KILICO VARIABLE SEPARATE ACCOUNT/IL, 485BPOS, 1999-04-23

KILICO VARIABLE SEPARATE ACCOUNT/IL
485BPOS, 1999-04-23

Previous: ENTERGY SERVICES INC, U-13-60, 1999-04-23

Next: JAMES INVESTMENT RESEARCH INC, 13F-HR, 1999-04-23

<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 23, 1999

REGISTRATION STATEMENT 33-65399
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------

POST-EFFECTIVE AMENDMENT NO. 6

TO
FORM S-6
FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933
OF SECURITIES OF UNIT INVESTMENT TRUSTS
REGISTERED ON FORM N-8B-2
------------------

A. Exact name of trust: KILICO VARIABLE SEPARATE ACCOUNT

B. Name of depositor: KEMPER INVESTORS LIFE INSURANCE COMPANY

C. Complete address of depositor's principal executive offices:

1 Kemper Drive
Long Grove, Illinois 60049

D. Name and complete address of agent for service:

DEBRA P. REZABEK, ESQ.
Kemper Investors Life Insurance Company
1 Kemper Drive
Long Grove, Illinois 60049

<TABLE>
<S> <C>
COPIES TO:
FRANK JULIAN, ESQ. JOAN E. BOROS, ESQ.
Kemper Investors Life Insurance Company Jorden Burt Boros Cicchetti Berenson & Johnson
1 Kemper Drive 1025 Thomas Jefferson Street, N.W.
Long Grove, Illinois 60049 Suite 400E
Washington, D.C. 20007
</TABLE>

It is proposed that this filing will become effective (check appropriate
box)

[ ] Immediately upon filing pursuant to paragraph (b), or

[ ]60 days after filing pursuant to paragraph (a)(1), or

[X]on May 1, 1999 pursuant to paragraph (b), or

[ ] on (date) pursuant to paragraph (a)(1) of Rule 485.

If appropriate, check the following box:

[ ] this post effective amendment designates a new effective date for a
previously filed post-effective amendment.

E. Title and amount of securities being registered:

The variable portion of Flexible Premium Variable Life Insurance
Policies.

F. Approximate date of proposed public offering:

Continuous.

[ ] Check box if it is proposed that this filing will become effective on
(date) at (time) pursuant to Rule 487.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2

This amendment to the registration statement on Form S-6 includes two
prospectuses describing flexible premium variable life insurance policies which
are substantially identical, except that the policy described in the second
prospectus makes available to policy owners different investment subaccounts of
Registrant than does the prospectus described in the original prospectus.
<PAGE> 3

RECONCILIATION AND TIE BETWEEN ITEMS
IN FORM N-8B-2 AND THE PROSPECTUS

<TABLE>
<CAPTION>
ITEM NO.
OF
FORM N-8B-2 CAPTION IN PROSPECTUS
- ----------- ---------------------
<C> <S>
1. Cover Page
2. Cover Page
3. Not Applicable
4. Distribution of Policies
5. KILICO and the Separate Account; State Regulation of KILICO
6. KILICO and the Separate Account
7. Not Applicable
8. Experts
9. Legal Proceedings; Legal Considerations
10. KILICO and the Separate Account; The Funds; The Policy;
Policy Benefits and Rights; General Provisions; Voting
Interests, Dollar Cost Averaging; Systematic Withdrawal
Plan; Federal Tax Matters
11. Cover Page; Summary; KILICO and the Separate Account; The
Funds
12. Not Applicable
13. Charges and Deductions
14. The Policy
15. The Policy; Policy Benefits and Rights
16. Summary; The Policy
17. The Policy; Policy Benefits and Rights
18. The Funds
19. General Provisions
20. The Funds; General Provisions
21. Policy Benefits and Rights
22. Not Applicable
23. Not Applicable
24. General Provisions
25. KILICO and the Separate Account
26. Not Applicable
27. KILICO and the Separate Account
28. KILICO's Directors and Officers
29. KILICO and the Separate Account
30. Not Applicable
31. Not Applicable
32. Not Applicable
33. Not Applicable
34. Not Applicable
35. KILICO and the Separate Account; Distribution of Policies
36. Not Applicable
37. Not Applicable
38. Distribution of Policies
39. KILICO and the Separate Account; Distribution of Policies
40. Not Applicable
41. KILICO and the Separate Account; Distribution of Policies
42. Not Applicable
43. Not Applicable
</TABLE>

i
<PAGE> 4

<TABLE>
<CAPTION>
ITEM NO.
OF
FORM N-8B-2 CAPTION IN PROSPECTUS
- ----------- ---------------------
<C> <S>
44. KILICO and the Separate Account; Charges and Deductions
45. Not Applicable
46. The Policy; Policy Benefits and Rights; Charges and
Deductions
47. Summary; KILICO and the Separate Account; The Policy
48. Not Applicable
49. Not Applicable
50. Not Applicable
51. Cover Page; Summary; KILICO and the Separate Account; The
Policy; Policy Benefits and Rights; Charges and Deductions;
General Provisions; Distribution of Policies
52. Summary; KILICO and the Separate Account; The Funds; General
Provisions
53. Federal Tax Matters
54. Not Applicable
55. Not Applicable
56. Not Applicable
57. Not Applicable
58. Not Applicable
59. Financial Statements
</TABLE>

ii
<PAGE> 5

PROSPECTUS--MAY 1, 1999

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

FLEXIBLE PREMIUM VARIABLE
LIFE INSURANCE POLICY
- --------------------------------------------------------------------------------

ISSUED BY

KEMPER INVESTORS LIFE INSURANCE COMPANY
THROUGH ITS KILICO VARIABLE SEPARATE ACCOUNT

HOME OFFICE: 1 KEMPER DRIVE, LONG GROVE, ILLINOIS 60049 (800) 321-9313

This Prospectus describes a variable life insurance policy of Kemper
Investors Life Insurance Company. The Policy provides life insurance and
accumulates variable Cash Value. Policy benefits depend upon the investment
experience of the KILICO Variable Separate Account. Generally, Policy premiums
are flexible.

The Policy is "life insurance" for federal tax purposes. If the Policy is a
modified endowment contract, different tax rules apply to distributions. See
"Federal Tax Matters", page 22 for a discussion of laws that affect the tax
treatment of the Policy.

A Policy owner has the following choices for allocating premium:

- the Fixed Account, which accrues interest at our guaranteed rate,
and

- the Subaccounts of the Separate Account, which invest in portfolios
of underlying mutual funds.

The following portfolios of underlying mutual funds are currently available
under the Policy:

- Kemper Variable Series (formerly Investors Fund Series)

- Kemper Money Market
- Kemper Total Return
- Kemper High Yield
- Kemper Growth

- Kemper Government Securities

- Kemper International
- Kemper Small Cap Growth

- Fidelity Variable Insurance Products Fund
- Fidelity VIP Equity-Income
- Fidelity VIP High Income

- Fidelity Variable Insurance Products Fund II
- Fidelity VIP II Contrafund
- Fidelity VIP II Index 500

- - Fidelity Variable Insurance Products Fund III

- Fidelity VIP III Growth Opportunities

- - American Skandia Trust

- AST Lord Abbett Growth and Income

- AST JanCap Growth

- AST T. Rowe Price International Equity

- AST T. Rowe Price Asset Allocation

- AST Janus Small-Cap Growth (formerly Founders

Capital Appreciation)

- AST INVESCO Equity Income

- AST PIMCO Total Return Bond

- AST PIMCO Limited Maturity Bond

- AST Neuberger Berman Mid-Cap Growth

- - Scudder Variable Life Investment Fund

- Scudder VLIF International (B-Shares)
- Scudder VLIF Growth and Income (B-Shares)

You may obtain more information about these portfolios in the attached
prospectuses. Not all portfolios described in the prospectuses may be available
under the Policy.

The Policy owner chooses from two death benefit options. The Death Benefit
is at least the amount shown in the Policy Specifications, unless there are
loans. Cash Value is not guaranteed. If the Surrender Value does not cover all
Policy charges, the Policy will lapse. The Policy Specifications show the
guarantee premium and the guarantee period. The Policy will not lapse during the
guarantee period if the guarantee premium is paid.

The Policy owner may cancel the Policy and receive a refund during the
Free-Look Period.

If you already own a flexible premium variable life insurance policy, it
may not be advantageous to buy additional insurance or to replace your policy
with the Policy described in this Prospectus.

THIS PROSPECTUS MUST BE ACCOMPANIED OR PRECEDED BY A CURRENT
PROSPECTUS FOR THE AVAILABLE UNDERLYING PORTFOLIOS. YOU SHOULD READ
AND RETAIN ALL PROSPECTUSES FOR FUTURE REFERENCE.

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 WEB SITE AT HTTP://WWW.SEC.GOV.

THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED
THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
<PAGE> 6

TABLE OF CONTENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Page
----
<S> <C>
DEFINITIONS................................................. 1
SUMMARY..................................................... 2
KILICO AND THE SEPARATE ACCOUNT............................. 5
THE FUNDS................................................... 5
FIXED ACCOUNT OPTION........................................ 8
THE POLICY.................................................. 9
POLICY BENEFITS AND RIGHTS.................................. 11
CHARGES AND DEDUCTIONS...................................... 15
GENERAL PROVISIONS.......................................... 18
DOLLAR COST AVERAGING....................................... 21
SYSTEMATIC WITHDRAWAL PLAN.................................. 21
DISTRIBUTION OF POLICIES.................................... 21
FEDERAL TAX MATTERS......................................... 22
LEGAL CONSIDERATIONS........................................ 24
SAFEKEEPING OF THE SEPARATE ACCOUNT'S ASSETS................ 24
VOTING INTERESTS............................................ 24
STATE REGULATION OF KILICO.................................. 24
KILICO'S DIRECTORS AND OFFICERS............................. 26
LEGAL MATTERS............................................... 27
LEGAL PROCEEDINGS........................................... 28
YEAR 2000 COMPLIANCE........................................ 28
EXPERTS..................................................... 29
REGISTRATION STATEMENT...................................... 29
FINANCIAL STATEMENTS........................................ 29
CHANGE OF ACCOUNTANTS....................................... 29
APPENDIX A ILLUSTRATIONS OF CASH VALUES, CASH SURRENDER
VALUES AND DEATH BENEFITS................................. 72
APPENDIX B TABLE OF DEATH BENEFIT FACTORS................... 81
</TABLE>

<PAGE> 7

DEFINITIONS

ACCUMULATION UNIT--An accounting unit of measure used to calculate the
value of each Subaccount.

AGE--The Insured's age on his or her nearest birthday.

BENEFICIARY--The person to whom the proceeds due on the Insured's death are
paid.

CASH VALUE--The sum of the value of Policy assets in the Separate Account,
Fixed Account and Loan Account.

COMPANY ("WE", "US", "OUR", "KILICO")--Kemper Investors Life Insurance
Company. Our home office is located at 1 Kemper Drive, Long Grove, Illinois
60049.

DATE OF RECEIPT--The date on which a request, form or payment is received
at our home office, provided: (1) that date is a Valuation Date and (2) we
receive the request, form or payment before the close of the New York Stock
Exchange (usually 3:00 p.m. Central time). Otherwise, the next Valuation Date.

DEBT--The sum of (1) the principal of any outstanding loan, plus (2) any
loan interest due or accrued to KILICO.

FIXED ACCOUNT--The amount of assets held in the General Account
attributable to the fixed portion of the Policy.

FREE-LOOK PERIOD--The time when a Policy owner may cancel the Policy and
receive a refund. This time depends on the state where the Policy is issued;
however, it will be at least 10 days from the date the owner receives the
Policy.

FUNDS--The underlying mutual funds in which the Subaccounts of the Separate
Account invest.

GENERAL ACCOUNT--The assets of KILICO other than those allocated to the
Separate Account or any other separate account.

GUIDELINE SINGLE PREMIUM--The maximum initial amount of premium that can be
paid while retaining qualification as a life insurance policy under the Internal
Revenue Code.

INSURED--The person whose life is covered by the Policy and who is named in
the Policy Specifications.

ISSUE DATE--The date shown in the Policy Specifications. Incontestability
and suicide periods are measured from the Issue Date.

LOAN ACCOUNT--The amount of assets transferred from the Separate Account
and the Fixed Account and held in the General Account as collateral for Debt.

MATURITY DATE--The Policy Date anniversary nearest the Insured's 100th
birthday.

MONTHLY PROCESSING DATE--The same day in each month as the Policy Date.

MORTALITY AND EXPENSE RISK CHARGE--A charge deducted in the calculation of
the Accumulation Unit Value for the assumption of mortality risks and expense
guarantees.

PLANNED PREMIUM--The scheduled premium specified by the Policy owner in the
application.

POLICY DATE--The date shown in the Policy Specifications. The Policy Date
is used to determine Policy Years and Monthly Processing Dates. The Policy Date
is the date that insurance coverage takes effect subject to principles of state
law regarding Our obligations between the time We accept an application and
premium and the time We issue the Policy. The specific terms are provided when
We accept an application.

POLICY YEAR--Each year commencing with the Policy Date and each Policy Date
anniversary thereafter.

SEPARATE ACCOUNT VALUE--The portion of the Cash Value in the Subaccount(s)
of the Separate Account.

SPECIFIED AMOUNT--The amount chosen by the Policy owner and used to
calculate the death benefit. The Specified Amount is shown in the Policy
Specifications.

SUBACCOUNT--A subdivision of the Separate Account.

SURRENDER VALUE--Cash Value minus (1) any applicable Surrender Charge and
minus (2) any Debt.

TRADE DATE--The date 30 days following the date the Policy owner completes
all requirements for coverage and we record coverage under the Policy as in
force.

VALUATION DATE--Each business day on which valuation of the assets of the
Separate Account is required by applicable law, which currently is each day that
the New York Stock Exchange is open for trading.

VALUATION PERIOD--The period that starts at the close of a Valuation Date
and ends at the close of the next succeeding Valuation Date.

1
<PAGE> 8

SUMMARY

This section summarizes this Prospectus. Please read the entire Prospectus.
You should refer to the heading "Definitions" for the meaning of certain terms.
If states require variations, they appear in supplements attached to this
Prospectus or in endorsements to the Policy. Unless otherwise indicated, this
Prospectus describes an in force Policy with no loans.

The Policy owner pays a premium for life insurance coverage on the Insured.
Generally, an owner may choose the amount and frequency of premium payments. The
Policy provides for a Surrender Value which is payable if the Policy is
terminated during an Insured's lifetime. The Death Benefit and Cash Value of the
Policy may increase or decrease to reflect investment experience. Cash Value is
not guaranteed. If the Surrender Value is insufficient to pay Policy charges,
the Policy will lapse unless an additional premium payment or loan repayment is
made. The Policy will remain in force during the guarantee period if the
premiums paid, minus withdrawals and Debt, are at least equal to the guarantee
premiums. (See "The Policy--Premiums and Allocation of Premiums and Separate
Account Value," page 9, "Charges and Deductions," page 15, and "Policy Benefits
and Rights," page 11.)

A Policy may be issued as or become a modified endowment contract as a
result of a material change or reduction in benefits as defined by the Internal
Revenue Code. The Policy may also become a modified endowment contract if excess
premiums are paid. For a Policy treated as a modified endowment contract,
certain distributions will be included in the Policy owner's gross federal
income (See "Federal Tax Matters," page 22.)

The purpose of the Policy is to provide insurance protection for the
beneficiary. The Policy is not comparable to a systematic investment plan of a
mutual fund.

POLICY BENEFITS

CASH VALUE. Cash Value reflects the amount and frequency of premium
payments, the investment experience of the selected Subaccounts, any values in
the Fixed Account and Loan Account, and Policy charges. The Policy owner bears
the entire investment risk on amounts allocated to the Separate Account. We do
not guarantee Separate Account Value. (See "Policy Benefits and Rights--Cash
Value," page 13.)

The Policy owner may surrender a Policy at any time and receive the
Surrender Value. The Surrender Value is the Cash Value minus surrender charges
and outstanding Debt. Partial withdrawals are available subject to restrictions.
(See "Policy Benefits and Rights--Surrender Privilege," page 15.)

POLICY LOANS. The Policy owner may borrow up to 90% of Cash Value minus
surrender charges. The minimum amount of a loan is $500. Interest is charged at
an effective annual rate of 4.50% in the first nine Policy Years and 3.00%
thereafter. (See "Federal Tax Matters," page 22.)

When a loan is made, a portion of Cash Value equal to the loan amount is
transferred from the Separate Account and the Fixed Account (pro rata, unless
the Policy owner requests otherwise) to the Loan Account. We credit 3% annual
interest to Cash Value held in the Loan Account. (See "Policy Benefits and
Rights--Policy Loans," page 14.)

If the Policy is a modified endowment contract, a loan is treated as a
taxable distribution. (See "Federal Tax Matters," page 22.)

DEATH BENEFITS. An in force Policy pays a death benefit payment upon the
death of the Insured. The Policy has two death benefit options. Under Option A,
the death benefit is the Specified Amount stated in the Policy Specifications.
Under Option B, the death benefit is the Specified Amount stated in the Policy
Specifications plus the Cash Value. The death benefit is never less than the
multiple of Cash Value specified in Appendix B. The death benefit payable is
reduced by any Debt. (See "Policy Benefits and Rights--Death Benefits," page
11.)

PREMIUMS

The amount and frequency of premium payments are flexible. The Policy owner
specifies a Planned Premium on the application. However, the owner is not
required to make the planned premiums, and, subject to certain restrictions, may
make premium payments in any amount and at any frequency. The amount, frequency,
and period of time over which an owner pays premiums affects whether the Policy
will be classified as a modified

2
<PAGE> 9

endowment contract. The minimum monthly premium payment is $50. Other minimums
apply for other payment modes.

Payment of the Planned Premium does not guarantee that a Policy remains in
force. Instead, Surrender Value must be sufficient to cover all Policy charges
for the Policy to remain in force. A Policy will remain in force during the
guarantee period if premiums paid, less withdrawals and Debt, equal or exceed
the sum of the guarantee premiums. (See "The Policy -- Premiums," page 9.)

THE SEPARATE ACCOUNT

ALLOCATION OF PREMIUMS. The portion of the premium available for allocation
equals the premium paid less applicable charges. A Policy owner indicates in the
application the percentages of premium to be allocated among the Subaccounts of
the Separate Account and the Fixed Account. The Policy currently offers
twenty-three Subaccounts, each of which invests in shares of a designated
portfolio of one of the Funds.

The initial premium, minus applicable charges, is allocated to the Kemper
Money Market Subaccount on the day after receipt. On the Trade Date, the
Separate Account Value in the Kemper Money Market Subaccount is allocated among
the Subaccounts and the Fixed Account in accordance with the Policy owner's
instructions in the application. (See "The Policy -- Policy Issue," page 9.)

TRANSFERS. The Policy owner may transfer Separate Account Value among the
Subaccounts once every fifteen days. One annual transfer is permitted between
the Fixed Account and the Subaccounts. (See "The Policy-Allocation of Premiums
and Separate Account Value," page 9.)

THE FUNDS

The following portfolios of Kemper Variable Series (formerly Investors Fund
Series) are currently available for investment by the Separate Account:

- KEMPER MONEY MARKET PORTFOLIO

- KEMPER TOTAL RETURN PORTFOLIO

- KEMPER HIGH YIELD PORTFOLIO

- KEMPER GROWTH PORTFOLIO

- KEMPER GOVERNMENT SECURITIES PORTFOLIO

- KEMPER INTERNATIONAL PORTFOLIO

- KEMPER SMALL CAP GROWTH PORTFOLIO.

The following portfolios of American Skandia Trust are currently available
for investment by the Separate Account:

- AST LORD ABBETT GROWTH AND INCOME

- AST JANCAP GROWTH

- AST T. ROWE PRICE INTERNATIONAL EQUITY

- AST T. ROWE PRICE ASSET ALLOCATION

- AST JANUS SMALL-CAP GROWTH (FORMERLY FOUNDERS CAPITAL APPRECIATION)

- AST INVESCO EQUITY INCOME

- AST PIMCO TOTAL RETURN BOND

- AST PIMCO LIMITED MATURITY BOND

- AST NEUBERGER BERMAN MID-CAP GROWTH (FORMERLY BERGER CAPITAL
GROWTH).

The following portfolios of Fidelity Variable Insurance Products Fund
(Fidelity VIP), Fidelity Variable Insurance Products Fund II (Fidelity VIP II)
and Fidelity Variable Insurance Products Fund III (Fidelity VIP III) are
currently available for investment by the Separate Account:

- FIDELITY VIP EQUITY-INCOME

- FIDELITY VIP HIGH INCOME

- FIDELITY VIP II CONTRAFUND

- FIDELITY VIP II INDEX 500

3
<PAGE> 10

- FIDELITY VIP III GROWTH OPPORTUNITIES.

The following portfolios of Scudder Variable Life Investment Fund are currently
available for investment by the Separate Account:

- SCUDDER VLIF INTERNATIONAL (B-SHARES)

- SCUDDER VLIF GROWTH AND INCOME (B-SHARES).

For a more detailed description of the Funds, see "The Funds," page 5, the
Funds' prospectuses accompanying this Prospectus, and Statements of Additional
Information available from Us upon request.

CHARGES

We deduct a state and local premium tax charge of 2.5% from each premium
payment before net premium is allocated. In addition, We deduct a charge of 1%
of each premium payment to compensate Us for corporate income tax liability.
(See Charges and Deductions--Deductions from Premiums, page 15.) We currently do
not deduct any other charges from premium or the Separate Account for federal,
state or other taxes. Should We determine that these taxes apply, We may make
deductions from the Separate Account to pay those taxes. (See "Federal Tax
Matters," page 22.)

We will deduct a charge from Cash Value in each Subaccount and the Fixed
Account on the Policy Date and on each Monthly Processing Date for the cost of
life insurance coverage. In addition, We deduct an asset charge, at an annual
rate of .90%, from each Subaccount on a daily basis for our assumption of
mortality and expense risks. (See "Charges and Deductions--Cost of Insurance
Charge and Mortality and Expense Risk Charge," pages 15 and 16, respectively.)

On each Monthly Processing Date, We deduct from Cash Value a $5 per month
administrative expense charge. (See "Charges and Deductions--Monthly
Administrative Charge," page 16.)

We deduct a surrender charge if the Policy is surrendered or the Cash Value
is applied under a Settlement Option prior to the 15th Policy Year (or the 15th
Policy Year following an increase in Specified Amount). (See "Policy Benefits
and Rights--Surrender Privilege," page 15.)

The Policy owner indirectly bears the annual Fund operating expenses of the
Portfolios in which the Subaccounts invest. These may include management fees,
12b-1 fees and other expenses. (See "Charges and Deductions--Charges Against the
Funds," page 17.)

TAX TREATMENT UNDER CURRENT FEDERAL TAX LAW

Under existing tax law, any increase in Cash Value is generally not taxable
until a distribution occurs through a withdrawal or surrender. Generally,
distributions are not included in income until the amount of the distributions
exceeds the premiums paid for the Policy. If the Policy is a modified endowment
contract, a loan is also treated as a distribution. Generally, distributions
from a modified endowment contract (including loans) are included in income to
the extent the Cash Value exceeds premiums paid. A change of Owners, an
assignment, a loan or a surrender of the Policy may have tax consequences.

Death Benefits payable under the Policy are generally excludable from the
gross income of the Beneficiary. As a result, the Beneficiary would not be
subject to income tax on the Death Benefit. (See "Federal Tax Matters," page
22.)

FREE-LOOK PERIOD

The Policy owner may examine a Policy and return it for a refund during the
Free-Look Period. The length of the Free-Look Period depends on the state where
the Policy is issued; however, it will be at least 10 days from the date the
owner receives the Policy. (See "Policy Benefits and Rights--Free-Look Period
and Exchange Rights," page 15.)

4
<PAGE> 11

ILLUSTRATIONS OF CASH VALUES, SURRENDER VALUES, DEATH BENEFITS

Tables in Appendix A illustrate Cash Values, Surrender Values and Death
Benefits. These illustrations are based on Policy charges and hypothetical
assumed rates of return for the Separate Account. The Separate Account's
investment experience will differ, and actual Policy values will be higher or
lower than those illustrated.

KILICO AND THE SEPARATE ACCOUNT

KEMPER INVESTORS LIFE INSURANCE COMPANY

Kemper Investors Life Insurance Company ("KILICO"), 1 Kemper Drive, Long
Grove, Illinois 60049, was organized in 1947 and is a stock life insurance
company organized under the laws of the State of Illinois. KILICO is a
wholly-owned subsidiary of Kemper Corporation, a nonoperating holding company.
Kemper Corporation is a majority owned (76.4 percent) subsidiary of Zurich
Holding Company of America ("ZHCA"), which is a wholly-owned subsidiary of
Zurich Insurance Company ("Zurich"). Zurich is a wholly-owned subsidiary of
Zurich Financial Services ("ZFS"). ZFS was formed in the September, 1998 merger
of the Zurich Group with the financial services business of B.A.T. Industries.
ZFS is owned by Zurich Allied A.G. and Allied Zurich p.l.c. fifty-seven percent
and forty-three percent, respectively. KILICO offers life insurance and annuity
products and is admitted to do business in the District of Columbia and all
states except New York.

SEPARATE ACCOUNT

KILICO Variable Separate Account (the "Separate Account") was established
as a separate investment account on January 22, 1987. The Separate Account
receives and invests net premiums under the Policy. In addition, the Separate
Account may receive and invest net premiums for other variable life insurance
policies offered by KILICO.

The Separate Account is administered and accounted for as part of Our
general business. The income, capital gains or capital losses of the Separate
Account are credited to or charged against Separate Account assets, without
regard to the income, capital gains or capital losses of any other separate
account or any other business We conduct. The Policy benefits are our
obligations.

The Separate Account is registered with the Securities and Exchange
Commission ("Commission") as a unit investment trust under the Investment
Company Act of 1940 (the "1940 Act"). However, the Commission does not supervise
the management, investment practices or policies of the Separate Account or
KILICO.

The Policy currently offers twenty-three Subaccounts. Additional
Subaccounts may be added in the future. Not all Subaccounts may be available in
all jurisdictions or under all Policies.

THE FUNDS

The Separate Account invests in shares of the Kemper Variable Series
(formerly Investors Fund Series), American Skandia Trust, Fidelity Variable
Insurance Products Fund, Fidelity Variable Insurance Products Fund II, Fidelity
Variable Insurance Products Fund III and Scudder Variable Life Investment Fund.
Each is a series type mutual fund registered as an open-end management
investment company. The Commission does not supervise their management,
investment practices or policies. The Funds provide investment vehicles for
variable life insurance and variable annuity contracts. Shares of the Funds
currently are sold only to insurance company separate accounts and certain
qualified retirement plans. In addition to the Separate Account, shares of the
Funds may be sold to variable life insurance and variable annuity separate
accounts of insurance companies not affiliated with KILICO. It is conceivable
that in the future it may be disadvantageous for variable life insurance
separate accounts of companies unaffiliated with KILICO, or for variable life
insurance separate accounts, variable annuity separate accounts and qualified
retirement plans to invest simultaneously in the Funds. Currently We do not
foresee disadvantages to variable life insurance owners, variable annuity owners
or qualified retirement plans. The Funds have an obligation to monitor events
for material conflicts between owners and determine what action, if any, should
be taken. In addition, if We believe that a Fund's response to any of those
events or conflicts insufficiently protects owners, We will take appropriate
action on Our own.

5
<PAGE> 12

Each portfolio operates as a separate investment fund, and the income, gains or
losses of one portfolio generally have no effect on the investment performance
of any other portfolio.

KEMPER VARIABLE SERIES (FORMERLY INVESTORS FUND SERIES)

The Kemper Variable Series (formerly Investors Fund Series) portfolios in
which the Separate Account invests are summarized below:

KEMPER MONEY MARKET PORTFOLIO: This Portfolio seeks maximum current income
to the extent consistent with stability of principal from a portfolio of high
quality money market instruments. 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.

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

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

KEMPER GROWTH PORTFOLIO: This Portfolio seeks maximum appreciation of
capital through diversification of investment securities having potential for
capital appreciation.

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

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

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

Scudder Kemper Investments, Inc. ("SKI"), Our affiliate, is the investment
manager to each Portfolio of the Kemper Variable Series (formerly Investors Fund
Series) specified above. Scudder Investments (U.K.) Limited ("Scudder U.K."), an
affiliate of SKI, is the sub-adviser for the Kemper International Portfolio.

AMERICAN SKANDIA TRUST

The American Skandia Trust portfolios in which the Separate Account invests
are summarized below:

AST LORD ABBETT GROWTH AND INCOME PORTFOLIO: This Portfolio seeks long-term
growth of capital and income while attempting to avoid excessive fluctuations in
market value by investing in common stocks of seasoned companies which are
expected to show above-average growth.

AST JANCAP GROWTH PORTFOLIO: This Portfolio seeks growth of capital in a
manner consistent with preservation of capital by emphasizing investments in
common stocks.

AST T. ROWE PRICE INTERNATIONAL EQUITY PORTFOLIO: This Portfolio seeks
total return on its assets from long-term growth of capital and income
principally through investment primarily in common stocks of established,
non-U.S. companies.

AST T. ROWE PRICE ASSET ALLOCATION PORTFOLIO: This Portfolio seeks a high
level of total return by investing primarily in a diversified group of fixed
income and equity securities.

AST JANUS SMALL-CAP GROWTH (FORMERLY FOUNDERS CAPITAL APPRECIATION)
PORTFOLIO: This Portfolio seeks capital growth through investment primarily in
common stocks of U.S. companies with market capitalizations of less than $1.5
billion or annual gross revenues of less than $500 million.

AST INVESCO EQUITY INCOME PORTFOLIO: This Portfolio seeks high current
income while following sound investment practices, with capital growth potential
as an additional but secondary consideration. The Portfolio invests primarily in
dividend-paying, marketable common stocks of domestic and foreign issuers.

AST PIMCO TOTAL RETURN BOND PORTFOLIO: This Portfolio seeks to maximize
total return, consistent with preservation of capital and prudent investment
management by investing primarily in fixed income securities of various
maturities.

6
<PAGE> 13

AST PIMCO LIMITED MATURITY BOND PORTFOLIO: This Portfolio seeks to maximize
total return, consistent with preservation of capital and prudent investment
management by investing primarily in fixed income securities of various
maturities.

AST NEUBERGER BERMAN MID-CAP GROWTH PORTFOLIO (FORMERLY BERGER CAPITAL
GROWTH PORTFOLIO): This Portfolio seeks capital growth by investing in the
common stocks of companies with market capitalizations from $300 million to $10
billion.

American Skandia Investment Services, Incorporated ("ASISI") is the
investment manager for the American Skandia Trust. ASISI engages a sub-adviser
for each Portfolio as described in the prospectus to the American Skandia Trust.

FIDELITY VARIABLE INSURANCE PRODUCTS FUND
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II
FIDELITY VARIABLE INSURANCE PRODUCTS FUND III

The Fidelity Variable Insurance Products Fund, Fidelity Variable Insurance
Products Fund II, and Fidelity Variable Insurance Products Fund III portfolios
in which the Separate Account invests are summarized below:

FIDELITY VIP EQUITY-INCOME PORTFOLIO: This Portfolio seeks reasonable
income.

FIDELITY VIP HIGH INCOME PORTFOLIO: This Portfolio seeks a high level of
current income while also considering growth of capital.

FIDELITY VIP II CONTRAFUND PORTFOLIO: This Portfolio seeks long-term
capital appreciation.

FIDELITY VIP II INDEX 500 PORTFOLIO: This Portfolio seeks investment
results that correspond to the total return of common stocks publicly traded in
the United States, as represented by the S&P 500.

FIDELITY VIP III GROWTH OPPORTUNITIES PORTFOLIO: This Portfolio seeks to
provide capital growth.

Fidelity Management & Research Company ("FMR") is the investment manager of
the Fidelity VIP, VIP II and VIP III Funds.

SCUDDER VARIABLE LIFE INVESTMENT FUND

The Scudder Variable Life Investment Fund portfolios in which the Separate
Account invests are summarized below:

SCUDDER VLIF INTERNATIONAL PORTFOLIO (B-SHARES): This Portfolio seeks
long-term growth of capital principally from a diversified portfolio of foreign
equity securities.

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

Scudder Kemper Investments, Inc. ("SKI") is the investment advisor of each
portfolio of the Scudder Variable Life Investment Fund specified above.

The Portfolios may not achieve their stated objectives. More detailed
information, including a description of risks involved in investing in the
Portfolios, is found in the Funds' prospectuses and Statements of Additional
Information. The Funds' prospectuses accompany this Prospectus. The Funds'
Statements of Additional Information are available from Us upon request.

CHANGE OF INVESTMENTS

7
<PAGE> 14

combine one or more subaccounts, transfer assets, or substitute one subaccount
for another subaccount, if, in Our discretion, marketing, tax or investment
conditions warrant. We will not substitute any shares attributable to a Policy
owner's interest in a Subaccount without notice to the owner and the
Commission's prior approval, if required. Nothing contained in this Prospectus
shall prevent the Separate Account from purchasing other securities for other
series or classes of policies, or from permitting a conversion between series or
classes of policies on the basis of requests made by Policy owners.

We also reserve the right to establish additional subaccounts of the
Separate Account, each of which would invest in a new portfolio of the Funds, or
in shares of another investment company. New subaccounts may be established
when, in Our sole discretion, marketing needs or investment conditions warrant.
New subaccounts may be made available to existing owners as We determine.

If We deem it to be in the best interests of persons having voting
interests under the Policy, the Separate Account may be:

- operated as a management company under the 1940 Act;

- deregistered under that Act in the event such registration is no
longer required; or

- combined with Our other separate accounts. To the extent permitted by
law, We may also transfer assets of the Separate Account to another
separate account, or to the General Account.

FIXED ACCOUNT OPTION

AMOUNTS ALLOCATED OR TRANSFERRED TO THE FIXED ACCOUNT ARE PART OF OUR
GENERAL ACCOUNT, SUPPORTING INSURANCE AND ANNUITY OBLIGATIONS. INTERESTS IN THE
FIXED ACCOUNT ARE NOT REGISTERED UNDER THE SECURITIES ACT OF 1933 ("1933 ACT"),
AND THE FIXED ACCOUNT IS NOT REGISTERED AS AN INVESTMENT COMPANY UNDER THE
INVESTMENT COMPANY ACT OF 1940 ("1940 ACT"). ACCORDINGLY, NEITHER THE FIXED
ACCOUNT NOR ANY FIXED ACCOUNT INTERESTS GENERALLY ARE SUBJECT TO THE PROVISIONS
OF THE 1933 OR 1940 ACTS. WE HAVE BEEN ADVISED THAT THE STAFF OF THE COMMISSION
HAS NOT REVIEWED THE DISCLOSURES IN THIS PROSPECTUS RELATING TO THE FIXED
ACCOUNT. STATEMENTS REGARDING THE FIXED ACCOUNT, HOWEVER, MAY BE SUBJECT TO THE
GENERAL PROVISIONS OF THE FEDERAL SECURITIES LAWS RELATING TO THE ACCURACY AND
COMPLETENESS OF STATEMENTS MADE IN PROSPECTUSES.

Under the Fixed Account Option, We pay a fixed interest rate for stated
periods. This Prospectus describes only the aspects of the Policy involving the
Separate Account, unless We refer to fixed accumulation and settlement options.

We guarantee the interest rate credited to the Fixed Account will be at
least 3% annually. At Our discretion, We may credit interest in excess of 3%. We
reserve the right to change the rate of excess interest credited. We also
reserve the right to declare different rates of excess interest depending on
when amounts are allocated or transferred to the Fixed Account. As a result,
amounts at any designated time may be credited with a different rate of excess
interest than the rate previously credited to such amounts and to amounts
allocated or transferred at any other designated time.

8
<PAGE> 15

THE POLICY

POLICY ISSUE

Before We issue a Policy, We must receive a completed application and a
full initial premium at Our home office. We ordinarily issue a Policy only for
Insureds Age 1 through 75 who supply satisfactory evidence of insurability.
Acceptance of an application is subject to Our underwriting requirements. If We
decline an application, We will refund the Cash Value in the Kemper Money Market
Subaccount plus the total amount of monthly deductions and deductions against
premiums.

After underwriting is complete and the Policy is delivered to its owner,
insurance coverage begins as of the Policy Date. (See "Premiums," below.)

PREMIUMS

We must receive premiums at Our home office. (See "Distribution of
Policies.") Checks must be made payable to KILICO.

PLANNED PREMIUMS. A Policy owner specifies a Planned Premium payment on the
application that provides for the payment of level premiums over a specified
period of time. However, the owner is not required to pay Planned Premiums.

The minimum monthly premium is $50. Other minimums are: single premium
$5,000; annual $600; semi-annual $300; quarterly $150. The amount, frequency and
period of time over which a Policy owner pays premiums may affect whether the
Policy will be classified as a modified endowment contract. Accordingly,
variations from Planned Premiums may cause the Policy to become a modified
endowment contract, and therefore subject to different tax treatment from
conventional life insurance contracts for certain pre-death distributions (See
"Federal Tax Matters".)

Payment of the Planned Premium does not guarantee that a Policy remains in
force. Instead, the duration of the Policy depends upon the Policy's Surrender
Value. Even if Planned Premiums are paid, the Policy will lapse any time
Surrender Value is insufficient to pay the current monthly deductions and a
grace period expires without sufficient payment. (See "Policy Lapse and
Reinstatement.")

A guarantee period and a monthly guarantee premium are specified in the
Policy Specifications. The guarantee period ends on the third Policy
anniversary. During the guarantee period, the Policy remains in force and no
grace period will begin, provided that the total premiums received, minus any
withdrawals and any Debt, equals or exceeds the monthly guarantee premium times
the number of months since the Policy Date, including the current month.

The full initial premium is the only premium required to be paid under a
Policy. However, additional premiums may be necessary to keep the Policy in
force. (See "The Policy--Policy Lapse and Reinstatement.") We may reject or
limit any premium payment below the current minimum premium amount, or that
would increase the death benefit by more than the amount of the premium. We may
return all or a portion of a premium payment if it would disqualify the Policy
as life insurance under the Internal Revenue Code.

Certain charges are deducted from each premium payment. (See "Charges and
Deductions.") The remainder of the premium, known as the net premium, is
allocated as described below under "Allocation of Premiums and Separate Account
Value."

POLICY DATE. The Policy Date is used to determine Policy Years and Monthly
Processing Dates. The Policy Date is the date that insurance coverage takes
effect. If this date is the 29th, 30th, or 31st of a month, the Policy Date will
be the first of the following month.

ALLOCATION OF PREMIUMS AND SEPARATE ACCOUNT VALUE

ALLOCATION OF PREMIUMS. The initial net premium is allocated to the Kemper
Money Market Subaccount. The Separate Account Value remains in the Kemper Money
Market Subaccount until the Trade Date. On the Trade Date, the Separate Account
Value in the Kemper Money Market Subaccount is allocated to the Subaccounts and
the Fixed Account as specified in the application. Additional premiums received
will be allocated as specified in the application or in later written
instructions received from the Policy owner. The minimum amount of any premium
that may be allocated to a Subaccount is $50. Cash Value may be allocated to a
total of ten accounts at any given time.

9
<PAGE> 16

The Separate Account Value will vary with the investment experience of the
chosen Subaccounts. The Policy owner bears the entire investment risk.

TRANSFERS. After the Trade Date, Separate Account Value may be transferred
among the Subaccounts and into the Fixed Account. These transfers are limited to
one transfer every fifteen days. All transfers made during a business day are
treated as one transfer.

Fixed Account Value may be transferred to one or more Subaccounts. One
transfer of Fixed Account Value may be made once each Policy Year in the thirty
day period following the end of a Policy Year.

Transfer requests must be in writing in a form acceptable to Us, or by
telephone authorization under forms We authorize. (See "General
Provisions--Written Notices and Requests.") The minimum partial transfer amount
is $500. No partial transfer may be made if the value of the Policy owner's
remaining interest in a Subaccount or the Fixed Account, from which amounts are
to be transferred, would be less than $500 after the transfer. We may waive
these minimums for reallocations under established third party asset allocation
programs. Transfers are based on the Accumulation Unit values next determined
following Our receipt of valid, complete transfer instructions. We may suspend,
modify or terminate the transfer provision. We reserve the right to charge up to
$25 for each transfer. We disclaim all liability if we follow in good faith
instructions given in accordance with Our procedures, including requests for
personal identifying information, that are designed to limit unauthorized use of
the privilege. Therefore, a Policy owner bears the risk of loss in the event of
a fraudulent telephone transfer.

If a Policy owner authorizes a third party to transact transfers on the
Policy owner's behalf, We will reallocate the Cash Value pursuant to the
authorized asset allocation program. However, We do not offer or participate in
any asset allocation program and We take no responsibility for any third party
asset allocation program. We may suspend or cancel acceptance of a third party's
instructions at any time and may restrict the investment options available for
transfer under third party authorizations.

AUTOMATIC ASSET REALLOCATION. A Policy owner may elect to have transfers
made automatically among the Subaccounts on an annual or a quarterly basis so
that Cash Value is reallocated to match the percentage allocations in the Policy
owner's predefined premium allocation elections. Transfers under this program
are not subject to the $500 minimum transfer limitations. An election to
participate in the automatic asset reallocation program must be in writing on
Our form and returned to Our home office.

POLICY LAPSE AND REINSTATEMENT

LAPSE. The Policy will lapse when the Surrender Value is insufficient to
cover the current monthly deductions and a grace period expires without a
sufficient payment. (See "Charges and Deductions.")

The grace period is 61 days. The grace period begins when We send notice
that the Surrender Value is insufficient to cover the monthly deductions. If We
do not receive a premium payment or loan repayment during the grace period
sufficient to keep the Policy in force for three months, the Policy will lapse
and terminate without value.

If payment is received within the grace period, the premium or loan
repayment will be allocated to the Subaccounts and the Fixed Account in
accordance with current allocation instructions. Amounts over and above the
amounts necessary to prevent lapse may be paid as additional premiums, to the
extent permissible. (See "The Policy--Premiums.")

We will not accept any payment causing the total premium payment to exceed
the maximum payment permitted for life insurance under the guideline premium
limits. However, the Policy owner may voluntarily repay a portion of Debt to
avoid lapse. The owner may also combine premium payments with Debt repayments.
(See "Federal Tax Matters.")

The death benefit payable during the grace period will be the Death Benefit
in effect immediately prior to the grace period, less any Debt and any unpaid
monthly deductions.

REINSTATEMENT. If a Policy lapses because of insufficient Surrender Value
to cover the monthly deductions, and it has not been surrendered for its
Surrender Value, it may be reinstated at any time within three years after the
date of lapse. Tax consequences may affect the decision to reinstate.
Reinstatement is subject to:

- receipt of evidence of insurability satisfactory to Us;

- payment of a minimum premium sufficient to cover monthly deductions
for the grace period and to keep the Policy in force three months; and

- payment or reinstatement of any Debt which existed at the date of
termination of coverage.

10
<PAGE> 17

The effective date of reinstatement of a Policy is the Monthly Processing
Date that coincides with or next follows the date We approve the application for
reinstatement. Suicide and incontestability provisions apply from the effective
date of reinstatement.

POLICY BENEFITS AND RIGHTS

DEATH BENEFITS

While the Policy is in force (see "Policy Lapse and Reinstatement--Lapse,"
above), the death benefit is based on the death benefit option, the Specified
Amount and the table of death benefit percentages applicable at the time of
death. The death benefit proceeds equal the death benefit minus any Debt and
minus any monthly deductions due during the grace period.

A Policy owner selects in the application one of two death benefit options:
Option A or Option B. Subject to certain restrictions, the owner can change the
death benefit option selected. So long as the Policy remains in force, the death
benefit under either option will never be less than the Specified Amount.

The Policy owner chooses the Specified Amount on the application. The
Specified Amount is stated in the Policy Specifications. The minimum Specified
Amount is $50,000.

OPTION A. Under Option A, the death benefit equals the Specified Amount or,
if greater, the Cash Value (determined as of the end of the Valuation Period
during which the Insured dies) multiplied by a death benefit percentage. The
death benefit percentages vary according to the Insured's age. The death benefit
percentage is 250% for an Insured at Age 40 or under, and it declines for older
Insureds. In setting the death benefit percentages, We seek to ensure that the
Policy will qualify for favorable federal income tax treatment. A table showing
the death benefit percentages is in the Appendix B to this Prospectus and in the
Policy.

OPTION B. Under Option B, the death benefit equals the Specified Amount
plus the Cash Value (determined as of the end of the Valuation Period during
which the Insured dies) or, if greater, the Cash Value multiplied by a death
benefit percentage. The specified percentage is the same as that used in
connection with Option A. The death benefit under Option B always varies as Cash
Value varies.

EXAMPLES OF OPTIONS A AND B. The following examples demonstrate the
determination of death benefits under Options A and B. The examples show three
Policies--Policies I, II, and III--with the same Specified Amount, but different
Cash Values and assume that the Insured is Age 35 at the time of death and that
there is no outstanding Debt.

<TABLE>
<CAPTION>
POLICY I POLICY II POLICY III
-------- --------- ----------
<S> <C> <C> <C>
Specified Amount.......................... $100,000 $100,000 $100,000
Cash Value on Date of Death............... $ 25,000 $ 50,000 $ 75,000
Death Benefit Percentage.................. 250% 250% 250%
Death Benefit Under Option A.............. $100,000 $125,000 $187,500
Death Benefit Under Option B.............. $125,000 $150,000 $187,500
</TABLE>

Under Option A, the death benefit for Policy I equals $100,000 since the
death benefit is the greater of the Specified Amount ($100,000) or the Cash
Value at the date of death times the death benefit percentage ($25,000 X 250% =
$62,500). For both Policies II and III under Option A, the Cash Value times the
death benefit percentage ($50,000 X 250% = $125,000 for Policy II; $75,000 X
250% = $187,500 for Policy III) is greater than the Specified Amount ($100,000),
so the death benefit equals the higher value. Under Option B, the death benefit
for Policy I equals $125,000 since the death benefit is the greater of Specified
Amount plus Cash Value ($100,000 + $25,000 = $125,000) or the Cash Value times
the death benefit percentage ($25,000 X 250% = $62,500). Similarly, in Policy
II, Specified Amount plus Cash Value ($100,000 + $50,000 = $150,000) is greater
than Cash Value times the death benefit percentage ($50,000 X 250% = $125,000).
In Policy III, the Cash Value times the death benefit percentage ($75,000 X 250%
= $187,500) is greater than the Specified Amount plus Cash Value ($100,000 +
$75,000 = $175,000), so the death benefit equals the higher value.

All calculations of death benefit are made as of the end of the Valuation
Period during which the Insured dies. Death benefit proceeds may be paid to a
Beneficiary in a lump sum or under the Policy's settlements options.

Death Benefits ordinarily are paid within seven days after We receive all
required documentation. Payments may be postponed in certain circumstances. (See
"General Provisions--Postponement of Payments")

11
<PAGE> 18

CHANGES IN DEATH BENEFIT OPTION

After the first Policy Year, a Policy owner may change the death benefit
option from Option A to Option B, or from Option B to Option A. Changes in the
death benefit option may be made, in writing once per Policy Year. The effective
date of the change is the next Monthly Processing Date after We accept the
change.

A change in the death benefit from Option A to Option B reduces the
Specified Amount by the amount of the Policy's Cash Value. Therefore, the death
benefit payable under Option B at the time of the change equals the amount
payable under Option A immediately prior to the change. The change in option
affects the determination of the death benefit since Cash Value will then be
added to the new Specified Amount, and the death benefit then varies with Cash
Value.

A change in the death benefit from Option B to Option A increases the
Specified Amount by the amount of the Policy's Cash Value. Therefore, the death
benefit payable under Option A at the time of the change equals the amount
payable under Option B immediately prior to the change. However, the change in
option affects the determination of the death benefit since the Cash Value is
not added to the Specified Amount in determining the death benefit. The death
benefit then equals the new Specified Amount (or, if higher, the Cash Value
times the applicable specified percentage).

A change in death benefit option may affect the future monthly cost of
insurance charge, which varies with the net amount at risk. Generally, net
amount at risk is the amount by which the death benefit exceeds Cash Value. (See
"Charges and Deductions--Cost of Insurance Charge.") If the death benefit does
not equal Cash Value times a death benefit percentage under either Options A or
B, changing from Option B to Option A will generally decrease the future net
amount at risk. This would decrease the future cost of insurance charges.
Changing from Option A to Option B generally results in a net amount at risk
that remains level. Such a change, however, results in an increase in the cost
of insurance charges over time, since the cost of insurance rates increase with
the Insured's Age.

CHANGES IN SPECIFIED AMOUNT

After the first Policy Year, a Policy owner may increase or decrease the
Specified Amount, subject to Our approval. A change in Specified Amount may only
be made once per Policy Year. The minimum change in Specified Amount is $25,000.
Increases are not allowed after the Insured attains age 75. Increasing the
Specified Amount could increase the death benefit. Decreasing the Specified
Amount could decrease the death benefit. The amount of change in the death
benefit will depend, among other things, upon the selected death benefit option
and the degree to which the death benefit exceeds the Specified Amount prior to
the change. Changing the Specified Amount could affect the subsequent level of
death benefit and Policy values. An increase in Specified Amount may increase
the net amount at risk, thereby increasing a Policy owner's cost of insurance
charge and the guarantee premium amount. However, an increase in Specified
Amount does not extend the guarantee period. Conversely, a decrease in Specified
Amount may decrease the net amount at risk, thereby decreasing an owner's cost
of insurance charge. A decrease in Specified Amount will not decrease the
guarantee premium. Decreases in the death benefit may have tax consequences.
(See "Federal Tax Matters.")

INCREASES. We require additional evidence of insurability for an increase
in Specified Amount.

DECREASES. Any decrease in Specified Amount is first applied to the most
recent increases successively, then to the original Specified Amount. A decrease
is not permitted if the Specified Amount would fall below the lesser of the
initial Specified Amount or $50,000. If after a decrease in the Specified
Amount, total premiums paid exceed the tax law's premium limitations, we will
refund the amount exceeding the premium limitations. Some or all of the amount
refunded may be subject to tax. (See "Federal Tax Matters.")

We reserve the right to deny a requested decrease in Specified Amount. The
reasons for denial may include:

- Our determination that the decrease would cause the Policy to fail
the tax guideline premium limitations, resulting in the Policy's
termination or

- Our determination that the decrease would cause the Policy to fail
the tax guideline premium limitations because the payments from Cash Value
required to effect the decrease exceed Surrender Value.

Requests for change in Specified Amount must be made in writing. The
requested change becomes effective on the Monthly Processing Date on or next
following Our acceptance of the request. If the Policy owner is not the Insured,
we require the Insured's consent.

12
<PAGE> 19

BENEFITS AT MATURITY

If the Insured is alive on the Policy Date anniversary nearest the
Insured's 100th birthday, We pay the Policy owner the Surrender Value of the
Policy. On the Maturity Date, the Policy terminates and We have no further
obligations under the Policy.

CASH VALUE

Cash Value reflects

- the investment experience of the selected Subaccounts

- the frequency and amount of premiums paid

- transfers between Subaccounts

- withdrawals

- any Fixed Account or Loan Account values

- Policy charges

A Policy owner may make partial withdrawals of Cash Value or surrender the
Policy and receive the Policy's Surrender Value. (See "Surrender Privilege.")
Cash Value is not guaranteed.

CALCULATION OF CASH VALUE. Cash Value is the total of

- Separate Account Value

- Fixed Account Value

- Loan Account value

Cash Value is determined on each Valuation Date. It is first calculated on
the Policy Date. On that date, the Cash Value equals the initial premium, minus
the monthly deductions for the first Policy Month. (See "Charges and
Deductions.")

On any Valuation Date, Separate Account Value in any Subaccount equals:

(1) Separate Account Value in the Subaccount at the end of the
preceding Valuation Period times the Investment Experience Factor (defined
below) for the current Valuation Period; plus

(2) Any net premiums received and allocated to the Subaccount during
the current Valuation Period; plus

(3) All amounts transferred to the Subaccount during the current
Valuation Period (from a Subaccount, the Fixed Account or the Loan Account
for Policy loan repayment (see "Policy Benefits and Rights--Policy
Loans,")); minus

(4) The pro rata portion of the monthly cost of insurance charge,
administrative charge, and any other charges assessed to the Subaccount.
(See "Charges and Deductions--Cost of Insurance Charge."); minus

(5) All amounts transferred from the Subaccount during the current
Valuation Period; minus

(6) All amounts withdrawn from the Subaccount during the current
Valuation Period; minus

(7) All amounts loaned from the Subaccount during the current
Valuation Period.

There will also be Cash Value in the Loan Account if there is a Policy loan
outstanding. The Loan Account is credited with amounts transferred from
Subaccounts for Policy loans. The Loan Account balance accrues daily interest at
an effective annual rate of 3.00%. (See "Policy Benefits and Rights--Policy
Loans.")

The Cash Value in the Fixed Account is credited with interest at Our
declared annual rate. The annual rate will never be less than 3%.

ACCUMULATION UNIT VALUE. Each Subaccount has its own Accumulation Unit
Value. When net premiums or other amounts are allocated to a Subaccount, units
are purchased based on the Subaccount's Accumulation Unit Value at the end of
the Valuation Period during which the allocation is made. When amounts are
transferred out of, or deducted from, a Subaccount, units are redeemed in a
similar manner.

13
<PAGE> 20

For each Subaccount, Accumulation Unit Value was initially set at the same
unit value as the net asset value of a share of the underlying Fund. The
Accumulation Unit Value for each subsequent Valuation Period is the Investment
Experience Factor for that Valuation Period times the Accumulation Unit Value
for the preceding Valuation Period. Each Valuation Period has a single
Accumulation Unit Value which applies for each day in the period. The number of
Accumulation Units will not change due to investment experience. The Investment
Experience Factor may be greater or less than one; therefore, the Accumulation
Unit Value may increase or decrease.

INVESTMENT EXPERIENCE FACTOR. The investment experience of the Separate
Account is calculated by applying the Investment Experience Factor to the
Separate Account Value in each Subaccount during a Valuation Period. Each
Subaccount has its own Investment Experience Factor. The Investment Experience
Factor of a Subaccount for any Valuation Period is determined by dividing (1) by
(2) and subtracting (3) from the result, where:

(1) is the net result of:

a. The net asset value per share of the investment held in the
Subaccount determined at the end of the current Valuation Period; plus

b. the per share amount of any dividend or capital gain distributions
made by the investments held in the Subaccount, if the "ex-dividend"
date occurs during the current Valuation Period; plus or minus

c. a charge or credit for any taxes reserved for the current Valuation
Period which we determine have resulted from the investment operations
of the Subaccount;

(2) is the net asset value per share of the investment held in the
Subaccount determined at the end of the preceding Valuation Period;

(3) is the factor representing the Mortality and Expense Risk Charge. (See
"Charges and Deductions--Mortality and Expense Risk Charge.")

POLICY LOANS

After the first Policy Year, the Policy owner may borrow all or part of the
Policy's maximum loan amount. The maximum loan amount is 90% of Surrender Value.
The amount of any new loan may not exceed the maximum loan amount less Debt on
the date a loan is granted. The minimum amount of a loan is $500. The loan
ordinarily is paid within 7 days after we receive a written loan request,
although payments may be postponed under certain circumstances. (See
"Postponement of Payments," and "Federal Tax Matters.")

On the date a loan is made, the loan amount is transferred from the
Separate Account and Fixed Account to the Loan Account. Unless the Policy owner
directs otherwise, the loan amount is deducted from the Subaccounts and the
Fixed Account in proportion to the values that each bears to the total of
Separate Account Value and Fixed Account Value at the end of the Valuation
Period during which the request is received.

Loan interest is charged at an effective annual rate of 4.5% in the first
nine Policy Years and 3.00% thereafter. Interest not paid when due is added to
the loan amount. Unpaid interest is due upon the earlier of the next Policy Date
anniversary or when coverage ceases. The same interest rates apply to unpaid
interest. When interest is added to the loan amount, we transfer an equal amount
from the Separate Account and the Fixed Account to the Loan Account.

Cash Value in the Loan Account earns 3.00% annual interest. Such interest
is allocated to the Loan Account.

LOAN REPAYMENT. All or any portion of a loan may be repaid at any time. A
Policy owner must specify that the purpose of a payment is loan repayment;
otherwise a payment is treated as premium. At the time of repayment, the Loan
Account is reduced by the repayment amount, adjusted for the difference between
interest charged and interest earned. The net repayment amount is allocated to
the Subaccounts and the Fixed Account, according to the Policy owner's current
allocation instructions, at the end of the Valuation Period during which the
repayment is received. These transfers are not limited by the 15 day transfer
restriction.

EFFECTS OF POLICY LOAN. Policy loans decrease Surrender Value and,
therefore, the amount available to pay Policy charges. If Surrender Value on the
day preceding a Monthly Processing Date is less than the next monthly deductions
We will notify the Policy owner. (See "General Provisions--Written Notices and
Requests.") The Policy will lapse and terminate without value, unless we receive
a sufficient payment within 61 days of the date notice is sent. (See "The
Policy--Policy Lapse and Reinstatement.")

EFFECT ON INVESTMENT EXPERIENCE. A Policy Loan affects Cash Value. The
collateral for the outstanding loan (the amount held in the Loan Account) does
not participate in the experience of the Subaccounts or earn current

14
<PAGE> 21

interest in the Fixed Account. If the interest credited to the Loan Account is
more than the amount that would have been earned in the Subaccounts or the Fixed
Account, the Cash Value will, and the Death Benefit may, be higher as a result
of the loan. Conversely, if the amount credited to the Loan Account is less than
would have been earned in the Subaccounts or the Fixed Account, the Cash Value,
as well as the Death Benefit, may be less.

TAX TREATMENT. If the Policy is a modified endowment contract, a loan is
treated as a distribution and is includible in income to the extent that Cash
Value exceeds premiums paid. Therefore, a loan may result in federal income tax
and a 10% tax penalty may also apply. (See "Federal Tax Matters.")

SURRENDER PRIVILEGE

If the Insured is alive, the Policy owner may surrender the Policy for its
Surrender Value. To surrender the Policy, the owner must return the Policy to
us, along with a written request. Surrender Value equals Cash Value, minus
Surrender Charges and Debt. (See "Surrender Charge," below.)

PARTIAL WITHDRAWALS. After the first Policy Year, a Policy owner may
withdraw a portion of Surrender Value. The minimum amount of each withdrawal is
$500. During the surrender period, the maximum amount of partial withdrawal is
10% of the Surrender Value. A $25 withdrawal charge is imposed for each
withdrawal. This charge is deducted after the partial withdrawal amount is
determined. (See "Charges and Deductions.") A withdrawal decreases Cash Value by
the amount of the withdrawal and, if Death Benefit Option A is in effect,
reduces Specified Amount by the amount of the withdrawal.

FREE-LOOK PERIOD AND EXCHANGE RIGHTS

During the Free-Look Period, the Policy owner may examine the Policy and
return it for a refund. The time period depends on where the Policy is issued;
however, it will be at least 10 days from the date the Policy is received by the
owner, or, 45 days after the owner completes the application for insurance,
whichever is later. The amount of the refund is the sum of Cash Value in the
Kemper Money Market Subaccount plus the total amount of monthly deductions and
deductions from Premium. An owner seeking a refund should return the Policy to
Us or to the agent who sold the Policy.

At any time during the first two years after the Issue Date, the Policy
owner may exchange the Policy for a non-variable permanent fixed benefit life
insurance policy then currently offered by KILICO or an affiliate. Evidence of
insurability is not required. The amount of the new policy may be, at the
election of the owner, either the initial Death Benefit or the same net amount
at risk as the Policy on the exchange date. All Debt must be repaid and the
Policy must be surrendered before the exchange is made. The new policy will have
the same Policy Date and issue age as the exchanged Policy.

CHARGES AND DEDUCTIONS

DEDUCTIONS FROM PREMIUMS

We deduct a state and local premium tax charge of 2.5% from each premium
payment before net premium is allocated. This charge reimburses Us for paying
state premium taxes. We expect to pay an average state premium tax rate of
approximately 2.5%, but the actual premium tax attributable to a Policy may be
more or less. In addition, a charge for federal taxes, equal to 1% of each
premium payment, is deducted to compensate Us for higher corporate income taxes
under the current Internal Revenue Code.

COST OF INSURANCE CHARGE

We deduct a cost of insurance charge monthly from the Subaccounts and the
Fixed Account. This charge covers Our anticipated mortality costs. The cost of
insurance charge is deducted monthly in advance and is allocated pro rata among
the Subaccounts and the Fixed Account.

We deduct the cost of insurance by cancelling units on the Policy Date and
on each Monthly Processing Date thereafter. If the Monthly Processing Date falls
on a day other than a Valuation Date, the charge is determined on the next
Valuation Date. The cost of insurance charge is determined by multiplying the
cost of insurance rate (see below) by the "net amount at risk" for each Policy
month. The net amount at risk equals the Death Benefit minus the Cash Value on
the Monthly Processing Date.

COST OF INSURANCE RATE. The monthly cost of insurance rates are based on
the issue age, sex, rate class of the Insured and Policy Year. We determine the
monthly cost of insurance rates based on Our expectations as to future mortality
experience. Any change in the schedule of rates applies to all individuals of
the same class as the

15
<PAGE> 22

Insured. The cost of insurance rate may never exceed those shown in the table of
guaranteed maximum cost of insurance rates in the Policy. The guaranteed maximum
cost of insurance rates are based on the 1980 Commissioner's Standard Ordinary
Smoker and Non-Smoker Mortality Tables, Age Nearest Birthday, published by the
National Association of Insurance Commissioners.

RATE CLASS. The rate class of an Insured will affect the cost of insurance
rate. We currently place Insureds in preferred rate classes and rate classes
involving a higher mortality risk. The cost of insurance rates for rate classes
involving a higher mortality risk are multiples of the preferred rates. (See
"Charges and Deductions--Cost of Insurance Rate," above.)

MORTALITY AND EXPENSE RISK CHARGE

We deduct a daily charge, at an annual rate of 0.90%, from the Subaccounts
for mortality and expense risks we assume.

The mortality and expense risk we assume is that Our estimates of longevity
and of the expenses incurred over the life of the Policy will not be correct.

MONTHLY ADMINISTRATIVE CHARGE

We deduct a monthly administrative expense charge to reimburse Us for
certain expenses related to maintenance of the Policies, accounting and record
keeping and periodic reporting to Policy owners. This charge is designed only to
reimburse Us for actual administrative expenses. Currently, this charge is $5
per month.

OTHER CHARGES

SURRENDER CHARGE. We deduct a Surrender Charge from Cash Value if the
Policy is surrendered or Cash Value is applied under a Settlement Option during
the first 14 Policy Years. A Surrender Charge is also assessed during the first
14 Policy Years following an increase in Specified Amount. The Surrender Charge
is:

(a) an administrative component (issue charge); plus

(b) a sales component (deferred sales charge); times

During the 14 Policy Years following an increase in Specified Amount, an
additional Surrender Charge applies. The additional charge is calculated as
described below based on the amount of the increase, years commencing on the
date of the increase and Target Premium associated with the increase.

The Surrender Charge is determined based upon the date We receive the
written request for surrender. In no case will the Surrender Charge be greater
than the maximum allowable under the Standard Non-forfeiture law. It is
possible, although unlikely, that in the early period of a Policy, the Surrender
Charge, which includes an issue charge component and deferred sales charge
component, could exceed premiums paid.

(a) Issue Charge. The issue charge is a level charge of $5.00 per thousand
of Specified Amount and the sum of coverage amounts for any other insureds.

This charge covers the administrative expenses associated with underwriting
and issuing a Policy. These expenses include the costs of processing
applications, conducting medical examinations, determining insurability and the
Insured's underwriting class, and establishing Policy records.

(b) Deferred Sales Charge. The deferred sales charge is (i) 30% of premiums
paid up to one Target Premium shown in the Policy plus (ii) for the sum of all
premiums paid in excess of one Target Premium ("excess premium charge"), a
percentage which varies by the issue age of the Insured as follows:

<TABLE>
<CAPTION>
Excess Premium Charge Issue Ages
--------------------- ----------
<S> <C>
7.5% 0-65
5.0% 66-75
</TABLE>

The deferred sales charge reimburses us for some of the expenses of
distributing the Policies.

(c) Surrender Charge Percentage. For issue ages up to age 66, the Surrender
Charge percentage is 100% for Policy Years 1-5 and declines by 10% each year in
Policy Years 6-14 until reaching zero at the beginning of Policy Year 15. For
issue ages 66-75, the Surrender Charge percentage is 100% for Policy Years 1-3
and declines by 10%

16
<PAGE> 23

each year in Policy Years 4-11 and by 5% in Policy Years 12-14 until reaching
zero at the beginning of Policy Year 15.

<TABLE>
<CAPTION>
SURRENDER CHARGE PERCENTAGES SURRENDER CHARGE PERCENTAGES
ISSUE AGES UP TO AGE 66 ISSUE AGES 66-75
--------------------------------- ---------------------------------
SURRENDER CHARGE SURRENDER CHARGE
PERCENTAGE AT PERCENTAGE AT
BEGINNING OF BEGINNING OF
POLICY YEAR PERCENTAGE POLICY YEAR PERCENTAGE
---------------- ---------- ---------------- ----------
<S> <C> <C> <C> <C> <C>
1-5 100% 1-3 100%
6 90% 4 90%
7 80% 5 80%
8 70% 6 70%
9 60% 7 60%
10 50% 8 50%
11 40% 9 40%
12 30% 10 30%
13 20% 11 20%
14 10% 12 15%
15+ 0% 13 10%
14 5%
15+ 0%
</TABLE>

(d) Example. Assume a female Insured purchases the Policy at age 40 for
$100,000 of Specified Amount, paying the Target Premium of $630 and an
additional premium amount of $1,000 in excess of the Target Premium, for a total
premium of $1,630. Assume further that she surrenders the Policy during the
second Policy Year. The Surrender Charge is calculated as follows:

<TABLE>
<S> <C>
(i) Issue Charge -- [100 x $5.00]........................... $500.00
($5.00 per $1,000.00 of Specified Amount)
(ii) Deferred Sales Charge
(1) 30% of Target Premium Paid......................... $189.00
(.30 x $630.00); and
(2) 7.5% of Premiums Paid In Excess of Target
Premium............................................... $ 75.00
(.075 x $1,000.00)
(iii) Surrender Charge Percentage........................... 100%
(iv) Calculation of Surrender Charge
[(a)$500.00 + (b)$189.00 + $75.00)] x (c) 100%......... $764.00
</TABLE>

WITHDRAWAL CHARGE. We impose a charge of $25 for each partial withdrawal.
This charge reimburses Us for the administrative expenses related to the
withdrawal.

TRANSFER CHARGE. We reserve the right to charge up to $25 for each
transfer. The transfer charge reimburses Us for the administrative expenses
related to the transfer.

TAXES. Currently, no charges are made against the Separate Account for
federal, state or other taxes attributable to the Separate Account. We may,
however, in the future impose charges for income taxes or other taxes
attributable to the Separate Account or the Policy. (See "Federal Tax Matters.")

CHARGES AGAINST THE FUNDS. Under investment advisory agreements with each
Fund, the investment manager and/or adviser provides investment advisory and/or
management services for the portfolios. The Funds are responsible for advisory
fees and various other expenses. Investment advisory fees and expenses differ
with respect to each of the portfolios of the Funds. (See "The Funds.")

Each portfolio incurs annual fund operating expenses consisting of
management fees, 12b-1 fees and other expenses. The management fees for each
Portfolio for the year ending December 31, 1998 as a percentage of average net
assets were as follows: Kemper Money Market 0.50%; Kemper Total Return 0.55%;
Kemper High Yield 0.60%; Kemper Growth 0.60%; Kemper Government Securities
0.55%; Kemper International 0.75%; Kemper Small Cap Growth 0.65%; AST Lord
Abbett Growth and Income 0.75%; AST JanCap Growth 0.90%; AST T. Rowe Price Asset
Allocation 0.85%; AST T. Rowe Price International Equity 1.00%; AST Janus
Small-Cap Growth (formerly Founders Capital Appreciation) 0.90%; AST INVESCO
Equity Income 0.75%; AST PIMCO

17
<PAGE> 24

Total Return Bond 0.65%; AST PIMCO Limited Maturity Bond 0.65%; AST Neuberger
Berman Mid-Cap Growth 0.90%; Fidelity VIP Equity-Income 0.49%; Fidelity VIP High
Income 0.58%; Fidelity VIP II Contrafund 0.59%; Fidelity VIP II Index 500 0.24%;
Fidelity VIP III Growth Opportunities 0.59%; Scudder VLIF International
(B-Shares) 0.87%; and Scudder VLIF Growth and Income (B-Shares) 0.47%. The
investment manager of the AST JanCap Growth Portfolio has agreed to reimburse
and or waive fees. With this fee waiver the management fee is 0.88%.

The other expenses for each Portfolio for the year ending December 31, 1998
as a percentage of average net assets were as follows: Kemper Money Market
0.04%; Kemper Total Return 0.05%; Kemper High Yield 0.05%; Kemper Growth 0.05%;
Kemper Government Securities 0.11%; Kemper International 0.18%; Kemper Small Cap
Growth 0.05%; AST Lord Abbett Growth and Income 0.16%; AST JanCap Growth 0.14%;
AST T. Rowe Price Asset Allocation 0.24%; AST T. Rowe Price International Equity
0.25%; AST Janus Small-Cap Growth (formerly Founders Capital Appreciation)
0.22%; AST INVESCO Equity Income 0.18%; AST PIMCO Total Return Bond 0.18%; AST
PIMCO Limited Maturity Bond 0.21%; AST Neuberger Berman Mid-Cap Growth 0.17%;
Fidelity VIP Equity-Income 0.09%; Fidelity VIP High Income 0.12%; Fidelity VIP
II Contrafund 0.11%; Fidelity VIP II Index 500 0.11%; Fidelity VIP III Growth
Opportunities 0.12%; Scudder VLIF International (B-Shares) 0.18%; and Scudder
VLIF Growth and Income (B-Shares) 0.09%. In addition, the Scudder VLIF
International Portfolio and Scudder VLIF Growth and Income Portfolio each also
have a 12b-1 fee of 0.23%. The investment manager for the American Skandia Trust
has agreed to reimburse and/or waive fees for certain Portfolios. Certain of the
Fidelity VIP, VIPII and VIPIII Funds, or their investment manager, have entered
into arrangements with their custodian whereby credits realized as a result of
uninvested cash balances were used to reduce custodian expenses. Including these
reductions, the total operating expenses, after reimbursement for Fidelity VIPII
Index 500, were: Fidelity VIP Equity-Income 0.57%, Fidelity VIPII Contrafund
0.66%, Fidelity VIPII Index 500 0.28%, and Fidelity VIPIII Growth Opportunities
0.70%. For additional information about the fees and expenses of the Funds, see
"The Funds", page 5, and the prospectuses for the Funds.

The Fund(s) may pay 12b-1 fees to Us or Our affiliates for support services
relating to Fund shares. We may receive compensation from the investment
advisers for services related to the Funds. This compensation will be consistent
with the services rendered or the cost savings resulting from the arrangement.
For more information concerning investment advisory fees and other charges
against the portfolios, see the Funds' prospectuses accompanying this Prospectus
and Statements of Additional Information available from Us upon request.

SYSTEMATIC WITHDRAWAL PLAN. A charge of $50 is imposed to enter into a
Systematic Withdrawal Plan. In addition, a $25 charge is imposed each time a
change is made to the plan. These charges reimburse Us for administrative
expenses of this plan. (See "Systematic Withdrawal Plan.")

REDUCTION OF CHARGES. We may reduce certain charges and the minimum
initial premium in special circumstances that result in lower sales,
administrative, or mortality expenses. For example, special circumstances may
exist in connection with group or sponsored arrangements, sales to our
policyowners, or sales to employees or clients of members of the Kemper group of
companies. The amounts of any reductions will reflect the reduced sales effort
and administrative costs resulting from, or the different mortality experience
expected as a result of, the special circumstances. Reductions will not unfairly
discriminate against any person, including the affected Policy owners and owners
of all other policies funded by the Separate Account.

GENERAL PROVISIONS

SETTLEMENT OPTIONS

The Policy owner, or Beneficiary at the death of the Insured if no election
by the owner is in effect, may elect to have the Death Benefit or Surrender
Value paid in a lump sum or have the amount applied to one of the Settlement
Options. Payments under these options will not be affected by the investment
experience of the Separate Account after proceeds are applied under a Settlement
Option. The payee elects monthly, quarterly, semi-annual or annual payments. The
option selected must result in a payment that at least equals our required
minimum in effect when the option is chosen. If at any time the payments are
less than the minimum, We may increase the period between payments to quarterly,
semi-annual or annual or make the payment in one lump sum.

Benefit payments are based on Surrender Value calculated on the day
preceding the date the first benefit payment is due. The payment will be based
on the Settlement Option elected in accordance with the appropriate settlement
option table.

OPTION 1--INCOME FOR SPECIFIED PERIOD. We pay income for the period and
payment mode elected. The period elected must at least 5 years, but not more
than 30 years.

18
<PAGE> 25

OPTION 2--LIFE INCOME. We pay monthly income to the payee during the
payee's lifetime. If this Option is elected, annuity payments terminate
automatically and immediately on the death of the payee without regard to the
number or total amount of payments made. Thus, it is possible for an individual
to receive only one payment if death occurred prior to the date the second
payment was due.

OPTION 3--LIFE INCOME WITH INSTALLMENTS GUARANTEED. We pay monthly income
for the guaranteed period elected and thereafter for the remaining lifetime of
the payee. The available guaranteed periods are 5, 10, 15 or 20 years.

OPTION 4--JOINT AND SURVIVOR ANNUITY. We pay the full monthly income while
both payees are living. Upon the death of either payee, the income continues
during the lifetime of the surviving payee. The surviving payee's income is
based on the percentage designated (50%, 66 2/3%, 75% or 100%) at election time.
Payments terminate automatically and immediately upon the death of the surviving
payee without regard to the number or total amount of payments received.

We must consent to any other payment methods.

The guaranteed monthly payments are based on an interest rate of 2.50% per
year and, where mortality is involved, the "1983 Table a" individual mortality
table developed by the Society of Actuaries, with a 5 year setback.

POSTPONEMENT OF PAYMENTS

GENERAL. Payment of any amount due upon: (a) Policy termination at the
Maturity Date, (b) surrender of the Policy, (c) payment of any Policy loan, or
(d) death of the Insured, may be postponed whenever:

(1) The New York Stock Exchange is closed other than customary weekend
and holiday closings, or trading on the New York Stock Exchange is
restricted as determined by the Commission;

(2) The Commission by order permits postponement for the protection of
Owners; or

(3) An emergency exists, as determined by the Commission, as a result
of which disposal of securities is not reasonably practicable or it is not
reasonably practicable to determine the value of the net assets of the
Separate Account.

Transfers may also be postponed under these circumstances.

PAYMENT NOT HONORED BY BANK. The portion of any payment due under the
Policy which is derived from any amount paid to Us by check or draft may be
postponed until such time as We determine that such instrument has been honored
by the bank upon which it was drawn.

THE CONTRACT

The Policy, any endorsements, and the application constitute the entire
contract between Us and the Policy owner. All statements made by the Insured or
contained in the application will, in the absence of fraud or misrepresentation,
be deemed representations and not warranties.

Only the President, the Secretary, or an Assistant Secretary of KILICO is
authorized to change or waive the terms of a Policy. Any change or waiver must
be in writing and signed by one of those persons.

MISSTATEMENT OF AGE OR SEX

If the age or sex of the Insured is misstated, the Death Benefit will be
adjusted to reflect the correct sex and age.

INCONTESTABILITY

We may contest the validity of a Policy if any material misrepresentations
are made in the application. However, a Policy will be incontestable after it
has been in force during the lifetime of the Insured for two years from the
Issue Date. A new two year contestability period will apply to increases in
insurance and to reinstatements, beginning with the effective date of the
increase or reinstatement.

SUICIDE

19
<PAGE> 26

limited to the premiums paid less any withdrawals and Debt. When the laws of the
state in which a Policy is delivered require less than a two year period, the
period or amount paid will be as stated in such laws.

ASSIGNMENT

No Policy assignment is binding on us until We receive it. We assume no
responsibility for the validity of the assignment. Any claim under an assignment
is subject to proof of the extent of the assignee's interest. If the Policy is
assigned, the rights of the Policy owner and Beneficiary are subject to the
rights of the assignee of record.

NONPARTICIPATING

The Policy does not pay dividends. It does not participate in any of
KILICO's surplus or earnings.

OWNER AND BENEFICIARY

The Policy owner may designate a new owner while the Insured is alive.

The Policy owner designates primary and secondary Beneficiaries in the
application. We rely upon the latest filed change of beneficiary. If the Insured
dies, and no designated Beneficiary is alive at that time, We will pay the
Insured's estate. The interest of any Beneficiary may be subject to that of an
assignee.

In order to change the Policy owner or a designated Beneficiary, the owner
must sign Our form. The change is effective when the owner signs the form, but
We are not liable for payments made or actions taken before We receive the
signed form.

RECORDS AND REPORTS

We keep the Separate Account records. We send Policy owners, at their last
known address of record, an annual report showing:

<TABLE>
<S> <C>
- Death Benefit - partial withdrawals
- Accumulation Unit Value - transfers
- Cash Value - Policy loans and repayments
- Surrender Value - Policy charges
- additional premium payments
</TABLE>

Confirmations and acknowledgments of various transactions are also sent to
Policy owners. We also send annual and semi-annual Fund reports.

WRITTEN NOTICES AND REQUESTS

Send written notices or requests to Our home office: Kemper Investors Life
Insurance Company, Customer Service, 1 Kemper Drive, Long Grove, Illinois 60049.
Please include the Policy number and the Insured's full name. We send notices to
a Policy owner's address shown in the application unless an address change is
filed with Us.

OPTIONAL INSURANCE BENEFITS

The following optional insurance benefits are available by Rider at the
time of application:

- waiver of monthly deductions due to Insured's total disability

- term insurance on the Insured's dependent children

- acceleration of a portion of the death benefit due to Insured's
terminal illness

- term insurance on additional insureds

The cost of these benefits is added to the monthly deduction. These
benefits and restrictions are described in the Rider. We provide samples of
these provisions upon written request.

20
<PAGE> 27

DOLLAR COST AVERAGING

Under Our Dollar Cost Averaging program, Cash Value in the Fixed Account,
the Kemper Money Market Subaccount or the Kemper Government Securities
Subaccount ("DCA Subaccount") is automatically transferred monthly to other
Subaccounts and the Fixed Account. A Policy owner may enroll any time by
completing our Dollar Cost Averaging form. Transfers are made on the 10th day of
the month. We must receive the enrollment form at least 5 business days before
the transfer date.

Transfers commence on the first transfer date following the Trade Date. The
minimum transfer amount is $500 per Subaccount or Fixed Account. In order to
enroll, Cash Value in the DCA Subaccount must be at least $10,000. Dollar Cost
Averaging automatically ends if Cash Value in the DCA Subaccount is less than
the amount designated to be transferred. Cash Value remaining in the DCA
Subaccount will be transferred.

Dollar Cost Averaging ends if:

- the number of designated monthly transfers has been completed

- Cash Value attributable to the DCA Subaccount is insufficient to
complete the next transfer

- we receive the Policy owner's written termination at least 5
business days before the next transfer date

- the Policy is surrendered.

We will give 30 days notice if we amend the Dollar Cost Averaging program.
We may terminate the program at any time.

A Policy owner may change Dollar Cost Averaging instructions by completing
our enrollment form. We must receive the enrollment form at least 5 business
days (10 business days for Fixed Account transfers), before the next transfer
date.

To participate in Dollar Cost Averaging, a Policy owner may have Cash Value
in the Fixed Account and no more than 8 non-DCA Subaccounts.

SYSTEMATIC WITHDRAWAL PLAN

We offer a Systematic Withdrawal Plan ("SWP") allowing Policy owners to
preauthorize periodic withdrawals after the first Policy Year. Policy owners
instruct Us to withdraw selected amounts from the Fixed Account, or up to 2
Subaccounts, on a monthly, quarterly, semi-annual or annual basis. The Policy
owner's periodic payment must be at least $500. These periodic payments are
partial withdrawals and are subject to surrender charges. (See "Policy Benefits
and Rights--Surrender Privileges," page 14.) The $25 withdrawal charge does not
apply. However, We charge $50 to establish an SWP and a $25 charge each time a
change is made. These charges reimburse Us for SWP administrative expenses.
Periodic payments may be subject to income taxes, withholding and tax penalties.
(See "Federal Tax Matters.") An SWP application and additional information may
be obtained from the Policy owner's representative or Us. We will give 30 days
notice if we amend the SWP. The SWP may be terminated at any time by the Policy
owner or Us.

DISTRIBUTION OF POLICIES

The Policy is sold by licensed insurance representatives who represent Us
and who are registered representatives of broker-dealers that are registered
under the Securities Exchange Act of 1934 and are members of the National
Association of Securities Dealers, Inc. The Policy is distributed through the
principal underwriter, Investors Brokerage Services, Inc. ("IBS"), our
affiliate. IBS is engaged in the sale and distribution of other variable life
policies and annuities.

The maximum sales commission payable to registered representatives is
approximately 63% of premiums up to the commission target premium and 2.5% of
excess premium in the first year and 2.5% of total premium in renewal years two
through ten. Beginning in the second Policy Year, a service fee on assets which
have been maintained and serviced may also be paid. In addition, certain
overrides and production and managerial bonuses may be paid. These additional
amounts may constitute a substantial portion of total commissions and fees paid.
Firms to which service fees and commissions may be paid include affiliated
broker-dealers. In addition to the commissions described above, We may pay
additional promotional incentives, in the form of cash or other compensation, to
licensed broker-dealers that sell the Policy. These incentives may be offered to
certain broker-dealers that sell or are expected to sell certain minimums during
specified periods.

21
<PAGE> 28

FEDERAL TAX MATTERS

INTRODUCTION

This discussion of the federal income tax treatment of the Policy is not
exhaustive, does not purport to cover all situations, and is not intended as tax
advice. The federal income tax treatment of the Policy is unclear in certain
circumstances, and a qualified tax adviser should always be consulted with
regard to the application of law to individual circumstances. This discussion is
based on the Internal Revenue Code of 1986, as amended ("Code"), Treasury
Department regulations, and interpretations existing on the date of this
Prospectus. These authorities, however, are subject to change by Congress, the
Treasury Department, and judicial decisions.

This discussion does not address state or local tax consequences associated
with owning the Policy. IN ADDITION, WE MAKE NO GUARANTEE REGARDING ANY TAX
TREATMENT -- FEDERAL, STATE OR LOCAL -- OF ANY POLICY OR OF ANY TRANSACTION
INVOLVING A POLICY.

OUR TAX STATUS

We are taxed as a life insurance company and the operations of the Separate
Account are treated as part of our total operations. The operations of the
Separate Account do not materially affect Our federal income tax liability
because We are allowed a deduction to the extent that net investment income of
the Separate Account is applied to increase Cash Value. We may incur state and
local taxes attributable to the Separate Account. At present, these taxes are
not significant. Accordingly, We do not charge or credit the Separate Account
for federal, state or local taxes. However, Our federal income taxes are
increased because of the federal tax law's treatment of deferred acquisition
costs. Accordingly, We charge 1% of each premium payment to compensate Us for
Our higher corporate income tax liability.

If there is a material change in law, charges or credits may be made to the
Separate Account for taxes or reserves for taxes. These charges or credits are
determined independently of the taxes We actually pay.

TAXATION OF LIFE INSURANCE POLICIES

TAX STATUS OF THE POLICY. The Code establishes a definition of life
insurance which, in part, places limitations on the amount of premiums that may
be paid and the Cash Value that can accumulate relative to the Death Benefit. We
believe the Policy meets this definition. We reserve the right to refund
premiums, increase the Death Benefit (which may result in higher Policy
charges), or take any other action We deem necessary to ensure the Policy's
compliance with the tax definition of life insurance. The Death Benefit is
generally excludable from the Beneficiary's gross income. Interest and other
income credited are not taxable unless certain withdrawals are made (or are
deemed to be made) from the Policy prior to the Insured's death, as discussed
below. This tax treatment will only apply, however, if (1) the investments of
the Separate Account are "adequately diversified", and (2) We, rather than the
Policy owner, are considered the owner of the assets of the Separate Account.

DIVERSIFICATION REQUIREMENTS. The Code prescribes the manner in which the
Separate Account must be "adequately diversified." If the Separate Account fails
to comply with these diversification standards, the Policy will not be treated
as a life insurance contract, and the Policy owner is taxable on the income on
the contract (as defined in the tax law). We expect that the Separate Account,
through the Funds, will comply with the prescribed diversification requirements.

OWNERSHIP TREATMENT. In certain circumstances, variable life insurance
contract owners may be considered the owners of the assets of the Separate
Account. Income and gains from the Separate Account would then be includible in
the Policy owners' gross income. The IRS has stated that a variable contract
owner will be considered the owner of the assets of a separate account if the
owner possesses the ability to exercise investment control. As of the date of
this Prospectus, no investor control guidance is available.

We reserve the right to modify the Policy as necessary to attempt to
prevent Policy owners from being considered the owners of the assets of the
Separate Account. However, there is no assurance that such efforts would be
successful.

The following discussion assumes that the Policy will be treated as a life
insurance contract for tax purposes.

TAX TREATMENT OF LIFE INSURANCE DEATH BENEFIT PROCEEDS. In general, the
Death Benefit is excludable from gross income under the Code. Certain transfers
of the Policy, however, may result in a portion of the Death Benefit being
taxable. If the Death Benefit is paid under a Settlement Option, generally
payments will be prorated between the non-taxable Death Benefit and taxable
interest.

22
<PAGE> 29

TAX DEFERRAL DURING ACCUMULATION PERIOD. Any increase in Cash Value is
generally not taxable to the Policy owner unless amounts are received (or are
deemed to be received) from the Policy before the Insured's death. If the Policy
is surrendered, the excess of Cash Value over the "investment in the contract"
is includible in the owner's ordinary income. The "investment in the contract"
generally is premium payments minus non-taxable distributions. Distributions may
be taxable to the owner if the Policy is considered a "modified endowment
contract" ("MEC").

POLICIES WHICH ARE NOT MECS

TAX TREATMENT OF WITHDRAWALS GENERALLY. If the Policy is not a MEC, the
amount of any withdrawal generally will be treated first as a non-taxable
recovery of premiums and then as taxable income. Thus, a withdrawal from a
non-MEC Policy generally is not taxable income unless the total withdrawals
exceed the investment in the contract.

DISTRIBUTIONS REQUIRED IN THE FIRST 15 POLICY YEARS. The Code limits the
amount of premium that may be paid and Cash Value that can accumulate relative
to the Death Benefit. Where cash distributions are required in connection with a
reduction in benefits during the first 15 years after the Policy is issued (or
if withdrawals are made in anticipation of a reduction in benefits during this
period), some or all of such amounts may be taxable. A reduction in benefits may
result from a decrease in Specified Amount, a change from an Option B Death
Benefit to an Option A Death Benefit, if withdrawals are made, and in certain
other instances.

TAX TREATMENT OF LOANS. If a Policy is not a MEC, a loan generally is
treated as indebtedness of the Policy owner. As a result, the loan is not
taxable income to the owner if the Policy remains in force. However, when the
interest rate credited to the Loan Account is the same as the interest rate
charged for the loan, some or all of the loan proceeds may be includible in
income. If a Policy lapses when a loan is outstanding, the amount of the loan
outstanding will be treated as a surrender in determining whether any amounts
are includible in the Policy owner's income.

Interest on an individual's Policy loans and interest on any loans of a
Policy owner that is a business entity are subject to possible disallowance
under complex rules. Consult a tax adviser on these issues.

POLICIES WHICH ARE MECS

CHARACTERIZATION OF A POLICY AS A MEC. A Policy is a MEC if (1) the Policy
is received in exchange for a life insurance contract that was a MEC, or (2) the
Policy is issued after June 21, 1988 and premiums are paid more rapidly than
permitted under the "7-Pay Test." A Policy fails this test (and thus is a MEC)
if the accumulated amount paid during the 1st 7 Policy Years exceeds the
cumulative sum of the net level premiums which would have been paid to that time
if the Policy provided for paid-up future benefits after the payment of 7 level
annual premiums. Under the Code, a material change of the Policy generally
results in a reapplication of the 7-Pay Test. In addition, any reduction in
benefits during the 7-Pay period will affect the application of this test.

We monitor the Policies and attempt to notify Policy owners on a timely
basis if a Policy is in jeopardy of becoming a MEC. The owner may then request
that we take available steps to avoid treating the Policy as a MEC.

TAX TREATMENT OF WITHDRAWALS, LOANS, ASSIGNMENTS AND PLEDGES UNDER MECS. If
the Policy is a MEC, withdrawals are treated first as withdrawals of income and
then as a recovery of premiums. Thus, withdrawals are includible in income if
Cash Value exceeds the investment in the contract. A Policy loan is treated as a
withdrawal for tax purposes.

If the Policy owner assigns or pledges Cash Value under a MEC (or agrees to
assign or pledge any portion), such portion is a withdrawal for tax purposes.
The investment in the contract is increased by the amount includible in income
with respect to any assignment, pledge, or loan, though it is not affected by
any other aspect of the assignment, pledge, or loan (including its release or
repayment). Before assigning, pledging, or requesting a loan under a MEC, a
Policy owner should consult a qualified tax adviser.

PENALTY TAX. Generally, proceeds of a surrender or a withdrawal (or the
amount of any deemed withdrawal) from a MEC are subject to a penalty tax of 10%
of the portion of the proceeds that is includible in income, unless the
surrender or withdrawal is made (1) after the owner attains age 59 1/2, (2)
because the owner has become disabled (as defined in the Code), or (3) as
substantially equal periodic payments over the life or life expectancy of the
owner (or the joint lives or life expectancies of the owner and his or her
beneficiary).

AGGREGATION OF POLICIES. All life insurance contracts which are treated as
MECs and which are purchased by the same person from Us or Our affiliates within
the same calendar year are aggregated and treated as one contract in determining
the tax on withdrawals (including deemed withdrawals). The effects of
aggregation are not clear;

23
<PAGE> 30

however, it could affect the taxable amount of a withdrawal (or a deemed
withdrawal) and could subject the withdrawal to the 10% penalty tax.

OTHER CONSIDERATIONS. Changing the Policy owner, exchanging the Policy,
changing from one Death Benefit option to another, and other Policy changes may
have tax consequences depending on the circumstances of the change. Federal
estate and state and local estate taxes, or inheritance taxes and other tax
consequences of ownership or receipt of Policy proceeds depend on the
circumstances of each Policy owner or Beneficiary.

FEDERAL INCOME TAX WITHHOLDING

We withhold and send to the federal government a part of the taxable
portion of withdrawals unless the Policy owner notifies Us in writing at the
time of withdrawal that he or she elects no withholding. The Policy owner is
always responsible for the payment of any taxes and early distribution penalties
that may be due on the amounts received. The Policy owner may also be required
to pay penalties under the estimated tax rules, if the owner's withholding and
estimated tax payments are insufficient to satisfy the owner's total tax
liability.

LEGAL CONSIDERATIONS

On July 6, 1983, the Supreme Court held in ARIZONA GOVERNING COMMITTEE V.
NORRIS that certain annuity benefits provided by employers' retirement and
fringe benefit programs may not vary between men and women on the basis of sex.
The Policy contains cost of insurance rates that distinguish between men and
women. Accordingly, employers and employee organizations should consider, in
consultation with legal counsel, the impact of federal, state and local laws,
including Title VII of the Civil Rights Act, the Equal Pay Act, and NORRIS and
subsequent cases on any employment-related insurance or fringe benefit program
before purchasing the Policy.

SAFEKEEPING OF THE SEPARATE ACCOUNT'S ASSETS

We hold the assets of the Separate Account. We keep these assets segregated
and apart from Our general funds. We maintain records of all purchases and
redemptions of the shares of each portfolio of the Funds by each of the
Subaccounts.

VOTING INTERESTS

We vote a Fund's shares held in the Separate Account at regular and special
shareholder meetings of the Fund in accordance with instructions received from
persons having voting interests in the corresponding Subaccounts of the Separate
Account. Owners of all Policies participating in each Subaccount are entitled to
give Us instructions with respect to that Subaccount. An owner's proportionate
interest in that Subaccount is measured by units. We determine the number of
shares for which a Policy owner may give voting instructions as of the record
date for the meeting. Owners will receive proxy material, reports, and other
materials relating to the appropriate portfolio of the Funds.

We vote all Fund shares held in the Separate Account proportionately based
on Policy owners' instructions. If changes in law permit, We may vote a Fund's
shares in Our own right.

We may, when required by state insurance regulatory authorities, disregard
voting instructions if the instructions require that the shares be voted so as
to cause a change in the subclassification or investment objective of the Fund
or of one or more of its portfolios or to approve or disapprove an investment
advisory contract for a portfolio of the Fund. In addition, We may disregard
voting instructions in favor of changes initiated by a Policy owner in the
investment policy or the investment adviser of a portfolio of a Fund if We
reasonably disapprove of such changes. A proposed change would be disapproved
only if the change is contrary to state law or prohibited by state regulatory
authorities, or if We determine that the change would have an adverse effect on
our General Account in that the proposed investment policy for a portfolio may
result in overly speculative or unsound investments. In the event We disregard
voting instructions, We will include a summary of that action and the reasons
for it in the next annual report to Policy owners.

STATE REGULATION OF KILICO

24
<PAGE> 31

March 1st of each year covering Our operations and reporting on Our financial
condition as of December 31st of the preceding year. Periodically, the Director
of Insurance examines the liabilities and reserves of KILICO and the Separate
Account and certifies to their adequacy.

In addition, We are subject to the insurance laws and regulations of the
other states where We operate. Generally, the insurance departments of other
states apply the laws of Illinois in determining Our permissible investments.

25
<PAGE> 32

KILICO'S DIRECTORS AND OFFICERS

Our directors and principal officers are listed below together with their
current positions and their other business experience during the past five
years. The address of each officer and director is 1 Kemper Drive, Long Grove,
Illinois 60049.

<TABLE>
<CAPTION>
NAME AND AGE
POSITION WITH KILICO
YEAR OF ELECTION OTHER BUSINESS EXPERIENCE DURING PAST 5 YEARS OR MORE
-------------------- -----------------------------------------------------
<S> <C>
John B. Scott (54) Chief Executive Officer, President and Director of Federal
Chief Executive Officer since Kemper Life Assurance Company (FKLA) and Fidelity Life
February 1992. President since Association (FLA) since 1988. Chief Executive Officer,
November 1993. Director since 1992. President and Director of Zurich Life Insurance Company of
America (ZLICA) and Zurich Direct, Inc. (ZD) since March
1996. Chairman of the Board and Director of Investors
Brokerage Services, Inc. (IBS) and Investors Brokerage
Services Insurance Agency, Inc. (IBSIA) since 1993. Chairman
of the Board of FKLA and FLA from April 1988 to January
1996. Chairman of the Board of KILICO from February 1992 to
January 1996. Executive Vice President and Director of
Kemper Corporation (Kemper) since January 1994 and March
1996, respectively. Executive Vice President of Kemper
Financial Companies, Inc. from January 1994 to January 1996
and Director from 1992 to January 1996.

Eliane C. Frye (51) Executive Vice President of FKLA and FLA since 1995.
Executive Vice President since 1995. Executive Vice President of ZLICA and ZD since March 1996.
Director since May 1998. Director of FLA since December 1997. Director of FKLA and
ZLICA since May 1998. Director of ZD from March 1996 to
March 1997. Director of IBS and IBSIA since 1995. Senior
Vice President of KILICO, FKLA and FLA from 1993 to 1995.
Vice President of FKLA and FLA from 1988 to 1993.

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

James C. Harkensee (40) Senior Vice President of FKLA and FLA since January 1996.
Senior Vice President since January Senior Vice President of ZLICA since 1995. Senior Vice
1996. President of ZD since 1995. Director of ZD from April 1993
to March 1997 and since March 1998. Vice President of ZLICA
from 1992 to 1995. Chief Actuary of ZLICA from 1991 to 1994.
Assistant Vice President of ZLICA from 1990 to 1992. Vice
President of ZD from 1994 to 1995.

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.
</TABLE>

26
<PAGE> 33

<TABLE>
<CAPTION>
NAME AND AGE
POSITION WITH KILICO
YEAR OF ELECTION OTHER BUSINESS EXPERIENCE DURING PAST 5 YEARS OR MORE
-------------------- -----------------------------------------------------
<S> <C>
Debra P. Rezabek (43) Senior Vice President of FKLA and FLA since March 1996.
Senior Vice President since 1996. Corporate Secretary of FKLA and FLA since January 1996.
General Counsel since 1992. Corporate Director of FLA since May 1998. Vice President of KILICO,
Secretary since January 1996. FKLA and FLA since 1995. General Counsel and Director of
Government Affairs of FKLA and FLA since 1992 and of KILICO
since 1993. Senior Vice President, General Counsel and
Corporate Secretary of ZLICA since March 1996. Senior Vice
President, General Counsel and Corporate Secretary of ZD
since March 1996. Director of ZD from March 1996 to March
1997. Secretary of IBS and IBSIA since 1993. Director of IBS
and IBSIA from 1993 to 1996. Assistant General Counsel of
FKLA and FLA from 1988 to 1992. General Counsel and
Assistant Secretary of KILICO, FKLA and FLA from 1992 to
1996. Assistant Secretary of Kemper since January 1996.

Kenneth M. Sapp (53) Senior Vice President of FKLA, FLA and ZLICA since January
Senior Vice President since January 1998. Director of IBS since May 1998. Director of IBSIA
1998. since September 1998. Vice President--Aetna Life Brokerage
of Aetna Life & Annuity Company from February 1992 to
January 1998.

George Vlaisavljevich (56) Senior Vice President of FKLA, FLA and ZLICA since October
Senior Vice President since October 1996. Senior Vice President of ZD since March 1997. Director
1996. of IBS and IBSIA since October 1996. Executive Vice
President of The Copeland Companies from April 1983 to
September 1996.

Loren J. Alter (60) Director of FKLA, FLA and Scudder Kemper Investments, Inc.
Director since January 1996. (SKI) since January 1996. Director of ZLICA since May 1979.
Executive Vice President and Chief Financial Officer of
Zurich U.S. since 1979. President, Chief Executive Officer
and Director of Kemper since January 1996.

William H. Bolinder (55) Chairman of the Board and Director of FKLA and FLA since
Chairman of the Board and Director January 1996. Chairman of the Board of ZLICA and ZD since
since January 1996. March 1995. Chairman of the Board and Director of Kemper
since January 1996. Director of SKI since January 1996. Vice
Chairman of SKI from January 1996 to 1998. Member of the
Group Executive Board of Zurich Financial Services Group
since 1998. Member of the Corporate Executive Board of
Zurich Insurance Group from October 1994 to 1998. Chairman
of Zurich American Insurance Company since 1998. Chairman of
the Board of American Guarantee and Liability Insurance
Company, Zurich American Insurance Company of Illinois,
American Zurich Insurance Company and Steadfast Insurance
Company since 1995. Chief Executive Officer of American
Guarantee and Liability Insurance Company, Zurich American
Insurance Company of Illinois and American Zurich Insurance
Company from 1986 to June 1995. President of Zurich Holding
Company of America since 1986. Manager of Zurich Insurance
Company, U.S. Branch from 1986 to 1998. Underwriter for
Zurich American Lloyds since 1986.

David A. Bowers (52) Director of FKLA and ZLICA since May 1997. Director of FLA
Director since May 1997. since June 1997. Executive Vice President, Corporate
Secretary and General Counsel of Zurich U.S. since August
1985. Vice President, General Counsel and Secretary of
Kemper since January 1996.

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

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
Insurance Law, have been passed upon by Frank J. Julian, Our Associate General

27
<PAGE> 34

Counsel. Jorden Burt Boros Cicchetti Berenson & Johnson, Washington, D.C., has
advised Us on certain legal matters concerning federal securities laws
applicable to the issue and sale of Policies.

LEGAL PROCEEDINGS

There are no legal proceedings to which the Separate Account is a party or
to which the assets of the Separate Account are subject. We are not a party in
any litigation that is of material importance in relation to Our total assets or
that relates to the Separate Account.

YEAR 2000 COMPLIANCE

Many existing computer programs were originally designed without
considering the impact of the year 2000 and currently use only two digits to
identify the year in the date field. This issue affects nearly all companies and
organizations and could cause computer applications and systems to fail or
create erroneous results 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 systems will be compliant for the year 2000. Such steps have included the
replacement of older systems with new systems which are already compliant. In
1996, We replaced Our investment accounting system, and, in 1997, We replaced
Our general ledger and accounts payable system. We have also ensured 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 $1.3 million
in 1998. We anticipate that it will cost an additional $662 thousand to bring
all remaining systems into compliance.

Our policy administration systems have been completely renovated to be year
2000 compliant and are currently running in a test environment. Approximately 75
percent of Our ancillary systems confirmed to be year 2000 compliant were in
production at December 31, 1998. We anticipate that all such systems will be in
production at April 30, 1999 or sooner. 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 requiring all other entities with which We
electronically interact, including suppliers and other financial services
institutions, to attest to Us in writing that their systems 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 are currently
developing contingency plans to handle the most reasonably likely worst case
scenarios. These contingency plans are scheduled for completion in the third
quarter of 1999.

28
<PAGE> 35

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
Separate Account as of December 31, 1998 and the related statements of
operations for the year then ended and the statements of changes in policy
owners' equity for the year then ended and for each of the period presented has
been included herein in reliance upon the report of PricewaterhouseCoopers LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.

Actuarial matters included in this prospectus have been examined by
Christopher J. Nickele, FSA as stated in the opinion filed as an exhibit to the
Registration Statement.

REGISTRATION STATEMENT

A Registration Statement has been filed with the Securities and Exchange
Commission under the Securities Act of 1933, as amended, with respect to the
Policies. For further information concerning the Separate Account, KILICO and
the Policy, reference is made to the Registration Statement as amended with
exhibits. Copies of the Registration Statement are available from the Commission
upon payment of a fee.

FINANCIAL STATEMENTS

The financial statements of the Separate Account relate to other life
insurance policies in addition to those offered by this Prospectus. Our included
financial statements should be considered only as bearing upon Our ability to
meet Our contractual obligations under the Policy. The investment experience of
the Separate Account does not affect Our financial statements.

CHANGE OF ACCOUNTANTS

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

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

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

29
<PAGE> 36

REPORT OF INDEPENDENT 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),
Janus Small Cap Growth Subaccount, Neuberger & Berman Mid-Cap Growth Subaccount,
Jancap Growth Subaccount, Lord Abbett Growth & Income Subaccount, T. Rowe Price
International Equity Subaccount, T. Rowe Price Asset Allocation Subaccount,
PIMCO Limited Maturity Bond Subaccount, PIMCO Total Return Subaccount, INVESCO
Equity Income Subaccount (investment options within the American Skandia Trust),
Growth Opportunities Subaccount, Index 500 Subaccount, Equity Income Subaccount,
Contrafund Subaccount, High Income Subaccount (investment options within the
Fidelity VIP Funds), 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 period presented, except for the Growth Opportunities
Subaccount, Index 500 Subaccount, Equity Income Subaccount, Contrafund
Subaccount, High Income Subaccount, 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

30
<PAGE> 37

(This page intentionally left blank)

31
<PAGE> 38

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.

32
<PAGE> 39

<TABLE>
<CAPTION>
AMERICAN SKANDIA TRUST
----------------------------------------------------------------------------------------------------------------
LORD ABBETT T. ROWE PRICE T. ROWE PRICE PIMCO LIMITED
JANUS NEUBERGER & BERMAN JANCAP GROWTH & INTERNATIONAL ASSET MATURITY
SMALL CAP GROWTH MID-CAP GROWTH GROWTH INCOME EQUITY ALLOCATION BOND
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------------- ------------------ ---------- ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
426 725 2,653 632 333 247 23
-- 1 2 1 -- -- --
--- --- ----- --- --- --- --
426 726 2,655 633 333 247 23
-- -- 2 -- -- -- --
-- -- -- -- -- -- --
--- --- ----- --- --- --- --
-- -- 2 -- -- -- --
--- --- ----- --- --- --- --
426 726 2,653 633 333 247 23
=== === ===== === === === ==
398 625 1,851 584 312 222 22
6 35 26 8 1 1 1
5 7 38 4 2 3 --
17 59 738 37 18 21 --
--- --- ----- --- --- --- --
426 726 2,653 633 333 247 23
=== === ===== === === === ==

<CAPTION>
AMERICAN SKANDIA TRUST
---------------------------

PIMCO TOTAL INVESCO
RETURN EQUITY INCOME
SUBACCOUNT SUBACCOUNT
----------- -------------
<S> <C> <C>
68 398
-- 1
-- ---
68 399
-- --
-- --
-- ---
-- --
-- ---
68 399
== ===
65 369
2 5
-- 3
1 22
-- ---
68 399
== ===
</TABLE>

33
<PAGE> 40

KILICO VARIABLE SEPARATE ACCOUNT

STATEMENTS OF ASSETS AND LIABILITIES AND POLICY OWNERS' EQUITY (CONTINUED)

DECEMBER 31, 1998

(IN THOUSANDS)

<TABLE>
<CAPTION>
SCUDDER VARIABLE LIFE
FIDELITY VIP FUNDS INVESTMENT FUNDS
------------------------------------------------------------------- --------------------------
GROWTH INDEX EQUITY CONTRA- HIGH GROWTH &
OPPORTUNITIES 500 INCOME FUND INCOME INTERNATIONAL INCOME
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
------------- ---------- ---------- ---------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Investments in underlying
portfolio funds, at current
value...................... $51 81 19 80 2 8 6
Dividends and other
receivables................ -- -- -- -- -- -- --
--- -- -- -- -- -- --
Total assets........... 51 81 19 80 2 8 6
--- -- -- -- -- -- --
LIABILITIES AND POLICY OWNERS'
EQUITY
Liabilities:
Mortality and expense risk
charges.................. -- -- -- -- -- -- --
Other...................... -- -- -- -- -- -- --
--- -- -- -- -- -- --
Total liabilities...... -- -- -- -- -- -- --
--- -- -- -- -- -- --
Policy owners' equity........ $51 81 19 80 2 8 6
=== == == == == == ==
ANALYSIS OF POLICY OWNERS'
EQUITY
Excess of proceeds from units
sold over payments for
units redeemed............. $47 76 19 71 2 8 6
Accumulated net investment
income..................... -- -- -- -- -- -- --
Accumulated net realized gain
on sales of investments.... -- -- -- -- -- -- --
Unrealized appreciation of
investments................ 4 5 -- 9 -- -- --
--- -- -- -- -- -- --
Policy owners' equity........ $51 81 19 80 2 8 6
=== == == == == == ==
</TABLE>

See accompanying notes to financial statements.

34
<PAGE> 41

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>

See accompanying notes to financial statements.

35
<PAGE> 42

KILICO VARIABLE SEPARATE ACCOUNT

STATEMENTS OF OPERATIONS (CONTINUED)

FOR THE YEAR ENDED DECEMBER 31, 1998

(IN THOUSANDS)

<TABLE>
<CAPTION>
AMERICAN SKANDIA TRUST
-------------------------------------------------------------------------------------------------
JANUS NEUBERGER & BERMAN LORD ABBETT T. ROWE PRICE T. ROWE PRICE
SMALL CAP MID-CAP JANCAP GROWTH & INTERNATIONAL ASSET
GROWTH GROWTH GROWTH INCOME EQUITY ALLOCATION
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ------------------ ---------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Dividends and capital gains
distributions................ $ 8 39 37 10 4 2
Mortality and expense risk
charges...................... 2 3 11 2 2 1
--- -- --- -- -- --
Net investment income........ 6 36 26 8 2 1
--- -- --- -- -- --
Net realized and unrealized
gain on
investments:
Net realized gain on sales of
investments................ 5 7 38 4 2 3
Change in unrealized
appreciation
of investments............. 13 54 718 34 21 19
--- -- --- -- -- --
Net realized and unrealized
gain on
investments.................. 18 66 756 38 23 22
--- -- --- -- -- --
Net increase in policy owners'
equity
resulting from operations.... $24 97 782 46 25 23
=== == === == == ==
</TABLE>

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

See accompanying notes to financial statements.

36
<PAGE> 43

AMERICAN SKANDIA TRUST FIDELITY VIP FUNDS
-------------------------------------------- -----------------------------------------------------------------------------
PIMCO LIMITED
MATURITY PIMCO TOTAL INVESCO EQUITY GROWTH INDEX EQUITY CONTRA HIGH
BOND RETURN INCOME OPPORTUNITIES 500 INCOME FUND INCOME
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A)
------------- ----------- -------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 2 7 -- -- -- -- --
-- -- 2 -- -- -- -- --
-- -- -- -- -- -- -- --
1 2 5 -- -- -- -- --
-- -- -- -- -- -- -- --
-- -- 3 -- -- -- -- --
-- 1 20 4 5 -- 9 --
-- -- -- -- -- -- -- --
-- 1 23 4 5 -- 9 --
-- -- -- -- -- -- -- --
1 3 28 4 5 -- 9 --
== == == == == == == ==

<CAPTION>
SCUDDER VARIABLE LIFE
INVESTMENT FUNDS
-----------------------------

GROWTH &
INTERNATIONAL INCOME
SUBACCOUNT(A) SUBACCOUNT(A)
------------- -------------
<S> <C> <C>
-- --
-- --
-- --
-- --
-- --
-- --
-- --
-- --
-- --
-- --
-- --
== ==
</TABLE>

37
<PAGE> 44

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>

See accompanying notes to financial statements.

38
<PAGE> 45

<TABLE>
<CAPTION>
AMERICAN SKANDIA TRUST
- ----------------------------------------------------------------------------------------------------------
JANUS NEUBERGER & BERMAN LORD ABBETT T. ROWE PRICE T. ROWE PRICE PIMCO LIMITED
SMALLCAP MID-CAP JANCAP GROWTH & INTERNATIONAL ASSET MATURITY
GROWTH GROWTH GROWTH INCOME EQUITY ALLOCATION BOND
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
- ---------- ------------------ ---------- ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
6 36 26 8 2 1 1

5 7 38 4 2 3 --
13 54 718 34 21 19 --
--- ---- ----- ---- --- --- --

24 97 782 46 25 23 1
--- ---- ----- ---- --- --- --
256 404 1,148 373 215 133 11

95 159 615 247 77 91 7
(84) (135) (419) (145) (80) (58) (4)
--- ---- ----- ---- --- --- --
267 428 1,344 475 212 166 14
--- ---- ----- ---- --- --- --

291 525 2,126 521 237 189 15
135 201 527 112 96 58 8
--- ---- ----- ---- --- --- --
426 726 2,653 633 333 247 23
=== ==== ===== ==== === === ==

<CAPTION>
AMERICAN SKANDIA TRUST
- ---------- ------------------------
JANUS INVESCO
SMALLCAP PIMCO TOTAL EQUITY
GROWTH RETURN INCOME
SUBACCOUNT SUBACCOUNT SUBACCOUNT
- ---------- ----------- ----------
<S> <C> <C>
6 2 5
5 -- 3
13 1 20
--- --- ---
24 3 28
--- --- ---
256 36 240
95 24 139
(84) (12) (80)
--- --- ---
267 48 299
--- --- ---
291 51 327
135 17 72
--- --- ---
426 68 399
=== === ===
</TABLE>

39
<PAGE> 46

KILICO VARIABLE SEPARATE ACCOUNT

STATEMENTS OF CHANGES IN POLICY OWNERS' EQUITY (CONTINUED)

FOR THE YEAR ENDED DECEMBER 31, 1998

(IN THOUSANDS)

FIDELITY VIP FUNDS
-----------------------------------------------------------------------------
GROWTH INDEX EQUITY CONTRA- HIGH
OPPORTUNITIES 500 INCOME FUND INCOME
SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A) SUBACCOUNT(A)
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Operations:
Net investment income........... $-- -- -- -- --
Net realized gain on sales of
investments................... -- -- -- -- --
Change in unrealized
appreciation of investments... 4 5 -- 9 --
--- -- -- -- --
Net increase in policy owners'
equity resulting from
operations.................. 4 5 -- 9 --
--- -- -- -- --
Account unit transactions:
Proceeds from units sold........ 22 36 11 25 --
Net transfers from affiliate and
subaccounts................... 28 45 10 52 2
Payments for units redeemed..... (3) (5) (2) (6) --
--- -- -- -- --
Net increase in policy owners'
equity from account unit
transactions................ 47 76 19 71 2
--- -- -- -- --
Total increase in policy owners'
equity.......................... 51 81 19 80 2
Policy owners' equity:
Beginning of period............. -- -- -- -- --
--- -- -- -- --
End of period................... $51 81 19 80 2
=== == == == ==

<CAPTION>
SCUDDER VARIABLE LIFE
INVESTMENT FUNDS
-----------------------------
GROWTH &
INTERNATIONAL INCOME
SUBACCOUNT(A) SUBACCOUNT(A)
------------- -------------
<S> <C> <C>
Operations:
Net investment income........... -- --
Net realized gain on sales of
investments................... -- --
Change in unrealized
appreciation of investments... -- --
-- --
Net increase in policy owners'
equity resulting from
operations.................. -- --
-- --
Account unit transactions:
Proceeds from units sold........ 2 4
Net transfers from affiliate and
subaccounts................... 7 4
Payments for units redeemed..... (1) (2)
-- --
Net increase in policy owners'
equity from account unit
transactions................ 8 6
-- --
Total increase in policy owners'
equity.......................... 8 6
Policy owners' equity:
Beginning of period............. -- --
-- --
End of period................... 8 6
== ==
</TABLE>

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

See accompanying notes to financial statements.

40
<PAGE> 47

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.

41
<PAGE> 48

KILICO VARIABLE SEPARATE ACCOUNT

STATEMENTS OF CHANGES IN POLICY OWNERS' EQUITY (CONTINUED)

FOR THE YEAR ENDED DECEMBER 31, 1997

(IN THOUSANDS)

<TABLE>
<CAPTION>
AMERICAN SKANDIA TRUST
------------------------------------------------------------------------------------------
JANUS NEUBERGER & BERMAN LORD ABBETT T. ROWE PRICE T. ROWE PRICE
SMALLCAP MID-CAP JANCAP GROWTH & INTERNATIONAL ASSET
GROWTH GROWTH GROWTH INCOME EQUITY ALLOCATION
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ------------------ ---------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Operations:
Net investment loss.... $ -- (1) -- -- (1) --
Net realized gain on
sales of
investments.......... -- -- -- -- -- --
Change in unrealized
appreciation
(depreciation) of
investments.......... 4 5 20 3 (3) 2
---- --- --- --- --- ---
Net increase
(decrease) in
policy owners'
equity resulting
from operations.... 4 4 20 3 (4) 2
---- --- --- --- --- ---
Account unit
transactions:
Proceeds from units
sold................. 89 124 330 58 63 35

Net transfers from
affiliate and
subaccounts.......... 63 99 242 61 50 27
Payments for units
redeemed............. (21) (28) (69) (12) (13) (6)
---- --- --- --- --- ---
Net increase in
policy owners'
equity from account
unit
transactions....... 131 195 503 107 100 56
---- --- --- --- --- ---
Total increase in policy
owners' equity......... 135 199 523 110 96 58
Policy owners' equity:
Beginning of period.... -- 2 4 2 -- --
---- --- --- --- --- ---
End of period.......... $135 201 527 112 96 58
==== === === === === ===

<CAPTION>
AMERICAN SKANDIA TRUST
---------------------------------------
PIMCO LIMITED PIMCO INVESCO
MATURITY TOTAL EQUITY
BOND RETURN INCOME
SUBACCOUNT SUBACCOUNT SUBACCOUNT
------------- ---------- ----------
<S> <C> <C> <C>
Operations:
Net investment loss.... -- -- --
Net realized gain on
sales of
investments.......... -- -- --
Change in unrealized
appreciation
(depreciation) of
investments.......... -- -- 2
-- -- --
Net increase
(decrease) in
policy owners'
equity resulting
from operations.... -- -- 2
-- -- --
Account unit
transactions:
Proceeds from units
sold................. 4 11 49
Net transfers from
affiliate and
subaccounts.......... 5 8 28
Payments for units
redeemed............. (1) (2) (7)
-- -- --
Net increase in
policy owners'
equity from account
unit
transactions....... 8 17 70
-- -- --
Total increase in policy
owners' equity......... 8 17 72
Policy owners' equity:
Beginning of period.... -- -- --
-- -- --
End of period.......... 8 17 72
== == ==
</TABLE>

See accompanying notes to financial statements.

42
<PAGE> 49

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.

43
<PAGE> 50

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, 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
AMERICAN SKANDIA TRUST:
Janus Small Cap Growth Subaccount......................... 24 409
Neuberger & Berman Mid-Cap Growth Subaccount.............. 42 666
Jancap Growth Subaccount.................................. 72 1,915
Lord Abbett Growth & Income Subaccount.................... 29 595
T. Rowe Price International Equity Subaccount............. 25 315
T. Rowe Price Asset Allocation Subaccount................. 14 226
PIMCO Limited Maturity Bond Subaccount.................... 2 23
PIMCO Total Return Subaccount............................. 6 67
INVESCO Equity Income Subaccount.......................... 23 376
FIDELITY VIP FUNDS:
Growth Opportunities Subaccount........................... 2 47
Index 500 Subaccount...................................... 1 76
Equity Income Subaccount.................................. 1 19
Contrafund Subaccount..................................... 3 71
High Income Subaccount.................................... 2 2
SCUDDER VARIABLE LIFE INVESTMENT FUNDS:
International Subaccount.................................. 1 8
Growth & Income Subaccount................................ 1 6
-------
TOTAL INVESTMENTS AT COST............................ $19,114
=======
</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.

44
<PAGE> 51

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.

AMERICAN SKANDIA TRUST

JANUS SMALL CAP GROWTH (FORMERLY FOUNDERS CAPITAL APPRECIATION) SUBACCOUNT:
This subaccount seeks capital appreciation through investment primarily in
common stocks of U.S. companies with market capitalizations of $1.5 billion or
less. These stocks normally will be traded in the over-the-counter market.

NEUBERGER & BERMAN MID-CAP GROWTH (FORMERLY BERGER CAPITAL GROWTH)
SUBACCOUNT: This subaccount seeks capital appreciation.

JANCAP GROWTH SUBACCOUNT: This subaccount seeks growth of capital in a
manner consistent with preservation of capital by emphasizing investments in
common stocks.

LORD ABBETT GROWTH & INCOME SUBACCOUNT: This subaccount seeks long-term
growth of capital and income while attempting to avoid excessive fluctuations in
market value by investing in common stocks of seasoned companies which are
expected to show above-average growth.

T. ROWE PRICE INTERNATIONAL EQUITY SUBACCOUNT: This subaccount seeks total
return on its assets from long-term growth of capital and income principally
through investment primarily in common stocks of established, non-U.S.
companies.

T. ROWE PRICE ASSET ALLOCATION SUBACCOUNT: This subaccount seeks a high
level of total return by investing primarily in a diversified group of fixed
income and equity securities.

PIMCO LIMITED MATURITY BOND SUBACCOUNT: This subaccount seeks to maximize
total return, consistent with preservation of capital and prudent investment
management by investing primarily in fixed income securities of various types.

PIMCO TOTAL RETURN SUBACCOUNT: This subaccount seeks to maximize total
return, consistent with preservation of capital by investing primarily in fixed
income securities of various types.

INVESCO EQUITY INCOME SUBACCOUNT: This subaccount seeks high current
income while following sound investment practices, with capital growth potential
as an additional but secondary consideration. The subaccount invests primarily
in dividend-paying, marketable common stocks of domestic and foreign industrial
issuers.

FIDELITY VIP FUNDS

GROWTH OPPORTUNITIES SUBACCOUNT: This subaccount seeks to provide capital
growth.

INDEX 500 SUBACCOUNT: This subaccount seeks investment results that
correspond to the total return of common stocks publicly traded in the United
States, as represented by the S&P 500.

EQUITY-INCOME SUBACCOUNT: This subaccount seeks reasonable income.

CONTRAFUND SUBACCOUNT: This subaccount seeks long-term capital
appreciation.

HIGH INCOME SUBACCOUNT: This subaccount seeks a high level of current
income while also considering growth of 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.

45
<PAGE> 52

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(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.

(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>
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
</TABLE>

46
<PAGE> 53

<TABLE>
<CAPTION>
NUMBER POLICY
OF UNIT OWNERS'
UNITS VALUE EQUITY
------ ----- -------
<S> <C> <C> <C>
AMERICAN SKANDIA TRUST:
Janus Small Cap Growth Subaccount........................... 24 $ 18.064 $ 426
Neuberger & Berman Mid-Cap Growth Subaccount................ 37 19.854 726
JanCap Growth Subaccount.................................... 67 39.864 2,653
Lord Abbett Growth & Income Subaccount...................... 27 23.455 633
T. Rowe Price International Equity Subaccount............... 24 13.673 333
T. Rowe Price Asset Allocation Subaccount................... 14 18.225 247
PIMCO Limited Maturity Bond Subaccount...................... 2 12.036 23
PIMCO Total Return Subaccount............................... 5 13.095 68
INVESCO Equity Income Subaccount............................ 21 19.165 399
FIDELITY VIP FUNDS:
Growth Opportunities Subaccount............................. 2 22.769 51
Index 500 Subaccount........................................ 1 140.563 81
Equity Income Subaccount.................................... 1 25.296 19
Contrafund Subaccount....................................... 3 24.321 80
High Income Subaccount...................................... 0 11.474 2
SCUDDER VARIABLE LIFE INVESTMENT FUNDS:
International Subaccount.................................... 1 14.439 8
Growth & Income Subaccount.................................. 1 11.275 6
------
TOTAL POWER V POLICY OWNERS' EQUITY.................... $8,481
======
</TABLE>

<TABLE>
<S> <C> <C> <C>
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>

47
<PAGE> 54

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

48
<PAGE> 55

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. In connection with our audit of the consolidated financial
statements, we also have audited the financial statement schedules as of
December 31, 1996 as listed in the accompanying index. These financial statement
schedules are incorporated by reference to a previously filed Form 10-K. These
consolidated financial statements and the financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and schedules 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. Also, in our opinion, the aforementioned supplementary
financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.

KPMG LLP

Chicago, Illinois

March 21, 1997

49
<PAGE> 56

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.

50
<PAGE> 57

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.

51
<PAGE> 58

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.

52
<PAGE> 59

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.

53
<PAGE> 60

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.

54
<PAGE> 61

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.

55
<PAGE> 62

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.

56
<PAGE> 63

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 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.

57
<PAGE> 64

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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>

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

58
<PAGE> 65

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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>

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.

59
<PAGE> 66

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(3) INVESTED ASSETS AND RELATED INCOME (CONTINUED)

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>

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>

60
<PAGE> 67

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(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%).

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

61
<PAGE> 68

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(5) CONCENTRATION OF CREDIT RISK (CONTINUED)

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>

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>

62
<PAGE> 69

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

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.

63
<PAGE> 70

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(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, $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

64
<PAGE> 71

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(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. 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.

65
<PAGE> 72

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(10) COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)

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 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.

66
<PAGE> 73

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

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>

67
<PAGE> 74

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.

68
<PAGE> 75

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

69
<PAGE> 76

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>

70
<PAGE> 77

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>

71
<PAGE> 78

APPENDIX A

ILLUSTRATIONS OF CASH VALUES,
CASH SURRENDER VALUES AND
DEATH BENEFITS

The tables in this Prospectus have been prepared to help show how values
under a Policy change with investment experience. The tables illustrate how Cash
Values, Surrender Values (reflecting the deduction of Surrender Charges, if any)
and Death Benefits under a Policy issued on an Insured of a given age would vary
over time if the hypothetical gross investment rates of return were a uniform,
after tax, annual rate of 0%, 6%, and 12%. If the hypothetical gross investment
rate of return averages 0%, 6%, or 12%, but fluctuates over or under those
averages throughout the years, the Cash Values, Surrender Values and Death
Benefits may be different.

The amounts shown for the Cash Value, Surrender Value and Death Benefit as
of each Policy Anniversary reflect the fact that the net investment return on
the assets held in the Subaccounts is lower than the gross return. This is
because of a daily charge to the Subaccounts for assuming mortality and expense
risks, which is equivalent to an effective annual charge of 0.90%. This charge
is guaranteed not to exceed an effective annual rate of 0.90%. In addition, the
net investment returns also reflect the deduction of the Fund investment
advisory fees and other Fund expenses, (.82%, the average of the fees and
expenses). The tables also reflect applicable charges and deductions including a
3.5% deduction against premiums, a monthly administrative charge of $5 and
monthly charges for providing insurance protection. For each hypothetical gross
investment rate of return, tables are provided reflecting current and guaranteed
cost of insurance charges. Hypothetical gross average investment rates of return
of 0%, 6% and 12% correspond to the following approximate net annual investment
rate of return of -1.72%, 4.28% and 10.28%, on a current basis. On a guaranteed
basis, these rates of return would be -1.72%, 4.28% and 10.28%, respectively.
Cost of insurance rates vary by issue age, sex, rating class and Policy Year
and, therefore, are not reflected in the approximate net annual investment rate
of return above.

Values are shown for Policies which are issued to a male standard nonsmoker
and a male preferred nonsmoker. Values for Policies issued on a basis involving
a higher mortality risk would result in lower Cash Values, Surrender Values and
Death Benefits than those illustrated. Females generally have a more favorable
rate structure than males.

The tables also reflect the fact that no charges for federal, state or
other income taxes are currently made against the Separate Account. If such a
charge is made in the future, it will take a higher gross rate of return than
illustrated to produce the net after-tax returns shown in the tables.

Upon request, we will furnish an illustration based on the proposed
Insured's age, sex and premium payment requested.

72
<PAGE> 79

FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY

MALE STANDARD NON-SMOKER $1,000.00 ANNUAL PREMIUM ISSUE AGE 35

$100,000 INITIAL DEATH BENEFIT:

VALUES--CURRENT COST OF INSURANCE

<TABLE>
<CAPTION>
0.00% HYPOTHETICAL 6.00% HYPOTHETICAL 12.00% HYPOTHETICAL
PREMIUM GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
PAID PLUS ------------------------------ ----------------------------- ---------------------------------
POLICY INTEREST CASH SURRENDER DEATH CASH SURRENDER DEATH CASH SURRENDER DEATH
YEAR AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- ------ --------- -------- --------- ------- ------- --------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,050 724 18 100,000 775 68 100,000 826 119 100,000
2 2,153 1,432 650 100,000 1,578 797 100,000 1,732 950 100,000
3 3,310 2,116 1,260 100,000 2,406 1,549 100,000 2,720 1,864 100,000
4 4,526 2,779 1,847 100,000 3,258 2,327 100,000 3,800 2,869 100,000
5 5,802 3,420 2,413 100,000 4,137 3,131 100,000 4,982 3,975 100,000
6 7,142 4,034 3,061 100,000 5,039 4,065 100,000 6,269 5,296 100,000
7 8,549 4,623 3,697 100,000 5,963 5,038 100,000 7,675 6,750 100,000
8 10,027 5,185 4,323 100,000 6,913 6,051 100,000 9,212 8,350 100,000
9 11,578 5,723 4,939 100,000 7,888 7,104 100,000 10,894 10,110 100,000
10 13,207 6,252 5,561 100,000 8,908 8,217 100,000 12,754 12,063 100,000
11 14,917 6,773 6,191 100,000 9,974 9,391 100,000 14,810 14,228 100,000
12 16,713 7,287 6,827 100,000 11,088 10,629 100,000 17,085 16,625 100,000
13 18,599 7,793 7,472 100,000 12,254 11,933 100,000 19,600 19,278 100,000
14 20,579 8,292 8,124 100,000 13,473 13,305 100,000 22,381 22,213 100,000
15 22,657 8,784 8,784 100,000 14,748 14,748 100,000 25,458 25,458 100,000
16 24,840 9,269 9,269 100,000 16,081 16,081 100,000 28,860 28,860 100,000
17 27,132 9,747 9,747 100,000 17,475 17,475 100,000 32,622 32,622 100,000
18 29,539 10,217 10,217 100,000 18,933 18,933 100,000 36,783 36,783 100,000
19 32,066 10,682 10,682 100,000 20,457 20,457 100,000 41,385 41,385 100,000
20 34,719 11,139 11,139 100,000 22,052 22,052 100,000 46,474 46,474 100,000

25 50,113 11,094 11,094 100,000 29,051 29,051 100,000 79,988 79,988 107,184
30 69,761 8,819 8,819 100,000 36,123 36,123 100,000 134,390 134,390 163,955
35 94,836 2,532 2,532 100,000 42,438 42,438 100,000 221,096 221,096 256,471
40 126,840 0 0 0 46,523 46,523 100,000 359,989 359,989 385,188
45 167,685 0 0 0 44,811 44,811 100,000 584,900 584,900 614,145
</TABLE>

ASSUMPTIONS:

(1) BASED ON DEATH BENEFIT OPTION A AND ASSUMES NO POLICY LOANS HAVE BEEN
MADE.

(2) VALUES REFLECT CURRENT COST OF INSURANCE CHARGES.

(3) NET INVESTMENT RETURNS ARE CALCULATED AS THE HYPOTHETICAL GROSS
INVESTMENT RETURN LESS ALL CHARGES AND DEDUCTIONS.

(4) DEATH BENEFIT REFLECTS CURRENT INTERNAL REVENUE CODE REQUIREMENTS.

(5) ZERO VALUES INDICATE POLICY LAPSE IN ABSENCE OF AN ADDITIONAL PREMIUM
PAYMENT.

THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER AND ACTUAL EXPENSES. THE DEATH BENEFIT,
CASH VALUE AND SURRENDER VALUE FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN
IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% AND 12% OVER A PERIOD OF YEARS BUT
ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. NO
REPRESENTATIONS CAN BE MADE BY KEMPER INVESTORS LIFE INSURANCE COMPANY THAT
THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED
OVER ANY PERIOD OF TIME.

73
<PAGE> 80

FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY

MALE STANDARD NON-SMOKER $1,000.00 ANNUAL PREMIUM ISSUE AGE 35

$100,000 INITIAL DEATH BENEFIT:

VALUES--GUARANTEED COST OF INSURANCE

<TABLE>
<CAPTION>
0.00% HYPOTHETICAL 6.00% HYPOTHETICAL 12.00% HYPOTHETICAL
PREMIUM GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
PAID PLUS ---------------------------- ---------------------------- ---------------------------------
POLICY INTEREST CASH SURRENDER DEATH CASH SURRENDER DEATH CASH SURRENDER DEATH
YEAR AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- ------ --------- ------ --------- ------- ------ --------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,050 723 17 100,000 774 67 100,000 825 118 100,000
2 2,153 1,428 646 100,000 1,574 793 100,000 1,727 946 100,000
3 3,310 2,111 1,254 100,000 2,400 1,543 100,000 2,713 1,857 100,000
4 4,526 2,771 1,840 100,000 3,250 2,318 100,000 3,791 2,859 100,000
5 5,802 3,409 2,402 100,000 4,125 3,118 100,000 4,967 3,960 100,000
6 7,142 4,022 3,049 100,000 5,024 4,051 100,000 6,252 5,279 100,000
7 8,549 4,610 3,685 100,000 5,947 5,022 100,000 7,655 6,730 100,000
8 10,027 5,172 4,310 100,000 6,895 6,033 100,000 9,189 8,327 100,000
9 11,578 5,706 4,922 100,000 7,866 7,082 100,000 10,865 10,081 100,000
10 13,207 6,213 5,522 100,000 8,862 8,171 100,000 12,700 12,009 100,000
11 14,917 6,690 6,107 100,000 9,881 9,298 100,000 14,706 14,124 100,000
12 16,713 7,135 6,676 100,000 10,923 10,463 100,000 16,903 16,443 100,000
13 18,599 7,548 7,227 100,000 11,986 11,665 100,000 19,309 18,987 100,000
14 20,579 7,928 7,760 100,000 13,072 12,904 100,000 21,947 21,778 100,000
15 22,657 8,270 8,270 100,000 14,179 14,179 100,000 24,840 24,840 100,000
16 24,840 8,575 8,575 100,000 15,306 15,306 100,000 28,016 28,016 100,000
17 27,132 8,837 8,837 100,000 16,450 16,450 100,000 31,504 31,504 100,000
18 29,539 9,050 9,050 100,000 17,606 17,606 100,000 35,335 35,335 100,000
19 32,066 9,209 9,209 100,000 18,771 18,771 100,000 39,548 39,548 100,000
20 34,719 9,308 9,308 100,000 19,939 19,939 100,000 44,184 44,184 100,000

25 50,113 8,690 8,690 100,000 25,698 25,698 100,000 75,723 75,723 101,469
30 69,761 5,355 5,355 100,000 30,721 30,721 100,000 127,163 127,163 155,138
35 94,836 0 0 0 33,403 33,403 100,000 208,790 208,790 242,196
40 126,840 0 0 0 30,397 30,397 100,000 339,102 339,102 362,839
45 167,685 0 0 0 12,335 12,335 100,000 549,834 549,834 577,326
</TABLE>

ASSUMPTIONS:

(1) BASED ON DEATH BENEFIT OPTION A AND ASSUMES NO POLICY LOANS HAVE BEEN
MADE.

(2) VALUES REFLECT GUARANTEED COST OF INSURANCE CHARGES.

(3) NET INVESTMENT RETURNS ARE CALCULATED AS THE HYPOTHETICAL GROSS
INVESTMENT RETURN LESS ALL CHARGES AND DEDUCTIONS.

(4) DEATH BENEFIT REFLECTS CURRENT INTERNAL REVENUE CODE REQUIREMENTS.

(5) ZERO VALUES INDICATE POLICY LAPSE IN ABSENCE OF AN ADDITIONAL PREMIUM
PAYMENT.

74
<PAGE> 81

FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY

MALE STANDARD NON-SMOKER $3,000.00 ANNUAL PREMIUM ISSUE AGE 55

$100,000 INITIAL DEATH BENEFIT:

VALUES--CURRENT COST OF INSURANCE

<TABLE>
<CAPTION>
0.00% HYPOTHETICAL 6.00% HYPOTHETICAL 12.00% HYPOTHETICAL
PREMIUM GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
PAID PLUS -------------------------------- ----------------------------- ---------------------------------
POLICY INTEREST CASH SURRENDER DEATH CASH SURRENDER DEATH CASH SURRENDER DEATH
YEAR AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- ------ --------- ---------- --------- ------- ------- --------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 3,150 2,034 790 100,000 2,182 937 100,000 2,330 1,086 100,000
2 6,458 3,975 2,506 100,000 4,399 2,930 100,000 4,842 3,372 100,000
3 9,930 5,816 4,121 100,000 6,646 4,951 100,000 7,548 5,853 100,000
4 13,577 7,560 5,640 100,000 8,927 7,007 100,000 10,476 8,556 100,000
5 17,406 9,195 7,051 100,000 11,232 9,087 100,000 13,639 11,494 100,000
6 21,426 10,763 8,630 100,000 13,606 11,473 100,000 17,110 14,977 100,000
7 25,647 12,323 10,247 100,000 16,111 14,035 100,000 20,984 18,908 100,000
8 30,080 13,874 11,900 100,000 18,756 16,782 100,000 25,308 23,335 100,000
9 34,734 15,417 13,590 100,000 21,547 19,720 100,000 30,136 28,309 100,000
10 39,620 16,952 15,318 100,000 24,493 22,858 100,000 35,524 33,889 100,000
11 44,751 18,480 17,082 100,000 27,603 26,205 100,000 41,539 40,141 100,000
12 50,139 19,999 18,883 100,000 30,885 29,769 100,000 48,252 47,136 100,000
13 55,796 21,510 20,721 100,000 34,350 33,561 100,000 55,746 54,958 100,000
14 61,736 23,014 22,597 100,000 38,007 37,590 100,000 64,112 63,695 100,000
15 67,972 24,509 24,509 100,000 41,867 41,867 100,000 73,449 73,449 100,000
16 74,521 25,997 25,997 100,000 45,941 45,941 100,000 83,873 83,873 100,000
17 81,397 27,477 27,477 100,000 50,241 50,241 100,000 95,473 95,473 107,884
18 88,617 28,949 28,949 100,000 54,780 54,780 100,000 108,276 108,276 120,186
19 96,198 30,414 30,414 100,000 59,571 59,571 100,000 122,406 122,406 133,423
20 104,158 31,871 31,871 100,000 64,628 64,628 100,000 138,006 138,006 147,666

25 150,340 22,182 22,182 100,000 88,400 88,400 100,000 240,921 240,921 252,968
30 209,282 0 0 0 122,190 122,190 128,299 403,071 403,071 423,224
35 284,509 0 0 0 161,188 161,188 169,247 653,392 653,392 686,062
40 380,519 0 0 0 209,175 209,175 211,267 1,055,328 1,055,328 1,065,882
45 503,055 0 0 0 274,046 274,046 274,046 1,740,570 1,740,570 1,740,570
</TABLE>

ASSUMPTIONS:

(1) BASED ON DEATH BENEFIT OPTION A AND ASSUMES NO POLICY LOANS HAVE BEEN
MADE.

(2) VALUES REFLECT CURRENT COST OF INSURANCE CHARGES.

(3) NET INVESTMENT RETURNS ARE CALCULATED AS THE HYPOTHETICAL GROSS
INVESTMENT RETURN LESS ALL CHARGES AND DEDUCTIONS.

(4) DEATH BENEFIT REFLECTS CURRENT INTERNAL REVENUE CODE REQUIREMENTS.

(5) ZERO VALUES INDICATE POLICY LAPSE IN ABSENCE OF AN ADDITIONAL PREMIUM
PAYMENT.

75
<PAGE> 82

FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY

MALE STANDARD NON-SMOKER $3,000.00 ANNUAL PREMIUM ISSUE AGE 55

$100,000 INITIAL DEATH BENEFIT:

VALUES--GUARANTEED COST OF INSURANCE

<TABLE>
<CAPTION>
0.00% HYPOTHETICAL 6.00% HYPOTHETICAL 12.00% HYPOTHETICAL
PREMIUM GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
PAID PLUS ---------------------------- ---------------------------- ---------------------------------
POLICY INTEREST CASH SURRENDER DEATH CASH SURRENDER DEATH CASH SURRENDER DEATH
YEAR AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- ------ --------- ------ --------- ------- ------ --------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 3,150 2,032 788 100,000 2,180 935 100,000 2,328 1,084 100,000
2 6,458 3,969 2,499 100,000 4,392 2,923 100,000 4,835 3,365 100,000
3 9,930 5,808 4,114 100,000 6,637 4,942 100,000 7,539 5,844 100,000
4 13,577 7,549 5,629 100,000 8,914 6,994 100,000 10,462 8,542 100,000
5 17,406 9,183 7,039 100,000 11,218 9,073 100,000 13,623 11,478 100,000
6 21,426 10,705 8,573 100,000 13,545 11,412 100,000 17,046 14,913 100,000
7 25,647 12,108 10,032 100,000 15,891 13,815 100,000 20,759 18,683 100,000
8 30,080 13,379 11,405 100,000 18,247 16,273 100,000 24,793 22,819 100,000
9 34,734 14,506 12,679 100,000 20,605 18,778 100,000 29,182 27,355 100,000
10 39,620 15,474 13,839 100,000 22,956 21,321 100,000 33,970 32,335 100,000
11 44,751 16,270 14,872 100,000 25,293 23,895 100,000 39,213 37,815 100,000
12 50,139 16,883 15,767 100,000 27,614 26,498 100,000 44,981 43,866 100,000
13 55,796 17,301 16,512 100,000 29,914 29,125 100,000 51,362 50,573 100,000
14 61,736 17,508 17,091 100,000 32,192 31,775 100,000 58,459 58,042 100,000
15 67,972 17,484 17,484 100,000 34,442 34,442 100,000 66,400 66,400 100,000
16 74,521 17,196 17,196 100,000 36,652 36,652 100,000 75,339 75,339 100,000
17 81,397 16,553 16,553 100,000 38,768 38,768 100,000 85,460 85,460 100,000
18 88,617 15,593 15,593 100,000 40,839 40,839 100,000 96,918 96,918 107,579
19 96,198 14,200 14,200 100,000 42,805 42,805 100,000 109,555 109,555 119,415
20 104,158 12,293 12,293 100,000 44,643 44,643 100,000 123,506 123,506 132,151

25 150,340 0 0 0 51,397 51,397 100,000 217,036 217,036 227,888
30 209,282 0 0 0 50,445 50,445 100,000 363,456 363,456 381,629
35 284,509 0 0 0 21,278 21,278 100,000 587,146 587,146 616,503
40 380,519 0 0 0 0 0 0 945,311 945,311 954,764
45 503,055 0 0 0 0 0 0 1,561,119 1,561,119 1,561,119
</TABLE>

ASSUMPTIONS:

(1) BASED ON DEATH BENEFIT OPTION A AND ASSUMES NO POLICY LOANS HAVE BEEN
MADE.

(2) VALUES REFLECT GUARANTEED COST OF INSURANCE CHARGES.

(3) NET INVESTMENT RETURNS ARE CALCULATED AS THE HYPOTHETICAL GROSS
INVESTMENT RETURN LESS ALL CHARGES AND DEDUCTIONS.

(4) DEATH BENEFIT REFLECTS CURRENT INTERNAL REVENUE CODE REQUIREMENTS.

(5) ZERO VALUES INDICATE POLICY LAPSE IN ABSENCE OF AN ADDITIONAL PREMIUM
PAYMENT.

76
<PAGE> 83

FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY

MALE PREFERRED NON-SMOKER $1,500.00 ANNUAL PREMIUM ISSUE AGE 35

$150,000 INITIAL DEATH BENEFIT:

VALUES--CURRENT COST OF INSURANCE

<TABLE>
<CAPTION>
0.00% HYPOTHETICAL 6.00% HYPOTHETICAL 12.00% HYPOTHETICAL
PREMIUM GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
PAID PLUS ---------------------------- ----------------------------- -------------------------------
POLICY INTEREST CASH SURRENDER DEATH CASH SURRENDER DEATH CASH SURRENDER DEATH
YEAR AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- ------ --------- ------ --------- ------- ------- --------- ------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,575 1,116 63 150,000 1,193 140 150,000 1,270 217 150,000
2 3,229 2,206 1,041 150,000 2,431 1,265 150,000 2,664 1,498 150,000
3 4,965 3,262 1,984 150,000 3,705 2,427 150,000 4,186 2,907 150,000
4 6,788 4,299 2,908 150,000 5,033 3,643 150,000 5,863 4,472 150,000
5 8,703 5,319 3,816 150,000 6,421 4,918 150,000 7,716 6,213 150,000
6 10,713 6,324 4,869 150,000 7,870 6,416 150,000 9,764 8,310 150,000
7 12,824 7,313 5,930 150,000 9,385 8,002 150,000 12,026 10,644 150,000
8 15,040 8,287 6,998 150,000 10,967 9,679 150,000 14,526 13,237 150,000
9 17,367 9,246 8,074 150,000 12,620 11,449 150,000 17,288 16,116 150,000
10 19,810 10,190 9,157 150,000 14,348 13,315 150,000 20,339 19,306 150,000
11 22,376 11,120 10,249 150,000 16,152 15,281 150,000 23,710 22,839 150,000
12 25,069 12,036 11,349 150,000 18,037 17,350 150,000 27,436 26,748 150,000
13 27,898 12,937 12,457 150,000 20,007 19,526 150,000 31,551 31,071 150,000
14 30,868 13,825 13,574 150,000 22,065 21,813 150,000 36,099 35,847 150,000
15 33,986 14,699 14,699 150,000 24,215 24,215 150,000 41,123 41,123 150,000
16 37,261 15,560 15,560 150,000 26,461 26,461 150,000 46,674 46,674 150,000
17 40,699 16,407 16,407 150,000 28,808 28,808 150,000 52,808 52,808 150,000
18 44,309 17,242 17,242 150,000 31,260 31,260 150,000 59,585 59,585 150,000
19 48,099 18,064 18,064 150,000 33,821 33,821 150,000 67,072 67,072 150,000
20 52,079 18,873 18,873 150,000 36,498 36,498 150,000 75,345 75,345 150,000
25 75,170 20,563 20,563 150,000 49,754 49,754 150,000 130,507 130,507 174,880
30 104,641 20,028 20,028 150,000 64,804 64,804 150,000 219,867 219,867 268,237
35 142,254 15,760 15,760 150,000 81,690 81,690 150,000 363,393 363,393 421,536
40 190,260 4,910 4,910 150,000 100,910 100,910 150,000 594,696 594,696 636,325
45 251,528 0 0 0 124,169 124,169 150,000 970,129 970,129 1,018,636
</TABLE>

ASSUMPTIONS:

(1) BASED ON DEATH BENEFIT OPTION A AND ASSUMES NO POLICY LOANS HAVE BEEN
MADE.

(2) VALUES REFLECT CURRENT COST OF INSURANCE CHARGES.

(3) NET INVESTMENT RETURNS ARE CALCULATED AS THE HYPOTHETICAL GROSS
INVESTMENT RETURN LESS ALL CHARGES AND DEDUCTIONS.

(4) DEATH BENEFIT REFLECTS CURRENT INTERNAL REVENUE CODE REQUIREMENTS.

(5) ZERO VALUES INDICATE POLICY LAPSE IN ABSENCE OF AN ADDITIONAL PREMIUM
PAYMENT.

77
<PAGE> 84

FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
MALE PREFERRED NON-SMOKER $1,500.00 ANNUAL PREMIUM ISSUE AGE 35
$150,000 INITIAL DEATH BENEFIT:

VALUES--GUARANTEED COST OF INSURANCE

<TABLE>
<CAPTION>
0.00% HYPOTHETICAL 6.00% HYPOTHETICAL 12.00% HYPOTHETICAL
PREMIUM GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
PAID PLUS ---------------------------- ---------------------------- -----------------------------
POLICY INTEREST CASH SURRENDER DEATH CASH SURRENDER DEATH CASH SURRENDER DEATH
YEAR AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- ------ --------- ------ --------- ------- ------ --------- ------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,575 1,115 62 150,000 1,192 138 150,000 1,269 216 150,000
2 3,229 2,201 1,035 150,000 2,424 1,259 150,000 2,658 1,492 150,000
3 4,965 3,254 1,976 150,000 3,696 2,418 150,000 4,175 2,897 150,000
4 6,788 4,273 2,883 150,000 5,006 3,616 150,000 5,834 4,443 150,000
5 8,703 5,257 3,754 150,000 6,355 4,852 150,000 7,646 6,143 150,000
6 10,713 6,205 4,751 150,000 7,743 6,289 150,000 9,626 8,172 150,000
7 12,824 7,114 5,731 150,000 9,167 7,785 150,000 11,788 10,406 150,000
8 15,040 7,984 6,695 150,000 10,631 9,342 150,000 14,153 12,865 150,000
9 17,367 8,811 7,640 150,000 12,132 10,960 150,000 16,738 15,566 150,000
10 19,810 9,598 8,565 150,000 13,672 12,639 150,000 19,568 18,535 150,000
11 22,376 10,339 9,468 150,000 15,248 14,377 150,000 22,665 21,794 150,000
12 25,069 11,033 10,346 150,000 16,861 16,174 150,000 26,056 25,369 150,000
13 27,898 11,678 11,197 150,000 18,510 18,029 150,000 29,772 29,291 150,000
14 30,868 12,272 12,021 150,000 20,195 19,943 150,000 33,847 33,595 150,000
15 33,986 12,811 12,811 150,000 21,913 21,913 150,000 38,318 38,318 150,000
16 37,261 13,293 13,293 150,000 23,666 23,666 150,000 43,229 43,229 150,000
17 40,699 13,710 13,710 150,000 25,446 25,446 150,000 48,624 48,624 150,000
18 44,309 14,054 14,054 150,000 27,248 27,248 150,000 54,552 54,552 150,000
19 48,099 14,318 14,318 150,000 29,068 29,068 150,000 61,073 61,073 150,000
20 52,079 14,490 14,490 150,000 30,898 30,898 150,000 68,252 68,252 150,000
25 75,170 13,692 13,692 150,000 39,998 39,998 150,000 117,152 117,152 156,983
30 104,641 8,832 8,832 150,000 48,190 48,190 150,000 196,640 196,640 239,901
35 142,254 0 0 0 53,246 53,246 150,000 322,778 322,778 374,422
40 190,260 0 0 0 50,591 50,591 150,000 524,148 524,148 560,838
45 251,528 0 0 0 27,525 27,525 150,000 849,789 849,789 892,279
</TABLE>

ASSUMPTIONS:

(1) BASED ON DEATH BENEFIT OPTION A AND ASSUMES NO POLICY LOANS HAVE BEEN
MADE.

(2) VALUES REFLECT GUARANTEED COST OF INSURANCE CHARGES.

(3) NET INVESTMENT RETURNS ARE CALCULATED AS THE HYPOTHETICAL GROSS
INVESTMENT RETURN LESS ALL CHARGES AND DEDUCTIONS.

(4) DEATH BENEFIT REFLECTS CURRENT INTERNAL REVENUE CODE REQUIREMENTS.

(5) ZERO VALUES INDICATE POLICY LAPSE IN ABSENCE OF AN ADDITIONAL PREMIUM
PAYMENT.

78
<PAGE> 85

FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY

MALE PREFERRED NON-SMOKER $4,500.00 ANNUAL PREMIUM ISSUE AGE 55

$150,000 INITIAL DEATH BENEFIT:

VALUES--CURRENT COST OF INSURANCE

<TABLE>
<CAPTION>
0.00% HYPOTHETICAL 6.00% HYPOTHETICAL 12.00% HYPOTHETICAL
PREMIUM GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
PAID PLUS ---------------------------- ----------------------------- ---------------------------------
POLICY INTEREST CASH SURRENDER DEATH CASH SURRENDER DEATH CASH SURRENDER DEATH
YEAR AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- ------ --------- ------ --------- ------- ------- --------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1... 4,725 3,081 1,221 150,000 3,304 1,444 150,000 3,527 1,667 150,000
2... 9,686 6,094 3,896 150,000 6,736 4,538 150,000 7,406 5,208 150,000
3... 14,896 9,079 6,543 150,000 10,344 7,808 150,000 11,718 9,183 150,000
4... 20,365 12,036 9,163 150,000 14,136 11,263 150,000 16,512 13,639 150,000
5... 26,109 14,966 11,756 150,000 18,123 14,913 150,000 21,842 18,632 150,000
6... 32,139 17,869 14,676 150,000 22,315 19,122 150,000 27,767 24,574 150,000
7... 38,471 20,745 17,637 150,000 26,721 23,613 150,000 34,355 31,247 150,000
8... 45,120 23,595 20,639 150,000 31,353 28,397 150,000 41,678 38,722 150,000
9... 52,101 26,418 23,682 150,000 36,223 33,487 150,000 49,820 47,084 150,000
10.. 59,431 29,216 26,767 150,000 41,342 38,893 150,000 58,872 56,423 150,000
11.. 67,127 31,987 29,893 150,000 46,723 44,629 150,000 68,935 66,840 150,000
12.. 75,208 34,733 33,061 150,000 52,381 50,709 150,000 80,122 78,450 150,000
13.. 83,694 37,453 36,271 150,000 58,328 57,146 150,000 92,559 91,377 150,000
14.. 92,604 40,149 39,524 150,000 64,580 63,955 150,000 106,387 105,762 150,000
15.. 101,959 42,819 42,819 150,000 71,152 71,152 150,000 121,759 121,759 150,000
16.. 111,782 45,465 45,465 150,000 78,062 78,062 150,000 138,826 138,826 159,650
17.. 122,096 48,086 48,086 150,000 85,325 85,325 150,000 157,661 157,661 178,157
18.. 132,926 50,684 50,684 150,000 92,961 92,961 150,000 178,440 178,440 198,068
19.. 144,297 53,257 53,257 150,000 100,988 100,988 150,000 201,367 201,367 219,490
20.. 156,237 55,806 55,806 150,000 109,427 109,427 150,000 226,670 226,670 242,537

25.. 225,511 53,697 53,697 150,000 155,300 155,300 163,065 395,028 395,028 414,779
30.. 313,924 38,927 38,927 150,000 212,719 212,719 223,355 663,376 663,376 696,545
35.. 426,763 0 0 0 280,165 280,165 294,173 1,085,418 1,085,418 1,139,689
40.. 570,779 0 0 0 363,210 363,210 366,842 1,766,507 1,766,507 1,784,173
45.. 754,583 0 0 0 472,212 472,212 472,212 2,910,383 2,910,383 2,910,383
</TABLE>

ASSUMPTIONS:

(1) BASED ON DEATH BENEFIT OPTION A AND ASSUMES NO POLICY LOANS HAVE BEEN
MADE.

(2) VALUES REFLECT CURRENT COST OF INSURANCE CHARGES.

(3) NET INVESTMENT RETURNS ARE CALCULATED AS THE HYPOTHETICAL GROSS
INVESTMENT RETURN LESS ALL CHARGES AND DEDUCTIONS.

(4) DEATH BENEFIT REFLECTS CURRENT INTERNAL REVENUE CODE REQUIREMENTS.

(5) ZERO VALUES INDICATE POLICY LAPSE IN ABSENCE OF AN ADDITIONAL PREMIUM
PAYMENT.

79
<PAGE> 86

FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY

MALE PREFERRED NON-SMOKER $4,500.00 ANNUAL PREMIUM ISSUE AGE 55

$150,000 INITIAL DEATH BENEFIT:

VALUES--GUARANTEED COST OF INSURANCE

<TABLE>
<CAPTION>
0.00% HYPOTHETICAL 6.00% HYPOTHETICAL 12.00% HYPOTHETICAL
PREMIUM GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
PAID PLUS ---------------------------- ---------------------------- ---------------------------------
POLICY INTEREST CASH SURRENDER DEATH CASH SURRENDER DEATH CASH SURRENDER DEATH
YEAR AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- ------ --------- ------ --------- ------- ------ --------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 4,725 3,078 1,218 150,000 3,301 1,441 150,000 3,524 1,664 150,000
2 9,686 6,012 3,814 150,000 6,652 4,454 150,000 7,319 5,121 150,000
3 14,896 8,801 6,266 150,000 10,053 7,518 150,000 11,415 8,880 150,000
4 20,365 11,441 8,568 150,000 13,505 10,632 150,000 15,843 12,970 150,000
5 26,109 13,922 10,712 150,000 16,999 13,788 150,000 20,634 17,423 150,000
6 32,139 16,234 13,041 150,000 20,530 17,336 150,000 25,823 22,630 150,000
7 38,471 18,367 15,259 150,000 24,091 20,983 150,000 31,455 28,347 150,000
8 45,120 20,304 17,348 150,000 27,672 24,716 150,000 37,576 34,620 150,000
9 52,101 22,024 19,288 150,000 31,258 28,522 150,000 44,239 41,502 150,000
10 59,431 23,506 21,057 150,000 34,838 32,389 150,000 51,510 49,061 150,000
11 67,127 24,731 22,637 150,000 38,401 36,306 150,000 59,477 57,382 150,000
12 75,208 25,684 24,012 150,000 41,944 40,272 150,000 68,246 66,574 150,000
13 83,694 26,343 25,161 150,000 45,462 44,280 150,000 77,950 76,768 150,000
14 92,604 26,688 26,063 150,000 48,953 48,328 150,000 88,750 88,126 150,000
15 101,959 26,688 26,688 150,000 52,410 52,410 150,000 100,841 100,841 150,000
16 111,782 26,295 26,295 150,000 55,814 55,814 150,000 114,458 114,458 150,000
17 122,096 25,371 25,371 150,000 59,090 59,090 150,000 129,884 129,884 150,000
18 132,926 23,976 23,976 150,000 62,311 62,311 150,000 147,284 147,284 163,485
19 144,297 21,934 21,934 150,000 65,390 65,390 150,000 166,459 166,459 181,440
20 156,237 19,127 19,127 150,000 68,295 68,295 150,000 187,626 187,626 200,760

25 225,511 0 0 0 79,649 79,649 150,000 329,544 329,544 346,021
30 313,924 0 0 0 81,442 81,442 150,000 551,709 551,709 579,294
35 426,763 0 0 0 49,334 49,334 150,000 891,114 891,114 935,670
40 570,779 0 0 0 0 0 0 1,434,561 1,434,561 1,448,906
45 754,583 0 0 0 0 0 0 2,368,941 2,368,941 2,368,941
</TABLE>

ASSUMPTIONS:

(1) BASED ON DEATH BENEFIT OPTION A AND ASSUMES NO POLICY LOANS HAVE BEEN
MADE.

(2) VALUES REFLECT GUARANTEED COST OF INSURANCE CHARGES.

(3) NET INVESTMENT RETURNS ARE CALCULATED AS THE HYPOTHETICAL GROSS
INVESTMENT RETURN LESS ALL CHARGES AND DEDUCTIONS.

(4) DEATH BENEFIT REFLECTS CURRENT INTERNAL REVENUE CODE REQUIREMENTS.

(5) ZERO VALUES INDICATE POLICY LAPSE IN ABSENCE OF AN ADDITIONAL PREMIUM
PAYMENT.

80
<PAGE> 87

APPENDIX B

TABLE OF DEATH BENEFIT FACTORS

<TABLE>
<CAPTION>
ATTAINED ATTAINED ATTAINED ATTAINED
AGE* PERCENT AGE* PERCENT AGE* PERCENT AGE* PERCENT
- -------- ------- -------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
0-40 250 50 185 60 130 70 115
41 243 51 178 61 128 71 113
42 236 52 171 62 126 72 111
43 229 53 164 63 124 73 109
44 222 54 157 64 122 74 107
45 215 55 150 65 120 75-90 105
46 209 56 146 66 119 91 104
47 203 57 142 67 118 92 103
48 197 58 138 68 117 93 102
49 191 59 134 69 116 94 101
95-99 100
</TABLE>

* ATTAINED AGE AS OF THE BEGINNING OF THE POLICY YEAR

81
<PAGE> 88

(This page intentionally left blank)

82
<PAGE> 89

PROSPECTUS--MAY 1, 1999

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

FLEXIBLE PREMIUM VARIABLE
LIFE INSURANCE POLICY
- --------------------------------------------------------------------------------

ISSUED BY

KEMPER INVESTORS LIFE INSURANCE COMPANY
THROUGH ITS KILICO VARIABLE SEPARATE ACCOUNT

HOME OFFICE: 1 KEMPER DRIVE, LONG GROVE, ILLINOIS 60049 (800) 321-9313

The Policy is "life insurance" for federal tax purposes. If the Policy is a
modified endowment contract, different tax rules apply to distributions. See
"Federal Tax Matters", page 20 for a discussion of laws that affect the tax
treatment of the Policy.

A Policy owner has the following choices for allocating premium:

- the Fixed Account, which accrues interest at our guaranteed rate,
and

- the Subaccounts of the Separate Account, which invest in portfolios
of underlying mutual funds.

The following portfolios of underlying mutual funds are currently available
under the Policy:

- Kemper Variable Series (formerly
Investors Fund Series)

- Kemper High Yield
- Kemper Government Securities

- Kemper-Dreman High Return Equity

- Kemper Small Cap Growth

- Janus Aspen Series

- Janus Aspen Capital Appreciation
Portfolio

- PIMCO Variable Insurance Trust
- PIMCO Low Duration Bond
- PIMCO Foreign Bond
- - Templeton Variable Products Series Fund
- Templeton Developing Markets Fund
(Class 2 Shares)

- - Scudder Variable Life Investment Fund
- Scudder VLIF International (A-Shares)
- Scudder VLIF Growth and Income (A-Shares)
- Scudder VLIF Bond (A-Shares)
- Scudder VLIF Money Market

You may obtain more information about these portfolios in the attached
prospectuses. Not all portfolios described in the prospectuses may be available
under the Policy.

The Policy owner may cancel the Policy and receive a refund during the
Free-Look Period.

If you already own a flexible premium variable life insurance policy, it
may not be advantageous to buy additional insurance or to replace your policy
with the Policy described in this Prospectus.

THIS PROSPECTUS MUST BE ACCOMPANIED OR PRECEDED BY A CURRENT
PROSPECTUS FOR THE AVAILABLE UNDERLYING PORTFOLIOS. YOU SHOULD READ
AND RETAIN ALL PROSPECTUSES FOR FUTURE REFERENCE.

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 WEB SITE AT HTTP://WWW.SEC.GOV.

THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED
THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
<PAGE> 90

TABLE OF CONTENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Page
----
<S> <C>
DEFINITIONS................................................. 1
SUMMARY..................................................... 2
KILICO AND THE SEPARATE ACCOUNT............................. 4
THE FUNDS................................................... 5
FIXED ACCOUNT OPTION........................................ 7
THE POLICY.................................................. 8
POLICY BENEFITS AND RIGHTS.................................. 10
CHARGES AND DEDUCTIONS...................................... 14
GENERAL PROVISIONS.......................................... 17
DOLLAR COST AVERAGING....................................... 20
SYSTEMATIC WITHDRAWAL PLAN.................................. 20
DISTRIBUTION OF POLICIES.................................... 20
FEDERAL TAX MATTERS......................................... 21
LEGAL CONSIDERATIONS........................................ 23
SAFEKEEPING OF THE SEPARATE ACCOUNT'S ASSETS................ 23
VOTING INTERESTS............................................ 24
STATE REGULATION OF KILICO.................................. 24
KILICO'S DIRECTORS AND OFFICERS............................. 25
LEGAL MATTERS............................................... 26
LEGAL PROCEEDINGS........................................... 27
YEAR 2000 COMPLIANCE........................................ 27
EXPERTS..................................................... 28
REGISTRATION STATEMENT...................................... 28
FINANCIAL STATEMENTS........................................ 28
CHANGE OF ACCOUNTANTS....................................... 28
APPENDIX A ILLUSTRATIONS OF CASH VALUES, CASH SURRENDER
VALUES AND DEATH BENEFITS................................. 62
APPENDIX B TABLE OF DEATH BENEFIT FACTORS................... 71
</TABLE>

<PAGE> 91

DEFINITIONS

ACCUMULATION UNIT--An accounting unit of measure used to calculate the
value of each Subaccount.

AGE--The Insured's age on his or her nearest birthday.

BENEFICIARY--The person to whom the proceeds due on the Insured's death are
paid.

CASH VALUE--The sum of the value of Policy assets in the Separate Account,
Fixed Account and Loan Account.

COMPANY ("WE", "US", "OUR", "KLICO")--Kemper Investors Life Insurance
Company. Our home office is located at 1 Kemper Drive, Long Grove, Illinois
60049.