<PAGE> 1
1998 ANNUAL
REPORT
...........
KEMPER
SELECT
Variable Universal Life Policies
------
Kemper Investors Life Insurance Company
------
Variable Separate Account
PERIOD ENDED DECEMBER 31, 1998 [KEMPER LOGO]
<PAGE> 2
REPORT OF INDEPENDENT ACCOUNTANTS
THE BOARD OF DIRECTORS OF
KEMPER INVESTORS LIFE INSURANCE COMPANY AND POLICY OWNERS
OF VARIABLE SEPARATE ACCOUNT
In our opinion, the accompanying combined statements of assets and liabilities
and policy owners' equity and the related combined statements of operations and
combined statements of changes in policy owners' equity present fairly, in all
material respects, the financial position of Kemper Investors Life Insurance
Company Variable Separate Account (the "Company") at December 31, 1998 and the
combined results of its operations for the year then ended and the combined
changes in its policy owners' equity for the years ended December 31, 1998 and
1997 in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audits 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 evaluations of the overall financial statement
presentation. Our procedures included confirmation of portfolio shares owned at
December 31, 1998 by correspondence with the custodian. We believe that our
audits provide a reasonable basis for our opinion expressed above.
PricewaterhouseCoopers L.L.P.
February 19, 1999
1
<PAGE> 3
COMBINED FINANCIAL STATEMENTS
KEMPER INVESTORS LIFE INSURANCE COMPANY
VARIABLE SEPARATE ACCOUNT
COMBINED STATEMENT OF ASSETS AND LIABILITIES
AND POLICY OWNERS' EQUITY
December 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
MONEY TOTAL GOVERNMENT
MARKET RETURN HIGH YIELD GROWTH SECURITIES
COMBINED SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
- ------------------------------------------------------------------------------------------------------------
ASSETS
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Investment, at current value $13,863 981 3,681 1,333 3,472 4,396
Dividend and other receivables 4 3 -- -- 1 --
- ------------------------------------------------------------------------------------------------------------
TOTAL ASSETS 13,867 984 3,681 1,333 3,473 4,396
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
LIABILITIES AND POLICY OWNERS' EQUITY
- ------------------------------------------------------------------------------------------------------------
Liabilities:
Mortality and expense risk
charges 9 1 2 1 2 3
Other 17 17 -- -- -- --
- ------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 26 18 2 1 2 3
- ------------------------------------------------------------------------------------------------------------
Policy owners' equity $13,841 966 3,679 1,332 3,471 4,393
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
ANALYSIS OF POLICY OWNERS' EQUITY
- ------------------------------------------------------------------------------------------------------------
Excess of proceeds from units sold
over payments for units redeemed $ 4,838 348 948 318 1,346 1,878
Accumulated net investment income 6,492 618 1,698 903 1,406 1,867
Accumulated net realized gain on
sales of investments 1,779 -- 816 66 319 578
Unrealized appreciation of
investments 732 -- 217 45 400 70
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Policy owners' equity $13,841 966 3,679 1,332 3,471 4,393
- ------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to combined financial statements.
2
<PAGE> 4
COMBINED FINANCIAL STATEMENTS
KEMPER INVESTORS LIFE INSURANCE COMPANY
VARIABLE SEPARATE ACCOUNT
COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
MONEY TOTAL GOVERNMENT
MARKET RETURN HIGH YIELD GROWTH SECURITIES
COMBINED SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------
Dividend and capital gain
distributions $1,392 72 505 84 458 273
- -------------------------------------------------------------------------------------------------------
Mortality and expense risk
charges 103 6 16 13 27 41
- -------------------------------------------------------------------------------------------------------
Net investment income 1,289 66 489 71 431 232
- -------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments:
Net realized gain (loss) on
sales of investments (113) -- (67) (42) (288) 284
Change in unrealized
appreciation (depreciation)
of investments (30) -- (1) (10) 234 (253)
- -------------------------------------------------------------------------------------------------------
Net realized and
unrealized gain (loss)
on investments (143) -- (68) (52) (54) 31
- -------------------------------------------------------------------------------------------------------
NET INCREASE IN POLICY
OWNERS' EQUITY RESULTING
FROM OPERATIONS $1,146 66 421 19 377 263
- -------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to combined financial statements.
3
<PAGE> 5
COMBINED FINANCIAL STATEMENTS
KEMPER INVESTORS LIFE INSURANCE COMPANY
VARIABLE SEPARATE ACCOUNT
COMBINED STATEMENTS OF CHANGES IN POLICY OWNERS' EQUITY
For the years ended December 31, 1998 and 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
MONEY MARKET
COMBINED SUBACCOUNT
-------------------- -------------------
1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------
OPERATIONS
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net investment income $ 1,289 1,290 66 34
Net realized gain (loss) on sales of investments (113) 531 -- --
Change in unrealized appreciation (depreciation) of
investments (30) (312) -- --
- ------------------------------------------------------------------------------------------------------------
Net increase in policy owners' equity resulting from
operations 1,146 1,509 66 34
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
ACCOUNT UNIT TRANSACTIONS
- ------------------------------------------------------------------------------------------------------------
Proceeds from units sold 6,365 3,138 5,791 2,965
Net transfers (to) from affiliate or subaccounts (2,005) (707) (2,163) (1,059)
Payments for units redeemed (5,039) (2,547) (3,694) (2,011)
- ------------------------------------------------------------------------------------------------------------
Net increase (decrease) in policy owners' equity from
account unit transactions (679) (116) (66) (105)
- ------------------------------------------------------------------------------------------------------------
Total increase (decrease) in policy owners' equity 467 1,393 -- (71)
- ------------------------------------------------------------------------------------------------------------
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POLICY OWNERS' EQUITY
- ------------------------------------------------------------------------------------------------------------
Beginning of period 13,374 11,981 966 1,037
- ------------------------------------------------------------------------------------------------------------
End of period $13,841 13,374 966 966
- ------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to combined financial statements.
4
<PAGE> 6
COMBINED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
TOTAL RETURN HIGH YIELD GOVERNMENT
SUBACCOUNT SUBACCOUNT GROWTH SUBACCOUNT SECURITIES SUBACCOUNT
- ----------------- ------------- ----------------- ---------------------
1998 1997 1998 1997 1998 1997 1998 1997
<S> <C> <C> <C> <C> <C> <C> <C>
489 390 71 87 431 496 232 283
(67) 426 (42) 96 (288) (10) 284 19
(1) (281) (10) (27) 234 (21) (253) 17
- -----------------------------------------------------------------------------
421 535 19 156 377 465 263 319
- -----------------------------------------------------------------------------
63 27 86 22 393 92 32 32
638 (400) (502) 298 421 (38) (399) 492
(479) (217) (205) (50) (461) (138) (200) (131)
- -----------------------------------------------------------------------------
222 (590) (621) 270 353 (84) (567) 393
- -----------------------------------------------------------------------------
643 (55) (602) 426 730 381 (304) 712
- -----------------------------------------------------------------------------
3,036 3,091 1,934 1,508 2,741 2,360 4,697 3,985
- -----------------------------------------------------------------------------
3,679 3,036 1,332 1,934 3,471 2,741 4,393 4,697
- -----------------------------------------------------------------------------
</TABLE>
5
<PAGE> 7
NOTES TO COMBINED FINANCIAL STATEMENTS
KEMPER INVESTORS LIFE INSURANCE COMPANY
VARIABLE SEPARATE ACCOUNT
- --------------------------------------------------------------------------------
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 five subaccounts and each subaccount
invests exclusively in the shares of a
corresponding portfolio of the Investors Fund
Series (the "Fund"), an open-end diversified
management investment company. The Fund has added
additional subaccounts, which are not reflected in
the accompanying financial statements, and which
are not available investment options to Select
Policy Owners of the Separate Account. The Power V
Policy Owners also have additional subaccounts
which invest exclusively in the shares of another
fund, which are not reflected in the accompanying
financial statements.
ESTIMATES. The preparation of financial statements
in conformity with generally accepted accounting
principles requires management to make estimates
and assumptions that could affect the reported
amounts of assets and liabilities as well as the
disclosure of contingent amounts at the date of the
financial statements. As a result, actual results
reported as income and expenses could differ from
the estimates reported in the accompanying
financial statements.
SECURITY VALUATION. The investments are stated at
current value which is based on the closing bid
price, net asset value, at December 31, 1998.
SECURITY TRANSACTIONS AND INVESTMENT INCOME.
Security transactions are accounted for on the
trade date (the date the order to buy or sell is
executed). Dividends and capital gains
distributions are recorded as income on the ex-
dividend date. Realized gains and losses from
security transactions are reported on a first in,
first out ("FIFO") cost basis.
ACCOUNT UNIT TRANSACTIONS. Proceeds from a Policy
are automatically allocated to the Money Market
subaccount on the trade date for a 15 day period.
At the end of this period, the Separate Account
value (cash value) may be allocated to other
subaccounts as designated by the owner of the
Policy.
ACCUMULATION UNIT VALUATION. On each day the New
York Stock Exchange (the "Exchange") is open for
trading, the accumulation unit value is determined
as of the earlier of 3:00 p.m. (Chicago time) or
the close of the Exchange by dividing the total
value of each subaccount's investments and other
assets, less
6
<PAGE> 8
NOTES TO COMBINED FINANCIAL STATEMENTS
liabilities, by the number of accumulation units
outstanding in the respective subaccount.
FEDERAL INCOME TAXES. The operations of the
Separate Account are included in the Federal income
tax return of KILICO. Under existing Federal income
tax law, investment income and realized capital
gains and losses of the Separate Account increase
liabilities under the policy and are, therefore,
not taxed. Thus the Separate Account may realize
net investment income and capital gains and losses
without Federal income tax consequences.
- --------------------------------------------------------------------------------
2 SUMMARY
OF INVESTMENTS 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
Investors Fund Series Total Return Subaccount 1,347 3,464
Investors Fund Series High Yield Subaccount 1,088 1,288
Investors Fund Series Growth Subaccount 1,175 3,072
Investors Fund Series Government Securities
Subaccount 3,639 4,326
-----------------------------------------------------------------------
TOTAL INVESTMENTS $13,131
-----------------------------------------------------------------------
</TABLE>
The underlying investments are summarized below.
MONEY MARKET SUBACCOUNT: This subaccount invests
primarily in short-term obligations of major banks
and corporations.
TOTAL RETURN SUBACCOUNT: This subaccount's
investments will normally consist of fixed-income
and equity securities. Fixed-income securities will
include bonds and other debt securities and
preferred stocks. Equity investments normally will
consist of common stocks and securities convertible
into or exchangeable for common stocks, however,
the subaccount may also make private placement
investments (which are normally restricted
securities).
HIGH YIELD SUBACCOUNT: This subaccount invests in
fixed-income securities, a substantial portion of
which are high yielding fixed-income securities.
These securities ordinarily will be in the lower
rating categories of recognized rating agencies or
will be non-rated, and generally will involve more
risk than securities in the higher rating
categories.
GROWTH SUBACCOUNT: This subaccount's investments
normally will consist of common stocks and
securities convertible into or exchangeable for
common stocks, however, it may also make private
placement investments (which are normally
restricted securities).
GOVERNMENT SECURITIES SUBACCOUNT: This subaccount
invests primarily in U.S. Government Securities.
The subaccount may also invest in fixed-income
securities other than U.S. Government securities
and may engage in options and financial futures
transactions.
7
<PAGE> 9
NOTES TO COMBINED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
3 TRANSACTIONS WITH
AFFILIATES KILICO provides a death benefit payment upon the
death of the Policy Owner under the terms of the
death benefit option selected by the Policy Owner
as further described in the Policy. KILICO assesses
a monthly charge to the subaccounts for the cost of
providing this insurance protection to the Policy
Owner. These cost of insurance charges vary with
the issue age, sex and rate class of the Policy
Owner, and are allocated among the subaccounts in
the proportion of each subaccount to the Separate
Account value. Cost of insurance charges totaled
approximately $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 accrual 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 costs 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 the 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
portfolios of the Fund which serve as the
underlying investments of the Separate Account.
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 subaccount or
to the general account of KILICO.
8
<PAGE> 10
NOTES TO COMBINED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
5 POLICY OWNERS'
EQUITY Policy owners' equity at December 31, 1998, is as
follows (in thousands, except unit value;
differences are due to rounding):
<TABLE>
<CAPTION>
POLICY
NUMBER UNIT OWNERS'
SELECT POLICIES OF UNITS VALUE EQUITY
--------------- -------- ----- -------
<S> <C> <C> <C>
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
-----------------------------------------------------------------------------
POLICY
NUMBER UNIT OWNERS'
POWER V POLICIES OF UNITS VALUE EQUITY
-------------------------------------------- ----- ------ -------
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
-----------------------------------------------------------------------------
TOTAL POWER V POLICY OWNERS' EQUITY $ 1,468
-----------------------------------------------------------------------------
</TABLE>
9
<PAGE> 11
Distributed by
Investors Brokerage Services, Inc.
Kemper Investors Life Insurance Company
1 Kemper Drive
[ZURICH KEMPER LOGO] Long Grove, IL 60049
<TABLE>
<S> <C> <C>
Policy Form Series L-5672, L-5454 & L-5797 [LOGO] PRINTED ON RECYCLED PAPER. L-5759(2/99)1042
</TABLE>
