KILICO VARIABLE SEPARATE ACCOUNT/IL, 485APOS, 1999-01-25

KILICO VARIABLE SEPARATE ACCOUNT/IL
485APOS, 1999-01-25

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 25, 1999

REGISTRATION STATEMENT 33-65399
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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POST-EFFECTIVE AMENDMENT NO. 4

TO
FORM S-6
FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933
OF SECURITIES OF UNIT INVESTMENT TRUSTS
REGISTERED ON FORM N-8B-2
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A. Exact name of trust: KILICO VARIABLE SEPARATE ACCOUNT

B. Name of depositor: KEMPER INVESTORS LIFE INSURANCE COMPANY

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

1 Kemper Drive
Long Grove, Illinois 60049

D. Name and complete address of agent for service:

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

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COPIES TO:
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

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

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

If appropriate, check the following box:

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

E. Title and amount of securities being registered:

Units of Interests in the Separate Account under
Flexible Premium Variable Life Insurance Policies.

F. Approximate date of proposed public offering:

Continuous.

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

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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.

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PROSPECTUS-- , 1999

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FLEXIBLE PREMIUM VARIABLE
LIFE INSURANCE POLICY
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ISSUED BY

KEMPER INVESTORS LIFE INSURANCE COMPANY
THROUGH ITS KILICO VARIABLE SEPARATE ACCOUNT

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

This Prospectus describes a variable life insurance policy 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 21 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:

- Investors Fund Series

- Kemper Money Market

- Kemper Total Return

- Kemper High Yield

- Kemper Growth

- Kemper Government

- Kemper International

- Kemper Small Cap Growth

- - American Skandia Trust

- Lord Abbett Growth and Income

- JanCap Growth

- T. Rowe Price International Equity

- T. Rowe Price Asset Allocation

- Founders Capital Appreciation

- INVESCO Equity Income

- PIMCO Total Return Bond

- PIMCO Limited Maturity Bond

- Neuberger & Berman Mid-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

- - 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.

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TABLE OF CONTENTS
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Page
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DEFINITIONS................................................. 1
SUMMARY..................................................... 2
KILICO AND THE SEPARATE ACCOUNT............................. 5
THE FUNDS................................................... 5
FIXED ACCOUNT OPTION........................................ 8
THE POLICY.................................................. 9
POLICY BENEFITS AND RIGHTS.................................. 11
CHARGES AND DEDUCTIONS...................................... 15
GENERAL PROVISIONS.......................................... 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.................................. 25
KILICO'S DIRECTORS AND OFFICERS ............................ 26
LEGAL MATTERS............................................... 28
LEGAL PROCEEDINGS........................................... 28
YEAR 2000 COMPLIANCE........................................ 28
EXPERTS..................................................... 28
REGISTRATION STATEMENT...................................... 29
FINANCIAL STATEMENTS........................................ 29
CHANGE OF ACCOUNTANTS....................................... 29
APPENDIX A ILLUSTRATIONS OF CASH VALUES, CASH SURRENDER
VALUES AND DEATH BENEFITS................................. 65
APPENDIX B TABLE OF DEATH BENEFIT FACTORS................... 74
</TABLE>

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DEFINITIONS

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

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

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

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

DATE OF RECEIPT--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. Long Grove 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
conditional receipt.

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.

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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

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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 "Allocation of Premiums and Separate
Account Value," page 9.)

THE FUNDS

The following portfolios of 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:

- LORD ABBETT GROWTH AND INCOME

- JANCAP GROWTH

- T. ROWE PRICE INTERNATIONAL EQUITY

- T. ROWE PRICE ASSET ALLOCATION

- FOUNDERS CAPITAL APPRECIATION

- INVESCO EQUITY INCOME

- PIMCO TOTAL RETURN BOND

- PIMCO LIMITED MATURITY BOND

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

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

- FIDELITY VIP EQUITY-INCOME

- FIDELITY VIP HIGH INCOME

- FIDELITY VIP II CONTRAFUND

- FIDELITY VIP II INDEX 500

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- 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, and Statements of Additional Information available 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.)

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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 wholly-owned 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 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.

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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.

INVESTORS FUND SERIES

The Investors Fund Series portfolios in which the Separate Account invests
are summarized below:

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

KEMPER TOTAL RETURN PORTFOLIO: This Portfolio seeks a high total return, a
combination of income and capital appreciation, by investing in a combination of
debt securities and common stocks.

KEMPER HIGH YIELD PORTFOLIO: This Portfolio seeks a high level of current
income by investing in fixed-income securities.

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

KEMPER GOVERNMENT SECURITIES PORTFOLIO: This Portfolio seeks high current
return consistent with preservation of capital from a portfolio composed
primarily of U.S. Government securities.

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

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

Scudder Kemper Investments, Inc. ("SKI") (formerly Zurich Kemper
Investments, Inc.), an affiliate of KILICO, serves as the investment adviser to
each Portfolio of the Investors Fund Series specified above. Zurich Investment
Management Limited ("ZIML"), an affiliate of SKI, serves as sub-adviser for the
Kemper International Portfolio.

AMERICAN SKANDIA TRUST

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

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

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

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

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

FOUNDERS CAPITAL APPRECIATION PORTFOLIO: This Portfolio seeks capital
appreciation through investment primarily in common stocks of U.S. companies
with market capitalizations of $1.5 billion or less. These stocks normally will
be traded in the over-the-counter market.

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

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

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

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

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

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

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

FIDELITY VIP EQUITY-INCOME PORTFOLIO: This Portfolio seeks reasonable
income by investing primarily in income-producing equity securities.

FIDELITY VIP HIGH INCOME PORTFOLIO: This Portfolio seeks to obtain a high
level of current income by investing primarily in high-yielding, lower rated,
fixed income securities.

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

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

FIDELITY VIP III GROWTH OPPORTUNITIES PORTFOLIO: This Portfolio seeks
capital growth by investing in a wide range of common stocks, convertible and
foreign securities and bonds that may offer long-term growth potential.

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

SCUDDER VARIABLE LIFE INVESTMENT FUND

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

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

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

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

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. We will send a Portfolio prospectus and Fund Statement of
Additional Information upon request.

CHANGE OF INVESTMENTS

7
<PAGE> 12

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: (a) operated as a
management company under the 1940 Act; (b) deregistered under that Act in the
event such registration is no longer required; or (c) combined with 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.

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<PAGE> 13

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.

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<PAGE> 14

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:

(1) receipt of evidence of insurability satisfactory to us;

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

(3) payment or reinstatement of any Debt which existed at the date of
termination of coverage.

10
<PAGE> 15

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 multiplied by the death benefit percentage ($25,000 X
250% = $62,500). For both Policies II and III under Option A, the Cash Value
multiplied by the death benefit percentage ($50,000 X 250% = $125,000 for Policy
II; $75,000 X 250% = $187,500 for Policy III) is greater than the Specified
Amount ($100,000), so the death benefit 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 multiplied by 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 multiplied by the death benefit
percentage ($50,000 X 250% = $125,000). In Policy III, the Cash Value multiplied
by the death benefit percentage ($75,000 X 250% = $187,500) is greater than the
Specified Amount plus Cash Value ($100,000 + $75,000 = $175,000), so the death
benefit 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> 16

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> 17

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> 18

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 Cash Value minus
surrender charges. The amount of any new loan may not exceed the maximum loan
amount less Debt on the date a loan is granted. The minimum amount of a loan is
$500. 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. 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 interest in
the Fixed Account. If the interest credited to the Loan Account is more than the
amount that would

14
<PAGE> 19

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 and when a Surrender Charge is assessable, the maximum amount is 10% of the
Surrender Value. A $25 withdrawal charge is imposed for each withdrawal. (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 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

15
<PAGE> 20

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.

(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> 21

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. [TO BE UPDATED BY AMENDMENT]
[The management fees for each Portfolio for the year ending December 31, 1997 as
a percentage of average net assets were as follows: Kemper Money Market 0.50%;
Kemper Total Return 0.55%; Kemper High Yield 0.60%; Kemper Growth 0.60%; Kemper
Government Securities 0.55%; Kemper International 0.75%; Kemper Small Cap Growth
0.65%; Lord Abbett Growth and Income 0.75%; JanCap Growth 0.90%; T. Rowe Price
Asset Allocation 0.85%; T. Rowe Price International Equity 1.00%; Founders
Capital Appreciation 0.90%; INVESCO Equity Income 0.75%; PIMCO Total Return Bond
0.65%;

17
<PAGE> 22

PIMCO Limited Maturity Bond 0.65%; Neuberger & Berman Mid-Cap Growth 0.90%;
Fidelity VIP Equity-Income 0.50%; Fidelity VIP High Income 0.59%; Fidelity VIP
II Contrafund 0.60%; Fidelity VIP II Index 500 0.24%; Fidelity VIP III Growth
Opportunities 0.60%; Scudder VLIF International (B-Shares) 0.83%; and Scudder
VLIF Growth and Income (B-Shares) 0.48%. The investment manager of the JanCap
Growth Portfolio has voluntarily agreed to waive a portion of its management fee
equal to 0.05% of the average daily net assets of the Portfolio in excess of $1
billion. With this fee waiver the management fee is 0.88%.

The other expenses for each Portfolio for the year ending December 31, 1997
as a percentage of average net assets were as follows: Kemper Money Market
0.05%; Kemper Total Return 0.05%; Kemper High Yield 0.05%; Kemper Growth 0.05%;
Kemper Government Securities 0.09%; Kemper International 0.16%; Kemper Small Cap
Growth 0.06%; Lord Abbett Growth and Income 0.18%; JanCap Growth 0.18%; T. Rowe
Price Asset Allocation 0.28%; T. Rowe Price International Equity 0.26%; Founders
Capital Appreciation 0.23%; INVESCO Equity Income 0.20%; PIMCO Total Return Bond
0.21%; PIMCO Limited Maturity Bond 0.23%; Neuberger & Berman Mid-Cap Growth
0.24%; Fidelity VIP Equity-Income 0.08%; Fidelity VIP High Income 0.12%;
Fidelity VIP II Contrafund 0.11%; Fidelity VIP II Index 500 0.04%; Fidelity VIP
III Growth Opportunities 0.14%; Scudder VLIF International (B-Shares) 0.16%; and
Scudder VLIF Growth and Income (B-Shares) 0.07%. In addition, the Scudder VLIF
International Portfolio and Scudder VLIF Growth and Income Portfolio each also
have a 12b-1 fee of 0.25%. The investment manager for the American Skandia Trust
has agreed to reimburse each Portfolio to the extent expenses exceed specified
percentage limits. For additional information about the fees and expenses of the
Funds, see "The Funds", page 5, and the prospectuses for the Funds.]

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 and Statements of Additional
Information available 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.

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.

18
<PAGE> 23

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 the time this
option is elected. Payments terminate automatically and immediately upon the
death of the surviving payee without regard to the number or total amount of
payments received.

Our consent is necessary for any other payment methods.

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

POSTPONEMENT OF PAYMENTS

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

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

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

(3) An emergency exists, as determined by the Commission, as a result
of which disposal of securities 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

Suicide by the Insured, while sane or insane, within two years from the
Issue Date (or within two years following an increase in Specified Amount) is a
risk not assumed under the Policy. Our liability for such suicide is limited to
the premiums paid less any withdrawals and Debt. When the laws of the state in
which a Policy is delivered require less than a two year period, the period or
amount paid will be as stated in such laws.

19
<PAGE> 24

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. KILICO relies 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 at 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> 25

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> 26

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> 27

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> 28

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.

24
<PAGE> 29

STATE REGULATION OF KILICO

KILICO, a stock life insurance company organized under the laws of
Illinois, is subject to regulation by the Illinois Department of Insurance. We
file an annual statement with the Director of Insurance on or before 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. The National Association of Insurance Commissioners
conducts a full examination of our operations at least once every three years.

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> 30

KILICO'S DIRECTORS AND OFFICERS

[TO BE UPDATED BY AMENDMENT]

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 (53) Chief Executive Officer, President and Director of Federal
Chief Executive Officer since Kemper Life Assurance Company (FKLA) and Fidelity Life
February 1992. President since Association (FLA) since 1988. Chief Executive Officer,
November 1993. Director since 1992. President and Director of Zurich Life Insurance Company of
America (ZLICA) and Zurich Direct, Inc. (ZD) since March
1996. Chairman of the Board and Director of Investors
Brokerage Services, Inc. (IBS) and Investors Brokerage
Services Insurance Agency, Inc. (IBSIA) since 1993. Chairman
of the Board of FKLA and FLA from April 1988 to January
1996. Chairman of the Board of KILICO from February 1992 to
January 1996. Executive Vice President and Director of
Kemper Corporation (Kemper) from January 1994 and March
1996, respectively. Executive Vice President of Kemper
Financial Companies, Inc. from January 1994 to January 1996
and Director from 1992 to January 1996.
Eliane C. Frye (50) Executive Vice President of FKLA and FLA since 1995.
Executive Vice President since 1995. Executive Vice President of ZLICA and ZD since March 1996.
Director of FLA since December 1997. Director of ZD from
March 1996 to March 1997. Director of IBS and IBSIA since
1995. Senior Vice President of KILICO, FKLA and FLA from
1993 to 1995. Vice President of FKLA and FLA from 1988 to
1993.
Frederick L. Blackmon (46) Senior Vice President and Chief Financial Officer of FKLA
Senior Vice President and Chief since December 1995. Senior Vice President and Chief
Financial Officer since December Financial Officer of FLA since January 1996. Senior Vice
1995. President and Chief Financial Officer of ZLICA since March
1996. Senior Vice President and Chief Financial Officer of
ZD since March 1996. Director of ZD from March 1996 to March
1997. Treasurer and Chief Financial Officer of Kemper since
January 1996. Chief Financial Officer of Alexander Hamilton
Life Insurance Company from April 1989 to November 1995.
James C. Harkensee (39) Senior Vice President of FKLA and FLA since January 1996.
Senior Vice President since January Senior Vice President of ZLICA since 1995. Senior Vice
1996. President of ZD since 1995. Director of ZD from April 1993
to March 1997. Vice President of ZLICA from 1992 to 1995.
Chief Actuary of ZLICA from 1991 to 1994. Assistant Vice
President of ZLICA from 1990 to 1992. Vice President of ZD
from 1994 to 1995.
James E. Hohmann (42) Senior Vice President and Chief Actuary of FKLA since
Senior Vice President and Chief December 1995. Senior Vice President and Chief Actuary of
Actuary since December 1995. FLA since January 1996. Senior Vice President and Chief
Actuary of ZLICA since March 1996. Senior Vice President and
Chief Actuary of ZD since March 1996. Director of FLA since
June 1997. Director of ZD from March 1996 to March 1997.
Managing Principal (Partner) of Tillinghast-Towers Perrin
from January 1991 to December 1995. Consultant/Principal
(Partner) of Tillinghast-Towers Perrin from November 1986 to
January 1991.
Edward K. Loughridge (43) Senior Vice President and Corporate Development Officer of
Senior Vice President and Corporate FKLA and FLA since January 1996. Senior Vice President and
Development Officer since January Corporate Development Officer for ZLICA and ZD since March
1996. 1996. Senior Vice President of Human Resources of
Zurich-American Insurance Group from February 1992 to March
1996.
</TABLE>

26
<PAGE> 31

<TABLE>
<CAPTION>
NAME AND AGE
POSITION WITH KILICO
YEAR OF ELECTION OTHER BUSINESS EXPERIENCE DURING PAST 5 YEARS OR MORE
-------------------- -----------------------------------------------------
<S> <C>
Phillip D. Meserve (47) Senior Vice President of FKLA, FLA, ZLICA and ZD since March
Senior Vice President since March 1997. Director of IBSIA and IBS since March and May, 1997,
1997 respectively. Managing Director of Equitable Distributors
from May 1996 to March 1997. Senior Vice President of
Banker's Trust from April 1995 to April 1996. Senior Vice
President of Fidelity Investments Insurance Services from
February 1992 to March 1995.
Debra P. Rezabek (42) Senior Vice President of FKLA and FLA since March 1996.
Senior Vice President since 1996. Corporate Secretary of FKLA and FLA since January 1996. Vice
General Counsel since 1992. Corporate President of KILICO, FKLA and FLA since 1995. General
Secretary since January 1996. Counsel and Director of Government Affairs of FKLA and FLA
since 1992 and of KILICO since 1993. Senior Vice President,
General Counsel and Corporate Secretary of ZLICA since March
1996. Senior Vice President, General Counsel and Corporate
Secretary of ZD since March 1996. Director of ZD from March
1996 to March 1997. Secretary of IBS and IBSIA since 1993.
Director of IBS and IBSIA from 1993 to 1996. Assistant
General Counsel of FKLA and FLA from 1988 to 1992. General
Counsel and Assistant Secretary of KILICO, FKLA and FLA from
1992 to 1996. Assistant Secretary of Kemper since January
1996.
Kenneth M. Sapp (52) Senior Vice President of FKLA, FLA and ZLICA since January
Senior Vice President since January 1998. Vice President -- Aetna Life Brokerage of Aetna Life &
1998. Annuity Company from February 1992 to January 1998.
George Vlaisavljevich (55) Senior Vice President of FKLA, FLA and ZLICA since October
Senior Vice President since October 1996. Senior Vice President of ZD since March 1997. Director
1996. of IBS and IBSIA since October 1996. Executive Vice
President of The Copeland Companies from April 1983 to
September 1996.
Loren J. Alter (59) Director of FKLA, FLA and Scudder Kemper Investments, Inc.
Director since January 1996. (SKI) since January 1996. Director of ZLICA since May 1979.
Executive Vice President of Zurich Insurance Company since
1979. President, Chief Executive Officer and Director of
Kemper since January 1996.
William H. Bolinder (54) Chairman of the Board and Director of FKLA and FLA since
Chairman of the Board and Director January 1996. Chairman of the Board of ZLICA and ZD since
since January 1996. March 1995. Chairman of the Board and Director of Kemper
since January 1996. Vice Chairman and Director of SKI since
January 1996. Member of the Corporate Executive Board of
Zurich Insurance Group since October 1994. Chairman of the
Board of American Guarantee and Liability Insurance Company,
Zurich American Insurance Company of Illinois, American
Zurich Insurance Company and Steadfast Insurance Company
since 1995. Chief Executive Officer of American Guarantee
and Liability Insurance Company, Zurich American Insurance
Company of Illinois, American Zurich Insurance Company and
Steadfast Insurance Company from 1986 to June 1995.
President of Zurich Holding Company of America since 1986.
Manager of Zurich Insurance Company, U.S. Branch since 1986.
Underwriter for Zurich American Lloyds since 1986.
David A. Bowers (51) Director of FKLA and ZLICA since May 1997. Director of FLA
Director since May 1997. since June 1997. Executive Vice President, Corporate
Secretary and General Counsel of Zurich-American Insurance
Group since August 1985. Vice President, General Council and
Secretary of Kemper since January 1996.
Markus Rohrbasser (43) Director of FKLA, FLA and ZLICA since May 1997. Chief
Director since May 1997. Financial Officer and Member of the Corporate Executive
Board of Zurich Insurance Company since January 1997. Member
of Enlarged Corporate Executive Board and Chief Executive
Officer of Union Bank of Switzerland (North America) from
1992 to 1997.
</TABLE>

27
<PAGE> 32

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
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

[TO BE UPDATED BY AMENDMENT]

Many existing computer programs were originally designed without
considering the impact of the year 2000 and currently use only two digits to
identify the year in the date field. This issue affects nearly all companies and
organizations and could cause computer applications and systems to fail or
create erroneous results to occur for any transaction with a date of January 1,
2000, or later.

Many companies must undertake major projects to address the year 2000
issue. 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. These steps include the
replacement of older systems with new compliant systems. In 1996, we replaced
our investment accounting system. 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 1996 and 1997 are already year 2000
compliant. Data processing expenses related solely to bringing our systems in
compliance with the year 2000 amounted to $88 thousand in 1997 and we anticipate
that it will cost an additional $895 thousand to bring all remaining systems
into compliance. We have also taken steps which require that all other entities
with which we electronically interact, including suppliers and other financial
services institutions, attest to us in writing that their systems are year 2000
compliant.

EXPERTS

[TO BE UPDATED BY AMENDMENT]

The consolidated balance sheet of KILICO as of December 31, 1997 and the
related consolidated statements of operations, stockholder's equity, and cash
flows for the year ended December 31, 1997 have been included herein and in the
registration statement in reliance upon the report of PricewaterhouseCoopers
LLP, independent certified public accountants, appearing elsewhere herein, and
upon the authority of said firm as experts in accounting and auditing. The
consolidated balance sheet of KILICO as of December 31, 1996 and the related
consolidated statements of operations, stockholder's equity, and cash flows for
the periods from January 4, 1996 to December 31, 1996 and for the year ended
December 31, 1995 have been included herein and in the registration statement in
reliance upon the report of KPMG LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing. The report of KPMG LLP covering KILICO's financial
statements referred to above contains an explanatory paragraph that states as a
result of the acquisition of its parent, Kemper Corporation, the consolidated
financial information for the period after the acquisition is presented on a
different cost basis than that for the period before the acquisition and,
therefore, is not comparable.

28
<PAGE> 33

PricewaterhouseCoopers LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.

The statement of changes in policy owners' equity of the Separate Account
for the year ended December 31, 1996 has been included herein in reliance upon
the report of KPMG 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

[TO BE UPDATED BY AMENDMENT]

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

[TO BE UPDATED BY AMENDMENT]

On September 12, 1997, Kemper Investors Life Insurance Company ("KILICO")
appointed the accounting firm of PricewaterhouseCoopers LLP as independent
accountants for the year ended December 31, 1997 to replace KPMG LLP effective
with such appointment. KILICO's Board of Directors approved the selection of
PricewaterhouseCoopers LLP as the new independent accountants. Management had
not consulted with PricewaterhouseCoopers LLP on any accounting, auditing or
reporting matter, prior to that time.

During the two most recent fiscal years ended December 31, 1996, there have
been no disagreements with KPMG 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 the past
two years contained no adverse opinion or disclaimer of opinion and was not
qualified or modified as to uncertainty, audit scope or accounting principles.

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

29
<PAGE> 34

[TO BE UPDATED BY AMENDMENT]

REPORT OF INDEPENDENT ACCOUNTANTS

THE BOARD OF DIRECTORS OF
KEMPER INVESTORS LIFE INSURANCE COMPANY AND
POLICY OWNERS OF KILICO VARIABLE SEPARATE ACCOUNT:

We have audited the accompanying statements of assets and liabilities and
policy owners' equity of the Kemper Money Market Subaccount, Kemper Total Return
Subaccount, Kemper High Yield Subaccount, Kemper Growth Subaccount, Kemper
Government Securities Subaccount, Kemper International Subaccount and Kemper
SmallCap Growth Subaccount (investment options within the Investors Fund
Series), Founders Capital Appreciation Subaccount, Neuberger & Berman Mid-Cap
Growth Subaccount, Jancap Growth Subaccount, Lord Abbett Growth & Income
Subaccount, T. Rowe Price International Equity Subaccount, T. Rowe Price Asset
Allocation Subaccount, PIMCO Limited Maturity Bond Subaccount, PIMCO Total
Return Subaccount and INVESCO Equity Income Subaccount (investment options
within the American Skandia Trust), of KILICO Variable Separate Account as of
December 31, 1997 and the related statements of operations and the statements of
changes in policy owners' equity for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. The statement of changes in policy owners' equity for the year ended
December 31, 1996 was audited by other auditors, whose report, dated March 26,
1997, expressed an unqualified opinion on that statement.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of investments owned at December 31, 1997 by correspondence with
transfer agents. An audit also includes assessing the accounting principles used
and significant estimates made by management as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.

In our opinion, the December 31, 1997 financial statements referred to
above present fairly, in all material respects, the financial position of the
subaccounts of KILICO Variable Separate Account at December 31, 1997 and the
results of their operations and changes in their policy owners' equity for the
year then ended, in conformity with generally accepted accounting principles.

PricewaterhouseCoopers LLP

Chicago, Illinois
February 20, 1998

30
<PAGE> 35

INDEPENDENT AUDITORS' REPORT

THE BOARD OF DIRECTORS
KEMPER INVESTORS LIFE INSURANCE COMPANY:

We have audited the accompanying statement of changes in policy owners'
equity of the Kemper Money Market Subaccount, Kemper Total Return Subaccount,
Kemper High Yield Subaccount, Kemper Growth Subaccount, Kemper Government
Securities Subaccount, Kemper International Subaccount, Kemper SmallCap Growth
Subaccount (investment options within the Investors Fund Series), Founders
Capital Appreciation Subaccount, Neuberger & Berman Mid-Cap Growth Subaccount,
Jancap Growth Subaccount, Lord Abbett Growth & Income Subaccount, T. Rowe Price
International Equity Subaccount, T. Rowe Price Asset Allocation Subaccount,
PIMCO Limited Maturity Bond Subaccount, PIMCO Total Return Subaccount, and
INVESCO Equity Income Subaccount (investment options within the American Skandia
Trust), of KILICO Variable Separate Account (the Account) for the year ended
December 31, 1996. This financial statement is the responsibility of the
Account's management. Our responsibility is to express an opinion on this
financial statement based on our audit.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statement referred to above presents fairly,
in all material respects, the changes in policy owners' equity of the
subaccounts of KILICO Variable Separate Account for the year ended December 31,
1996 in conformity with generally accepted accounting principles.

KPMG LLP

Chicago, Illinois
March 26, 1997

31
<PAGE> 36

KILICO VARIABLE SEPARATE ACCOUNT

STATEMENTS OF ASSETS AND LIABILITIES AND POLICY OWNERS' EQUITY

DECEMBER 31, 1997
(IN THOUSANDS)

<TABLE>
<CAPTION>
INVESTORS FUND SERIES
---------------------------------------------------------------------------------------------
KEMPER KEMPER KEMPER
MONEY KEMPER KEMPER KEMPER GOVERNMENT KEMPER SMALLCAP
MARKET TOTAL RETURN HIGH YIELD GROWTH SECURITIES INTERNATIONAL GROWTH
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ------------ ---------- ---------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Investments in underlying
portfolio funds, at current
value......................... $885 2,890 1,934 2,758 4,709 48 224
Dividends and other
receivables................... 101 148 1 -- -- -- 1
---- ----- ----- ----- ----- --- ---
Total assets.............. 986 3,038 1,935 2,758 4,709 48 225
LIABILITIES AND POLICY OWNERS'
EQUITY
Liabilities:
Mortality and expense risk
charges..................... 1 2 1 2 3 -- --
Other......................... 19 -- -- 15 9 -- 1
---- ----- ----- ----- ----- --- ---
Total liabilities......... 20 2 1 17 12 -- 1
---- ----- ----- ----- ----- --- ---
Policy owners' equity........... $966 3,036 1,934 2,741 4,697 48 224
==== ===== ===== ===== ===== === ===
ANALYSIS OF POLICY OWNERS' EQUITY
Excess of proceeds from units
sold over payments for units
redeemed...................... 414 726 939 993 2,445 49 204
Accumulated net investment
income (loss)................. 552 1,209 832 975 1,635 -- 2
Accumulated net realized gain on
sales of investments.......... -- 883 108 607 294 -- --
Unrealized appreciation
(depreciation) of
investments................... -- 218 55 166 323 (1) 18
---- ----- ----- ----- ----- --- ---
Policy owners' equity........... $966 3,036 1,934 2,741 4,697 48 224
==== ===== ===== ===== ===== === ===
</TABLE>

See accompanying notes to financial statements.

32
<PAGE> 37
<TABLE>
<CAPTION>
AMERICAN SKANDIA TRUST
------------------------------------------------------------------------------------------------------------
FOUNDERS NEUBERGER & BERMAN LORD ABBETT T. ROWE PRICE T. ROWE PRICE PIMCO LIMITED
CAPITAL MID-CAP JANCAP GROWTH & INTERNATIONAL ASSET MATURITY
APPRECIATION GROWTH GROWTH INCOME EQUITY ALLOCATION BOND
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
------------ ------------------ ---------- ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
135 201 527 112 96 58 8
-- -- -- -- -- -- --
--- --- --- --- --- -- --
135 201 527 112 96 58 8
-- -- -- -- -- -- --
-- -- -- -- -- -- --
--- --- --- --- --- -- --
-- -- -- -- -- -- --
--- --- --- --- --- -- --
135 201 527 112 96 58 8
=== === === === === == ==
131 197 507 109 100 56 8
-- (1) -- -- (1) -- --
-- -- -- -- -- -- --
4 5 20 3 (3) 2 --
--- --- --- --- --- -- --
135 201 527 112 96 58 8
=== === === === === == ==

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

PIMCO TOTAL INVESCO
RETURN EQUITY INCOME
SUBACCOUNT SUBACCOUNT
----------- -------------
<S> <C> <C>
17 72
-- --
-- --
17 72
-- --
-- --
-- --
-- --
-- --
17 72
== ==
17 70
-- --
-- --
-- 2
-- --
17 72
== ==
</TABLE>

33
<PAGE> 38

KILICO VARIABLE SEPARATE ACCOUNT

STATEMENTS OF OPERATIONS

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

<TABLE>
<CAPTION>
INVESTORS FUND SERIES
---------------------------------------------------------------------------------------------
KEMPER KEMPER KEMPER
MONEY KEMPER KEMPER KEMPER GOVERNMENT KEMPER SMALLCAP
MARKET TOTAL RETURN HIGH YIELD GROWTH SECURITIES INTERNATIONAL GROWTH
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ------------ ---------- ---------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Dividends and capital gains
distributions................... $66 414 101 522 325 -- 2
Mortality and expense risk
charges......................... 32 24 14 26 42 -- --
--- ---- --- ---- ---- -- --
Net investment income (loss).... 34 390 87 496 283 -- 2
--- ---- --- ---- ---- -- --
Net realized and unrealized gain
(loss) on investments:
Net realized gain (loss) on
sales of investments.......... -- 426 96 (10) 19 -- --
Change in unrealized
appreciation (depreciation) of
investments................... -- (281) (27) (21) 17 (1) 18
--- ---- --- ---- ---- -- --
Net realized and unrealized gain
(loss) on investments........... -- 145 69 (31) 36 (1) 18
--- ---- --- ---- ---- -- --
Net increase (decrease) in policy
owners' equity resulting from
operations...................... $34 535 156 465 319 (1) 20
=== ==== === ==== ==== == ==
</TABLE>

See accompanying notes to financial statements.

34
<PAGE> 39
<TABLE>
<CAPTION>
AMERICAN SKANDIA TRUST
------------------------------------------------------------------------------------------------------------
FOUNDERS NEUBERGER & BERMAN LORD ABBETT T. ROWE PRICE T. ROWE PRICE PIMCO LIMITED
CAPITAL MID-CAP JANCAP GROWTH & INTERNATIONAL ASSET MATURITY
APPRECIATION GROWTH GROWTH INCOME EQUITY ALLOCATION BOND
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
------------ ------------------ ---------- ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
-- -- -- -- -- -- --
-- 1 -- -- 1 -- --
-- -- -- -- -- -- --
-- (1) -- -- (1) -- --
-- -- -- -- -- -- --
-- -- -- -- -- -- --
4 5 20 3 (3) 2 --
-- -- -- -- -- -- --
4 5 20 3 (3) 2 --
-- -- -- -- -- -- --
4 4 20 3 (4) 2 --
== == == == == == ==

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

PIMCO TOTAL INVESCO EQUITY
RETURN INCOME
SUBACCOUNT SUBACCOUNT
----------- --------------
<S> <C> <C>
-- --
-- --
-- --
-- --
-- --
-- --
-- 2
-- --
-- 2
-- --
-- 2
== ==
</TABLE>

35
<PAGE> 40

KILICO VARIABLE SEPARATE ACCOUNT

STATEMENTS OF CHANGES IN POLICY OWNERS' EQUITY

FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
(IN THOUSANDS)

<TABLE>
<CAPTION>
INVESTORS FUND SERIES
-----------------------------------------------------------------------------
KEMPER KEMPER KEMPER
MONEY MARKET TOTAL RETURN HIGH YIELD
SUBACCOUNT SUBACCOUNT SUBACCOUNT
--------------------- ------------------- -------------------
1997 1996 1997 1996 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Operations:
Net investment income................... $ 34 46 390 142 87 154
Net realized gain (loss) on sales of
investments........................... -- -- 426 128 96 9
Change in unrealized appreciation
(depreciation) of investments......... -- -- (281) 117 (27) 34
------- ----- ----- ----- ----- -----
Net increase (decrease) in policy
owners' equity resulting from
operations.......................... 34 46 535 387 156 197
------- ----- ----- ----- ----- -----
Account unit transactions:
Proceeds from units sold................ 2,965 270 27 43 22 6
Net transfers (to) from affiliated
divisions and subaccounts............. (1,059) 55 (400) 484 298 (567)
Payments for units redeemed............. (2,011) (336) (217) (376) (50) (217)
------- ----- ----- ----- ----- -----
Net increase (decrease) in policy
owners' equity from account unit
transactions........................ (105) (11) (590) 151 270 (778)
------- ----- ----- ----- ----- -----
Total increase (decrease) in policy
owners' equity.......................... (71) 35 (55) 538 426 (581)
Policy owners' equity:
Beginning of year....................... 1,037 1,002 3,091 2,553 1,508 2,089
------- ----- ----- ----- ----- -----
End of year............................. $ 966 1,037 3,036 3,091 1,934 1,508
======= ===== ===== ===== ===== =====
</TABLE>

See accompanying notes to financial statements.

36
<PAGE> 41

<TABLE>
<CAPTION>
INVESTORS FUND SERIES
- ---------------------------------------------------------------
KEMPER
KEMPER GOVERNMENT KEMPER KEMPER
GROWTH SECURITIES INTERNATIONAL SMALLCAP GROWTH
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
- ------------- ------------- ------------- ---------------
1997 1996 1997 1996 1997 1996 1997 1996
- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
496 261 283 251 -- -- 2 --
(10) 397 19 17 -- -- -- --
(21) (228) 17 (203) (1) -- 18 --
- ----- ----- ----- ----- -- -- --- --
465 430 319 65 (1) -- 20 --
- ----- ----- ----- ----- -- -- --- --
92 121 32 22 35 -- 137 2
(38) 65 492 (37) 19 -- 93 --
(138) (179) (131) (162) (5) -- (28) --
- ----- ----- ----- ----- -- -- --- --
(84) 7 393 (177) 49 -- 202 2
- ----- ----- ----- ----- -- -- --- --
381 437 712 (112) 48 -- 222 2
2,360 1,923 3,985 4,097 -- -- 2 --
- ----- ----- ----- ----- -- -- --- --
2,741 2,360 4,697 3,985 48 -- 224 2
===== ===== ===== ===== == == === ==
</TABLE>

37
<PAGE> 42

KILICO VARIABLE SEPARATE ACCOUNT

STATEMENTS OF CHANGES IN POLICY OWNERS' EQUITY (CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
(IN THOUSANDS)

<TABLE>
<CAPTION>
AMERICAN SKANDIA TRUST
-------------------------------------------------------
NEUBERGER &
FOUNDERS BERMAN LORD ABBETT
CAPITAL MID-CAP JANCAP GROWTH &
APPRECIATION GROWTH GROWTH INCOME
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
------------- ----------- ----------- -----------
1997 1996 1997 1996 1997 1996 1997 1996
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operations:
Net investment loss................................ $ -- -- (1) -- -- -- -- --
Net realized gain on sales of investments.......... -- -- -- -- -- -- -- --
Change in unrealized appreciation (depreciation) of
investments...................................... 4 -- 5 -- 20 -- 3 --
---- --- --- -- --- -- --- --
Net increase (decrease) in policy owners' equity
resulting from operations...................... 4 -- 4 -- 20 -- 3 --
---- --- --- -- --- -- --- --
Account unit transactions:
Proceeds from units sold........................... 89 -- 124 2 330 4 58 2

Net transfers from affiliated divisions and
subaccounts...................................... 63 -- 99 -- 242 -- 61 --
Payments for units redeemed........................ (21) -- (28) -- (69) -- (12) --
---- --- --- -- --- -- --- --
Net increase in policy owners' equity from
account unit transactions...................... 131 -- 195 2 503 4 107 2
---- --- --- -- --- -- --- --
Total increase in policy owners' equity.............. 135 -- 199 2 523 4 110 2
Policy owners' equity:
Beginning of year.................................. -- -- 2 -- 4 -- 2 --
---- --- --- -- --- -- --- --
End of year........................................ $135 -- 201 2 527 4 112 2
==== === === == === == === ==
</TABLE>

See accompanying notes to financial statements.

38
<PAGE> 43

<TABLE>
<CAPTION>
AMERICAN SKANDIA TRUST
-------------------------------------------------------------------------
T. ROWE PRICE T. ROWE PRICE PIMCO LIMITED INVESCO
INTERNATIONAL ASSET MATURITY PIMCO TOTAL EQUITY
EQUITY ALLOCATION BOND RETURN INCOME
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
------------- ------------- ------------- ----------- -----------
1997 1996 1997 1996 1997 1996 1997 1996 1997 1996
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(1) -- -- -- -- -- -- -- -- --
-- -- -- -- -- -- -- -- -- --
(3) -- 2 -- -- -- -- -- 2 --
--- -- -- -- -- -- -- -- -- --
(4) -- 2 -- -- -- -- -- 2 --
--- -- -- -- -- -- -- -- -- --
63 -- 35 -- 4 -- 11 -- 49 --

50 -- 27 -- 5 -- 8 -- 28 --
(13) -- (6) -- (1) -- (2) -- (7) --
--- -- -- -- -- -- -- -- -- --
100 -- 56 -- 8 -- 17 -- 70 --
--- -- -- -- -- -- -- -- -- --
96 -- 58 -- 8 -- 17 -- 72 --
-- -- -- -- -- -- -- -- -- --
--- -- -- -- -- -- -- -- -- --
96 -- 58 -- 8 -- 17 -- 72 --
=== == == == == == == == == ==
</TABLE>

39
<PAGE> 44

KILICO VARIABLE SEPARATE ACCOUNT

NOTES TO FINANCIAL STATEMENTS

(1) GENERAL INFORMATION AND SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION

KILICO Variable Separate Account (the "Separate Account") is a unit
investment trust registered under the Investment Company Act of 1940, as
amended, established by Kemper Investors Life Insurance Company ("KILICO").
KILICO is a wholly-owned subsidiary of Kemper Corporation. Kemper Corporation
was acquired by an investor group led by Zurich Insurance Company ("Zurich") on
January 4, 1996. Effective February 27, 1998, KILICO and Kemper Corporation
became wholly-owned subsidiaries of Zurich.

The Separate Account is used to fund policies ("Policy") for the Select
variable universal life policies and the Power V flexible premium variable
universal life policies. The Separate Account is divided into sixteen
subaccounts. The Select policies have five subaccounts which are available to
Policy Owners and each subaccount invests exclusively in the shares of a
corresponding portfolio of the Investors Fund Series (the "Fund"), an open-end
diversified management investment company. The Power V policies have sixteen
subaccounts which are available to Policy Owners and each subaccount invests
exclusively in the shares of a corresponding portfolio of the Investors Fund
Series and the American Skandia Trust, also an open-end diversified management
investment company.

ESTIMATES

SECURITY VALUATION

The investments are stated at current value which is based on the closing
bid price, net asset value, at December 31, 1997.

SECURITY TRANSACTIONS AND INVESTMENT INCOME

Security transactions are accounted for on the trade date (date when KILICO
accepts risks of providing insurance coverage to the insured). Dividends and
capital gains distributions are recorded as income on the ex-dividend date.
Realized gains and losses from security transactions are reported on a first in,
first out ("FIFO") cost basis.

ACCOUNT UNIT TRANSACTIONS

Proceeds from a Policy are automatically allocated to the Kemper Money
Market subaccount on the trade date for a 15 day period. At the end of this
period, the Separate Account value (cash value) may be allocated to other
subaccounts as designated by the owner of the Policy.

ACCUMULATION UNIT VALUATION

On each day the New York Stock Exchange (the "Exchange") is open for
trading, the accumulation unit value is determined as of the earlier of 3:00
p.m. (Chicago time) or the close of the Exchange by dividing the total value of
each subaccount's investments and other assets, less liabilities, by the number
of accumulation units outstanding in the respective subaccount.

FEDERAL INCOME TAXES

The operations of the Separate Account are included in the federal income
tax return of KILICO. Under existing federal income tax law, investment income
and realized capital gains and losses of the Separate Account increase
liabilities under the policy and are, therefore, not taxed. Thus, the Separate
Account may realize net investment income and capital gains and losses without
federal income tax consequences.

40
<PAGE> 45
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

In early 1998, the Clinton Administration's Fiscal Year 1999 Budget was
released and contained certain proposals to change the taxation of non-qualified
fixed and variable annuities as well as variable universal life contracts. It is
currently unknown whether such proposals will be adopted, amended or omitted in
the final 1999 budget approved by Congress.

(2) SUMMARY OF INVESTMENTS

Investments, at cost, at December 31, 1997, are as follows (in thousands):

<TABLE>
<CAPTION>
SHARES
OWNED COST
------ ----
<S> <C> <C>
INVESTORS FUND SERIES
Kemper Money Market Subaccount............................ 885 $ 885
Kemper Total Return Subaccount............................ 1,024 2,672
Kemper High Yield Subaccount.............................. 1,493 1,879
Kemper Growth Subaccount.................................. 919 2,592
Kemper Government Securities Subaccount................... 3,900 4,386
Kemper International Subaccount........................... 30 49
Kemper Small Cap Growth Subaccount........................ 114 206
AMERICAN SKANDIA TRUST
Founders Capital Appreciation Subaccount.................. 8 131
Neuberger & Berman Mid-Cap Growth Subaccount.............. 12 196
Jancap Growth Subaccount.................................. 23 507
Lord Abbett Growth & Income Subaccount.................... 5 109
T. Rowe Price International Equity Subaccount............. 8 99
T. Rowe Price Asset Allocation Subaccount................. 4 56
PIMCO Limited Maturity Bond Subaccount.................... 1 8
PIMCO Total Return Subaccount............................. 1 17
INVESCO Equity Income Subaccount.......................... 4 70
-------
TOTAL INVESTMENTS.................................... $13,862
=======
</TABLE>

The underlying investments are summarized below.

INVESTORS FUND SERIES

KEMPER MONEY MARKET SUBACCOUNT: This subaccount invests primarily in
short-term obligations of major banks and corporations.

KEMPER TOTAL RETURN SUBACCOUNT: This subaccount's investments will
normally consist of fixed-income and equity securities. Fixed-income securities
will include bonds and other debt securities and preferred stocks. Equity
investments normally will consist of common stocks and securities convertible
into or exchangeable for common stocks, however, the subaccount may also make
private placement investments (which are normally restricted securities).

KEMPER HIGH YIELD SUBACCOUNT: This subaccount invests in fixed-income
securities, a substantial portion of which are high yielding fixed-income
securities. These securities ordinarily will be in the lower rating categories
of recognized rating agencies or will be non-rated, and generally will involve
more risk than securities in the higher rating categories.

KEMPER GROWTH SUBACCOUNT: This subaccount's investments normally will
consist of common stocks and securities convertible into or exchangeable for
common stocks, however, it may also make private placement investments (which
are normally restricted securities).

KEMPER GOVERNMENT SECURITIES SUBACCOUNT: This subaccount invests primarily
in U.S. Government Securities. The subaccount may also invest in fixed-income
securities other than U.S. Government securities and may engage in options and
financial futures transactions.

KEMPER INTERNATIONAL SUBACCOUNT: This subaccount's investments will
normally consist of equity securities of non-United States issuers, however, it
may also invest in convertible and debt securities of non-United States issuers
and foreign currencies.

41
<PAGE> 46
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

KEMPER SMALL CAP GROWTH SUBACCOUNT: This subaccount's investments will
consist primarily of common stocks and securities convertible into or
exchangeable for common stocks and to a limited degree in preferred stocks and
debt securities. At least 65% of the subaccount's total assets will be invested
in equity securities of companies having a market capitalization of $1 billion
or less at the time of initial investment.

AMERICAN SKANDIA TRUST

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

NEUBERGER & BERMAN MID-CAP GROWTH (FORMERLY BERGER CAPITAL GROWTH)
SUBACCOUNT: This subaccount seeks long-term capital appreciation by investing
primarily in the common stocks of established companies.

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

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

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

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

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

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

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

(3) TRANSACTIONS WITH AFFILIATES

KILICO provides a death benefit payment upon the death of the Policy owner
under the terms of the death benefit option selected by the Policy owner as
further described in the Policy. KILICO assesses a monthly charge to the
subaccounts for the cost of providing this insurance protection to the Policy
owner. These cost of insurance charges vary with the issue age, sex and rate
class of the Policy owner, and are allocated among the subaccounts in the
proportion of each subaccount to the Separate Account value. Cost of insurance
charges totaled approximately $121,300 and $396,200 for the Select and Power V
variable universal life products, respectively, for the year ended December 31,
1997. Additionally, KILICO assesses a daily charge to the subaccounts for
mortality and expense risk assumed by KILICO at an annual rate of .90% of
assets.

A state and local premium tax charge of 2.5% is deducted from each premium
payment under the Power V policy prior to allocation of the net premium. This
charge is to reimburse KILICO for the payment of state premium taxes. KILICO
expects to pay an average state premium tax rate of approximately 2.5% but the
actual premium tax attributable to a Policy may be more or less. In addition, a
charge for federal taxes equal to 1% of each premium payment will be deducted to
compensate KILICO for a higher corporate income tax liability resulting from
changes made to the Internal Revenue Code by the Omnibus Budget Reconciliation
Act of 1990.

Policy loans are also provided for under the terms of the Policy. The
minimum amount of the loan is $500 and is limited to 90% of the Policy's
investment value, less applicable surrender charges. Interest is assessed
against the policy loan under the terms of the Policy. Policy loans are carried
in KILICO's general account.

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

42
<PAGE> 47
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

Scudder Kemper Investments, Inc. ("SKI"), formerly Zurich Kemper
Investments, Inc., an affiliated company, is the investment manager of the
portfolios of the Investors Fund Series portfolios. American Skandia Investment
Services, Incorporated ("ASISI"), an unaffiliated company, is the investment
manager for the American Skandia Trust.

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

(4) NET TRANSFERS (TO) FROM AFFILIATED DIVISIONS AND SUBACCOUNTS

Net transfers (to) from affiliated divisions or accounts include transfers
of all or part of the Policy Owner's interest to or from another subaccount or
to the general account of KILICO.

(5) POLICY OWNERS' EQUITY

Policy Owners' equity at December 31, 1997, is as follows (in thousands,
except unit value; differences are due to rounding):

<TABLE>
<CAPTION>
NUMBER POLICY
OF UNIT OWNERS'
UNITS VALUE EQUITY
------ ----- -------
<S> <C> <C> <C>
POWER V POLICIES

INVESTORS FUND SERIES:
Kemper Money Market Subaccount.............................. 362 $ 1.054 $ 382
Kemper Total Return Subaccount.............................. 4 3.340 14
Kemper High Yield Subaccount................................ 26 1.413 36
Kemper Growth Subaccount.................................... 32 4.045 129
Kemper Government Securities Subaccount..................... 5 1.301 7
Kemper International Subaccount............................. 29 1.693 48
Kemper Small Cap Growth Subaccount.......................... 101 2.225 224
</TABLE>

AMERICAN SKANDIA TRUST:

<TABLE>
<S> <C> <C> <C>
Founders Capital Appreciation Subaccount.................... 8 17.611 135
Neuberger & Berman Mid-Cap Growth Subaccount................ 12 16.603 201
JanCap Growth Subaccount.................................... 22 23.905 527
Lord Abbett Growth & Income Subaccount...................... 5 21.040 112
T. Rowe Price International Equity Subaccount............... 8 12.098 96
T. Rowe Price Asset Allocation Subaccount................... 4 15.536 58
PIMCO Limited Maturity Bond Subaccount...................... -- 11.487 8
PIMCO Total Return Subaccount............................... 1 12.071 17
Invesco Equity Income Subaccount............................ 4 17.062 72
-------
TOTAL POWER V POLICY OWNERS' EQUITY.................... $ 2,066
=======
</TABLE>

<TABLE>
<S> <C> <C> <C>
SELECT POLICIES

INVESTORS FUND SERIES:
Kemper Money Market Subaccount.............................. 357 $ 1.635 $ 584
Kemper Total Return Subaccount.............................. 1,215 2.488 3,022
Kemper High Yield Subaccount................................ 776 2.446 1,898
Kemper Growth Subaccount.................................... 779 3.354 2,612
Kemper Government Securities Subaccount..................... 2,330 2.013 4,690
-------
TOTAL SELECT POLICY OWNERS' EQUITY..................... $12,806
=======
</TABLE>

43
<PAGE> 48

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

THE BOARD OF DIRECTORS AND STOCKHOLDER'S
KEMPER INVESTORS LIFE INSURANCE COMPANY:

We have audited the accompanying consolidated balance sheet of Kemper
Investors Life Insurance Company and subsidiaries as of December 31, 1997, and
the related consolidated statements of operations, stockholder's equity, and
cash flows for the year then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audit. The
financial statements of Kemper Investors Life Insurance Company and subsidiaries
for the period from January 4, 1996 to December 31, 1996 (post-acquisition
basis) and for the year ended December 31, 1995 (pre-acquisition basis), were
audited by other auditors, whose unqualified report, dated March 21, 1997,
included an explanatory paragraph that described the acquisition of Kemper
Investors Life Insurance Company as discussed in Note 1 to the financial
statements.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Kemper Investors Life Insurance Company and subsidiaries as of December 31,
1997, and the results of their operations and their cash flows for the year then
ended in conformity with generally accepted accounting principles.

/s/ PricewaterhouseCoopers L.L.P.

Coopers & Lybrand L.L.P.

Chicago, Illinois
March 18, 1998

44
<PAGE> 49

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

THE BOARD OF DIRECTORS AND STOCKHOLDER
KEMPER INVESTORS LIFE INSURANCE COMPANY:

We have audited the accompanying consolidated balance sheet of Kemper
Investors Life Insurance Company and subsidiaries as of December 31, 1996 and
the related consolidated statements of operations, stockholder's equity, and
cash flows for the period from January 4, 1996 to December 31, 1996
(post-acquisition), and for the year ended December 31, 1995 (pre-acquisition).
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the aforementioned post-acquisition consolidated financial
statements present fairly, in all material respects, the financial position of
Kemper Investors Life Insurance Company and subsidiaries as of December 31, 1996
and the results of their operations and their cash flows for the
post-acquisition period, in conformity with generally accepted accounting
principles. Also, in our opinion, the aforementioned pre-acquisition
consolidated financial statements present fairly, in all material respects, the
results of their operations and their cash flows for the pre-acquisition period,
in conformity with generally accepted accounting principles.

As discussed in Note 1 to the consolidated financial statements, effective
January 4, 1996, an investor group as described in Note 1, acquired all of the
outstanding stock of Kemper Corporation, the parent of Kemper Investors Life
Insurance Company, in a business combination accounted for as a purchase. As a
result of the acquisition, the consolidated financial information for the period
after the acquisition is presented on a different cost basis than that for the
period before the acquisition and, therefore, is not comparable.

KPMG LLP

Chicago, Illinois
March 21, 1997

45
<PAGE> 50

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)

<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Fixed maturities, available for sale, at fair value
(amortized cost: December 31, 1997, $3,644,075; December
31, 1996, $3,929,650)..................................... $ 3,668,643 $3,866,431
Short-term investments...................................... 236,057 71,696
Joint venture mortgage loans................................ 72,663 110,971
Third-party mortgage loans.................................. 102,974 106,585
Other real estate-related investments....................... 44,409 50,157
Policy loans................................................ 282,439 288,302
Equity securities........................................... 24,839 9,910
Other invested assets....................................... 20,820 13,597
----------- ----------
Total investments................................. 4,452,844 4,517,649
Cash........................................................ 23,868 2,776
Accrued investment income................................... 117,789 115,199
Goodwill.................................................... 229,393 244,688
Value of business acquired.................................. 138,482 189,639
Deferred insurance acquisition costs........................ 59,459 26,811
Deferred income taxes....................................... 39,993 --
Reinsurance recoverable..................................... 382,609 427,165
Receivable on sales of securities........................... 20,076 32,569
Other assets and receivables................................ 3,187 34,117
Assets held in separate accounts............................ 5,121,950 2,127,247
----------- ----------
Total assets...................................... $10,589,650 $7,717,860
=========== ==========
LIABILITIES
Future policy benefits...................................... $ 3,856,871 $4,256,521
Ceded future policy benefits................................ 382,609 427,165
Benefits and funds payable.................................. 150,524 36,142
Other accounts payable and liabilities...................... 212,133 59,462
Deferred income taxes....................................... -- 60,362
Liabilities related to separate accounts.................... 5,121,950 2,127,247
----------- ----------
Total liabilities................................. 9,724,087 6,966,899
----------- ----------
Commitments and contingent liabilities
STOCKHOLDER'S EQUITY
Capital stock--$10 par value,
authorized 300,000 shares; outstanding 250,000 shares..... 2,500 2,500
Additional paid-in capital.................................. 806,538 761,538
Unrealized gain (loss) on investments....................... 12,637 (47,498)
Retained earnings........................................... 43,888 34,421
----------- ----------
Total stockholder's equity........................ 865,563 750,961
----------- ----------
Total liabilities and stockholder's equity........ $10,589,650 $7,717,860
=========== ==========
</TABLE>

See accompanying notes to consolidated financial statements.

46
<PAGE> 51

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------
PREACQUISITION
--------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
REVENUE
Net investment income....................................... $296,195 $299,688 $ 348,448
Realized investment gains (losses).......................... 10,546 13,602 (318,700)
Premium income.............................................. 22,239 7,822 236
Separate account fees and charges........................... 85,413 25,309 21,909
Other income................................................ 11,087 9,786 16,192
-------- -------- ---------
Total revenue..................................... 425,480 356,207 68,085
-------- -------- ---------
BENEFITS AND EXPENSES
Interest credited to policyholders.......................... 199,782 223,094 237,984
Claims incurred and other policyholder benefits............. 28,372 14,255 7,631
Taxes, licenses and fees.................................... 52,608 2,173 6,912
Commissions................................................. 32,602 25,962 24,881
Operating expenses.......................................... 36,837 24,678 20,837
Deferral of insurance acquisition costs..................... (38,177) (27,820) (36,870)
Amortization of insurance acquisition costs................. 3,204 2,316 14,423
Amortization of value of business acquired.................. 24,948 21,530 --
Amortization of goodwill.................................... 15,295 10,195 --
-------- -------- ---------
Total benefits and expenses....................... 355,471 296,383 275,798
-------- -------- ---------
Income (loss) before income tax expense (benefit)........... 70,009 59,824 (207,713)
Income tax expense (benefit)................................ 31,292 25,403 (74,664)
-------- -------- ---------
Net income (loss)................................. $ 38,717 $ 34,421 $(133,049)
======== ======== =========
</TABLE>

See accompanying notes to consolidated financial statements.

47
<PAGE> 52

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(in thousands)

<TABLE>
<CAPTION>
PREACQUISITION
--------------
DECEMBER 31 DECEMBER 31 JANUARY 4 DECEMBER 31
1997 1996 1996 1995
----------- ----------- --------- -----------
<S> <C> <C> <C> <C>
CAPITAL STOCK, beginning and end of period........... $ 2,500 $ 2,500 $ 2,500 $ 2,500
-------- -------- -------- ---------

ADDITIONAL PAID-IN CAPITAL, beginning of period...... 761,538 743,104 491,994 491,994
Capital contributions from parent.................... 45,000 18,434 -- --
Adjustment to reflect purchase accounting method..... -- -- 251,110 --
-------- -------- -------- ---------
End of period.............................. 806,538 761,538 743,104 491,994
-------- -------- -------- ---------

UNREALIZED GAIN (LOSS) ON INVESTMENTS, beginning of
period............................................. (47,498) -- 68,502 (236,443)
Unrealized gain (loss) on revaluation of investments,
net................................................ 60,135 (47,498) -- 304,945
Adjustment to reflect purchase accounting method..... -- -- (68,502) --
-------- -------- -------- ---------
End of period.............................. 12,637 (47,498) -- 68,502
-------- -------- -------- ---------

RETAINED EARNINGS, beginning of period............... 34,421 -- 42,880 175,929
Net income (loss).................................... 38,717 34,421 -- (133,049)
Dividends to parent.................................. (29,250) -- -- --
Adjustment to reflect purchase accounting method..... -- -- (42,880) --
-------- -------- -------- ---------
End of period.............................. 43,888 34,421 -- 42,880
-------- -------- -------- ---------

Total stockholder's equity................. $865,563 $750,961 $745,604 $ 605,876
======== ======== ======== =========
</TABLE>

See accompanying notes to consolidated financial statements.

48
<PAGE> 53

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

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------
PREACQUISITION
--------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)...................................... $ 38,717 $ 34,421 $(133,049)
Reconcilement of net income (loss) to net cash
provided:
Realized investment losses (gains).................. (10,546) (13,602) 318,700
Interest credited and other charges................. 198,206 230,298 237,984
Deferred insurance acquisition costs................ (34,973) (25,504) (22,447)
Amortization of value of business acquired.......... 24,948 21,530 --
Amortization of goodwill............................ 15,295 10,195 --
Amortization of discount and premium on
investments....................................... 17,866 25,743 4,586
Deferred income taxes............................... (99,370) (897) 38,423
Net change in current federal income taxes.......... 97,386 108,806 (86,990)
Benefits and premium taxes due related to separate
account bank-owned life insurance................. 180,546 -- --
Other, net.......................................... 17,168 (22,283) (29,905)
--------- ----------- ---------
Net cash provided from operating activities.... 445,243 368,707 327,302
--------- ----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash from investments sold or matured:
Fixed maturities held to maturity................... 229,208 264,383 320,143
Fixed maturities sold prior to maturity............. 633,872 891,995 297,637
Mortgage loans, policy loans and other invested
assets............................................ 131,866 168,727 450,573
Cost of investments purchased or loans originated:
Fixed maturities.................................... (606,028) (1,369,091) (549,867)
Mortgage loans, policy loans and other invested
assets............................................ (76,350) (119,044) (131,966)
Short-term investments, net............................ (164,361) 300,819 (168,351)
Net change in receivable and payable for securities
transactions........................................ 29,746 (31,667) (1,397)
Net reductions in other assets......................... 244 115 1,996
--------- ----------- ---------
Net cash provided by investing activities...... 178,197 106,237 218,768
--------- ----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Policyholder account balances:
Deposits............................................ 145,687 141,159 247,778
Withdrawals......................................... (745,510) (700,084) (755,917)
Capital contributions from parent...................... 45,000 18,434 --
Dividends to parent.................................... (29,250) -- --
Other.................................................. (18,275) 42,512 (35,309)
--------- ----------- ---------
Net cash used in financing activities.......... (602,348) (497,979) (543,448)
--------- ----------- ---------
Net increase (decrease) in cash........... 21,092 (23,035) 2,622
CASH, beginning of period................................ 2,776 25,811 23,189
--------- ----------- ---------
CASH, end of period...................................... $ 23,868 $ 2,776 $ 25,811
========= =========== =========
</TABLE>

See accompanying notes to consolidated financial statements.

49
<PAGE> 54

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

Kemper Investors Life Insurance Company and subsidiaries (the "Company")
issues fixed and variable annuity products, variable life, term life and
interest-sensitive life insurance products marketed primarily through a network
of financial institutions, securities brokerage firms, insurance agents and
financial planners. The Company is licensed in the District of Columbia and all
states except New York. The Company is a wholly-owned subsidiary of Kemper
Corporation ("Kemper"). On January 4, 1996, an investor group comprised of
Zurich Insurance Company ("Zurich"), Insurance Partners, L.P. ("IP") and
Insurance Partners Offshore (Bermuda), L.P. (together with IP, "Insurance
Partners") acquired all of the issued and outstanding common stock of Kemper. As
a result of that change in control, Zurich and Insurance Partners owned 80
percent and 20 percent, respectively, of Kemper and therefore the Company. On
February 27, 1998, Zurich acquired Insurance Partner's remaining 20 percent
interest for cash. As a result of this transaction, Kemper and the Company
became wholly-owned subsidiaries of Zurich.

The financial statements include the accounts of the Company on a
consolidated basis. All significant intercompany balances and transactions have
been eliminated. Certain reclassifications have been made to the 1996 and 1995
consolidated financial statements in order for them to conform to the 1997
presentation.

PURCHASE ACCOUNTING METHOD

The acquisition of the Company on January 4, 1996, was accounted for using
the purchase method of accounting. The consolidated financial statements of the
Company prior to January 4, 1996, were prepared on a historical cost basis in
accordance with generally accepted accounting principles. The accompanying
financial statements and notes thereto prepared prior to January 4, 1996 have
been labeled "preacquisition". The accompanying consolidated financial
statements of the Company as of January 4, 1996 (the acquisition date) and as of
and for the years ended December 31, 1996 and 1997, have been prepared in
conformity with the purchase method of accounting. The Company has presented
January 4, 1996 (the acquisition date), as the opening purchase accounting
balance sheet where appropriate for comparative purposes throughout the
accompanying financial statements and notes thereto.

Under purchase accounting, the Company's assets and liabilities have been
marked to their relative fair values as of the acquisition date. The difference
between the cost of acquiring the Company and the net fair values of the
Company's assets and liabilities as of the acquisition date has been recorded as
goodwill. The allocated cost of acquiring the Company was $745.6 million and the
acquisition resulted in goodwill of $254.9 million as of January 4, 1996. The
Company began to amortize goodwill during 1996 on a straight-line basis over
twenty-five years. In December of 1997, the Company changed its amortization
period to twenty years in order to conform to Zurich's accounting practices and
policies. As a result of the change in amortization periods, the Company
recorded an increase in goodwill amortization expense of $5.1 million during
1997.

The Company reviews goodwill to determine if events or changes in
circumstances may have affected the recoverability of the outstanding goodwill
as of each reporting period. In the event that the Company determines that
goodwill is not recoverable, it would amortize such amounts as additional
goodwill expense in the accompanying financial statements. As of December 31,
1997, the Company believes that no such adjustment is necessary.

Purchase accounting adjustments primarily affected the recorded historical
values of fixed maturities, mortgage loans, other invested assets, deferred
insurance acquisition costs, future policy benefits and deferred income taxes.

Deferred insurance acquisition costs, and the related amortization thereof,
for policies sold prior to January 4, 1996, have been replaced by the value of
business acquired.

The value of business acquired reflects the estimated fair value of the
Company's life insurance business in force and represents the portion of the
cost to acquire the Company that is allocated to the value of the right to
receive future cash flows from insurance contracts existing at the date of
acquisition. Such value is the present value of the actuarially determined
projected cash flows for the acquired policies.

A 15 percent discount rate was used to determine such value and represents
the rate of return required by Zurich and Insurance Partners to invest in the
business being acquired. In selecting the rate of return used to value
50
<PAGE> 55
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the policies purchased, the Company considered the magnitude of the risks
associated with each of the actuarial assumptions used in determining expected
future cash flows, the cost of capital available to fund the acquisition, the
perceived likelihood of changes in insurance regulations and tax laws, the
complexity of the Company's business, and the prices paid (i.e., discount rates
used in determining other life insurance company valuations) on similar blocks
of business sold in recent periods.

The value of the business acquired is amortized over the estimated contract
life of the business acquired in relation to the present value of estimated
gross profits using current assumptions based on an interest rate equal to the
liability or contract rate on the value of business acquired. The estimated
amortization and accretion of interest for the value of business acquired for
each of the years through December 31, 2002 are as follows:

<TABLE>
<CAPTION>
PROJECTED
(IN THOUSANDS) BEGINNING ACCRETION OF ENDING
YEAR ENDED DECEMBER 31 BALANCE AMORTIZATION INTEREST BALANCE
- ---------------------------------------------------- --------- ------------ ------------ ---------
<S> <C> <C> <C> <C>
1996 (actual)....................................... $190,222 $(31,427) $ 9,897 $168,692
1997 (actual)....................................... 168,692 (34,906) 9,958 143,744
1998................................................ 143,744 (25,633) 8,933 127,044
1999................................................ 127,044 (23,701) 7,873 111,216
2000................................................ 111,216 (21,668) 6,876 96,424
2001................................................ 96,424 (19,122) 5,973 83,275
2002................................................ 83,275 (17,835) 5,134 70,574
</TABLE>

The projected ending balance of the value of business acquired will be
further adjusted to reflect the impact of unrealized gains or losses on fixed
maturities held as available for sale in the investment portfolio. Such
adjustments are not recorded in the Company's net income but rather are recorded
as a credit or charge to stockholder's equity, net of income tax. As of December
31, 1997 and 1996, this adjustment increased (decreased) the value of business
acquired by $(5.3) million and $20.9 million, respectively, and stockholder's
equity by approximately $(3.4) million and $13.6 million, respectively.

ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that could affect the reported amounts of assets and liabilities as
well as the disclosure of contingent assets or liabilities at the date of the
financial statements. As a result, actual results reported as revenue and
expenses could differ from the estimates reported in the accompanying financial
statements. As further discussed in the accompanying notes to the consolidated
financial statements, significant estimates and assumptions affect deferred
insurance acquisition costs, the value of business acquired, provisions for real
estate-related losses and reserves, other-than-temporary declines in values for
fixed maturities, the valuation allowance for deferred income taxes and the
calculation of fair value disclosures for certain financial instruments.

LIFE INSURANCE REVENUE AND EXPENSES

Revenue for annuities, variable life insurance and interest-sensitive life
insurance products consists of investment income, and policy charges such as
mortality, expense and surrender charges and expense loads for premium taxes on
certain contracts. Expenses consist of benefits and interest credited to
contracts, policy maintenance costs and amortization of deferred insurance
acquisition costs. Also reflected in fees and other income is a ceding
commission experience adjustment received in 1995 as a result of certain
reinsurance transactions entered into by the Company during 1992. (See note
captioned "Reinsurance".)

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

51
<PAGE> 56
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED INSURANCE ACQUISITION COSTS

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

FUTURE POLICY BENEFITS

Liabilities for future policy benefits related to annuities and
interest-sensitive life contracts reflect net premiums received plus interest
credited during the contract accumulation period and the present value of future
payments for contracts that have annuitized. Current interest rates credited
during the contract accumulation period range from 3.0 percent to 7.3 percent.
Future minimum guaranteed interest rates vary from 3.0 percent to 4.0 percent.
For contracts that have annuitized, interest rates used in determining the
present value of future payments range principally from 3.0 percent to 12.0
percent.

Liabilities for future term life policy benefits have been computed
principally by a net level premium method. Anticipated rates of mortality are
based on the 1975-1980 Select and Ultimate Table modified by Company experience,
including withdrawals. Estimated future investment yields are a level 7 percent
for reinsurance assumed and for direct business, 8 percent for three years; 7
percent for year four; and 6 percent thereafter.

INVESTED ASSETS AND RELATED INCOME

Investments in fixed maturities and equity securities are carried at fair
value. Short-term investments are carried at cost, which approximates fair
value. (See note captioned "Fair Value of Financial Instruments".)

The amortized cost of fixed maturities is adjusted for amortization of
premiums and accretion of discounts to maturity, or in the case of
mortgage-backed and asset-backed securities, over the estimated life of the
security. Such amortization is included in net investment income. Amortization
of the discount or premium from mortgage-backed and asset-backed securities is
recognized using a level effective yield method which considers the estimated
timing and amount of prepayments of the underlying loans and is adjusted to
reflect differences which arise between the prepayments originally anticipated
and the actual prepayments received and currently anticipated. To the extent
that the estimated lives of such securities change as a result of changes in
prepayment rates, the adjustment is also included in net investment income. The
Company does not accrue interest income on fixed maturities deemed to be
impaired on an other-than-temporary basis, or on mortgage loans and other real
estate loans where the likelihood of collection of interest is doubtful.

Mortgage loans are carried at their unpaid balance, net of unamortized
discount and any applicable reserves or write-downs. Other real estate-related
investments net of any applicable reserve and write-downs include notes
receivable from real estate ventures; investments in real estate ventures,
adjusted for the equity in the operating income or loss of such ventures; and
real estate owned carried at fair value.

Real estate reserves are established when declines in collateral values,
estimated in light of current economic conditions and calculated in conformity
with Statement of Financial Accounting Standards ("SFAS") 114, ACCOUNTING BY
CREDITORS FOR IMPAIRMENT OF A LOAN, indicate a likelihood of loss. At year-end
1995, reflecting the Company's change in strategy with respect to its real
estate portfolio, and the disposition thereof, and on January 4, 1996,
reflecting the acquisition of the Company, real estate-related investments were
valued using an estimate of the investments observable market price, net of
estimated costs to sell.

Under purchase accounting, the market value of the Company's policy loans
and other invested assets consisting primarily of venture capital investments
and a leveraged lease, became the Company's new cost basis in such investments.
Investments in policy loans and other invested assets after January 4, 1996 are
carried at cost.

52
<PAGE> 57
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Realized gains or losses on sales of investments, determined on the basis
of identifiable cost on the disposition of the respective investment,
recognition of other-than-temporary declines in value and changes in real
estate-related reserves and write-downs are included in revenue. Net unrealized
gains or losses on revaluation of investments are credited or charged to
stockholder's equity. Such unrealized gains are recorded net of deferred income
tax expense, while unrealized losses are not tax benefitted.

SEPARATE ACCOUNT BUSINESS

The assets and liabilities of the separate accounts represent segregated
funds administered and invested by the Company for purposes of funding variable
annuity and variable life insurance contracts for the exclusive benefit of
variable annuity and variable life insurance contract holders. The Company
receives administrative fees from the separate account and retains varying
amounts of withdrawal charges to cover expenses in the event of early
withdrawals by contract holders. The assets and liabilities of the separate
accounts are carried at fair value.

INCOME TAX

The operations of the Company prior to January 4, 1996 have been included
in the consolidated federal income tax return of Kemper. Income taxes receivable
or payable have been determined on a separate return basis, and payments have
been received from or remitted to Kemper pursuant to a tax allocation
arrangement between Kemper and its subsidiaries, including the Company. The
Company generally had received a tax benefit for losses to the extent such
losses can be utilized in Kemper's consolidated federal tax return. Subsequent
to January 4, 1996, the Company and its subsidiaries file separate federal
income tax returns.

Deferred taxes are provided on the temporary differences between the tax
and financial statement basis of assets and liabilities.

(2) CASH FLOW INFORMATION

The Company defines cash as cash in banks and money market accounts.
Federal income tax refunded by Kemper under the tax allocation arrangement for
the period from January 1, 1996 to January 4, 1996 and for the years ended
December 31, 1995 amounted to $108.8 million and $25.2 million, respectively.
The Company paid federal income taxes of $29.0 million and $28.1 million
directly to the United States Treasury Department during 1997 and 1996,
respectively.

53
<PAGE> 58
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(3) INVESTED ASSETS AND RELATED INCOME

The Company is carrying its fixed maturity investment portfolio at
estimated fair value as fixed maturities are considered available for sale. The
carrying value (estimated fair value) of fixed maturities compared with
amortized cost, adjusted for other-than-temporary declines in value, were as
follows:

<TABLE>
<CAPTION>
ESTIMATED UNREALIZED
CARRYING AMORTIZED --------------------
VALUE COST GAINS LOSSES
(in thousands) -------- --------- ----- ------
<S> <C> <C> <C> <C>
DECEMBER 31, 1997
U.S. treasury securities and obligations of U.S.
government agencies and authorities................. $ 6,258 $ 6,298 $ 4 $ (44)
Obligations of states and political subdivisions,
special revenue and nonguaranteed................... 29,330 29,308 160 (138)
Debt securities issued by foreign governments......... 92,563 92,722 188 (347)
Corporate securities.................................. 1,861,655 1,846,588 24,733 (9,666)
Mortgage and asset-backed securities.................. 1,678,837 1,669,159 10,035 (357)
---------- ---------- ------- --------
Total fixed maturities......................... $3,668,643 $3,644,075 $35,120 $(10,552)
========== ========== ======= ========

DECEMBER 31, 1996
U.S. treasury securities and obligations of U.S.
government agencies and authorities................. $ 92,238 $ 93,202 $ -- $ (964)
Obligations of states and political subdivisions,
special revenue and nonguaranteed................... 30,853 31,519 -- (666)
Debt securities issued by foreign governments......... 105,394 108,456 504 (3,566)
Corporate securities.................................. 1,896,615 1,935,511 5,918 (44,814)
Mortgage and asset-backed securities.................. 1,741,331 1,760,962 1,990 (21,621)
---------- ---------- ------- --------
Total fixed maturities......................... $3,866,431 $3,929,650 $ 8,412 $(71,631)
========== ========== ======= ========
</TABLE>

Upon default or indication of potential default by an issuer of fixed
maturity securities, the Company-owned issue(s) of such issuer would be placed
on nonaccrual status and, since declines in fair value would no longer be
considered by the Company to be temporary, would be analyzed for possible
write-down. Any such issue would be written down to its net realizable value
during the fiscal quarter in which the impairment was determined to have become
other than temporary. Thereafter, each issue on nonaccrual status is regularly
reviewed, and additional write-downs may be taken in light of later
developments.

The Company's computation of net realizable value involves judgments and
estimates, so such value should be used with care. Such value determination
considers such factors as the existence and value of any collateral security;
the capital structure of the issuer; the level of actual and expected market
interest rates; where the issue ranks in comparison with other debt of the
issuer; the economic and competitive environment of the issuer and its business;
the Company's view on the likelihood of success of any proposed issuer
restructuring plan; and the timing, type and amount of any restructured
securities that the Company anticipates it will receive.

The Company's $220.0 million real estate portfolio at December 31, 1997
consists of joint venture and third-party mortgage loans and other real
estate-related investments. At December 31, 1997 and 1996, total impaired real
estate-related loans were as follows:

<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31
1997 1996
(in millions) ----------- -----------
<S> <C> <C>
Impaired loans without reserves--gross...................... $39.3 $39.8
Impaired loans with reserves--gross......................... 2.2 7.6
----- -----
Total gross impaired loans........................... 41.5 47.4
Reserves related to impaired loans.......................... (2.1) (4.4)
----- -----
Net impaired loans................................... $39.4 $43.0
===== =====
</TABLE>

Impaired loans without reserves include loans in which the deficit in
equity investments in real estate-related investments is considered in
determining reserves and write-downs. At December 31, 1997 and 1996, the
54
<PAGE> 59
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(3) INVESTED ASSETS AND RELATED INCOME (CONTINUED)
Company's deficit in equity investments considered in determining reserves and
write-downs amounted to $0 and $5.9 million, respectively. The Company had an
average balance of $45.2 million and $30.8 million in impaired loans for 1997
and 1996, respectively. Cash payments received on impaired loans are generally
applied to reduce the outstanding loan balance.

At December 31, 1997 and December 31, 1996, loans on nonaccrual status,
before reserves and write-downs, amounted to $47.4 million and $43.5 million,
respectively. The Company's nonaccrual loans are generally included in impaired
loans.

At December 31, 1997, securities carried at approximately $6.3 million were
on deposit with governmental agencies as required by law.

Proceeds from sales of investments in fixed maturities prior to maturity
were $633.9 million, $892.0 million and $297.6 million during 1997, 1996 and
1995, respectively. Gross gains of $3.1 million, $9.9 million and $21.2 million
and gross losses of $13.7 million, $16.2 million and $11.9 million were realized
on sales and write-downs of fixed maturities in 1997, 1996 and 1995,
respectively.

The carrying value and amortized cost of fixed maturity investments, by
contractual maturity at December 31, 1997, are shown below. Actual maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties and
because mortgage-backed and asset-backed securities provide for periodic
payments throughout their life.

<TABLE>
<CAPTION>
CARRYING AMORTIZED
VALUE COST VALUE
(in thousands) -------- ----------
<S> <C> <C>
One year or less............................................ $ 47,724 $ 47,797
Over one year through five.................................. 649,279 648,291
Over five years through ten................................. 988,849 984,495
Over ten years.............................................. 303,954 294,333
Securities not due at a single maturity date, primarily
mortgage and asset-backed securities(1)................... 1,678,837 1,669,159
---------- ----------
Total fixed maturities............................... $3,668,643 $3,644,075
========== ==========
</TABLE>

- ---------------
(1) Weighted average maturity of 3.8 years.

The sources of net investment income were as follows:

<TABLE>
<CAPTION>
PREACQUISITION
--------------
1997 1996 1995
(in thousands) -------- -------- --------------
<S> <C> <C> <C>
Interest and dividends on fixed maturities................. $250,170 $250,683 $269,934
Dividends on equity securities............................. 2,123 646 681
Income from short-term investments......................... 4,128 9,130 13,159
Income from mortgage loans................................. 16,283 20,257 40,494
Income from policy loans................................... 20,549 20,700 19,658
Income from other real estate-related investments.......... 6,631 4,917 15,565
Income from other loans and investments.................... 2,045 2,480 1,555
-------- -------- --------
Total investment income............................. 301,929 308,813 361,046
Investment expense......................................... (5,734) (9,125) (12,598)
-------- -------- --------
Net investment income............................... $296,195 $299,688 $348,448
======== ======== ========
</TABLE>

55
<PAGE> 60
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(3) INVESTED ASSETS AND RELATED INCOME (CONTINUED)
Realized gains (losses) for the years ended December 31, 1997, 1996 and
1995, were as follows:

<TABLE>
<CAPTION>
REALIZED GAINS (LOSSES)
-----------------------------------------------
PREACQUISITION
--------------
1997 1996 1995
(in thousands) -------- ------- --------------
<S> <C> <C> <C>
Real estate-related...................................... $ 19,758 $17,462 $(325,611)
Fixed maturities......................................... (10,656) (6,344) 9,336
Equity securities........................................ 914 -- (346)
Other.................................................... 530 2,484 (2,079)
-------- ------- ---------
Realized investment gains (losses) before income tax
expense (benefit)................................... 10,546 13,602 (318,700)
Income tax expense (benefit) 3,691 4,761 (111,545)
-------- ------- ---------
Net realized investment gains (losses)................. $ 6,855 $ 8,841 $(207,155)
======== ======= =========
</TABLE>

Unrealized gains (losses) are computed below as follows: fixed
maturities--the difference between fair value and amortized cost, adjusted for
other-than-temporary declines in value; equity securities and other--the
difference between fair value and cost. The change in unrealized investment
gains (losses) by class of investment for the years ended December 31, 1997,
1996 and 1995 were as follows:

<TABLE>
<CAPTION>
CHANGE IN UNREALIZED GAINS (LOSSES)
---------------------------------------------------------
PREACQUISITION
--------------
DECEMBER 31 DECEMBER 31 JANUARY 4 DECEMBER 31
1997 1996 1996 1995
(in thousands) ------------ ------------ ---------- --------------
<S> <C> <C> <C> <C>
Fixed maturities..................................... $ 87,787 $(63,219) $ $351,964
Equity and other securities.......................... (103) 1,256 -- 180
Adjustment to deferred insurance acquisition costs... (2,325) 1,307 -- (14,277)
Adjustment to value of business acquired............. (26,209) 20,947 -- --
-------- -------- -- --------
Unrealized gain (loss) before income tax expense... 59,150 (39,709) -- 337,867
Income tax expense (benefit)......................... (985) 7,789 -- 32,922
-------- -------- -- --------
Net unrealized gain (loss) on investments..... $ 60,135 $(47,498) $-- $304,945
======== ======== == ========
</TABLE>

(4) UNCONSOLIDATED INVESTEES

At December 31, 1997 and 1996 the Company, along with other Kemper
subsidiaries, directly held partnership interests in a number of real estate
joint ventures. The Company's direct and indirect real estate joint venture
investments are accounted for utilizing the equity method, with the Company
recording its share of the operating results of the respective partnerships. The
Company, as an equity owner, has the ability to fund, and historically has
elected to fund, operating requirements of certain of the joint ventures.
Consolidation accounting methods are not utilized as the Company, in most
instances, does not own more than 50 percent in the aggregate, and in any event,
major decisions of the partnership must be made jointly by all partners.

As of December 31, 1997 and December 31, 1996, the Company's net equity
investment in unconsolidated investees amounted to $19.3 million and $11.7
million, respectively. The Company's share of net income related to such
unconsolidated investees amounted to $835 thousand and $223 thousand in 1997 and
1996, respectively, and a net loss of $453 thousand in 1995.

(5) CONCENTRATION OF CREDIT RISK

The Company generally strives to maintain a diversified invested asset
portfolio; however, certain concentrations of credit risk exist in mortgage and
asset-backed securities and real estate.

Approximately 35.1 percent of the Company's investment-grade fixed
maturities at December 31, 1997 were mortgage-backed securities, down from 36.4
percent at December 31, 1996, due to sales and paydowns during

56
<PAGE> 61
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(5) CONCENTRATION OF CREDIT RISK (CONTINUED)

1997. These investments consist primarily of marketable mortgage pass-through
securities issued by the Government National Mortgage Association, the Federal
National Mortgage Association or the Federal Home Loan Mortgage Corporation and
other investment-grade securities collateralized by mortgage pass-through
securities issued by these entities. The Company has not made any investments in
interest-only or other similarly volatile tranches of mortgage-backed
securities. The Company's mortgage-backed investments are generally AAA credit
quality.

Approximately 10.8 percent and 8.8 percent of the Company's
investment-grade fixed maturities at December 31, 1997 and 1996, respectively,
consisted of corporate asset-backed securities. The majority of the Company's
investments in asset-backed securities were backed by home equity loans (27.7%),
auto loans (22.3%), manufactured housing loans (17.2%), equipment loans (13.7%),
and commercial mortgage backed securities (10.7%).

The Company's real estate portfolio is distributed by geographic location
and property type, as shown in the following two tables:

GEOGRAPHIC DISTRIBUTION AS OF DECEMBER 31, 1997

<TABLE>
<S> <C>
California....................... 38.2%
Hawaii........................... 14.2
Colorado......................... 9.8
Oregon........................... 9.2
Washington....................... 9.1
Florida.......................... 6.4
Texas............................ 5.1
Michigan......................... 3.7
Ohio............................. 3.3
Illinois......................... 1.0
-----
Total.................. 100.0%
=====
</TABLE>

DISTRIBUTION BY PROPERTY TYPE AS OF DECEMBER 31, 1997

<TABLE>
<S> <C>
Hotel............................ 41.3%
Land............................. 28.2
Residential...................... 13.1
Retail........................... 3.3
Office........................... 3.1
Industrial....................... .9
Other............................ 10.1
-----
Total.................. 100.0%
=====
</TABLE>

Undeveloped land represented approximately 28.2 percent of the Company's
real estate portfolio at December 31, 1997. To maximize the value of certain
land and other projects, additional development has been proceeding or has been
planned. Such development of existing projects would continue to require
funding, either from the Company or third parties. In the present real estate
markets, third-party financing can require credit enhancing arrangements (e.g.,
standby financing arrangements and loan commitments) from the Company. The
values of development projects are dependent on a number of factors, including
Kemper's and the Company's plans with respect thereto, obtaining necessary
construction and zoning permits and market demand for the permitted use of the
property. The values of certain development projects have been written down as
of December 31, 1995, reflecting changes in plans in connection with the
Zurich-led acquisition of Kemper. There can be no assurance that such permits
will be obtained as planned or at all, nor that such expenditures will occur as
scheduled, nor that Kemper's and the Company's plans with respect to such
projects may not change substantially.

Approximately half of the Company's real estate mortgage loans are on
properties or projects where the Company, Kemper, or their affiliates have taken
ownership positions in joint ventures with a small number of partners. (See note
captioned "Unconsolidated Investees".)

At December 31, 1997, loans to and investments in joint ventures in which
Patrick M. Nesbitt or his affiliates ("Nesbitt"), a third-party real estate
developer, have ownership interests constituted approximately $88.2 million, or
40.1 percent, of the Company's real estate portfolio. The Nesbitt ventures
consist of nine hotel properties and two office buildings. At December 31, 1997,
the Company did not have any Nesbitt-related off-balance-sheet legal funding
commitments outstanding.

At December 31, 1997, loans to a master limited partnership (the "MLP")
between subsidiaries of Kemper and subsidiaries of Lumbermens Mutual Casualty
Company ("Lumbermens"), a former affiliate, constituted approximately $60.5
million, or 27.5 percent, of the Company's real estate portfolio. Kemper's
interest is

57
<PAGE> 62
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

75 percent at December 31, 1997. At December 31, 1997, MLP-related commitments
accounted for approximately $7.4 million of the Company's off-balance-sheet
legal commitments, which the Company expects to fund.

At December 31, 1997, the Company no longer had any outstanding loans or
investments in projects with the Prime Group, Inc. or its affiliates, as all
such investments have been sold or written-down to zero. However, the Company
continues to have Prime Group-related commitments, which accounted for $25.7
million of the Company's off-balance-sheet legal commitments at December 31,
1997. The Company does not expect to fund any of these commitments.

(6) INCOME TAXES

Income tax expense (benefit) was as follows for the years ended December
31, 1997, 1996 and 1995:

<TABLE>
<CAPTION>
PREACQUISITION
--------------
1997 1996 1995
(in thousands) -------- ------- --------------
<S> <C> <C> <C>
Current.................................................. $130,662 $26,300 $(113,087)
Deferred................................................. (99,370) (897) 38,423
-------- ------- ---------
Total.......................................... $ 31,292 $25,403 $ (74,664)
======== ======= =========
</TABLE>

Included in the 1995 current tax benefit is the recognition of a net
operating loss carryover at December 31, 1995 which was utilized against taxable
income on Kemper's consolidated short-period federal income tax return for the
January 1 through January 4, 1996 tax year. Beginning January 5, 1996, the
Company and its subsidiaries each filed a stand alone federal income tax return.
Previously, the Company had filed a consolidated federal income tax return with
Kemper. In 1996, the Company and Kemper settled all outstanding balances under
the tax allocation agreement.

The actual income tax expense (benefit) for 1997, 1996 and 1995 differed
from the "expected" tax expense (benefit) for those years as displayed below.
"Expected" tax expense (benefit) was computed by applying the U.S. federal
corporate tax rate of 35 percent in 1997, 1996, and 1995 to income (loss) before
income tax expense (benefit).

<TABLE>
<CAPTION>
PREACQUISITION
--------------
1997 1996 1995
(in thousands) ------- ------- --------------
<S> <C> <C> <C>
Computed expected tax expense (benefit)................... $24,503 $20,938 $(72,700)
Difference between "expected" and actual tax expense
(benefit):
State taxes............................................. 1,801 913 (1,370)
Amortization of goodwill................................ 5,353 3,568 --
Foreign tax credit...................................... (278) -- (183)
Other, net.............................................. (87) (16) (411)
------- ------- --------
Total actual tax expense (benefit).............. $31,292 $25,403 $(74,664)
======= ======= ========
</TABLE>

Deferred tax assets and liabilities are generally determined based on the
difference between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. The Company only records deferred tax
assets if future realization of the tax benefit is more likely than not, with a
valuation allowance recorded for the portion that is not likely to be realized.
The valuation allowance is subject to future adjustments based upon, among other
items, the Company's estimates of future operating earnings and capital gains.

The Company has established a valuation allowance to reduce the deferred
federal tax asset related to real estate and other investments to the amount
that, based upon available evidence, is, in management's judgment, more likely
than not to be realized. Any reversals of the valuation allowance are contingent
upon the recognition of future capital gains in the Company's federal income tax
return or a change in circumstances which causes the recognition of the benefits
to become more likely than not. The change in the valuation allowance is related
solely to the change in the net deferred federal tax asset or liability from
unrealized gains or losses on investments.

58
<PAGE> 63
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(6) INCOME TAXES (CONTINUED)

The tax effects of temporary differences that give rise to significant
portions of the Company's net deferred federal tax asset or liability were as
follows:

<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31 JANUARY 4
1997 1996 1996
(in thousands) ----------- ------------ ---------
<S> <C> <C> <C>
Deferred federal tax assets:
Deferred insurance acquisition costs.................. $ 75,522 $ 4,520 $ --
Unrealized losses on investments...................... -- 16,624 --
Life policy reserves.................................. 43,337 46,452 46,654
Unearned revenue...................................... 37,243 -- --
Real estate-related................................... 13,400 20,642 27,736
Other investment-related.............................. 3,298 5,409 1,773
Other................................................. 4,371 3,639 9,750
-------- -------- --------
Total deferred federal tax assets.................. 177,171 97,286 85,913
Valuation allowance................................... (15,201) (31,825) (15,201)
-------- -------- --------
Total deferred federal tax assets after valuation
allowance........................................ 161,970 65,461 70,712
-------- -------- --------
Deferred federal tax liabilities:
Value of business acquired............................ 48,469 66,373 66,578
Deferred insurance acquisition costs.................. 20,811 9,384 --
Depreciation and amortization......................... 20,201 15,473 15,490
Other investment-related.............................. 18,774 28,855 37,919
Unrealized gains on investments....................... 9,002 -- --
Other................................................. 4,720 5,738 4,197
-------- -------- --------
Total deferred federal tax liabilities............. 121,977 125,823 124,184
-------- -------- --------
Net deferred federal tax assets (liabilities)........... $ 39,993 $(60,362) $(53,472)
======== ======== ========
</TABLE>

The net deferred tax assets relate primarily to unearned revenue and the
tax on deferred insurance acquisition costs ("DAC Tax") associated with $2.7
billion of new 1997 sales from a non-registered individual and group variable
bank-owned life insurance contract ("BOLI"). As a result of proposed tax law
changes, as more fully discussed below, the level of DAC Tax experienced in 1997
is not anticipated to occur in future periods and it is expected that the
Company will return to its normalized earnings patterns in 1998. Management
believes that it is more likely, than not, that the results of future operations
will generate sufficient taxable income over the ten year amortization period of
the unearned revenue and DAC Tax to realize such deferred tax assets.

In early 1998, the Clinton Administration's Fiscal Year 1998 Budget
("Budget") was released and contained certain proposals to change the taxation
of non-qualified fixed and variable annuities and variable life insurance
contracts, including BOLI. It is currently unknown whether or not such proposals
will be accepted, amended or omitted in the final 1999 Budget approved by
Congress. If the current Budget proposals are accepted, certain of the Company's
non-qualified fixed and variable annuities and certain of its variable life
insurance products, including BOLI and the non-registered individual variable
universal life insurance contracts introduced during 1997, may no longer be tax
advantaged products and therefore no longer attractive to those customers who
purchase them because of their favorable tax attributes. Additionally, sales of
such products during 1998 may also be negatively impacted until the likelihood
of the current proposals being enacted into law has been determined.

The tax returns through the year 1986 have been examined by the Internal
Revenue Service ("IRS"). Changes proposed are not material to the Company's
financial position. The tax returns for the years 1987 through 1993 are
currently under examination by the IRS.

(7) RELATED-PARTY TRANSACTIONS

The Company received cash capital contributions of $45.0 million and $18.4
million during 1997 and 1996, respectively. The Company paid cash dividends of
$29.3 million to Kemper during 1997.

59
<PAGE> 64
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(7) RELATED-PARTY TRANSACTIONS (CONTINUED)
The Company has loans to joint ventures, consisting primarily of mortgage
loans on real estate, in which the Company and/or one of its affiliates has an
ownership interest. At December 31, 1997 and December 31, 1996, joint venture
mortgage loans totaled $72.7 million and $111.0 million, respectively, and
during 1997, 1996 and 1995, the Company earned interest income on these joint
venture loans of $7.5 million, $9.5 million and $19.6 million, respectively.

All of the Company's personnel are employees of Federal Kemper Life
Assurance Company ("FKLA"), an affiliated company. The Company is allocated
expenses for the utilization of FKLA employees and facilities, the investment
management services of Scudder Kemper Investments, Inc. ("SKI"), formerly Zurich
Kemper Investments, Inc., an affiliated company, and the information systems of
Kemper Service Company ("KSvC"), an SKI subsidiary, based on the Company's share
of administrative, legal, marketing, investment management, information systems
and operation and support services. During 1997, 1996 and 1995, expenses
allocated to the Company from SKI and KSvC amounted to $114 thousand, $1.7
million and $4.4 million, respectively. The Company also paid to SKI investment
management fees of $3.5 million, $3.6 million and $3.4 million during 1997, 1996
and 1995, respectively. In addition, expenses allocated to the Company from FKLA
during 1997, 1996 and 1995 amounted to $30.0 million, $10.5 million and $14.3
million, respectively.

During 1995, the Company sold certain mortgages and real estate-related
investments, net of reserves, amounting to approximately $3.5 million to an
affiliated non-life realty company, in exchange for cash. No gain or loss was
recognized on these sales. During 1996, the Company purchased approximately
$24.5 million of real estate-related investments from an affiliated non-life
realty subsidiary for cash. The Company also paid to Kemper real estate
subsidiaries $2.2 million, $1.8 million and $1.8 million in 1997, 1996 and 1995,
respectively, related to the management of the Company's real estate portfolio.

(8) REINSURANCE

In the ordinary course of business, the Company enters into reinsurance
agreements to diversify risk and limit its overall financial exposure to certain
blocks of fixed-rate annuities and to individual death claims. The Company
generally cedes 100 percent of the related annuity liabilities under the terms
of the reinsurance agreements. Although these reinsurance agreements
contractually obligate the reinsurers to reimburse the Company, they do not
discharge the Company from its primary liabilities and obligations to
policyholders. As such, these amounts paid or deemed to have been paid are
recorded on the Company's consolidated balance sheet as reinsurance recoverables
and ceded future policy benefits.

In 1992 and 1991, the Company entered into 100 percent indemnity
reinsurance agreements ceding $515.7 million and $416.3 million, respectively,
of its fixed-rate annuity liabilities to Fidelity Life Association, a Mutual
Legal Reserve Company ("FLA"). FLA is a mutual insurance company that shares
common management and common board members with the Company, FKLA and Kemper. As
of December 31, 1997 and 1996, the reinsurance recoverable related to the
fixed-rate annuity liabilities ceded to FLA amounted to $382.6 million and
$427.2 million, respectively. During 1995, the Company recorded income of $4.4
million related to a ceding commission experience adjustment from the 1992
reinsurance agreement.

In December 1996, the Company assumed on a yearly renewable term basis
approximately $14.4 billion (face amount) of term life insurance from FKLA. As a
result of this transaction, the Company recorded premiums and reserves of
approximately $7.3 million. The difference between the cash transferred, which
represents the statutory reserves of the business assumed, and the reserves
recorded under generally accepted accounting principles, of approximately $18.4
million, was deemed to be a capital contribution from Kemper and was recorded as
additional paid-in-capital during 1996. Premiums assumed during 1997 under the
terms of the treaty amounted to $21.1 million and the face amount which remained
outstanding at December 31, 1997 amounted to $12.6 billion.

The Company's retention limit on term life insurance prior to 1997 was $300
thousand (face amount) on the life of any one individual with the excess amounts
ceded to outside reinsurers. The term life insurance business assumed from FKLA
during 1996 did not have any individual contracts greater than $300 thousand in
face amount. Effective January 1, 1997, the Company ceded 90 percent of all new
term life insurance premiums to outside reinsurers. Term life reserves ceded to
outside reinsurers on the Company's direct business amounted to approximately
$139 thousand and $102 thousand as of December 31, 1997 and 1996, respectively.

60
<PAGE> 65
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

During December 1997, the Company entered into a funds held reinsurance
agreement with a Zurich affiliated company, EPICENTRE Reinsurance (Bermuda)
Limited ("EPICENTRE"). Under the terms of this agreement, the Company ceded, on
a yearly renewable term basis, ninety percent of the net amount at risk (death
benefit payable to the insured less the insured's separate account cash
surrender value) related to a new product developed in 1997, a non-registered
variable bank-owned life insurance contract ("BOLI"), which is held in the
Company's separate accounts. During 1997, the Company issued $59.3 billion (face
amount) of new BOLI business and ceded $51.1 billion (face amount) to EPICENTRE
under the terms of the treaty. During 1997, the Company also ceded $24.3 million
of separate account fees (cost of insurance charges) to EPICENTRE. The Company
has also withheld approximately $23.4 million of such funds due to EPICENTRE
under the terms of the reinsurance agreement as a component of benefits and
funds payable in the accompanying consolidated balance sheet as of December 31,
1997.

(9) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS

FKLA sponsors a welfare plan that provides medical and life insurance
benefits to its retired and active employees and the Company is allocated a
portion of the costs of providing such benefits. The Company is self insured
with respect to medical benefits, and the plan is not funded except with respect
to certain disability-related medical claims. The medical plan provides for
medical insurance benefits at retirement, with eligibility based upon age and
the participant's number of years of participation attained at retirement. The
plan is contributory for pre-Medicare retirees, and will be contributory for all
retiree coverage for most current employees, with contributions generally
adjusted annually. Postretirement life insurance benefits are noncontributory
and are limited to $10,000 per participant.

The allocated accumulated postretirement benefit obligation accrued by the
Company amounted to $1.9 million and $1.7 million at December 31, 1997 and 1996,
respectively.

The discount rate used in determining the allocated postretirement benefit
obligation was 7.25 percent and 7.75 percent for 1997 and 1996, respectively.
The assumed health care trend rate used was based on projected experience for
1997 and 1998, 8 percent in 1999, gradually declining to 5.0 percent by the year
2002 and remaining at that level thereafter.

A one percentage point increase in the assumed health care cost trend rate
for each year would increase the accumulated postretirement benefit obligation
as of December 31, 1997 and 1996 by $242 thousand and $191 thousand,
respectively.

The Company also provides certain severance-related policies to provide
benefits, generally limited in time, to former or inactive employees after
employment but before retirement.

(10) COMMITMENTS AND CONTINGENT LIABILITIES

The Company is involved in various legal actions for which it establishes
liabilities where appropriate. In the opinion of the Company's management, based
upon the advice of legal counsel, the resolution of such litigation is not
expected to have a material adverse effect on the consolidated financial
statements.

Although neither the Company or its joint venture projects have been
identified as a "potentially responsible party" under federal environmental
guidelines, inherent in the ownership of or lending to real estate projects is
the possibility that environmental pollution conditions may exist on or near or
relate to properties owned or previously owned on properties securing loans.
Where the Company has presently identified remediation costs, they have been
taken into account in determining the cash flows and resulting valuations of the
related real estate assets. Based on the Company's receipt and review of
environmental reports on most of the projects in which it is involved, the
Company believes its environmental exposure would be immaterial to its
consolidated results of operations. However, the Company may be required in the
future to take actions to remedy environmental exposures, and there can be no
assurance that material environmental exposures will not develop or be
identified in the future. The amount of future environmental costs is impossible
to estimate due to, among other factors, the unknown magnitude of possible
exposures, the unknown timing and extent of corrective actions that may be
required, the determination of the Company's liability in proportion to others
and the extent such costs may be covered by insurance or various environmental
indemnification agreements.

See the note captioned "Financial Instruments--Off-Balance-Sheet Risk"
below for the discussion regarding the Company's loan commitments and standby
financing agreements.
61
<PAGE> 66
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(10) COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
The Company is liable for guaranty fund assessments related to certain
unaffiliated insurance companies that have become insolvent during the years
1997 and prior. The Company's financial statements include provisions for all
known assessments that are expected to be levied against the Company as well as
an estimate of amounts (net of estimated future premium tax recoveries) that the
Company believes it will be assessed in the future for which the life insurance
industry has estimated the cost to cover losses to policyholders. The Company is
also contingently liable for any future guaranty fund assessments related to
insolvencies of unaffiliated insurance companies, for which the life insurance
industry has been unable to estimate the cost to cover losses to policyholders.
No specific amount can be reasonably estimated for such insolvencies as of
December 31, 1997.

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

At December 31, 1997, the Company had future legal loan commitments and
stand-by financing agreements totaling $75.3 million to support the financing
needs of various real estate investments. To the extent these arrangements are
called upon, amounts loaned would be secured by assets of the joint ventures,
including first mortgage liens on the real estate. The Company's criteria in
making these arrangements are the same as for its mortgage loans and other real
estate investments. The Company presently expects to fund approximately $21.2
million of these arrangements. These commitments are included in the Company's
analysis of real estate-related reserves and write-downs. The fair values of
loan commitments and standby financing agreements are estimated in conjunction
with and using the same methodology as the fair value estimates of mortgage
loans and other real estate-related investments.

(12) FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair value estimates are made at specific points in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from offering
for sale at one time the Company's entire holdings of a particular financial
instrument. A significant portion of the Company's financial instruments are
carried at fair value. (See note captioned "Invested Assets and Related
Income".) Fair value estimates for financial instruments not carried at fair
value are generally determined using discounted cash flow models and assumptions
that are based on judgments regarding current and future economic conditions and
the risk characteristics of the investments. Although fair value estimates are
calculated using assumptions that management believes are appropriate, changes
in assumptions could significantly affect the estimates and such estimates
should be used with care.

Fair value estimates are determined for existing on- and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and certain liabilities that are not
considered financial instruments. Accordingly, the aggregate fair value
estimates presented do not represent the underlying value of the Company. For
example, the Company's subsidiaries are not considered financial instruments,
and their value has not been incorporated into the fair value estimates. In
addition, tax ramifications related to the realization of unrealized gains and
losses can have a significant effect on fair value estimates and have not been
considered in any of the estimates.

The following methods and assumptions were used by the Company in
estimating the fair value of its financial instruments:

Fixed maturities and equity securities: Fair values were determined by
using market quotations, or independent pricing services that use prices
provided by market makers or estimates of fair values obtained from yield data
relating to instruments or securities with similar characteristics, or fair
value as determined in good faith by the Company's portfolio manager, SKI.

Cash and short-term investments: The carrying amounts reported in the
consolidated balance sheet for these instruments approximate fair values.

Mortgage loans and other real estate-related investments: Fair values were
estimated based upon the investments observable market price, net of estimated
costs to sell. The estimates of fair value should be used with care given the
inherent difficulty of estimating the fair value of real estate due to the lack
of a liquid quotable market.

62
<PAGE> 67
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(12) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Other loans and investments: The carrying amounts reported in the
consolidated balance sheet for these instruments approximate fair values. The
fair values of policy loans were estimated by discounting the expected future
cash flows using an interest rate charged on policy loans for similar policies
currently being issued.

Life policy benefits: Fair values of the life policy benefits regarding
investment contracts (primarily deferred annuities) and universal life contracts
were estimated by discounting gross benefit payments, net of contractual
premiums, using the average crediting rate currently being offered in the
marketplace for similar contracts with maturities consistent with those
remaining for the contracts being valued. The Company had projected its future
average crediting rate in 1997 and 1996 to be 5.25 percent and 4.75 percent,
respectively, while the assumed average market crediting rate was 6.0 percent
and 5.8 percent in 1997 and 1996, respectively.

The carrying values and estimated fair values of the Company's financial
instruments at December 31, 1997 and 1996 were as follows:

<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------ ------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
(in thousands) -------- ----- -------- -----
<S> <C> <C> <C> <C>
Financial instruments recorded as assets:
Fixed maturities.............................. $3,668,643 $3,668,643 $3,866,431 $3,866,431
Cash and short-term investments............... 259,925 259,925 74,472 74,472
Mortgage loans and other real estate-related
assets..................................... 220,046 220,046 267,713 267,713
Policy loans.................................. 282,439 282,439 288,302 288,302
Equity securities............................. 24,839 24,839 9,910 9,910
Other invested assets......................... 20,820 24,404 13,597 13,597
Financial instruments recorded as liabilities:
Life policy benefits, excluding term life
reserves................................... 3,846,023 4,050,852 4,249,264 4,101,588
</TABLE>

(13) STOCKHOLDER'S EQUITY--RETAINED EARNINGS

The maximum amount of dividends which can be paid by insurance companies
domiciled in the State of Illinois to shareholders without prior approval of
regulatory authorities is restricted. The maximum amount of dividends which can
be paid by the Company without prior approval in 1998 is $58.4 million. The
Company paid cash dividends of $29.3 million to Kemper during 1997. The Company
paid no cash dividends in 1996 or 1995.

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

<TABLE>
<CAPTION>
1997 1996 1995
(in thousands) ---- ---- ----
<S> <C> <C> <C>
Net income (loss)........................................... $ 58,372 $ 37,287 $(64,707)
======== ======== ========
Statutory capital and surplus............................... $476,924 $411,837 $383,374
======== ======== ========
</TABLE>

63
<PAGE> 68
KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(14) UNAUDITED INTERIM FINANCIAL INFORMATION

The following table sets forth the Company's unaudited quarterly financial
information:

(in thousands)

<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------------- -------- ------- ------------ -----------
<S> <C> <C> <C> <C>
1997 OPERATING SUMMARY
Net investment income.............................. $74,249 $74,050 $72,950 $ 74,946
Realized investment gains (losses)................. 889 8,161 (3,032) 4,528
Premium income..................................... 5,008 4,121 3,938 9,172
Separate account fees and other income............. 8,909 12,961 12,215 62,415(1)
------- ------- ------- --------
Total revenue.............................. 89,055 99,293 86,071 151,061
------- ------- ------- --------
Interest credited and benefits to policyholders.... 57,859 56,643 57,965 55,687
Commissions, taxes, licenses and fees.............. 8,023 9,475 8,389 59,323(1)
Operating expenses................................. 7,175 8,780 10,014 10,868
Net deferral of insurance acquisition costs........ (7,216) (6,877) (7,471) (13,409)
Amortization of value of business acquired......... 4,821 6,991 6,743 6,393
Amortization of goodwill........................... 2,547 2,552 2,549 7,647(2)
------- ------- ------- --------
Total benefits and expenses................ 73,209 77,564 78,189 126,509
------- ------- ------- --------
Income before income tax expense................... 15,846 21,729 7,882 24,552
Income tax expense................................. 5,678 8,723 3,778 13,113
------- ------- ------- --------
Net income................................. $10,168 $13,006 $ 4,104 $ 11,439
======= ======= ======= ========
1996 OPERATING SUMMARY
Net investment income.............................. $72,302 $74,647 $76,070 $ 76,669
Realized investment gains (losses)................. (1,248) (2,439) 13,518 3,771
Premium income..................................... 130 109 150 7,433(3)
Separate account fees and other income............. 8,028 9,419 8,478 9,170
------- ------- ------- --------
Total revenue.............................. 79,212 81,736 98,216 97,043
------- ------- ------- --------
Interest credited and benefits to policyholders.... 58,296 57,335 57,512 64,206
Commissions, taxes, licenses and fees.............. 6,868 6,486 6,819 7,962
Operating expenses................................. 5,440 4,920 6,974 7,344
Net deferral of insurance acquisition costs........ (5,032) (7,302) (5,434) (7,736)
Amortization of value of business acquired......... 4,234 2,787 11,582 2,927
Amortization of goodwill........................... 2,547 2,552 2,549 2,547
------- ------- ------- --------
Total benefits and expenses................ 72,353 66,778 80,002 77,250
------- ------- ------- --------
Income before income tax expense................... 6,859 14,958 18,214 19,793
Income tax expense................................. 3,513 6,402 7,391 8,097
------- ------- ------- --------
Net income................................. $ 3,346 $ 8,556 $10,823 $ 11,696
======= ======= ======= ========
</TABLE>

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

Notes:

(1) Reflects premium tax expense loads received and premium taxes incurred of
$49.1 million related to new BOLI sales of $2.6 billion in the fourth
quarter of 1997.

(2) Reflects the effect of the change in amortization of goodwill from 25 to 20
years.

(3) Reflects the assumption of term life insurance business from FKLA.

64
<PAGE> 69

APPENDIX A [TO BE UPDATED BY AMENDMENT]

ILLUSTRATIONS OF CASH VALUES,
CASH SURRENDER VALUES AND
DEATH BENEFITS

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

The amounts shown for the Cash Value, Surrender Value and Death Benefit as
of each Policy Anniversary reflect the fact that the net investment return on
the assets held in the Subaccounts is lower than the gross return. This is
because of a daily charge to the Subaccounts for assuming mortality and expense
risks, which is equivalent to an effective annual charge of 0.90%. This charge
is guaranteed not to exceed an effective annual rate of 0.90%. In addition, the
net investment returns also reflect the deduction of the Fund investment
advisory fees and other Fund expenses, (.83%, the average of the fees and
expenses). The tables also reflect applicable charges and deductions including a
3.5% deduction against premiums, a monthly administrative charge of $5 and
monthly charges for providing insurance protection. For each hypothetical gross
investment rate of return, tables are provided reflecting current and guaranteed
cost of insurance charges. Hypothetical gross average investment rates of return
of 0%, 6% and 12% correspond to the following approximate net annual investment
rate of return of -1.73%, 4.27% and 10.27%, on a current basis. On a guaranteed
basis, these rates of return would be -1.73%, 4.27% and 10.27%, respectively.
Cost of insurance rates vary by issue age, sex, rating class and Policy Year
and, therefore, are not reflected in the approximate net annual investment rate
of return above.

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

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

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

65
<PAGE> 70

FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
MALE STANDARD NON-SMOKER $1,000.00 ANNUAL PREMIUM ISSUE AGE 35
$100,000 INITIAL DEATH BENEFIT:

VALUES--CURRENT COST OF INSURANCE

<TABLE>
<CAPTION>
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL
PREMIUM GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
PAID PLUS ----------------------------- ---------------------------- -----------------------------
POLICY INTEREST CASH SURRENDER DEATH CASH SURRENDER DEATH CASH SURRENDER DEATH
YEAR AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- ------ --------- ------- --------- ------- ------ --------- ------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,050 724 18 100,000 775 68 100,000 826 119 100,000
2 2,153 1,431 650 100,000 1,578 797 100,000 1,731 950 100,000
3 3,310 2,116 1,259 100,000 2,405 1,549 100,000 2,720 1,863 100,000
4 4,526 2,778 1,847 100,000 3,258 2,326 100,000 3,799 2,868 100,000
5 5,802 3,419 2,412 100,000 4,136 3,130 100,000 4,980 3,973 100,000
6 7,142 4,033 3,060 100,000 5,037 4,063 100,000 6,267 5,294 100,000
7 8,549 4,621 3,695 100,000 5,961 5,035 100,000 7,672 6,747 100,000
8 10,027 5,183 4,321 100,000 6,909 6,047 100,000 9,208 8,345 100,000
9 11,578 5,720 4,936 100,000 7,884 7,100 100,000 10,889 10,105 100,000
10 13,207 6,248 5,558 100,000 8,902 8,212 100,000 12,746 12,055 100,000
11 14,917 6,769 6,186 100,000 9,967 9,384 100,000 14,800 14,218 100,000
12 16,713 7,282 6,822 100,000 11,080 10,621 100,000 17,072 16,613 100,000
13 18,599 7,788 7,466 100,000 12,244 11,923 100,000 19,584 19,263 100,000
14 20,579 8,286 8,118 100,000 13,462 13,294 100,000 22,362 22,194 100,000
15 22,657 8,777 8,777 100,000 14,735 14,735 100,000 25,434 25,434 100,000
16 24,840 9,261 9,261 100,000 16,065 16,065 100,000 28,831 28,831 100,000
17 27,132 9,738 9,738 100,000 17,457 17,457 100,000 32,587 32,587 100,000
18 29,539 10,207 10,207 100,000 18,912 18,912 100,000 36,741 36,741 100,000
19 32,066 10,671 10,671 100,000 20,434 20,434 100,000 41,335 41,335 100,000
20 34,719 11,127 11,127 100,000 22,025 22,025 100,000 46,415 46,415 100,000

25 50,113 11,077 11,077 100,000 29,003 29,003 100,000 79,852 79,852 107,001
30 69,761 8,797 8,797 100,000 36,042 36,042 100,000 134,111 134,111 163,616
35 94,836 2,506 2,506 100,000 42,304 42,304 100,000 220,552 220,552 255,840
40 126,840 0 0 0 46,297 46,297 100,000 358,956 358,956 384,083
45 167,685 0 0 0 44,406 44,406 100,000 582,976 582,976 612,124
</TABLE>

ASSUMPTIONS:

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

(2) VALUES REFLECT CURRENT COST OF INSURANCE CHARGES.

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

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

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

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

66
<PAGE> 71

FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
MALE STANDARD NON-SMOKER $1,000.00 ANNUAL PREMIUM ISSUE AGE 35
$100,000 INITIAL DEATH BENEFIT:

VALUES--GUARANTEED COST OF INSURANCE

<TABLE>
<CAPTION>
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL
PREMIUM GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
PAID PLUS ----------------------------- ---------------------------- -----------------------------
POLICY INTEREST CASH SURRENDER DEATH CASH SURRENDER DEATH CASH SURRENDER DEATH
YEAR AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- ------ --------- ------- --------- ------- ------ --------- ------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,050 723 17 100,000 774 67 100,000 825 118 100,000
2 2,153 1,428 646 100,000 1,574 793 100,000 1,727 946 100,000
3 3,310 2,110 1,253 100,000 2,399 1,542 100,000 2,713 1,856 100,000
4 4,526 2,771 1,839 100,000 3,249 2,317 100,000 3,790 2,858 100,000
5 5,802 3,408 2,401 100,000 4,123 3,117 100,000 4,966 3,959 100,000
6 7,142 4,021 3,047 100,000 5,022 4,049 100,000 6,250 5,277 100,000
7 8,549 4,608 3,683 100,000 5,945 5,019 100,000 7,652 6,727 100,000
8 10,027 5,169 4,307 100,000 6,892 6,030 100,000 9,185 8,323 100,000
9 11,578 5,703 4,919 100,000 7,862 7,078 100,000 10,860 10,076 100,000
10 13,207 6,209 5,519 100,000 8,857 8,166 100,000 12,692 12,001 100,000
11 14,917 6,686 6,103 100,000 9,875 9,292 100,000 14,697 14,114 100,000
12 16,713 7,130 6,671 100,000 10,915 10,455 100,000 16,890 16,431 100,000
13 18,599 7,543 7,221 100,000 11,977 11,656 100,000 19,293 18,972 100,000
14 20,579 7,921 7,753 100,000 13,061 12,893 100,000 21,927 21,759 100,000
15 22,657 8,263 8,263 100,000 14,166 14,166 100,000 24,816 24,816 100,000
16 24,840 8,567 8,567 100,000 15,291 15,291 100,000 27,987 27,987 100,000
17 27,132 8,828 8,828 100,000 16,432 16,432 100,000 31,469 31,469 100,000
18 29,539 9,040 9,040 100,000 17,586 17,586 100,000 35,294 35,294 100,000
19 32,066 9,198 9,198 100,000 18,748 18,748 100,000 39,498 39,498 100,000
20 34,719 9,296 9,296 100,000 19,913 19,913 100,000 44,124 44,124 100,000

25 50,113 8,675 8,675 100,000 25,652 25,652 100,000 75,587 75,587 101,287
30 69,761 5,335 5,335 100,000 30,644 30,644 100,000 126,888 126,888 154,804
35 94,836 0 0 0 33,276 33,276 100,000 208,259 208,259 241,580
40 126,840 0 0 0 30,182 30,182 100,000 338,103 338,103 361,770
45 167,685 0 0 0 11,940 11,940 100,000 547,985 547,985 575,384
</TABLE>

ASSUMPTIONS:

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

(2) VALUES REFLECT GUARANTEED COST OF INSURANCE CHARGES.

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

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

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

67
<PAGE> 72

FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
MALE STANDARD NON-SMOKER $3,000.00 ANNUAL PREMIUM ISSUE AGE 55
$100,000 INITIAL DEATH BENEFIT:

VALUES--CURRENT COST OF INSURANCE

<TABLE>
<CAPTION>
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL
PREMIUM GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
PAID PLUS -------------------------------- ----------------------------- ---------------------------------
POLICY INTEREST CASH SURRENDER DEATH CASH SURRENDER DEATH CASH SURRENDER DEATH
YEAR AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- ------ --------- ---------- --------- ------- ------- --------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 3,150 2,034 789 100,000 2,182 937 100,000 2,330 1,085 100,000
2 6,457 3,975 2,505 100,000 4,399 2,929 100,000 4,841 3,372 100,000
3 9,930 5,815 4,120 100,000 6,644 4,949 100,000 7,547 5,852 100,000
4 13,577 7,558 5,638 100,000 8,924 7,004 100,000 10,473 8,553 100,000
5 17,406 9,192 7,047 100,000 11,228 9,084 100,000 13,635 11,490 100,000
6 21,426 10,759 8,626 100,000 13,600 11,468 100,000 17,103 14,971 100,000
7 25,647 12,317 10,241 100,000 16,104 14,028 100,000 20,975 18,899 100,000
8 30,080 13,867 11,893 100,000 18,746 16,772 100,000 25,296 23,322 100,000
9 34,734 15,409 13,582 100,000 21,535 19,708 100,000 30,119 28,292 100,000
10 39,620 16,942 15,307 100,000 24,478 22,843 100,000 35,502 33,867 100,000
11 44,751 18,467 17,070 100,000 27,584 26,186 100,000 41,510 40,112 100,000
12 50,139 19,985 18,869 100,000 30,863 29,747 100,000 48,216 47,100 100,000
13 55,796 21,494 20,705 100,000 34,322 33,534 100,000 55,701 54,912 100,000
14 61,736 22,995 22,578 100,000 37,974 37,557 100,000 64,055 63,638 100,000
15 67,972 24,488 24,488 100,000 41,828 41,828 100,000 73,380 73,380 100,000
16 74,521 25,973 25,973 100,000 45,896 45,896 100,000 83,787 83,787 100,000
17 81,397 27,450 27,450 100,000 50,189 50,189 100,000 95,369 95,369 107,767
18 88,617 28,920 28,920 100,000 54,719 54,719 100,000 108,152 108,152 120,049
19 96,198 30,381 30,381 100,000 59,501 59,501 100,000 122,259 122,259 133,262
20 104,158 31,835 31,835 100,000 64,548 64,548 100,000 137,831 137,831 147,479
25 150,340 22,121 22,121 100,000 88,219 88,219 100,000 240,534 240,534 252,561
30 209,282 0 0 0 121,897 121,897 127,992 402,274 402,274 422,388
35 284,509 0 0 0 160,765 160,765 168,803 651,846 651,846 684,438
40 380,519 0 0 0 208,570 208,570 210,656 1,052,401 1,052,401 1,062,925
45 503,055 0 0 0 273,173 273,173 273,173 1,735,012 1,735,012 1,735,012
</TABLE>

ASSUMPTIONS:

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

(2) VALUES REFLECT CURRENT COST OF INSURANCE CHARGES.

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

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

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

68
<PAGE> 73

FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
MALE STANDARD NON-SMOKER $3,000.00 ANNUAL PREMIUM ISSUE AGE 55
$100,000 INITIAL DEATH BENEFIT:

VALUES--GUARANTEED COST OF INSURANCE

<TABLE>
<CAPTION>
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL
PREMIUM GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
PAID PLUS ---------------------------- ---------------------------- ---------------------------------
POLICY INTEREST CASH SURRENDER DEATH CASH SURRENDER DEATH CASH SURRENDER DEATH
YEAR AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- ------ --------- ------ --------- ------- ------ --------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 3,150 2,032 787 100,000 2,180 935 100,000 2,328 1,083 100,000
2 6,457 3,968 2,498 100,000 4,392 2,922 100,000 4,834 3,364 100,000
3 9,930 5,807 4,112 100,000 6,636 4,941 100,000 7,538 5,843 100,000
4 13,577 7,547 5,627 100,000 8,912 6,992 100,000 10,459 8,539 100,000
5 17,406 9,180 7,035 100,000 11,214 9,070 100,000 13,618 11,474 100,000
6 21,426 10,701 8,568 100,000 13,540 11,407 100,000 17,039 14,906 100,000
7 25,647 12,102 10,026 100,000 15,883 13,808 100,000 20,750 18,674 100,000
8 30,080 13,372 11,398 100,000 18,238 16,264 100,000 24,780 22,806 100,000
9 34,734 14,498 12,671 100,000 20,593 18,766 100,000 29,165 27,338 100,000
10 39,620 15,464 13,829 100,000 22,941 21,306 100,000 33,948 32,313 100,000
11 44,751 16,258 14,860 100,000 25,275 23,877 100,000 39,184 37,786 100,000
12 50,139 16,869 15,753 100,000 27,591 26,476 100,000 44,945 43,829 100,000
13 55,796 17,285 16,496 100,000 29,887 29,098 100,000 51,316 50,527 100,000
14 61,736 17,490 17,073 100,000 32,160 31,743 100,000 58,401 57,984 100,000
15 67,972 17,464 17,464 100,000 34,404 34,404 100,000 66,328 66,328 100,000
16 74,521 17,173 17,173 100,000 36,607 36,607 100,000 75,251 75,251 100,000
17 81,397 16,528 16,528 100,000 38,715 38,715 100,000 85,351 85,351 100,000
18 88,617 15,566 15,566 100,000 40,778 40,778 100,000 96,787 96,787 107,434
19 96,198 14,170 14,170 100,000 42,734 42,734 100,000 109,402 109,402 119,248
20 104,158 12,260 12,260 100,000 44,560 44,560 100,000 123,326 123,326 131,959

25 150,340 0 0 0 51,219 51,219 100,000 216,653 216,653 227,486
30 209,282 0 0 0 50,019 50,019 100,000 362,686 362,686 380,820
35 284,509 0 0 0 19,973 19,973 100,000 585,679 585,679 614,963
40 380,519 0 0 0 0 0 0 942,572 942,572 951,998
45 503,055 0 0 0 0 0 0 1,555,949 1,555,949 1,555,949
</TABLE>

ASSUMPTIONS:

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

(2) VALUES REFLECT GUARANTEED COST OF INSURANCE CHARGES.

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

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

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

69
<PAGE> 74

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

VALUES--CURRENT COST OF INSURANCE

<TABLE>
<CAPTION>
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL
PREMIUM GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
PAID PLUS ---------------------------- ----------------------------- -------------------------------
POLICY INTEREST CASH SURRENDER DEATH CASH SURRENDER DEATH CASH SURRENDER DEATH
YEAR AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- ------ --------- ------ --------- ------- ------- --------- ------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,575 1,116 63 150,000 1,193 140 150,000 1,270 217 150,000
2 3,229 2,206 1,040 150,000 2,430 1,264 150,000 2,664 1,498 150,000
3 4,965 3,262 1,983 150,000 3,704 2,426 150,000 4,185 2,907 150,000
4 6,788 4,297 2,907 150,000 5,032 3,641 150,000 5,861 4,471 150,000
5 8,703 5,317 3,814 150,000 6,419 4,916 150,000 7,714 6,211 150,000
6 10,713 6,321 4,867 150,000 7,868 6,413 150,000 9,760 8,306 150,000
7 12,824 7,310 5,927 150,000 9,381 7,998 150,000 12,021 10,639 150,000
8 15,040 8,283 6,994 150,000 10,962 9,674 150,000 14,519 13,230 150,000
9 17,367 9,241 8,069 150,000 12,614 11,442 150,000 17,278 16,107 150,000
10 19,810 10,185 9,152 150,000 14,339 13,306 150,000 20,327 19,294 150,000
11 22,376 11,113 10,242 150,000 16,142 15,271 150,000 23,695 22,824 150,000
12 25,069 12,028 11,341 150,000 18,025 17,338 150,000 27,416 26,729 150,000
13 27,898 12,928 12,448 150,000 19,992 19,512 150,000 31,527 31,046 150,000
14 30,868 13,815 13,563 150,000 22,047 21,796 150,000 36,069 35,817 150,000
15 33,986 14,687 14,687 150,000 24,194 24,194 150,000 41,086 41,086 150,000
16 37,261 15,547 15,547 150,000 26,437 26,437 150,000 46,629 46,629 150,000
17 40,699 16,393 16,393 150,000 28,780 28,780 150,000 52,753 52,753 150,000
18 44,309 17,226 17,226 150,000 31,227 31,227 150,000 59,519 59,519 150,000
19 48,099 18,046 18,046 150,000 33,784 33,784 150,000 66,993 66,993 150,000
20 52,079 18,853 18,853 150,000 36,455 36,455 150,000 75,251 75,251 150,000

25 75,170 20,535 20,535 150,000 49,677 49,677 150,000 130,294 130,294 174,594
30 104,641 19,990 19,990 150,000 64,673 64,673 150,000 219,425 219,425 267,698
35 142,254 15,713 15,713 150,000 81,476 81,476 150,000 362,518 362,518 420,521
40 190,260 4,856 4,856 150,000 100,560 100,560 150,000 593,019 593,019 634,531
45 251,528 0 0 0 123,575 123,575 150,000 966,984 966,984 1,015,333
</TABLE>

ASSUMPTIONS:

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

(2) VALUES REFLECT CURRENT COST OF INSURANCE CHARGES.

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

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

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

70
<PAGE> 75

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

VALUES--GUARANTEED COST OF INSURANCE

<TABLE>
<CAPTION>
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL
PREMIUM GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
PAID PLUS ----------------------------- ---------------------------- -----------------------------
POLICY INTEREST CASH SURRENDER DEATH CASH SURRENDER DEATH CASH SURRENDER DEATH
YEAR AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- ------ --------- ------- --------- ------- ------ --------- ------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,575 1,115 62 150,000 1,192 138 150,000 1,269 215 150,000
2 3,229 2,200 1,035 150,000 2,424 1,258 150,000 2,657 1,492 150,000
3 4,965 3,253 1,975 150,000 3,695 2,417 150,000 4,175 2,896 150,000
4 6,788 4,272 2,882 150,000 5,005 3,614 150,000 5,833 4,442 150,000
5 8,703 5,256 3,753 150,000 6,353 4,850 150,000 7,644 6,140 150,000
6 10,713 6,203 4,749 150,000 7,740 6,286 150,000 9,623 8,168 150,000
7 12,824 7,111 5,728 150,000 9,163 7,781 150,000 11,783 10,401 150,000
8 15,040 7,980 6,691 150,000 10,626 9,337 150,000 14,146 12,858 150,000
9 17,367 8,807 7,635 150,000 12,125 10,953 150,000 16,729 15,557 150,000
10 19,810 9,593 8,560 150,000 13,664 12,631 150,000 19,557 18,524 150,000
11 22,376 10,333 9,462 150,000 15,238 14,367 150,000 22,650 21,779 150,000
12 25,069 11,026 10,338 150,000 16,849 16,162 150,000 26,037 25,350 150,000
13 27,898 11,669 11,189 150,000 18,495 18,015 150,000 29,748 29,267 150,000
14 30,868 12,262 12,011 150,000 20,178 19,926 150,000 33,818 33,566 150,000
15 33,986 12,800 12,800 150,000 21,893 21,893 150,000 38,282 38,282 150,000
16 37,261 13,281 13,281 150,000 23,642 23,642 150,000 43,185 43,185 150,000
17 40,699 13,697 13,697 150,000 25,419 25,419 150,000 48,571 48,571 150,000
18 44,309 14,039 14,039 150,000 27,217 27,217 150,000 54,488 54,488 150,000
19 48,099 14,301 14,301 150,000 29,033 29,033 150,000 60,997 60,997 150,000
20 52,079 14,473 14,473 150,000 30,858 30,858 150,000 68,161 68,161 150,000

25 75,170 13,667 13,667 150,000 39,927 39,927 150,000 116,943 116,943 156,704
30 104,641 8,801 8,801 150,000 48,070 48,070 150,000 196,219 196,219 239,388
35 142,254 0 0 0 53,048 53,048 150,000 321,962 321,962 373,476
40 190,260 0 0 0 50,256 50,256 150,000 522,611 522,611 559,194
45 251,528 0 0 0 26,905 26,905 150,000 846,942 846,942 889,290
</TABLE>

ASSUMPTIONS:

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

(2) VALUES REFLECT GUARANTEED COST OF INSURANCE CHARGES.

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

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

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

71
<PAGE> 76

FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
MALE PREFERRED NON-SMOKER $4,500.00 ANNUAL PREMIUM ISSUE AGE 55
$150,000 INITIAL DEATH BENEFIT:

VALUES--CURRENT COST OF INSURANCE

<TABLE>
<CAPTION>
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL
PREMIUM GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
PAID PLUS ------------------------------ ----------------------------- ---------------------------------
POLICY INTEREST CASH SURRENDER DEATH CASH SURRENDER DEATH CASH SURRENDER DEATH
YEAR AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- ------ --------- -------- --------- ------- ------- --------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 4,725 3,081 1,220 150,000 3,304 1,443 150,000 3,527 1,666 150,000
2 9,686 6,093 3,895 150,000 6,735 4,537 150,000 7,405 5,207 150,000
3 14,896 9,077 6,541 150,000 10,341 7,806 150,000 11,716 9,181 150,000
4 20,365 12,033 9,160 150,000 14,133 11,260 150,000 16,508 13,635 150,000
5 26,109 14,961 11,751 150,000 18,118 14,907 150,000 21,835 18,625 150,000
6 32,139 17,863 14,670 150,000 22,307 19,114 150,000 27,757 24,564 150,000
7 38,471 20,737 17,628 150,000 26,710 23,602 150,000 34,341 31,232 150,000
8 45,120 23,584 20,628 150,000 31,338 28,382 150,000 41,659 38,703 150,000
9 52,101 26,405 23,668 150,000 36,204 33,467 150,000 49,794 47,057 150,000
10 59,431 29,199 26,750 150,000 41,318 38,869 150,000 58,837 56,388 150,000
11 67,127 31,967 29,873 150,000 46,693 44,599 150,000 68,889 66,795 150,000
12 75,208 34,710 33,038 150,000 52,344 50,672 150,000 80,065 78,393 150,000
13 83,694 37,426 36,244 150,000 58,284 57,102 150,000 92,487 91,305 150,000
14 92,604 40,118 39,493 150,000 64,527 63,903 150,000 106,297 105,672 150,000
15 101,959 42,784 42,784 150,000 71,090 71,090 150,000 121,648 121,648 150,000
16 111,782 45,426 45,426 150,000 77,989 77,989 150,000 138,691 138,691 159,495
17 122,096 48,043 48,043 150,000 85,240 85,240 150,000 157,498 157,498 177,972
18 132,926 50,635 50,635 150,000 92,863 92,863 150,000 178,243 178,243 197,850
19 144,297 53,203 53,203 150,000 100,875 100,875 150,000 201,132 201,132 219,234
20 156,237 55,747 55,747 150,000 109,297 109,297 150,000 226,390 226,390 242,238

25 225,511 53,599 53,599 150,000 155,044 155,044 162,796 394,402 394,402 414,123
30 313,924 38,775 38,775 150,000 212,310 212,310 222,925 662,076 662,076 695,180
35 426,763 0 0 0 279,543 279,543 293,520 1,082,860 1,082,860 1,137,003
40 570,779 0 0 0 362,287 362,287 365,910 1,761,618 1,761,618 1,779,234
45 754,583 0 0 0 470,852 470,852 470,852 2,901,097 2,901,097 2,901,097
</TABLE>

ASSUMPTIONS:

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

(2) VALUES REFLECT CURRENT COST OF INSURANCE CHARGES.

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

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

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

72
<PAGE> 77

FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
MALE PREFERRED NON-SMOKER $4,500.00 ANNUAL PREMIUM ISSUE AGE 55
$150,000 INITIAL DEATH BENEFIT:

VALUES--GUARANTEED COST OF INSURANCE

<TABLE>
<CAPTION>
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL
PREMIUM GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
PAID PLUS ---------------------------- ---------------------------- ---------------------------------
POLICY INTEREST CASH SURRENDER DEATH CASH SURRENDER DEATH CASH SURRENDER DEATH
YEAR AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- ------ --------- ------ --------- ------- ------ --------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 4,725 3,078 1,218 150,000 3,301 1,440 150,000 3,524 1,663 150,000
2 9,686 6,011 3,813 150,000 6,651 4,453 150,000 7,318 5,120 150,000
3 14,896 8,799 6,264 150,000 10,051 7,516 150,000 11,413 8,877 150,000
4 20,365 11,438 8,565 150,000 13,501 10,628 150,000 15,839 12,966 150,000
5 26,109 13,917 10,707 150,000 16,993 13,783 150,000 20,627 17,417 150,000
6 32,139 16,228 13,035 150,000 20,522 17,329 150,000 25,814 22,621 150,000
7 38,471 18,359 15,251 150,000 24,080 20,972 150,000 31,441 28,333 150,000
8 45,120 20,294 17,337 150,000 27,658 24,701 150,000 37,557 34,601 150,000
9 52,101 22,011 19,275 150,000 31,240 28,504 150,000 44,213 41,477 150,000
10 59,431 23,491 21,042 150,000 34,815 32,366 150,000 51,477 49,028 150,000
11 67,127 24,713 22,619 150,000 38,372 36,278 150,000 59,433 57,339 150,000
12 75,208 25,662 23,991 150,000 41,909 40,238 150,000 68,191 66,519 150,000
13 83,694 26,319 25,137 150,000 45,421 44,239 150,000 77,881 76,699 150,000
14 92,604 26,661 26,036 150,000 48,904 48,279 150,000 88,663 88,038 150,000
15 101,959 26,658 26,658 150,000 52,352 52,352 150,000 100,732 100,732 150,000
16 111,782 26,260 26,260 150,000 55,746 55,746 150,000 114,324 114,324 150,000
17 122,096 25,333 25,333 150,000 59,010 59,010 150,000 129,718 129,718 150,000
18 132,926 23,935 23,935 150,000 62,218 62,218 150,000 147,087 147,087 163,267
19 144,297 21,888 21,888 150,000 65,282 65,282 150,000 166,228 166,228 181,188
20 156,237 19,077 19,077 150,000 68,169 68,169 150,000 187,355 187,355 200,470

25 225,511 0 0 0 79,377 79,377 150,000 328,965 328,965 345,413
30 313,924 0 0 0 80,791 80,791 150,000 550,545 550,545 578,072
35 426,763 0 0 0 47,336 47,336 150,000 888,895 888,895 933,340
40 570,779 0 0 0 0 0 0 1,430,415 1,430,415 1,444,719
45 754,583 0 0 0 0 0 0 2,361,113 2,361,113 2,361,113
</TABLE>

ASSUMPTIONS:

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

(2) VALUES REFLECT GUARANTEED COST OF INSURANCE CHARGES.

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

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

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

73
<PAGE> 78

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

74
<PAGE> 79

(This page intentionally left blank)

75
<PAGE> 80

PROSPECTUS-- , 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

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:

- Investors Fund Series

- Kemper High Yield

- Kemper Government Securities

- Kemper Dreman High Return Equity

- Kemper Small Cap Growth

- Janus Aspen Series

- 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> 81
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....................................... 19
SYSTEMATIC WITHDRAWAL PLAN.................................. 20
DISTRIBUTION OF POLICIES.................................... 20
FEDERAL TAX MATTERS......................................... 20
LEGAL CONSIDERATIONS........................................ 23
SAFEKEEPING OF THE SEPARATE ACCOUNT'S ASSETS................ 23
VOTING INTERESTS............................................ 23
STATE REGULATION OF KILICO.................................. 23
DIRECTORS AND OFFICERS OF KILICO............................ 24
LEGAL MATTERS............................................... 26
LEGAL PROCEEDINGS........................................... 26
YEAR 2000 COMPLIANCE........................................ 26
EXPERTS..................................................... 26
REGISTRATION STATEMENT...................................... 27
FINANCIAL STATEMENTS........................................ 27
CHANGE OF ACCOUNTANTS....................................... 27
APPENDIX A ILLUSTRATIONS OF CASH VALUES, CASH SURRENDER
VALUES AND DEATH BENEFITS................................. 70
APPENDIX B TABLE OF DEATH BENEFIT FACTORS................... 79
</TABLE>

<PAGE> 82