subsidiary of KILICO, is
the principal underwriter for the Separate Account.

(4) NET TRANSFERS (TO) FROM AFFILIATE OR SUBACCOUNTS

Net transfers (to) from affiliate or subaccounts include transfers of all
or part of the Policy Owner's interest to or from another eligible subaccount or
to the general account of KILICO.

55
<PAGE> 58
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(5) POLICY OWNERS' EQUITY

Policy Owners' Equity as of December 31, 1998 does not include any amounts
attributable to Destinations Life policies because sales had not commenced prior
to December 31, 1998.

Policy Owners' equity at December 31, 1998, 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:
Money Market Subaccount..................................... 578 $ 1.098 $ 636
Total Return Subaccount..................................... 27 3.811 103
High Yield Subaccount....................................... 106 1.421 151
Growth Subaccount........................................... 121 4.614 557
Government Securities Subaccount............................ 15 1.380 21
International Subaccount.................................... 95 1.846 176
Small Cap Growth Subaccount................................. 414 2.610 1,082
SCUDDER VARIABLE LIFE INVESTMENT FUNDS:
International Subaccount.................................... 1 14.439 8
Growth & Income Subaccount.................................. 1 11.275 6
-------
TOTAL POWER V POLICY OWNERS' EQUITY.................... $ 2,740
=======

SELECT POLICIES
INVESTORS FUND SERIES:
Money Market Subaccount..................................... 193 $ 1.704 $ 330
Total Return Subaccount..................................... 1,260 2.839 3,576
High Yield Subaccount....................................... 481 2.459 1,181
Growth Subaccount........................................... 762 3.826 2,914
Government Securities Subaccount............................ 2,047 2.136 4,372
-------
TOTAL SELECT POLICY OWNERS' EQUITY..................... $12,373
=======
</TABLE>

56
<PAGE> 59

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)

<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
1999 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Investments:
Fixed maturities, available for sale, at fair value
(amortized cost: September 30, 1999, $3,341,115;
December 31, 1998, $3,421,535)......................... $ 3,260,445 $ 3,482,820
Trading account securities at fair value (amortized cost:
September 30, 1999, $143,953; December 31, 1998,
$99,095)............................................... 139,490 101,781
Short-term investments.................................... 32,902 58,334
Joint venture mortgage loans.............................. 67,338 65,806
Third-party mortgage loans................................ 63,979 76,520
Other real estate-related investments..................... 24,705 22,049
Policy loans.............................................. 263,903 271,540
Equity securities......................................... 62,032 66,854
Other invested assets..................................... 24,858 23,645
----------- -----------
Total investments................................. 3,939,652 4,169,349
Cash........................................................ 18,975 13,486
Accrued investment income................................... 126,053 124,213
Goodwill.................................................... 207,093 216,651
Value of business acquired.................................. 123,676 118,850
Deferred insurance acquisition costs........................ 144,495 91,543
Federal income tax recoverable.............................. 33,968 --
Deferred income taxes....................................... 64,824 35,059
Reinsurance recoverable..................................... 319,071 344,837
Receivable on sales of securities........................... -- 3,500
Other assets and receivables................................ 19,135 23,029
Assets held in separate accounts............................ 8,174,741 7,099,204
----------- -----------
Total assets...................................... $13,171,683 $12,239,721
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Future policy benefits...................................... $ 3,789,748 $ 3,906,391
Benefits and funds payable.................................. 413,947 318,369
Other accounts payable and liabilities...................... 61,139 61,898
Liabilities related to separate accounts.................... 8,174,741 7,099,204
----------- -----------
Total liabilities................................. 12,439,575 11,385,862
----------- -----------
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.................................. 804,347 804,347
Accumulated other comprehensive income (loss)............... (73,940) 32,975
Retained earnings (deficit)................................. (799) 14,037
----------- -----------
Total stockholder's equity........................ 732,108 853,859
----------- -----------
Total liabilities and stockholder's equity........ $13,171,683 $12,239,721
=========== ===========
</TABLE>

See accompanying notes to consolidated financial statements (unaudited).

57
<PAGE> 60

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
(unaudited)

<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
-------------------- --------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUE
Net investment income.................................... $196,943 $205,910 $ 65,742 $ 66,892
Realized investment gains (losses)....................... (10,787) 26,478 (7,843) 8,951
Premium income........................................... 15,896 16,422 4,990 5,278
Separate account fees and charges........................ 49,374 50,206 12,668 15,826
Other income............................................. 8,713 7,765 2,744 1,805
-------- -------- -------- --------
Total revenue.................................. 260,111 306,781 78,301 98,752
-------- -------- -------- --------
BENEFITS AND EXPENSES
Interest credited to policyholders....................... 122,047 134,147 40,763 43,978
Claims and other policyholder benefits................... 12,079 35,973 3,031 10,273
Taxes, licenses and fees................................. 16,018 10,956 2,185 1,198
Commissions.............................................. 47,511 29,131 18,090 11,082
Operating expenses....................................... 33,891 32,781 11,230 10,528
Deferral of insurance acquisition costs.................. (52,595) (34,760) (19,495) (13,160)
Amortization of insurance acquisition costs.............. 7,699 5,135 4,091 3,491
Amortization of value of business acquired............... 12,189 17,907 3,920 6,359
Amortization of goodwill................................. 9,558 9,558 3,186 3,188
-------- -------- -------- --------
Total benefits and expenses.................... 208,397 240,828 67,001 76,937
-------- -------- -------- --------
Income before income tax expense......................... 51,714 65,953 11,300 21,815
Income tax expense (benefit)
Current................................................ 38,613 40,942 (1,609) 8,263
Deferred............................................... (17,063) (13,093) 6,439 565
-------- -------- -------- --------
Total income tax expense....................... 21,550 27,849 4,830 8,828
-------- -------- -------- --------
Net income..................................... $ 30,164 $ 38,104 $ 6,470 $ 12,987
======== ======== ======== ========
</TABLE>

See accompanying notes to consolidated financial statements (unaudited).

58
<PAGE> 61

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(unaudited)

<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
-------------------- ------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET INCOME........................................... $ 30,164 $ 38,104 $ 6,470 $12,987
OTHER COMPREHENSIVE INCOME (LOSS), BEFORE TAX:
Unrealized holding gains (losses) on investments
arising during period:
Unrealized holding gains (losses) on
investments................................... (140,670) 64,374 (26,576) 53,852
Adjustment to value of business acquired........ 16,683 (14,165) 3,730 (8,678)
Adjustment to deferred insurance acquisition
costs......................................... 8,915 (4,656) 2,207 (2,801)
--------- -------- -------- -------
Total unrealized holding gains (losses) on
investments arising during period........ (115,072) 45,553 (20,639) 42,373
--------- -------- -------- -------
Less reclassification adjustments for items
included in net income:
Adjustment for (gains) losses included in
realized investment gains (losses)............ 13,039 1,800 5,072 (621)
Adjustment for amortization of premium on fixed
maturities included in net investment
income........................................ (9,022) (12,882) (2,197) (4,031)
Adjustment for (gains) losses included in
amortization of value of business acquired.... (331) (4,379) 267 (1,046)
Adjustment for (gains) losses included in
amortization of insurance acquisition costs... 859 (900) 567 (40)
--------- -------- -------- -------
Total reclassification adjustments for
items included in net income............. 4,545 (16,361) 3,709 (5,738)
--------- -------- -------- -------
Other comprehensive income (loss), before related
income tax expense (benefit)....................... (119,617) 61,914 (24,348) 48,111
Related income tax expense (benefit)................. (12,702) 21,670 1,786 16,839
--------- -------- -------- -------
Other comprehensive income (loss), net of tax........ (106,915) 40,244 (26,134) 31,272
--------- -------- -------- -------
Comprehensive income (loss)................ $ (76,751) $ 78,348 $(19,664) $44,259
========= ======== ======== =======
</TABLE>

See accompanying notes to consolidated financial statements (unaudited).

59
<PAGE> 62

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
--------------------------
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................ $ 30,164 $ 38,104
Reconcilement of net income to net cash provided (used):
Realized investment (gains) losses..................... 10,787 (26,478)
Net change in trading account securities............... (44,739) --
Interest credited and other charges.................... 119,646 131,438
Deferred insurance acquisition costs................... (44,896) (29,625)
Amortization of value of business acquired............. 12,189 17,907
Amortization of goodwill............................... 9,558 9,558
Amortization of discount and premium on investments.... 9,510 12,883
Deferred income taxes.................................. (17,064) (13,094)
Net change in current Federal income taxes............. (54,254) (89,674)
Benefits and premium taxes due related to separate
account bank-owned life insurance..................... 96,355 59,207
Other, net............................................. 9,078 (9,054)
----------- ---------
Net cash flow provided by operating activities......... 136,334 101,172
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash from investments sold or matured:
Fixed maturities held to maturity...................... 281,197 373,576
Fixed maturities sold prior to maturity................ 1,014,262 688,702
Equity securities...................................... 11,377 571
Mortgage loans, policy loans and other invested
assets................................................ 59,554 106,515
Cost of investments purchased or loans originated:
Fixed maturities....................................... (1,233,431) (998,849)
Equity securities...................................... (8,703) (74,171)
Mortgage loans, policy loans and other invested
assets................................................ (37,154) (39,987)
Short-term investments, net............................... 25,432 210,600
Net change in receivable and payable for securities
transactions........................................... 9,718 6,790
----------- ---------
Net cash provided by investing activities.............. 122,252 273,747
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Policyholder account balances:
Deposits............................................... 270,261 123,413
Withdrawals............................................ (480,783) (507,283)
Dividends to parent....................................... (45,000) --
Other..................................................... 2,425 15,846
----------- ---------
Net cash used in financing activities.................. (253,097) (368,024)
----------- ---------
Net increase in cash........................................ 5,489 6,895
Cash at the beginning of period............................. 13,486 23,868
----------- ---------
Cash at the end of the period............................... $ 18,975 $ 30,763
=========== =========
</TABLE>

See accompanying notes to consolidated financial statements (unaudited).

60
<PAGE> 63

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. Kemper Investors Life Insurance Company ("KILICO") is incorporated under the
insurance laws of the State of Illinois. KILICO is licensed in the District
of Columbia and all states, except New York. KILICO is a wholly-owned
subsidiary of Kemper Corporation ("Kemper"), a nonoperating holding company.

The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles.

2. In the opinion of management, all necessary adjustments consisting of normal
recurring accruals have been made for a fair presentation of the results of
KILICO for the periods included in these financial statements. These
financial statements should be read in conjunction with the financial
statements and related notes in the 1998 Annual Report on Form 10-K.

3. KILICO, along with its affiliates Federal Kemper Life Assurance Company,
Zurich Life Insurance Company of America, Fidelity Life Association (a Mutual
Legal Reserve Company) and Zurich Direct, Inc. operate under the trade name
Zurich Kemper Life ("ZKL"). ZKL is segregated by Strategic Business Unit
("SBU"). The SBU concept has each SBU concentrate on a specific customer
market. The SBU is the focal point of ZKL because it is at the SBU level that
ZKL can clearly identify customer segments and then work to understand and
satisfy the needs of each customer. The contributions of ZKL's SBUs to
consolidated revenues, operating results and certain balance sheet data
pertaining thereto, are shown in the following tables on the basis of
generally accepted accounting principles.

ZKL is segregated into the Agency, Financial Institutions, Retirement
Solutions and Direct SBUs. The SBUs are not managed at the legal entity
level, but rather at the ZKL level. ZKL's SBUs cross legal entity lines, as
certain similar products are sold by more than one legal entity.

61
<PAGE> 64

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)

Summarized financial information for ZKL's SBUs are as follows:

As of and for the period ending September 30, 1999:
(in thousands)

<TABLE>
<CAPTION>
FINANCIAL RETIREMENT
AGENCY INSTITUTIONS SOLUTIONS DIRECT TOTAL
------ ------------ ---------- ------ -----
<S> <C> <C> <C> <C> <C>
Total revenues......................... $ 264,940 $ 153,319 $ 100,180 $34,566 $ 553,005
========== ========== ========== ======= ===========
Net income (loss)...................... $ 26,751 $ 20,161 $ 7,743 $ (644) $ 54,011
========== ========== ========== ======= ===========
Total assets................. $3,099,557 $9,376,982 $4,282,726 $85,176 $16,844,441
========== ========== ========== ======= ===========
</TABLE>

<TABLE>
<CAPTION>
NET
REVENUE INCOME (LOSS) ASSETS
------- ------------- ------
<S> <C> <C> <C>
Total revenue, net income (loss) and assets, respectively,
from above:................................................. $553,005 $54,011 $16,844,441
Less:
Revenue, net income & assets of FKLA...................... 227,015 22,258 3,222,738
Revenue, net income & assets of ZLICA..................... 37,545 7,951 445,891
Revenue, net (loss) & assets of Zurich Direct............. 28,334 (6,362) 4,129
-------- ------- -----------
Totals per KILICO's consolidated financial
statements...................................... $260,111 $30,164 $13,171,683
======== ======= ===========
</TABLE>

As of and for the period ending September 30, 1998:
(in thousands)

<TABLE>
<CAPTION>
FINANCIAL RETIREMENT
AGENCY INSTITUTIONS SOLUTIONS DIRECT TOTAL
------ ------------ ---------- ------ -----
<S> <C> <C> <C> <C> <C>
Total revenues......................... $ 298,801 $ 185,177 $ 108,628 $21,733 $ 614,339
========== ========== ========== ======= ===========
Net income............................. $ 20,837 $ 23,000 $ 15,760 $ 1,387 $ 60,984
========== ========== ========== ======= ===========
Total assets................. $3,303,280 $7,099,900 $3,938,266 $23,816 $14,365,262
========== ========== ========== ======= ===========
</TABLE>

<TABLE>
<CAPTION>
NET
REVENUE INCOME (LOSS) ASSETS
------- ------------- ------
<S> <C> <C> <C>
Total revenue, net income (loss) and assets, respectively,
from above:................................................. $614,339 $60,984 $14,365,262
Less:
Revenue, net income & assets of FKLA...................... 247,935 21,780 3,031,760
Revenue, net (loss) & assets of ZLICA..................... 41,863 (194) 400,492
Revenue, net income & assets of Zurich Direct............. 17,760 1,294 4,095
-------- ------- -----------
Totals per KILICO's consolidated financial
statements...................................... $306,781 $38,104 $10,928,915
======== ======= ===========
</TABLE>

62
<PAGE> 65

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

The Board of Directors and Stockholder of
Kemper Investors Life Insurance Company:

In our opinion, the accompanying consolidated balance sheets as of December
31, 1998 and 1997 and the related consolidated statements of operations,
comprehensive income, stockholder's equity and cash flows present fairly, in all
material respects, the financial position of Kemper Investors Life Insurance
Company and subsidiaries (the "Company") at December 31, 1998 and 1997, and the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles. In addition, in our
opinion, the financial statement schedules listed in the accompanying index
present fairly, in all material respects, the information set forth therein when
read in conjunction with the related consolidated financial statements. These
financial statements and financial statement schedules are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedules based on our audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above. The financial
statements of the Company for the period from January 4, 1996 to December 31,
1996 were audited by other independent accountants whose report, dated March 21,
1997, expressed an unqualified opinion on those statements.

PricewaterhouseCoopers LLP

Chicago, Illinois
March 12, 1999

63
<PAGE> 66

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

The Board of Directors and Stockholder
Kemper Investors Life Insurance Company:

We have audited the accompanying consolidated statements of operations,
comprehensive income, stockholder's equity, and cash flows of Kemper Investors
Life Insurance Company and subsidiaries for the period from January 4, 1996 to
December 31, 1996. 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.

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 aforementioned consolidated financial statements
present fairly, in all material respects, the results of operations and the cash
flows of Kemper Investors Life Insurance Company and subsidiaries for the period
from January 4, 1996 to December 31, 1996, in conformity with generally accepted
accounting principles.

KPMG LLP

Chicago, Illinois
March 21, 1997

64
<PAGE> 67

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)

<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Fixed maturities, available for sale, at fair value
(amortized cost: December 31, 1998, $3,421,535; December
31, 1997, $3,644,075)..................................... $ 3,482,820 $ 3,668,643
Trading account securities at fair value (amortized cost:
December 31, 1998, $99,095)............................... 101,781 --
Short-term investments...................................... 58,334 236,057
Joint venture mortgage loans................................ 65,806 72,663
Third-party mortgage loans.................................. 76,520 102,974
Other real estate-related investments....................... 22,049 44,409
Policy loans................................................ 271,540 282,439
Equity securities........................................... 66,854 24,839
Other invested assets....................................... 23,645 20,820
----------- -----------
Total investments................................. 4,169,349 4,452,844
Cash........................................................ 13,486 23,868
Accrued investment income................................... 124,213 117,789
Goodwill.................................................... 216,651 229,393
Value of business acquired.................................. 118,850 138,482
Deferred insurance acquisition costs........................ 91,543 59,459
Deferred income taxes....................................... 35,059 39,993
Reinsurance recoverable..................................... 344,837 382,609
Receivable on sales of securities........................... 3,500 20,076
Other assets and receivables................................ 23,029 3,187
Assets held in separate accounts............................ 7,099,204 5,121,950
----------- -----------
Total assets...................................... $12,239,721 $10,589,650
=========== ===========
LIABILITIES
Future policy benefits...................................... $ 3,906,391 $ 4,239,480
Benefits and funds payable.................................. 318,369 150,524
Other accounts payable and liabilities...................... 61,898 212,133
Liabilities related to separate accounts.................... 7,099,204 5,121,950
----------- -----------
Total liabilities................................. 11,385,862 9,724,087
----------- -----------
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.................................. 804,347 806,538
Accumulated other comprehensive income...................... 32,975 12,637
Retained earnings........................................... 14,037 43,888
----------- -----------
Total stockholder's equity........................ 853,859 865,563
----------- -----------
Total liabilities and stockholder's equity........ $12,239,721 $10,589,650
=========== ===========
</TABLE>

See accompanying notes to consolidated financial statements.

65
<PAGE> 68

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
REVENUE
Net investment income....................................... $273,512 $296,195 $299,688
Realized investment gains................................... 51,868 10,546 13,602
Premium income.............................................. 22,346 22,239 7,822
Separate account fees and charges........................... 61,982 85,413 25,309
Other income................................................ 10,031 11,087 9,786
-------- -------- --------
Total revenue..................................... 419,739 425,480 356,207
-------- -------- --------
BENEFITS AND EXPENSES
Interest credited to policyholders.......................... 176,906 199,782 223,094
Claims incurred and other policyholder benefits............. 28,029 28,372 14,255
Taxes, licenses and fees.................................... 30,292 52,608 2,173
Commissions................................................. 39,046 32,602 25,962
Operating expenses.......................................... 44,575 36,837 24,678
Deferral of insurance acquisition costs..................... (46,565) (38,177) (27,820)
Amortization of insurance acquisition costs................. 12,082 3,204 2,316
Amortization of value of business acquired.................. 17,677 24,948 21,530
Amortization of goodwill.................................... 12,744 15,295 10,195
-------- -------- --------
Total benefits and expenses....................... 314,786 355,471 296,383
-------- -------- --------
Income before income tax expense............................ 104,953 70,009 59,824
Income tax expense.......................................... 39,804 31,292 25,403
-------- -------- --------
Net income........................................ $ 65,149 $ 38,717 $ 34,421
======== ======== ========
</TABLE>

See accompanying notes to consolidated financial statements.

66
<PAGE> 69

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
NET INCOME.................................................. $ 65,149 $ 38,717 $ 34,421
-------- -------- --------
OTHER COMPREHENSIVE INCOME (LOSS), BEFORE TAX:
Unrealized holding gains (losses) on investments arising
during period:
Unrealized holdings gains (losses) on investments...... 25,372 60,802 (84,036)
Adjustment to value of business acquired............... (9,332) (28,562) 16,735
Adjustment to deferred insurance acquisition costs..... (2,862) (2,680) 1,307
-------- -------- --------
Total unrealized holding gains (losses) on
investments arising during period............... 13,178 29,560 (65,994)
-------- -------- --------
Less reclassification adjustments for items included in
net income:
Adjustment for (gains) losses included in realized
investment gains..................................... 6,794 (9,016) 3,963
Adjustment for amortization of premium on fixed
maturities included in net investment income......... (17,064) (17,866) (26,036)
Adjustment for (gains) losses included in amortization
of value of business acquired........................ (7,378) (2,353) (4,212)
Adjustment for (gains) losses included in amortization
of insurance acquisition costs....................... (463) (355) --
-------- -------- --------
Total reclassification adjustments for items
included in net income.......................... (18,111) (29,590) (26,285)
-------- -------- --------
Other comprehensive income (loss), before related income tax
expense (benefit)......................................... 31,289 59,150 (39,709)
Related income tax expense (benefit)........................ 10,952 (985) 7,789
-------- -------- --------
Other comprehensive income (loss), net of tax..... 20,337 60,135 (47,498)
-------- -------- --------
Comprehensive income (loss)....................... $ 85,486 $ 98,852 $(13,077)
======== ======== ========
</TABLE>

See accompanying notes to consolidated financial statements.

67
<PAGE> 70

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(in thousands)

<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CAPITAL STOCK, beginning and end of period.................. $ 2,500 $ 2,500 $ 2,500
-------- -------- --------

ADDITIONAL PAID-IN CAPITAL, beginning of period............. 806,538 761,538 743,104
Capital contributions from parent........................... 4,261 45,000 18,434
Adjustment to prior period capital contribution from
parent.................................................... (6,452) -- --
-------- -------- --------
End of period..................................... 804,347 806,538 761,538
-------- -------- --------

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS), beginning of
period.................................................... 12,637 (47,498) --
Other comprehensive income (loss), net of tax............... 20,338 60,135 (47,498)
-------- -------- --------
End of period..................................... 32,975 12,637 (47,498)
-------- -------- --------

RETAINED EARNINGS, beginning of period...................... 43,888 34,421 --
Net income.................................................. 65,149 38,717 34,421
Dividends to parent......................................... (95,000) (29,250) --
-------- -------- --------
End of period..................................... 14,037 43,888 34,421
-------- -------- --------

Total stockholder's equity........................ $853,859 $865,563 $750,961
======== ======== ========
</TABLE>

See accompanying notes to consolidated financial statements.

68
<PAGE> 71

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.......................................... $ 65,149 $ 38,717 $ 34,421
Reconcilement of net income to net cash provided:
Realized investment gains........................ (51,868) (10,546) (13,602)
Net change in trading account securities......... (6,727) -- --
Interest credited and other charges.............. 173,958 198,206 230,298
Deferred insurance acquisition costs............. (34,483) (34,973) (25,504)
Amortization of value of business acquired....... 17,677 24,948 21,530
Amortization of goodwill......................... 12,744 15,295 10,195
Amortization of discount and premium on
investments.................................... 17,353 17,866 25,743
Deferred income taxes............................ (12,469) (99,370) (897)
Net change in current federal income taxes....... (73,162) 97,386 108,806
Benefits and premium taxes due related to
separate account bank-owned life insurance..... 123,884 180,546 --
Other, net....................................... (41,477) 17,168 (22,283)
----------- --------- -----------
Net cash provided from operating
activities................................ 190,579 445,243 368,707
----------- --------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash from investments sold or matured:
Fixed maturities held to maturity................ 491,699 229,208 264,383
Fixed maturities sold prior to maturity.......... 882,596 633,872 891,995
Equity securities................................ 107,598 -- --
Mortgage loans, policy loans and other invested
assets......................................... 180,316 131,866 168,727
Cost of investments purchased or loans originated:
Fixed maturities................................. (1,319,119) (606,028) (1,369,091)
Equity securities................................ (83,303) -- --
Mortgage loans, policy loans and other invested
assets......................................... (66,331) (76,350) (119,044)
Short-term investments, net......................... 177,723 (164,361) 300,819
Net change in receivable and payable for securities
transactions..................................... (677) 29,746 (31,667)
Net change in other assets.......................... -- 244 115
----------- --------- -----------
Net cash provided by investing activities... 370,502 178,197 106,237
----------- --------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Policyholder account balances:
Deposits......................................... 180,124 145,687 141,159
Withdrawals...................................... (649,400) (745,510) (700,084)
Capital contributions from parent................... 4,261 45,000 18,434
Dividends to parent................................. (95,000) (29,250) --
Other............................................... (11,448) (18,275) 42,512
----------- --------- -----------
Net cash used in financing activities....... (571,463) (602,348) (497,979)
----------- --------- -----------
Net increase (decrease) in cash........ (10,382) 21,092 (23,035)
CASH, beginning of period............................. 23,868 2,776 25,811
----------- --------- -----------
CASH, end of period................................... $ 13,486 $ 23,868 $ 2,776
=========== ========= ===========
</TABLE>

See accompanying notes to consolidated financial statements.

69
<PAGE> 72

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"). Effective January 4, 1996, Zurich Insurance Company
("Zurich"), Insurance Partners, L.P. ("IP") and Insurance Partners Offshore
(Bermuda), L.P. (together with IP, "Insurance Partners") owned 80 percent and 20
percent, respectively, of Kemper and therefore 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.

Effective September 7, 1998, the businesses of Zurich merged with the
financial services business of B.A.T. Industries forming Zurich Financial
Services ("ZFS"). ZFS is owned by Zurich Allied AG and Allied Zurich p.l.c.,
fifty-seven percent and forty-three percent, respectively. Zurich Allied AG,
representing the financial interest of the former Zurich Group, is listed on the
Swiss Market Index, replacing Zurich. Allied Zurich p.l.c., representing the
financial interest of B.A.T. Industries, is included in the FTSE-100 Share Index
in London.

The 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 1997 and 1996
consolidated financial statements in order for them to conform to the 1998
presentation.

BASIS OF ACCOUNTING

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
consolidated financial statements of the Company as of and for the years ended
December 31, 1996, 1997 and 1998, have been prepared in conformity with
generally accepted accounting principles.

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.

GOODWILL

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,
1998, the Company believes that no such adjustment is necessary.

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.

70
<PAGE> 73
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.

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, 2003 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 (actual)....................................... 143,744 (26,807) 9,129 126,066
1999................................................ 126,066 (24,926) 7,741 108,881
2000................................................ 108,881 (22,649) 6,619 92,851
2001................................................ 92,851 (20,736) 5,577 77,692
2002................................................ 77,692 (17,096) 4,695 65,291
2003................................................ 65,291 (15,504) 3,948 53,735
</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 accumulated other comprehensive income, net of income
tax. As of December 31, 1998 and 1997, this adjustment decreased the value of
business acquired by $7.2 million and $5.3 million, respectively, and
accumulated other comprehensive income by approximately $4.7 million and $3.4
million, respectively.

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.

Premiums for term life policies are reported as earned when due. Profits
for such policies are recognized over the duration of the insurance policies by
matching benefits and expenses to premium income.

DEFERRED INSURANCE ACQUISITION COSTS

The costs of acquiring new business, principally commission expense and
certain policy issuance and underwriting expenses, have been deferred to the
extent they are recoverable from estimated future gross profits on the related
contracts and policies. The deferred insurance acquisition costs for annuities,
separate account business and interest-sensitive life insurance products are
being amortized over the estimated contract life in relation to the present
value of estimated gross profits. Deferred insurance acquisition costs related
to such interest-sensitive products also reflect the estimated impact of
unrealized gains or losses on fixed maturities held as available for sale in the
investment portfolio, through a credit or charge to accumulated other
comprehensive income, 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.

71
<PAGE> 74
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 7.5 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 2.5 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 6.8
percent.

GUARANTY FUND ASSESSMENTS

The Company is liable for guaranty fund assessments related to certain
unaffiliated insurance companies that have become insolvent during the years
1998 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.

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.

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 reserves and write-downs, include: (1) notes
receivable from real estate ventures; (2) investments in real estate ventures,
adjusted for the equity in the operating income or loss of such ventures, and
(3) real estate owned at December 31, 1997, carried at fair value. Real estate
reserves are established when declines in collateral values, estimated in light
of current economic conditions, indicate a likelihood of loss.

Investments in policy loans and other invested assets, consisting primarily
of venture capital investments and a leveraged lease, are carried primarily at
cost.

Realized gains or losses on sales of investments, determined on the basis
of identifiable cost on the disposition of the respective investment,
recognition of other-than-temporary declines in value and changes in real
estate-related reserves and write-downs are included in revenue. Net unrealized
gains or losses on revaluation of investments are credited or charged to
accumulated other comprehensive income. 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

72
<PAGE> 75
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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

For the period January 1 through January 4, 1996, the Company's federal
income tax return was consolidated with Kemper and Kemper's other wholly-owned
life insurance subsidiary, Federal Kemper Life Assurance Company ("FKLA"). The
Boards of Directors of Kemper, KILICO and FKLA, adopted a written plan that
provided that federal income taxes would be paid to or recovered from Kemper on
the basis of each company's taxable income or loss as shown on its respective
federal income tax return. In the event of a federal income tax credit which is
greater than the amount recoverable from the other life insurance company or
from the Internal Revenue Service, the funds available would be apportioned
among the life companies entitled to a recovery on the basis of the relationship
of each company's tax credit to the total of all of the life insurance companies
in a deficit position. For the period January 5 through December 31, 1996, and
subsequent years, the Company has filed a separate federal income tax return.

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. The
Company paid federal income taxes of $126.0 million, $29.0 million and $28.1
million directly to the United States Treasury Department during 1998, 1997 and
1996 respectively.

(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 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, 1998
U.S. treasury securities and obligations of U.S.
government agencies and authorities................. $ 7,951 $ 7,879 $ 81 $ (9)
Obligations of states and political subdivisions,
special revenue and nonguaranteed................... 27,039 26,768 362 (91)
Debt securities issued by foreign governments......... 69,357 67,239 2,266 (148)
Corporate securities.................................. 1,908,850 1,866,372 46,664 (4,186)
Mortgage and asset-backed securities.................. 1,469,623 1,453,277 19,063 (2,717)
---------- ---------- ------- --------
Total fixed maturities......................... $3,482,820 $3,421,535 $68,436 $ (7,151)
========== ========== ======= ========
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)
========== ========== ======= ========
</TABLE>

73
<PAGE> 76
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(3) INVESTED ASSETS AND RELATED INCOME (CONTINUED)
The carrying value and amortized cost of fixed maturity investments, by
contractual maturity at December 31, 1998, 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
(in thousands) -------- ---------
<S> <C> <C>
One year or less............................................ $ 44,816 $ 44,745
Over one year through five years............................ 814,646 802,147
Over five years through ten years........................... 891,767 866,613
Over ten years.............................................. 261,968 254,753
Securities not due at a single maturity date, primarily
mortgage and asset-backed securities(1)................... 1,469,623 1,453,277
---------- ----------
Total fixed maturities............................... $3,482,820 $3,421,535
========== ==========
</TABLE>

- ---------------
(1) Weighted average maturity of 4.0 years.

Proceeds from sales of investments in fixed maturities prior to maturity
were $882.6 million, $633.9 million and $892.0 million during 1998, 1997 and
1996, respectively. Gross gains of $10.1 million, $3.1 million and $9.9 million
and gross losses of $8.0 million, $13.7 million and $16.2 million were realized
on sales and write-downs of fixed maturities in 1998, 1997 and 1996,
respectively.

At December 31, 1998, the Company had 12 separate asset-backed securities
included in fixed maturity investments from trusts formed to collateralize
assets underwritten by Green Tree Financial Corporation, which in aggregate
amounted to $97.7 million. No other individual investments exceeded ten percent
of stockholder's equity at December 31, 1998.

At December 31, 1998, securities carried at approximately $6.4 million were
on deposit with governmental agencies as required by law.

Upon default or indication of potential default by an issuer of fixed
maturity securities, the 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 $164.4 million real estate portfolio at December 31, 1998
consists of joint venture and third-party mortgage loans and other real
estate-related investments. At December 31, 1998 and 1997, total impaired real
estate-related loans were as follows:

<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31
1998 1997
(in millions) ----------- -----------
<S> <C> <C>
Impaired loans without reserves--gross...................... $83.9 $39.3
Impaired loans with reserves--gross......................... 21.5 2.2
----- -----
Total gross impaired loans........................... 105.4 41.5
Reserves related to impaired loans.......................... (18.5) (2.1)
----- -----
Net impaired loans................................... $86.9 $39.4
===== =====
</TABLE>

74
<PAGE> 77
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(3) INVESTED ASSETS AND RELATED INCOME (CONTINUED)
Impaired loans without reserves include loans in which the deficit in
equity investments in real estate-related investments is considered in
determining reserves and write-downs. The Company had an average balance of
$54.6 million and $45.2 million in impaired loans for 1998 and 1997,
respectively. Cash payments received on impaired loans are generally applied to
reduce the outstanding loan balance.

At December 31, 1998 and 1997, loans on nonaccrual status, before reserves
and write-downs, amounted to $37.4 million and $47.4 million, respectively. The
Company's nonaccrual loans are generally included in impaired loans.

The sources of net investment income were as follows:

<TABLE>
<CAPTION>
1998 1997 1996
(in thousands) -------- -------- --------
<S> <C> <C> <C>
Interest and dividends on fixed maturities.................. $232,707 $250,170 $250,683
Dividends on equity securities.............................. 2,143 2,123 646
Income from short-term investments.......................... 5,391 4,128 9,130
Income from mortgage loans.................................. 14,964 16,283 20,257
Income from policy loans.................................... 21,096 20,549 20,700
Income from other real estate-related investments........... 352 6,631 4,917
Income from other loans and investments..................... 2,223 2,045 2,480
-------- -------- --------
Total investment income.............................. 278,876 301,929 308,813
Investment expense.......................................... (5,364) (5,734) (9,125)
-------- -------- --------
Net investment income................................ $273,512 $296,195 $299,688
======== ======== ========
</TABLE>

Net realized investment gains (losses) for the years ended December 31,
1998, 1997 and 1996, were as follows:

<TABLE>
<CAPTION>
REALIZED GAINS (LOSSES)
-------------------------------------
1998 1997 1996
(in thousands) -------- -------- -------
<S> <C> <C> <C>
Real estate-related......................................... $ 41,362 $ 19,758 $17,462
Fixed maturities............................................ 2,158 (10,656) (6,344)
Trading account securities--gross gains on transfer......... 3,254 -- --
Trading account securities--gross losses on transfer........ (417) -- --
Trading account securities--holding losses.................. (151) -- --
Equity securities........................................... 5,496 914 --
Other....................................................... 166 530 2,484
-------- -------- -------
Realized investment gains before income tax expense....... 51,868 10,546 13,602
Income tax expense.......................................... (18,154) (3,691) (4,761)
-------- -------- -------
Net realized investment gains............................. $ 33,714 $ 6,855 $ 8,841
======== ======== =======
</TABLE>

75
<PAGE> 78
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(3) INVESTED ASSETS AND RELATED INCOME (CONTINUED)
Unrealized gains (losses) are computed below as follows: fixed
maturities--the difference between fair value and amortized cost, adjusted for
other-than-temporary declines in value; equity and other securities--the
difference between fair value and cost. The change in net unrealized investment
gains (losses) by class of investment for the years ended December 31, 1998,
1997 and 1996 were as follows:

<TABLE>
<CAPTION>
CHANGE IN UNREALIZED GAINS (LOSSES)
-----------------------------------------
DECEMBER 31 DECEMBER 31 DECEMBER 31
1998 1997 1996
(in thousands) ------------ ------------ -----------
<S> <C> <C> <C>
Fixed maturities............................................ $ 36,717 $ 87,787 $(63,219)
Equity and other securities................................. (1,074) (103) 1,256
Adjustment to deferred insurance acquisition costs.......... (2,399) (2,325) 1,307
Adjustment to value of business acquired.................... (1,954) (26,209) 20,947
-------- -------- --------
Unrealized gain (loss) before income tax expense
(benefit).............................................. 31,290 59,150 (39,709)
Income tax expense (benefit)................................ 10,952 (985) 7,789
-------- -------- --------
Net unrealized gain (loss) on investments............ $ 20,338 $ 60,135 $(47,498)
======== ======== ========
</TABLE>

(4) UNCONSOLIDATED INVESTEES

At December 31, 1998 and 1997 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, 1998 and 1997, the Company's net equity investment in
unconsolidated investees amounted to $1.2 million and $19.3 million,
respectively. The Company's share of net income related to such unconsolidated
investees amounted to $241 thousand, $835 thousand and $223 thousand in 1998,
1997 and 1996, respectively.

(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 28.0 percent of the Company's investment-grade fixed
maturities at December 31, 1998 were mortgage-backed securities, down from 35.1
percent at December 31, 1997, due to sales and paydowns during 1998. These
investments consist primarily of marketable mortgage pass-through securities
issued by the Government National Mortgage Association, the Federal National
Mortgage Association or the Federal Home Loan Mortgage Corporation and other
investment-grade securities collateralized by mortgage pass-through securities
issued by these entities. 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 15.4 percent and 10.8 percent of the Company's
investment-grade fixed maturities at December 31, 1998 and 1997, respectively,
consisted of corporate asset-backed securities. The majority of the Company's
investments in asset-backed securities were backed by home equity loans (21.9%),
auto loans (8.2%), manufactured housing loans (14.8%), equipment loans (5.2%),
and commercial mortgage backed securities (22.1%).

The Company's real estate portfolio is distributed by geographic location
and property type. The geographic distribution of a majority of the real estate
portfolio as of December 31, 1998 was as follows: California (31.5%), Hawaii
(16.2%), Washington (9.9%) and Colorado (9.4%). The property type distribution
of a majority of the real estate portfolio as of December 31, 1998 was as
follows: hotels (39.9%), land (30.9%) and residential (15.5%).

76
<PAGE> 79
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(5) CONCENTRATION OF CREDIT RISK (CONTINUED)
Undeveloped land represented approximately 30.9 percent of the Company's
real estate portfolio at December 31, 1998. 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. 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.

At December 31, 1998, 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 $64.5 million, or
39.3 percent, of the Company's real estate portfolio. The Nesbitt ventures
consist of nine hotel properties and two office buildings. At December 31, 1998,
the Company did not have any Nesbitt-related off-balance-sheet legal funding
commitments outstanding.

At December 31, 1998, 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 $51.6
million, or 31.4 percent, of the Company's real estate portfolio. Kemper's
interest is 75 percent at December 31, 1998. At December 31, 1998, MLP-related
commitments accounted for approximately $6.1 million of the Company's
off-balance-sheet legal commitments.

The remaining significant real estate-related investments amounted to $27.3
million at December 31, 1998 and consisted of various zoned and unzoned
residential and commercial lots located in Hawaii. Due to certain negative
zoning restriction developments in January 1997 and a continuing economic slump
in Hawaii, the Company has placed these real estate-related investments on
nonaccrual status as of December 31, 1996. The Company is currently pursuing the
zoning of all remaining unzoned properties, as well as pursuing steps to sell
all remaining zoned properties. However, due to the state of Hawaii's economy,
which has lagged behind the economic expansion of most of the rest of the United
States, the Company anticipates that it could be several additional years until
the Company completely disposes of all of its investments in Hawaii.

At December 31, 1998, 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. 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, 1998.

(6) INCOME TAXES

Income tax expense (benefit) was as follows for the years ended December
31, 1998, 1997 and 1996:

<TABLE>
<CAPTION>
1998 1997 1996
(in thousands) -------- -------- --------
<S> <C> <C> <C>
Current................................................... $ 52,274 $130,662 $ 26,300
Deferred.................................................. (12,470) (99,370) (897)
-------- -------- --------
Total........................................... $ 39,804 $ 31,292 $ 25,403
======== ======== ========
</TABLE>

77
<PAGE> 80
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(6) INCOME TAXES (CONTINUED)
Additionally, the deferred income tax expense (benefit) related to items
included in other comprehensive income was as follows for the years ended
December 31, 1998, 1997 and 1996:

<TABLE>
<CAPTION>
1998 1997 1996
(in thousands) ------- ------- ------
<S> <C> <C> <C>
Unrealized gains and losses on investments.................. $12,475 $ 9,002 $ --
Value of business acquired.................................. (684) (9,173) 7,331
Deferred insurance acquisition costs........................ (840) (814) 457
------- ------- ------
Total............................................. $10,952 $ (985) $7,789
======= ======= ======
</TABLE>

The actual income tax expense for 1998, 1997 and 1996 differed from the
"expected" tax expense for those years as displayed below. "Expected" tax
expense was computed by applying the U.S. federal corporate tax rate of 35
percent in 1998, 1997, and 1996 to income before income tax expense.

<TABLE>
<CAPTION>
1998 1997 1996
(in thousands) ------- ------- -------
<S> <C> <C> <C>
Computed expected tax expense............................... $36,734 $24,503 $20,938
Difference between "expected" and actual tax expense:
State taxes............................................... (434) 1,801 913
Amortization of goodwill.................................. 4,460 5,353 3,568
Dividend received deduction............................... (540) -- --
Foreign tax credit........................................ (250) (278) --
Other, net................................................ (166) (87) (16)
------- ------- -------
Total actual tax expense.......................... $39,804 $31,292 $25,403
======= ======= =======
</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.

78
<PAGE> 81
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 assets or liabilities were as
follows:

<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31 DECEMBER 31
1998 1997 1996
(in thousands) ----------- ------------ ------------
<S> <C> <C> <C>
Deferred federal tax assets:
Deferred insurance acquisition costs..................... $ 86,332 $ 75,522 $ 4,520
Unrealized losses on investments......................... -- -- 16,624
Life policy reserves..................................... 27,240 43,337 46,452
Unearned revenue......................................... 42,598 37,243 --
Real estate-related...................................... 13,944 13,400 20,642
Other investment-related................................. 5,770 3,298 5,409
Other.................................................... 4,923 4,371 3,639
-------- -------- --------
Total deferred federal tax assets..................... 180,807 177,171 97,286
Valuation allowance...................................... (15,201) (15,201) (31,825)
-------- -------- --------
Total deferred federal tax assets after valuation
allowance........................................... 165,606 161,970 65,461
-------- -------- --------
Deferred federal tax liabilities:
Value of business acquired............................... 41,598 48,469 66,373
Deferred insurance acquisition costs..................... 32,040 20,811 9,384
Depreciation and amortization............................ 19,111 20,201 15,473
Other investment-related................................. 14,337 18,774 28,855
Unrealized gains on investments.......................... 21,477 9,002 --
Other.................................................... 1,984 4,720 5,738
-------- -------- --------
Total deferred federal tax liabilities................ 130,547 121,977 125,823
-------- -------- --------
Net deferred federal tax assets (liabilities).............. $ 35,059 $ 39,993 $(60,362)
======== ======== ========
</TABLE>

The net deferred tax assets relate primarily to unearned revenue and the
tax on deferred insurance acquisition costs ("DAC Tax") associated with $1.5
billion and $2.7 billion of new and renewal sales in 1998 and 1997, respectively
from a non-registered individual and group variable bank-owned life insurance
contract ("BOLI"). 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.

The tax returns through the year 1993 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 1994 through 1996 are
currently under examination by the IRS.

(7) RELATED-PARTY TRANSACTIONS

The Company received capital contributions from Kemper of $4.3 million,
$45.0 million and $18.4 million during 1998, 1997 and 1996, respectively. The
Company paid cash dividends of $95.0 million and $29.3 million to Kemper during
1998 and 1997, respectively. The Company did not pay any cash dividends to
Kemper during 1996.

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, 1998 and 1997, joint venture mortgage loans
totaled $65.8 million and $72.7 million, respectively, and during 1998, 1997 and
1996, the Company earned interest income on these joint venture loans of $6.8
million, $7.5 million and $9.5 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") 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 1998, 1997 and 1996, expenses allocated to the Company from SKI and KSvC
amounted to $43 thousand,

79
<PAGE> 82
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(7) RELATED-PARTY TRANSACTIONS (CONTINUED)
$114 thousand and $1.7 million, respectively. The Company also paid to SKI
investment management fees of $3.1 million, $3.5 million and $3.6 million during
1998, 1997 and 1996, respectively. In addition, expenses allocated to the
Company from FKLA during 1998, 1997 and 1996 amounted to $35.5 million, $30.0
million and $10.5 million, respectively. The Company also paid to Kemper real
estate subsidiaries $1.5 million, $2.2 million and $1.8 million in 1998, 1997
and 1996, 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.

As of December 31, 1998 and 1997, the reinsurance recoverable related to
fixed-rate annuity liabilities ceded to an affiliate amounted to $344.8 million
and $382.6 million, respectively.

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 ("GAAP"), of
approximately $18.4 million, was deemed to be a capital contribution from Kemper
and was recorded as additional paid-in-capital during 1996. As of the date of
this transaction, no deferred tax impact was recorded on the difference between
the statutory and GAAP reserves. This deferred tax impact of $6.5 million was
recorded in 1998 as a reduction to the original capital contribution. Premiums
assumed during 1998 under the terms of the treaty amounted to $21.6 million and
the face amount which remained outstanding at December 31, 1998 amounted to
$11.7 billion.

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
$293 thousand and $139 thousand as of December 31, 1998 and 1997, respectively.

During December 1997, the Company entered into a funds withheld reinsurance
agreement with a Zurich affiliated company, ZC Life Reinsurance Limited ("ZC
Life"), formerly EPICENTRE Reinsurance (Bermuda) Limited. Under the terms of
this agreement, 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 the new BOLI product
developed in 1997, 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 ZC Life under the terms of the treaty.
During 1997, the Company also ceded $24.3 million of separate account fees (cost
of insurance charges) to ZC Life. The Company has also withheld approximately
$23.4 million of such funds due to ZC Life under the terms of the reinsurance
agreement as a component of benefits and funds payable in the accompanying
consolidated balance sheet as of December 31, 1997.

During 1998, the Company modified the reinsurance agreement to increase the
reinsurance from ninety percent to one hundred percent. During 1998, the Company
issued $6.9 billion (face amount) of new BOLI business and ceded $11.1 billion
(face amount) to ZC Life under the terms of the modified treaty. During 1998,
the Company also ceded $175.5 million of separate account fees (cost of
insurance charges) to ZC Life. The Company has also withheld approximately
$170.9 million of such funds due to ZC Life under the terms of the reinsurance
agreement as a component of benefits and funds payable in the accompanying
consolidated balance sheet as of December 31, 1998.

KILICO has a large and growing funds withheld account ("FWA") supporting
reserve credits on reinsurance ceded on the BOLI product. Amendments to the
reinsurance contracts during 1998 changed the methodology used to determine
increases to the FWA. A substantial portion of the FWA is now marked-to-market
based upon the Total Return of the Governmental Bond Division of the KILICO
Variable Series I Separate Account.

80
<PAGE> 83
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(8) REINSURANCE (CONTINUED)
During 1998, the Company recorded a $2.5 million increase to the FWA related to
this mark-to-market. To properly match revenue and expenses, the Company has
placed assets supporting the FWA in a segmented portion of its General Account.
This portfolio is classified as "trading" under Statement of Financial
Accounting Standards No. 115 ("FAS 115"). FAS 115 mandates that assets held in a
trading account be valued at fair value, with changes in fair value flowing
through the income statement as realized capital gains and losses. During 1998,
the Company recorded a realized capital gain of $2.8 million upon transfer of
these assets from "available for sale" to the trading portfolio as required by
FAS 115. In addition, the Company recorded realized capital losses of $151
thousand related to the changes in fair value of this portfolio during 1998. The
fair value of this portfolio was $101.8 million at December 31, 1998, and the
amortized cost was $99.1 million. The Company periodically purchases assets into
this segmented portfolio to support changes in the FWA.

(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 $2.0 million and $1.9 million at December 31, 1998 and 1997,
respectively.

The discount rate used in determining the allocated postretirement benefit
obligation was 7.0 percent and 7.25 percent for 1998 and 1997, respectively. The
assumed health care trend rate used was based on projected experience for 1998,
8.0 percent for 1999, gradually declining to 6.4 percent by the year 2003 and
gradually declining 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, 1998 and 1997 by $312 thousand and $242 thousand,
respectively.

(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 nor 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.

(11) FINANCIAL INSTRUMENTS--OFF-BALANCE-SHEET RISK

At December 31, 1998, the Company had future legal loan commitments and
stand-by financing agreements totaling $64.4 million to support the financing
needs of various real estate investments. To the extent these
81
<PAGE> 84
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(11) FINANCIAL INSTRUMENTS--OFF BALANCE-SHEET (CONTINUED)
arrangements are called upon, amounts loaned would be collateralized 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. 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. 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 sheets 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 in estimating the fair value of real estate due to the lack
of a liquid quotable market.

OTHER LOANS AND INVESTMENTS: The carrying amounts reported in the
consolidated balance sheets 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 1998 and 1997 to be 4.75 percent and 5.25 percent,
respectively, while the assumed average market crediting rate was 5.0 percent
and 6.0 percent in 1998 and 1997, respectively.

82
<PAGE> 85
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(12) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The carrying values and estimated fair values of the Company's financial
instruments at December 31, 1998 and 1997 were as follows:

<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
------------------------ ------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
(in thousands) ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Financial instruments recorded as assets:
Fixed maturities.............................. $3,482,820 $3,482,820 $3,668,643 $3,668,643
Trading account securities.................... 101,781 101,781 -- --
Cash and short-term investments............... 71,820 71,820 259,925 259,925
Mortgage loans and other real estate-related
assets..................................... 164,375 164,375 220,046 220,046
Policy loans.................................. 271,540 271,540 282,439 282,439
Equity securities............................. 66,854 66,854 24,839 24,839
Other invested assets......................... 23,645 27,620 20,820 24,404
Financial instruments recorded as liabilities:
Life policy benefits, excluding term life
reserves................................... 3,551,050 3,657,510 3,846,023 4,050,852
Funds withheld account........................ 170,920 170,920 23,420 23,420
</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 1999 is $64.9 million. The
Company paid cash dividends of $95.0 million and $29.3 million to Kemper during
1998 and 1997, respectively. The Company paid no cash dividends in 1996.

The Company's net income and capital and surplus as determined in
accordance with statutory accounting principles were as follows:

<TABLE>
<CAPTION>
1998 1997 1996
(in thousands) -------- -------- --------
<S> <C> <C> <C>
Net income.................................................. $ 64,871 $ 58,372 $ 37,287
======== ======== ========
Statutory capital and surplus............................... $455,213 $476,924 $411,837
======== ======== ========
</TABLE>

83
<PAGE> 86
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>
1998 OPERATING SUMMARY
Net investment income.............................. $70,551 $68,467 $ 66,892 $ 67,602
Realized investment gains.......................... 1,854 15,673 8,951 25,390
Premium income..................................... 5,203 5,941 5,278 5,924
Separate account fees and other income............. 20,418 19,922 17,631 14,042
------- ------- -------- --------
Total revenue.............................. 98,026 110,003 98,752 112,958
------- ------- -------- --------
Interest credited and benefits to policyholders.... 57,930 57,939 54,251 34,815
Commissions, taxes, licenses and fees.............. 13,885 13,922 12,282 29,251
Operating expenses................................. 10,094 12,157 10,528 11,794
Net deferral of insurance acquisition costs........ (7,973) (11,983) (9,669) (4,858)
Amortization of value of business acquired......... 4,427 7,121 6,359 (230)
Amortization of goodwill........................... 3,186 3,186 3,186 3,186
------- ------- -------- --------
Total benefits and expenses................ 81,549 82,342 76,937 73,958
------- ------- -------- --------
Income before income tax expense................... 16,477 27,661 21,815 39,000
Income tax expense................................. 7,247 11,774 8,828 11,955
------- ------- -------- --------
Net income................................. $ 9,230 $15,887 $ 12,987 $ 27,045
======= ======= ======== ========
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
======= ======= ======== ========
</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.

(15) OPERATING SEGMENTS AND RELATED INFORMATION

In June 1997, the FASB issued SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF
AN ENTERPRISE AND RELATED INFORMATION. SFAS No. 131 establishes standards for
how to report information about operating segments. It also establishes
standards for related disclosures about products and services, geographic areas
and major customers. The Company adopted SFAS No. 131 as of December 31, 1998
and the impact of implementation did not affect the Company's consolidated
financial position, results of operations or cash flows. In the initial year of
adoption, SFAS No. 131 requires comparative information for earlier years to be
restated, unless impracticable to do so.

84
<PAGE> 87
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(15) OPERATING SEGMENTS AND RELATED INFORMATION (CONTINUED)
In connection with the acquisition by Zurich, the Company, FKLA, ZLICA, and
Fidelity Life Association ("FLA"), a Mutual Legal Reserve Company, owned by its
policyholders, began to operate under the trade name Zurich Kemper Life. For
purposes of this operating segment disclosure, Zurich Kemper Life will also
include the operations of Zurich Direct, Inc., an affiliated direct marketing
life insurance agency and excludes FLA, as it is owned by its policyholders.

Zurich Kemper Life is segregated by Strategic Business Unit ("SBU"). The
SBU concept employed by ZFS has each SBU concentrate on a specific customer
market. The SBU is the focal point of Zurich Kemper Life, because it is at the
SBU level that Zurich Kemper Life can clearly identify customer segments and
then work to understand and satisfy the needs of each customer. The
contributions of Zurich Kemper Life's SBU's to consolidated revenues, operating
results and certain balance sheet data pertaining thereto, are shown in the
following tables on the basis of generally accepted accounting principles.
Zurich Kemper Life's SBU's were formed in 1996, subsequent to the acquisition by
Zurich, however, financial information was not produced by SBU until 1997.
Therefore, Zurich Kemper Life has not provided segment information for 1996, as
it would be impracticable to do so.

Zurich Kemper Life is segregated into the Agency, Financial, Group
Retirement and Direct SBU's. The SBU's are not managed at the legal entity
level, but rather at the Zurich Kemper Life level. Zurich Kemper Life's SBU's
cross legal entity lines, as certain similar products are sold by more than one
legal entity. The vast majority of the Company's business is derived from the
Financial and Group Retirement SBU's.

Each SBU's revenue is derived from geographically dispersed areas as Zurich
Kemper Life is licensed in the District of Columbia and all states except New
York. During 1998 and 1997, Zurich Kemper Life did not derive net revenue from
one customer that exceeded 10 percent of the total revenue of Zurich Kemper
Life.

The principal products and markets of Zurich Kemper Life's SBU's are as
follows:

AGENCY: The Agency SBU develops low cost term and universal life insurance,
as well as fixed annuities, to market through independent agencies and national
marketing organizations.

FINANCIAL: The Financial SBU focuses on a wide range of products that
provide for the accumulation, distribution and transfer of wealth and primarily
includes variable and fixed annuities, variable universal life and bank-owned
life insurance. These products are distributed to consumers through financial
intermediaries such as banks, brokerage firms and independent financial
planners.

GROUP RETIREMENT: The Group Retirement SBU has a sharp focus on its target
customer. This SBU markets variable annuities to K-12 schoolteachers,
administrators, and healthcare workers, along with college professors and
certain employees of selected non-profit organizations. This target market is
eligible for what the IRS designates as retirement-oriented savings or
investment plans that qualify for special tax treatment.

DIRECT: The Direct SBU is a direct marketer of basic, low-cost term life
insurance through various marketing media.

85
<PAGE> 88
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Summarized financial information for ZKL's SBU's are as follows:

As of and for the period ending December 31, 1998:
(in thousands)

<TABLE>
<CAPTION>
GROUP
AGENCY FINANCIAL RETIREMENT DIRECT TOTAL
INCOME STATEMENT ---------- ---------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C>
REVENUE
Premium income........................ $ 160,067 $ 56 $ -- $ 5,583 $ 165,706
Net investment income................. 141,171 180,721 100,695 271 422,858
Realized investment gains............. 20,335 33,691 15,659 30 69,715
Fees and other income................. 80,831 40,421 31,074 23,581 175,907
---------- ---------- ---------- -------- -----------
Total revenue.................... 402,404 254,889 147,428 29,465 834,186
---------- ---------- ---------- -------- -----------
BENEFITS AND EXPENSES
Policyholder benefits................. 243,793 117,742 73,844 2,110 437,489
Intangible asset amortization......... 58,390 15,669 15,703 -- 89,762
Net deferral of insurance acquisition
costs.............................. (55,569) (9,444) (22,964) (22,765) (110,742)
Commissions and taxes, licenses and
fees............................... 29,539 43,919 22,227 11,707 107,392
Operating expenses.................... 61,659 24,924 20,279 35,593 142,455
---------- ---------- ---------- -------- -----------
Total benefits and expenses...... 337,812 192,810 109,089 26,645 666,356
---------- ---------- ---------- -------- -----------
Income before income tax expense........ 64,592 62,079 38,339 2,820 167,830
Income tax expense...................... 26,774 24,340 14,794 1,001 66,909
---------- ---------- ---------- -------- -----------
Net income....................... $ 37,818 $ 37,739 $ 23,545 $ 1,819 $ 100,921
========== ========== ========== ======== ===========
BALANCE SHEET
Total assets.......................... $3,194,530 $8,232,927 $4,172,828 $ 46,254 $15,646,539
========== ========== ========== ======== ===========
</TABLE>

<TABLE>
<CAPTION>
NET
REVENUE INCOME ASSETS
----------- -------- -----------
<S> <C> <C> <C> <C> <C>
Total revenue, net income and assets, respectively, from
above:...................................................... $ 834,186 $100,921 $15,646,539
----------- -------- -----------
Less:
Revenue, net income and assets of FKLA.................... 336,841 35,953 2,986,381
Revenue, net loss and assets of ZLICA..................... 54,058 (1,066) 416,115
Revenue, net income and assets Zurich Direct.............. 23,548 885 4,322
----------- -------- -----------
Totals per the Company's consolidated financial
statements............................................. $ 419,739 $ 65,149 $12,239,721
=========== ======== ===========
</TABLE>

86
<PAGE> 89
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and for the period ending December 31, 1997:
(in thousands)

<TABLE>
<CAPTION>
GROUP
AGENCY FINANCIAL RETIREMENT DIRECT TOTAL
INCOME STATEMENT ---------- ---------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C>
REVENUE
Premium income.................... $ 167,439 $ -- $ -- $ 4,249 $ 171,688
Net investment income............. 155,885 212,767 91,664 455 460,771
Realized investment gains......... 2,503 7,744 2,692 50 12,989
Fees and other income............. 78,668 73,823 23,663 8,007 184,161
---------- ---------- ---------- -------- -----------
Total revenue................ 404,495 294,334 118,019 12,761 829,609
---------- ---------- ---------- -------- -----------
BENEFITS AND EXPENSES
Policyholder benefits............. 247,878 153,327 60,061 2,234 463,500
Intangible asset amortization..... 58,534 25,593 15,589 -- 99,716
Net deferral of insurance
acquisition costs.............. (50,328) (18,222) (13,033) (5,242) (86,825)
Commissions and taxes, licenses
and fees....................... 39,477 66,552 16,668 3,518 126,215
Operating expenses................ 55,859 20,282 14,320 19,472 109,933
---------- ---------- ---------- -------- -----------
Total benefits and
expenses.................. 361,420 247,532 93,605 19,982 712,539
---------- ---------- ---------- -------- -----------
Income (loss) before income tax
expense (benefit)................. 53,075 46,802 24,414 (7,221) 117,070
Income tax expense (benefit)........ 25,554 21,144 10,545 (2,528) 54,715
---------- ---------- ---------- -------- -----------
Net income (loss)............ $ 27,521 $ 25,658 $ 13,869 $ (4,693) $ 62,355
========== ========== ========== ======== ===========
BALANCE SHEET
Total assets...................... $2,877,854 $7,416,791 $3,759,173 $ 41,669 $14,095,487
========== ========== ========== ======== ===========
</TABLE>

<TABLE>
<CAPTION>
NET
REVENUE INCOME ASSETS
----------- -------- -----------
<S> <C> <C> <C> <C> <C>
Total revenue, net income and assets, respectively, from
above:...................................................... $ 829,609 $ 62,355 $14,095,487
Less:
Revenue, net income and assets of FKLA.................... 338,854 24,740 3,105,396
Revenue, net income and assets of ZLICA................... 57,233 2,193 398,786
Revenue, net loss and assets of Zurich Direct............. 8,042 (3,295) 1,655
----------- -------- -----------
Totals per the Company's consolidated financial
statements........................................ $ 425,480 $ 38,717 $10,589,650
=========== ======== ===========
</TABLE>

87
<PAGE> 90

This prospectus does not constitute an offer to sell or a
solicitation of an offer to buy securities in any state,
to any person to whom it is not lawful to make such
an offer in such state.

This booklet includes the prospectuses for the
underlying Portfolios.

Kemper Destinations Life is distributed by
Investors Brokerage Services, Inc.

Printed on recycled paper SPVL-1 (11/9/99)